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1.YouarethenewCFOofGlobalInsuranceInc.Youhaveaskedataskforcetoreporttoyouonhowtostructureanenterpriseriskmanagementprogram（ERM）withtheobjectiveofensuringthatyourfirmhastheoptimallevelofriskforitslevelofcapital.Thetaskforcehasmadethefollowingrecommendations.WhichrecommendationwouldhinderyourERMprogramfromachievingitsobjective?

a.Managementshouldestimatetheamountofcapitalrequiredtosupporttheriskofitsoperationsgiventhefirm’stargetrating.

b.Managementshouldallocatetheamountofcapitaldeterminedtosupporttheriskofitsoperationswiththeobjectivethatunitswithbetteraccountingperformancereceivemorecapital.

c.Managementshouldmeasurefirm-levelriskbyaggregationrisksacrossthefirmconsistently.

d.Managementshouldfirstdeterminethefirm’sriskappetiteandthegeneralrulesforcapitalallocation.

2.Whichofthefollowingstatementsregardinghypothesistestingisincorrect?

a.TypeIIerrorreferstothefailuretorejectthenullhypothesiswhenitisactuallyfalse.

b.Hypothesistestingisusedtomakeinferencesabouttheparametersofagivenpopulationonthebasisofstatisticscomputedfoeasamplethatisdrawnfromthatpopulation.

c.Allelsebeingequal,thedecreaseinthechanceofmakingaTypeIerrorcomesatthecostofincreasingtheprobabilityofmakingaTypeIIerror.

d.Thep-valuedecisionruleistorejectthenullhypothesisifthep-valueisgreaterthanthesignificancelevel.

3.Yourfirm’sfixed-incomeportfoliohasinterest-onlybonds（IO）,callablecorporatebonds,inversefloaters,noncallablecorporatebonds.Yourbosswantstoknowwhichofthefollowingsecuritiescanlosevalueasyieldsdecline.

a.Callablecorporateonly

b.Inversefloateronly

c.IOandcallablecorporatebond

d.IOandnoncallablecorporatebond

4.YouareaskedbyyourbosstoestimatetheexposureofahedgefundtotheS&P500.Thoughthefundclaimstomarktomarketweekly,itdoesnotdosoandmarkstomarketonceamonth.ThefundalsodoesnottellinvestorsthatitsimplyholdsanExchangeTradedFund（ETF）thatisindexedtotheS&P500.Becauseoftheclaimsofthehedgefund,youdecidetoestimatethemarketexposurebyregressingweeklyreturnsofthefundontheweeklyreturnoftheS&P500.Whichofthefollowingcorrectlydescribesapropertyofyourregressionestimates?

a.Theinterceptofyourregressionwillbepositive,showingthatthefundhaspositivealphawhenestimatedusinganOLSregression.

b.Thebetawillbemisestimatedbecausehedgefundexposuresarenonlinear.

c.ThebetaofyourregressionwillbeonebecausethefundholdstheS&P500.

d.ThebetaofyourregressionwillbezerobecausethefundreturnsarenotsynchronouswiththeS&P500returns.

5.YouareananalystatBankAlpha.YouweregiventhetasktodeterminewhetherunderBaselIIyourbankcanusethesimplifiedapproachtoreportoptionsexposureinsteadoftheintermediateapproach.Whichofthefollowingcriteriawouldyourbankhavetosatisfyinorderforittousethesimplifiedapproach?

a.Thebankwritesoptions,butitsoptionstradingisinsignificantinrelationtoitsoverallbusinessactivities.

b.Thebankpurchasesandwritesoptionsandhassignificantoptiontrading.

c.Thebanksolelypurchasesoptions,anditsoptionstradingisinsignificantinrelationtoitsoverallbusinessactivities.

d.Thebankpurchasesandwritesoptions,butitsoptiontradingisinsignificant.

6.ThePotentialFutureExposure（PFE）modelcanbeusedto

i.calculateeconomicandregulatorycapital.

ii.quantifycreditrisk.

iii.calculatemarketrisk.

iv.determinetheappropriatestochasticprocessofacreditportfolio.

a.iiiandivonly

b.iandiiionly

c.i,ii,andiiionly

d.i,ii,andivonly

Thefollowingmini-casescenarioappliestobothquestion7and8.

7.OnJanuary1,ariskmanagerobservesthattheone-yearcontinuouslycompoundedinterestrateis5%andstoragecostsofacommodityproductAisUSD0.05perquarter（payableateachquarterend）.HefurtherobservesthefollowingforwardpricesforproductA:

·MarchUSD5,35

·JuneUSD5.90

·SeptemberUSD5.30

·DecemberUSD5.22

GiventhefollowingexplanationofsupplyanddemandforcommodityproductA,howwouldyoubestdescribeitsforwardpricecurveformJunetoDecember?

a.BackwardationasthesupplyofproductAisexpectedtodeclineaftersummer.

b.ContangoasthesupplyofproductAisexpectedtodeclineaftersummer.

c.ContangoasthereisexcessdemandforproductAinearlysummer.

d.BackwardationasthereisexcessdemandforproductAinearlysummer.

8.Whatistheannualizedrateofreturnearnedonacash-and-carrytradeenteredintoinMarchandclosedoutinJune?

a.9.8%

b.8.9%

c.39.1%

d.35.7%

9.Whichofthefollowingischaracteristicof”crowdedtrades”?

a.Asspreadsnarrow,tradershavelowereconomicincentivestoincreaseleveragelevelsinordertoachievecomparablereturns.

b.Theaggregatevolumeoftradesinthemarket（s）issuchthattraderscansimultaneouslyexitfromtheirpositionswithoutsignificantlyimpactingprevailingprices.

c.Untiltradersseektounwindpositions,crowdedtradesareoftencharacterizedbyadampeningofvolatilitiesandanincreaseinperceivedliquiditymeasures,leadingtomisleadinglylowriskcalculationsinconventionalVaR（includingliquidity-adjustedVaR）andotherriskmodels.

d.Asinglelargepartyentersintocorrelatedtradingstrategiesacrossoneormoremarkets.

10.Thepriceofathree-yearzerocoupongovernmentbondis85.16.Thepriceofasimilarfour-yearbondis79.81.Whatistheone-yearimpliedforwardrateformyear3toyear4?

a.5.4%

b.5.5%

c.5.8%

d.6.7%

11.Supposeyouaregiventhefollowinginformationabouttheoperationalrisklossesatyourbank.

Frequencydistribution

SeverityDistribution

Probability

Frequency

Probability

Severity

0.5

0

0.6

USD1,000

0.3

1

0.3

USD10,000

0.2

2

0.1

USD100,1000

WhatistheestimateoftheVaRatthe95%confidencelevel,assumingthatthefrequencyandseveritydistributionsareindependent?

a.USD100,000

b.USD101,000

c.USD200,000

d.USD110,000

12.Ariskmanagerestimatesdailyvariance（

）usingaGARCHmodelondailyreturns（

）:

Assumethemodelparametervaluesare

=0.005,

=0.04,

=0.94.Thelong-runannualizedvolatilityisapproximately

a.13.54%

b.7.94%

c.72.72%

d.25.00%

13.Inpricingafirst-to-defaultcreditbasketswap,whichofthefollowingistrue,allelsebeingequal?

a.Thelowerthecorrelationbetweentheassetsofthebasket,thelowerthepremium.

b.Thelowerthecorrelationbetweentheassetsofthebasket,thehigherthepremium.

c.Thehigherthecorrelationbetweentheassetsofthebasket,thehigherthepremium.

d.Thecorrelationbetweentheassetshasnoimpactonthepremiumofafirst-todefaultcreditbasketswap.

14.Tocontrolrisk-takingbytraders,yourbanklinkstradercompensationwiththeircompliancewithimposedVaRlimitsontheirtradingbook.WhyshouldyourbankbecarefulintyingcompensationtotheVaRofeachtrader?

a.Itencouragestradertoselectpositionswithhighestimatedrisks,whichleadstoanunderestimationoftheVaRlimits.

b.Itencouragestradertoselectpositionswithhighestimatedrisks,whichleadstoanoverestimationoftheVaRlimits.

c.Itencouragestradertoselectpositionswithlowestimatedrisks,whichleadstoanunderestimationoftheVaRlimits.

d.Itencouragestradertoselectpositionswithlowestimatedrisks,whichleadstoanoverestimationoftheVaRlimits.

15.BankZ,amedium-sizebank,usesonlyoperationallossdatafrominternalrecordstomodelitslossdistributionfromoperationalriskevents.Thebankrevieweditsrecords,and,afterconfirmingthattheywerecompleterecordsofitshistoricallossesandthatitslossescouldbeapproximatedbyauniformdistribution,itdecidedagainstusingexternallossdatatoestimateitslossdistribution.Basedonthatdecision,whichofthefollowingstatementsiscorrect?

a.TheestimatedlossdistributionlikelyaccuratelyrepresentsBankZ’srealriskbecausetherecordsareaccurateandcomplete.

b.TheestimatedlossdistributionlikelyovertakesbankZ’srealriskbecausemanyincidencesinthepastwerelikely“oneoff.”

c.TheestimatedlossdistributionlikelyisthebestestimateofBankZ’srealriskbecausethereisnobetterlossdataforthebankthanitsown.

d.TheestimatedlossdistributionlikelyunderstatesBankZ’srealriskbecausethebankhasnotexperiencedahugeloss.

16.Whichofthefollowingisnotanaccuratestatementregardingthepurchaseofinsurancebybanksforcoveringoperationalrisk-relatedlosses?

a.Insuranceforoperationalriskeventscanbeveryexpensive.

b.Insurancecompaniesdonothaveanycomparativeadvantageinbearingormeasuringoperationalriskandthusmakepoorriskmanagementpartnersforbanks.

c.Thepresenceofmoralhazardininsuranceleadstonumerouscontractingtermsthatrestrictandconditiontheinsuranceandthatmaketheinsurancelessvaluableforbanks.

d.Policylimitsoftenlimitinsurancecoveragetolevelswellbelowthecatastrophiclevelsforwhichbanksactuallyneedprotection.

17.Theskewofalognormaldistributionisalways

a.positive.

b.negative.

c.0.

d.3.

18.Considertwostocks,AandB.Assumetheirannualreturnsarejointlynormallydistributed,themarginaldistributionofeachstockhasmean2%andstandarddeviation10%,andthecorrelationis0.9.WhatistheexpectedannualreturnofstockAiftheannualreturnofstockBis3%?

a.2%

b.2.9%

c.4.7%

d.1.1%

19.Ifstockreturnsarein