QFC Quantitative Finance Risk & Derivatives 2

Question 1

A portfolio has a 1-day 99% VaR of $1 million. Under the square-root-of-time rule, what is the approximate 10-day 99% VaR?

Accepted Answer

$3.16 million

Answer

The 10-day VaR scales by √10 ≈ 3.162, so $1M × 3.162 ≈ $3.16 million.

Question 2

Which Greeks measure an option's sensitivity to the passage of time?

Accepted Answer

Theta

Answer

Theta measures the rate of decline in an option's value as time passes, often called time decay.

Question 3

In the Black-Scholes model, increasing implied volatility has what effect on both call and put option prices?

Accepted Answer

Increases both

Answer

Higher volatility increases the probability of large moves in either direction, raising the value of both calls and puts.

Question 4

A credit default swap (CDS) provides protection to the buyer by:

Accepted Answer

Receiving par value from the seller if a credit event occurs

Answer

Upon a qualifying credit event, the CDS protection seller pays the buyer the difference between par and recovery value (or delivers par in exchange for the defaulted bond).

Question 5

Expected Shortfall (ES) at the 95% confidence level is best described as:

Accepted Answer

The average loss in the worst 5% of scenarios

Answer

ES (also called CVaR) equals the conditional expected loss given that the loss exceeds the VaR threshold, i.e., the mean of the tail beyond the confidence level.

(QFC) Quantitative Finance Certification Practice Test

(QFC) Quantitative Finance Certification Practice Test

QFC Quantitative Finance Risk & Derivatives 2