Financial Risk Management Market Risk Measurement 2

Question 1

What is the Greeks term 'Delta' used to measure in options risk?

Accepted Answer

Sensitivity of option price to changes in the underlying asset price

Answer

Delta measures how much an option's price changes for a $1 move in the underlying asset, ranging from 0 to 1 for calls and -1 to 0 for puts.

Question 2

Which Greek measures the rate of change of Delta with respect to the underlying asset price?

Accepted Answer

Gamma

Answer

Gamma measures the curvature of the option price–underlying relationship and is highest for at-the-money options near expiry.

Question 3

What does 'Vega' represent in the context of options risk management?

Accepted Answer

Sensitivity to changes in implied volatility

Answer

Vega quantifies how much an option's value changes for a 1% change in implied volatility, and is always positive for long option positions.

Question 4

What is basis risk in the context of market risk hedging?

Accepted Answer

The risk that the price difference between the hedge instrument and the underlying exposure changes unexpectedly

Answer

Basis risk arises when the hedge does not perfectly offset the exposure because the two instruments do not move in lockstep, leaving a residual risk.

Question 5

A portfolio has a duration of 5 years and interest rates rise by 100 bps. Approximately how much does the portfolio value change?

Accepted Answer

Decreases by 5%

Answer

Using the modified duration approximation, ΔP/P ≈ −Duration × Δy, so a 100 bps rise gives −5 × 0.01 = −5% change in value.

Financial Risk Management Practice Test