Risk Latte - Quiz#2

1) Suppose an asset price follows an arithmetic Brownian motion. The current price of the asset is $500. The risk free interest rate is pretty close to zero and the volatility of the asset in dollar terms is $75 per annum. What is the value today of a digital cash or nothing option that pays $1 million in six months if the price of the asset is at or above $575?

a) $50,000
b) $78,650
c) $90,230
d) $83,140

2) Consider a portfolio made up of three stocks A, B and C in a single enquity market and all three stocks track the same index. The fund manager has invested $25 million, $15 million and $11 million respectively in A, B and C. The beta of A is 0.67, the beta of B is 0.56 and the beta of C is -1.34. The index volatility is 1% per day. The 95% daily VAR of the portfolio

a) $121,550
b) $224,400
c) $67,500
d) $171,245

3) The VaR of a $10 million, 10 year bond which has a price volatility of 0.84% and PVBP is $7,000. The volatility in basis points is 12. The VaR of the Bond is:

a) $84,000
b) $124,000
c) $34,500
d) $90,000

4) The correlation coefficient between two assets is 0.5. The equivalent Fisher transformation of the correlation coefficient is:

a) 0.5145
b) 0.5493
c) 0.5644
d) 0.5331

5) The Excel^TM formula (from its in built Library) for calculating the inverse Fisher transformation on a spreadsheet is:

a) = fisher(x)
b) = fisherinv(x)
c) = fishinv(x)
d) None of the above

6) In the above example (where the correlation was 0.5) the value of the 95% confifence interval of the correlation coefficient is:

a) 0.43;
b) 0.1756
c) 0.2633
d) None of the above;

7) JP Morgan published its RiskMetrics^TM in:

a) Autumn of 1994;
b) Summer of 1993;
c) Summer of 1996;
d) Autumn of 1992.

8) A passive breach of VaR limit happens when:

a) the volatility increases but the trader's position remains unchanged;
b) the volatility remains constant but the trader's position changes;
c) both the volatility and the trader's position changes;
d) None of the above.

9) The price volatility of a year vertex (say, 2 year LIBOR) is 10% and that of a 4 year vertex is 15%. A Cash flow that has a maturity of two and a half years will therefore have a price volatility of :

a) 18.97%
b) 13.75%
c) 12.67%
d) 17.50%

10) The cornish-Fisher expansion is used by RiskMetrics^TM to :

a) take care of the skew;
b) to capture the gamma risk of an options portfolio in VaR;
c) both of the above;
d) None of the above.

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