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Hull: Options, Futures, and Other Derivatives, Ninth Edition

Chapter 22: Value at Risk


Multiple Choice Test Bank: Questions
1. Which of the following is true of the 99.9% value at risk?
A. There is 1 chance in 10 that the loss will be greater than the value of
risk
B. There is 1 chance in 100 that the loss will be greater than the value of
risk
C. There is 1 chance in 1000 that the loss will be greater than the value of
risk
D. None of the above
2. The gain from a project is equally likely to have any value between -$0.15
million and +$0.85 million. What is the 99% value at risk?
A. $0.145 million
B. $0.14 million
C. $0.13 million
D. $0.10 million
3. The gain from a project is equally likely to have any value between $0.15
million and +$0.85 million. What is the 99% expected shortfall?
A. $0.145 million
B. $0.14 million
C. $0.13 million
D. $0.10 million
4. Which of the following is true of the historical simulation method for
calculating VaR?
A. It fits historical data on the behavior of variables to a normal
distribution
B. It fits historical data on the behavior of variables to a lognormal
distribution
C. It assumes that what will happen in the future is a random sample from
what has happened in the past
D. It uses Monte Carlo simulation to create random future scenarios
5. The 10-day VaR is often assumed to be which of the following
A. The 1-day VaR multiplied by 10
B. The 1-day VaR multiplied by the square root of10
C. The 1-day VaR divided by 10
D. The 1-day VaR divided by the square root of 10
6. Which was the minimum capital requirement for market risk in the 1996 BIS
Amendment?
A. At least 3 times the 10-day VaR with a 99% confidence level
B. At least 3 times 7-day VaR with a 97% confidence level
C. At least 2 times 5-day VaR with a 95% confidence level
D. 1-day VaR with a 99% confidence level

7. An investor has $2,000 invested in stock A and $5,000 in stock B. The daily
volatilities of A and B are 1.5% and 1% respectively and the coefficient of
correlation is 0.8. What is the one day 99% VaR? Assume that returns are
multivariate normal (Note that N(-2.326)=0.01)
A. $177
B. $135
C. $215
D. $331
8. What is the method of testing how often a VaR with a certain confidence level
was exceeded in the past called?
A. Stress testing
B. Back testing
C. EWMA
D. The model-building approach
9. Which of the following is true when delta, but not gamma, is used in
calculating VaR for option positions?
A. VaR for a long call is too low and VaR for a long put is too low
B. VaR for a long call is too low and VaR for a long put is too high
C. VaR for a long call is too high and VaR for a long put is too low
D. VaR for a long call is too high and VaR for a long put is too high
10.Which of the following is true?
A. The quadratic model approximates daily changes in using delta and
gamma
B. The quadratic model approximates daily changes using delta, but not
gamma
C. The quadratic model approximates daily changes using gamma, but
not delta
D. None of the above
11.Which of the following is true?
A. Cash flow mapping is a way of calculating the present value of cash
flows
B. Cash flow mapping is used to handle interest rate exposures in the
model building approach
C. Cash flow mapping is used to handle interest rate exposures in the
historical simulation approach
D. None of the above
12.Which of the following describes stressed VaR?
A. It is based on movements in market variables in stressed market
conditions
B. It is VaR with a very high confidence level
C. It is VaR multiplied by a factor of 3

D. None of the above

13.A German bank has exposure to the S&P500. Which of the following is true
A. The S&P 500 index should be always be measured in U.S. dollars when
VaR is calculated
B. The S&P 500 index should be always be measured in euros when VaR
is calculated
C. Either A or B can be done
D. The S&P 500 index should be measured in euros only if the bank has
not got a U.S. subsidiary.
14.Which of the following is true of a covariance matrix?
A. The numbers on the diagonal are variances
B. The numbers on the diagonal are standard deviations
C. The numbers on the diagonal are all one.
D. The numbers on the diagonal are all zero
15.Consider a position in options on a particular stock. The position has a delta
of 12 and the stock price is 10. Which of the following is the approximate
relation between the change in the portfolio value in one day, dP, and the
return on the stock during the day, dx
A. dP=12dx
B. dP=1.2dx
C. dP=120dx
D. dP=22dx
16.A position in options on a particular stock has a delta of zero and a gamma of
4. The stock price is 10. Which of the following is the approximate relation
between the change in the portfolio value in one day, dP, and the return on
the stock, dx
A. dP = 4 times the square of dx
B. dP = 2 times the square of dx
C. dP = 20 times the square of dx
D. dP = 200 times the square of dx
17.In a principal components analysis which of the following is the quantity of a
particular factor in an observation
A. Factor loading
B. Factor score
C. Factor size
D. Factor rating
Answer: B

18.In the
to
A.
B.
C.
D.

case of interest rate movements the most important factor corresponds


A parallel shift
A slope change
A bowing
An increase in short rates

19.In the case of interest rate movements the second most important factor
corresponds to
A. A parallel shift
B. A slope change
C. A bowing
D. An increase in short rates
20.Which of the following is true
A. Expected shortfall is always less than VaR
B. Expected shortfall is always greater than VaR
C. Expected shortfall is sometimes greater than VaR and sometimes less
than VaR
D. Expected shortfall is a measure of liquidity risk wheras VaR is a
measure of market risk