Examination Paper of Risk Management
IIBM Institute of Business Management 7
IIBM Institute of Business Management
Examination Paper MM.100
Risk Management and Financial Institutions
Section A: Objective Type (30 marks)
• This section consists of multiple choice questions & Short Notes type questions.
• Answer all the questions.
• Part one Question carries 1 mark each & Part Two question carry 5 Marks each.
Part One:
Multiple Choices:
1. The options where the strike price is close to the price of underlying asset is-
a. At-the-money options
b. In-the-money options
c. Out-of-the money Options
d. All of these
2. Which of the following are the non-traditional derivatives?
a. Weather derivatives
b. Oil derivatives
c. Natural gas derivatives
d. All of the above
3. An option gives the holder the right to sell the underlying asset by a certain price is termed as-
a. Call option
b. Put option
c. American option
d. European option
4. A product where value at any given time is linearly dependent on the value of an underlying market variable is-
a. Linear product
b. Non-Linear product
c. Both a & b
d. None of these
Examination Paper of Risk Management
IIBM Institute of Business Management 8
5. The agreement between two companies to exchange cash flows in the future known as-
a. Future
b. Forward
c. Swap
d. Options
6. The life insurance lasts for a specified period & pays a lump sum either when the policy holder dies or at the end of the period, which ever, is known as-
a. Variable life insurance
b. Group life insurance
c. Whole life insurance
d. Endowment life insurance
7. When an company wishing to issue is not publicly traded, the share issue known as-
a. Equity share
b. Initial public offer(IPO)
c. Debenture
d. None of these
8. VaR stands for--------------------------
9. The volatility of this model is changes with the passage of time
a. EMWA Model
b. GAMMA Model
c. VEGA Model
d. GARCH Model
10. LIBOR is stands for ----------------------------
Part Two:
1. What is difference between open-ended and close-ended mutual fund?
2. Write short note on ‘option contract’?
3. What are the main sources of liquidity for financial institution?
4. Explain the Concept of ‘Exchange-Traded Markets’?
End Of Section A SSectioSECTION A
Examination Paper of Risk Management
IIBM Institute of Business Management 9
Section B: Practical Problems (40 Marks)
• This section consists of Practical Questions.
• Answer all the questions.
• Each Question carries 10 marks.
• Detailed information should from the part of your answer.
1. In the 1980s, Bankers Trust developed index currency option notes (ICONs). These are bonds in which the amount received by the holder at maturity varies with a foreign exchange rate. One example was its trade at maturity varies with a foreign exchange rate. One example was its trade with the Long Term Credit Bank of Japan. The ICON specified that if the yen/US dollar exchange rate, ST , is greater than 169 yen per dollar at maturity (in 1995), the holder of the bond receives $1,000. If it is less than 169 yen per dollar, the amount received by the holder of the bond is
1,000- max[0, 1,000 (169 - 1)
ST
When the exchange rate is below 84.5, nothing is received by the holder at maturity. Show that this ICON is a combination of a regular bond and two options.
2. Suppose that the risk-free zero curves is flat at 7% per annum with continuous compounding and that defaults can occur halfway through each year in a new 5- year credit default swap. Suppose that the recovery rate is 30% and the default probabilities each year conditional on no earlier default are 3%. Estimate the credit default swap spread. Assume payments are made annually.
3. Suppose that 6- month, 12-month, 18-month, 24-month, and 30-month zero rates are 4%, 4.2%, 4.4%, 4.6%, and 4.8% per annum, respectively, with continuous compounding. Estimate the cash price of a bond with a face value of 100 that will mature in 30 months and pays a coupon of 4% per annum semiannually.
4. Suppose that the economic capital estimates for two business units are as follows:
Business Unit
1 2
Market risk 10 50
Credit risk 30 30
Operational risk 50 10
Examination Paper of Risk Management
IIBM Institute of Business Management 10
The correlation between market risk and credit risk in the same business unit is 0.3. the correlation between credit risk in one business unit and credit risk in another is 0.7. the correlation between market risk in one business unit and market risk in the other is 0.2. All other correlations are zero. Calculate the total economic capital. How much should be allocated to each business unit?
End Of Section B SECTION B
Section C: Applied Theory (30 marks)
• This section consists of Long Questions.
• Answer all the questions.
• Each question carries 15 marks.
• Detailed information should from the part of your answer (Word limit 200 to 250 words).
1. Define “Derivative market”. Explain the types of derivative market?
2. What is “Operational Risk”. Explain the categories of operational risk?
End Of Section C C SECTION C
S-2-311012
IIBM Institute of Business Management 7
IIBM Institute of Business Management
Examination Paper MM.100
Risk Management and Financial Institutions
Section A: Objective Type (30 marks)
• This section consists of multiple choice questions & Short Notes type questions.
• Answer all the questions.
• Part one Question carries 1 mark each & Part Two question carry 5 Marks each.
Part One:
Multiple Choices:
1. The options where the strike price is close to the price of underlying asset is-
a. At-the-money options
b. In-the-money options
c. Out-of-the money Options
d. All of these
2. Which of the following are the non-traditional derivatives?
a. Weather derivatives
b. Oil derivatives
c. Natural gas derivatives
d. All of the above
3. An option gives the holder the right to sell the underlying asset by a certain price is termed as-
a. Call option
b. Put option
c. American option
d. European option
4. A product where value at any given time is linearly dependent on the value of an underlying market variable is-
a. Linear product
b. Non-Linear product
c. Both a & b
d. None of these
Examination Paper of Risk Management
IIBM Institute of Business Management 8
5. The agreement between two companies to exchange cash flows in the future known as-
a. Future
b. Forward
c. Swap
d. Options
6. The life insurance lasts for a specified period & pays a lump sum either when the policy holder dies or at the end of the period, which ever, is known as-
a. Variable life insurance
b. Group life insurance
c. Whole life insurance
d. Endowment life insurance
7. When an company wishing to issue is not publicly traded, the share issue known as-
a. Equity share
b. Initial public offer(IPO)
c. Debenture
d. None of these
8. VaR stands for--------------------------
9. The volatility of this model is changes with the passage of time
a. EMWA Model
b. GAMMA Model
c. VEGA Model
d. GARCH Model
10. LIBOR is stands for ----------------------------
Part Two:
1. What is difference between open-ended and close-ended mutual fund?
2. Write short note on ‘option contract’?
3. What are the main sources of liquidity for financial institution?
4. Explain the Concept of ‘Exchange-Traded Markets’?
End Of Section A SSectioSECTION A
Examination Paper of Risk Management
IIBM Institute of Business Management 9
Section B: Practical Problems (40 Marks)
• This section consists of Practical Questions.
• Answer all the questions.
• Each Question carries 10 marks.
• Detailed information should from the part of your answer.
1. In the 1980s, Bankers Trust developed index currency option notes (ICONs). These are bonds in which the amount received by the holder at maturity varies with a foreign exchange rate. One example was its trade at maturity varies with a foreign exchange rate. One example was its trade with the Long Term Credit Bank of Japan. The ICON specified that if the yen/US dollar exchange rate, ST , is greater than 169 yen per dollar at maturity (in 1995), the holder of the bond receives $1,000. If it is less than 169 yen per dollar, the amount received by the holder of the bond is
1,000- max[0, 1,000 (169 - 1)
ST
When the exchange rate is below 84.5, nothing is received by the holder at maturity. Show that this ICON is a combination of a regular bond and two options.
2. Suppose that the risk-free zero curves is flat at 7% per annum with continuous compounding and that defaults can occur halfway through each year in a new 5- year credit default swap. Suppose that the recovery rate is 30% and the default probabilities each year conditional on no earlier default are 3%. Estimate the credit default swap spread. Assume payments are made annually.
3. Suppose that 6- month, 12-month, 18-month, 24-month, and 30-month zero rates are 4%, 4.2%, 4.4%, 4.6%, and 4.8% per annum, respectively, with continuous compounding. Estimate the cash price of a bond with a face value of 100 that will mature in 30 months and pays a coupon of 4% per annum semiannually.
4. Suppose that the economic capital estimates for two business units are as follows:
Business Unit
1 2
Market risk 10 50
Credit risk 30 30
Operational risk 50 10
Examination Paper of Risk Management
IIBM Institute of Business Management 10
The correlation between market risk and credit risk in the same business unit is 0.3. the correlation between credit risk in one business unit and credit risk in another is 0.7. the correlation between market risk in one business unit and market risk in the other is 0.2. All other correlations are zero. Calculate the total economic capital. How much should be allocated to each business unit?
End Of Section B SECTION B
Section C: Applied Theory (30 marks)
• This section consists of Long Questions.
• Answer all the questions.
• Each question carries 15 marks.
• Detailed information should from the part of your answer (Word limit 200 to 250 words).
1. Define “Derivative market”. Explain the types of derivative market?
2. What is “Operational Risk”. Explain the categories of operational risk?
End Of Section C C SECTION C
S-2-311012
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