financial risk management

1. What is a normal distribution and what are the two parameters for a normal distribution?

2. How do you get analytical VaR given a percentile?

3. At i annual interest rate, what’s the future value of $100 principal in t years from now with n payments per year using compound rate formula?

4. How does a yield curve dictate the price of a bond?

5. A 7-year bond with a 2% YTM is priced at $2.20. Given that the bond price at 3% YTM is $2.10 and the bond price at 1% YTM is $2.40, what is the effective sensitivity for 1 bpt move of YTM ?

6. A 10-year bond is priced at $2.00 and has a duration of 8 years and a YTM of 3%. What is the theoretical BPV of this bond?

7. State and describe the formula for how a currency forward is priced.

8. List 3 ways to take a short or generally defensive position on different asset types or the broader market.

9. What is the definition of risk neutral probability? A bookie has the following probabilities on horse A and horse B winning the game {0.8, 02} and the betting information of the game is 90000 vs 10000. What is the risk neutral probability to set the payout at in this example?

10. List 3 greeks associated with options and describe what they measure.

11. List 3 uses for options.

12. What are the inputs to the Black Scholes option pricing model?

13. Market risk limits can be denominated in several ways. State 3 different metrics for measuring market risk.

14. What is the idea behind an optimal hedge ratio? What problem does John Hull’s optimal hedge ratio resolve?

15. List 2 downsides of delta hedging ie hedging by matching 1st order price sensitivities?

16. What is the difference between current ratio and quick ratio? And, what is the rationale for that difference.

17. What are the numerator and denominator in a company’s leverage ratio?

18. Name at least 2 of the 5 components of operating cash flow.

19. What is a CDS?

20. State at least 2 ways to mitigate credit risk in a debt or derivative transaction.

21. Name 3 methods to measure the PD of a corporate credit.

22. What is a benefit of Altman’s Z-score over other credit loss estimating models.

23. Name 3 types of loan portfolio concentrations which are frequently segmented for credit risk modeling purposes.

24. Identify 2 sources of information for monitoring counterparty credit exposure.

25. Name 3 causes of the 2008 financial crisis.

26. Name 2 types of funding for non-banks.

27. Name 2 measures of liquidity for an investment.

28. What is endogenous liquidity risk and what kinds of assets can contribute to it.

29. Name 2 ways to mitigate investment liquidity risk.

30. Give an example of wrong way risk.

1. What is the difference between risk and uncertainty? What is an appropriate risk management philosophy related to risk and uncertainty?

2. List 3 items on a company’s Income Statement. List 3 items on a company’s Balance Sheet. List 3 items in a company’s Cash Flow Statement. List 3 important ratios related to financial statement analysis.

3. A. Give a definition of VaR and list 3 components of a VaR calculation. B. List 3 types of VaR calculation methods and, explain how to get analytical 10 Day VaR given a percentile? C. What are 3 things that can go wrong with VaR?

4. As an analyst, you are asked to provide suitable stress shocks for the following two scenarios:

(A) Global stock market crash; (B) War in Korea. Suggest shocks, positive or negative, for the following market indicators: bond yield , FX, risk free rate, stock market change. For FX, state the country and currency affected.

5. Bond A is a 10-year bond with a duration of 8.9 years; bond B is a 3-year bond with a duration of 2.8; and Bond C is a 30-year bond with a duration of 30 years.

Part 1: Describe how to calculate how many T-Note futures contracts are appropriate to hedge a Corporate Bond by first order sensitivities. Note that the 10-year T-Note has a duration of 9.0 years; the 3-year T-Note has a duration of 2.9 years; and 30-year T-Note has a duration of 19.9 years.

Part 2: Are T-Note futures contracts appropriate to hedge Bond A, B or C?

6. In his interview, Mark Abbott commented that market risks and the practices designed to manage them have evolved during the last 20 years. Describe how the nature of market risk and the practices designed to manage it evolved during that period.

7. Describe a) what kinds of credit exposure you get from buying interest rate futures on the CME, and b) under what circumstances could the amount of your credit exposures increase.

8. Describe a) what kind of credit exposure you get from buying an OTC call option on Apple stock from an investment bank, b) under what circumstances could the amount of your credit exposure increase, and c) one method you can use to mitigate the amount of your credit exposure.

9. Describe the steps needed to estimate the PD of a corporate bond using Moody’s and Standard & Poor’s default tables.

10. Describe the steps needed to calculate the LGD of a currency swap.

11. The liquidity of a large bond position has deteriorated, causing a breach in the minimum liquidity limit in your portfolio’s 5-day liquidity bucket. Describe 2 actions that can be taken to put your portfolio’s 5-day liquidity back within limits.

12. Your supplier of fertilizer has failed to make the shipments for which you pre-paid. List 4 types of information which you need to obtain in order to formulate a plan to recover your pre-payments.

13. List 3 types of documents that you need to obtain in order to design suitable legal and financial covenants for a medium-term loan to a manufacturing joint-venture.

14. In his interview, Tom Day commented on the evolution of credit risk measurement and what lies in its future. Describe how credit risk modeling developed from early beginnings, its current limitations and how new technologies are using data for advanced credit risk analytics.

15. Name 2 types of investments suitable for redemption in each of the following liquidity buckets: a) 2 days, b) 2 months, c) 1 year.

16. Describe 2 strategies that a bank can use to generate funding liquidity in times of stress.

17. Name 3 sources of funding that contribute to a bank’s projected funding inflows.

18. In his interview, Geoff Craddock commented on how past crisis affected liquidity risk and its management. Describe how liquidity risk and its management has changed in the aftermath of the 2008 financial crisis.

19. Describe which of the following asset types are prone to contagion risk and why: sovereign bonds, senior unsecured bank bonds, municipal bonds, high-yield corporate bonds, US Treasury bonds, bank COCO bonds, common stocks, commercial real estate, hedge funds, private equity.

20. In his interview, Enrico Dallavecchia commented on a) the changing nature of interconnected risks and the practices designed to manage them during the last 20 years, b) lessons learned from past crises, c) advances and limitations in interconnected risk measurement and d ) the role of data in interconnected risk analytics.