Market Risk Management Flashcards

What does Value at Risk (VaR) measure in market risk management?

Answer: The maximum expected loss over a given time horizon at a specified confidence level

VaR quantifies the maximum potential loss a portfolio could face over a defined period at a given confidence level, such as 95% or 99%.

Which of the following best describes delta in the context of options market risk?

Answer: The rate of change of an option's price relative to a $1 change in the underlying asset

Delta measures how much an option's price changes for each $1 move in the underlying asset price.

A 10-day VaR at 99% confidence is $1 million. What does this mean?

Answer: There is a 1% chance losses will exceed $1 million over the next 10 days

A 99% VaR of $1 million means there is only a 1% probability that losses over the 10-day period will exceed $1 million.

What is the primary limitation of VaR as a risk measure?

Answer: It does not capture losses beyond the confidence threshold (tail risk)

VaR tells you nothing about the magnitude of losses that exceed the confidence threshold, which is the key tail risk concern.

Which market risk factor primarily affects the value of fixed income securities?

Answer: Interest rate changes

Fixed income securities are most sensitive to interest rate movements, as their prices move inversely with yields.

Stress testing in market risk is used to:

Answer: Evaluate portfolio performance under hypothetical or historical extreme scenarios

Stress testing assesses how a portfolio would perform under severe but plausible market conditions beyond normal VaR assumptions.