İŞLETME FİNANSI II

The risks subject to market risk capital requirements include but are not limited to:

(1) default risk, interest rate risk, credit spread risk, equity risk, foreign exchange (FX) risk and commodities risk for trading book instruments; and

(2) FX risk and commodities risk for banking book instruments. The correct answer is E.

According to the Basel Committee, market risk is defined as the risk of losses arising from movements in market prices. The correct answer is E.

Broadly speaking, credit risk is the risk that a borrower fails to meet obligations for a loan granted. This risk is of vital importance to banks, as their main business involves lending money to be repaid over a certain period, which in some cases, e.g. mortgages, may be 10 to 20 years or more. The quantification and management of credit risk are radically different from market risk, which focuses mainly on changes in asset prices, and which offers an infinite set of probabilities due to available data. The correct answer is D.

With the enhancement of the Basel-II, the Basel Committee added a new class of risk into the calculation of risk-based capital charges. The Committee defined the operational risk as the “risk of loss resulting from inadequate or failed internal processes, people and systems or from external events”. 

This definition includes human error, fraud and malice, failures of information systems, problems related to personnel management, commercial disputes, accidents, fires, and floods. In other words, its scope seems so wide that, with no significant prior data available to extract a meaningful and accurate risk profile, the practical application is difficult to immediately perceive.

The correct answer is D.

The Variance-covariance (VCV hereafter) method estimates VaR by first assuming that a portfolio comprises a small number of risk factors (equities, commodities, etc.). Each risk factor is assumed to be drawn from some known theoretical distribution. The statistical distributions of these individual risk factors are combined to yield a single theoretical distribution for the returns of the entire portfolio. This distribution is then used to calculate the VaR of the portfolio. The VCV method is also known as an analytic or parametric method. It is considered the simplest of the suggested methodologies and thus is often used by banks and other financial institutions, for example, for calculating intra-day VaR figures. The VCV approach is generally used with a normal distribution, which significantly facilitates its calculation. Of course, other distributions can be used, but at a higher computational cost. The correct answer is C.

The Basel Committee defines the historical simulation methodology as a simulation approach that calculates the hypothetical change in the value of the current portfolio in the light of actual historical movements in risk factors (Basel Committee on Banking Supervision, 1996b). The correct answer is C.

The Monte Carlo (MC) approach is based on the idea of simulating the changes in the portfolio value by randomly drawing from the imposed theoretical distribution function. The correct answer is B.

Extreme value theory (EVT) studies the tail of distributions and deals with the asymptotic behavior of the extreme order statistics of a random sample, such as the maximum or minimum order. The correct answer B.

Market risk can be defined as the risk related to a financial institution’s financial condition resulting from unexpected market movements in the price level of certain risk factors. These risk factors can be categorized into four main classes: equity prices, commodity prices, foreign exchange rates, and interest rates. The correct answer is A.

The literature on risk management has grown exponentially in the last two decades. The milestones are the 1988 regulation on capital adequacy by the Basel Committee, the release of RiskMetricsTM Technical Document by JP Morgan in 1994, and the release of Basel-II by the Basel Committee in 2000. The correct answer is A.

Risk is the “possibility of loss or injury,” highlighting the perils of putting oneself in a situation in which the outcome is unknown.

Market risk can be defined as the risk related to a financial institution’s financial condition resulting from unexpected market movements in the price level of certain risk factors.

Broadly speaking, credit risk is the risk that a borrower fails to meet obligations for a loan granted.

Market risk is defined as the risk of losses arising from movements in market prices.

Broadly speaking, credit risk is the risk that a borrower fails to meet obligations for a loan granted.

Operational risk is simply any event that disrupts the normal flow of business processes and which generates financial loss or damage to the image of the bank.

As all fund managers and traders know, there is a trade-off between risk and return when money is invested. The greater the risks are taken, the higher the potential returns.

VaR answers the question: how much can I lose with x % probability over a given time horizon.

If the probability of an outcome is zero, you know the outcome is certain not to occur.

Risk is a measure of uncertainty about the future payoff of an investment, assessed over a particular time horizon and relative to a benchmark.