Financial Risk Management Market Risk Management

Question 1

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

Accepted Answer

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

Answer

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

Question 2

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

Accepted Answer

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

Answer

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

Question 3

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

Accepted Answer

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

Answer

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

Question 4

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

Accepted Answer

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

Answer

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

Question 5

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

Accepted Answer

Interest rate changes

Answer

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

Financial Risk Management Practice Test