Question 1

Uncertainty differs from risk in that the former:

Accepted Answer

Uncertainty is characterized by the unknown probability distribution of outcomes, unlike risk, where the probabilities of outcomes are known or can be estimated.

Question 2

The definition of risk includes:

Accepted Answer

The definition of risk encompasses all the given options: the extent of dispersion around the mean, the possibility of a gain, and the volatility of unexpected outcomes, as these factors contribute to the uncertainty and variability associated with an investment's returns.

Question 3

Foreign exchange risk arises because of:

Accepted Answer

A

Question 4

The USD/AUD exchange rate on 31 December 2002 was 0.5662 as compared with 0.5636 on the previous day. Calculate the daily return.

Accepted Answer

The daily return is calculated as ((0.5662 - 0.5636) / 0.5636) * 100 = 0.46%.

Question 5

Calculate the mean return of the USD/AUD over this period. You have calculated the following daily returns for the USD/AUD.

Accepted Answer

The answer of Calculate the mean return of the USD/AUD...

Question 6

Calculate the mean of the expected percentage change of the USD/AUD. An Australian investor buys a U.S. financial asset for USD at the time the asset is purchased is 0.8800. On maturity the exchange rate may assume one of several values according to the following probability distribution:

Accepted Answer

The answer of Calculate the mean of the expected percentage...

Question 7

Calculate the standard deviation of the expected percentage change of the USD/AUD. An Australian investor buys a U.S. financial asset for USD at the time the asset is purchased is 0.8800. On maturity the exchange rate may assume one of several values according to the following probability distribution:

Accepted Answer

The answer of Calculate the standard deviation of the expected...

Question 8

Calculate the variance of the expected percentage change of the USD/AUD. An Australian investor buys a U.S. financial asset for USD at the time the asset is purchased is 0.8800. On maturity the exchange rate may assume one of several values according to the following probability distribution:

Accepted Answer

The answer of Calculate the variance of the expected percentage...

Question 9

Calculate the volatility of the USD/AUD over this period. You have calculated the following daily returns and the mean daily return for the USD/AUD.

Accepted Answer

The answer of Calculate the volatility of the USD/AUD over...

Question 10

Calculate the mean absolute deviation of the USD/AUD over this period. You have calculated the following daily returns and the mean daily return for the USD/AUD.

Accepted Answer

The answer of Calculate the mean absolute deviation of the...

Question 11

'Value-at-risk' refers to:

Accepted Answer

Value-at-risk (VaR) is a statistical measure used to assess the level of financial risk within a firm or investment portfolio over a specific time frame. It estimates the maximum potential loss with a given confidence level (probability), indicating the amount of potential loss that could be experienced on an investment portfolio over a set period of time under normal market conditions.

Question 12

The main problem with the parametric approach to the calculation of value-at-risk is the assumption that the rate of return:

Accepted Answer

The main issue with the parametric approach to calculating value-at-risk (VaR) is the assumption that returns are normally distributed. This assumption can be problematic because financial returns often exhibit fat tails and are not perfectly normal, leading to potential underestimation of risk.

Question 13

Distributions of financial returns are not normal because they:

Accepted Answer

Financial returns often exhibit fat tails and can be skewed, meaning they do not follow a normal distribution which assumes symmetry and thinner tails.

Question 14

The benefits offered by the value-at-risk methodology include:

Accepted Answer

Value-at-risk (VaR) methodology is appreciated for its simplicity in providing a single number that sums up the risk of an entire portfolio, making it easier to understand and communicate. Additionally, its straightforwardness and quantifiable nature make it suitable for setting risk limits, helping organizations manage and mitigate risk effectively. However, its accuracy can be debated, as it relies on historical data and assumptions that may not always capture future risks accurately.

Question 15

Value-at-risk:

Accepted Answer

Value-at-risk (VaR) is a statistical technique used in finance to quantify the level of financial risk within a firm or investment portfolio over a specific time frame. It summarizes the worst-case scenario of potential losses that could be incurred with a certain level of confidence (e.g., 95% or 99%). It does not equal the present value of future cash flows, is not used primarily by manufacturing companies, and is not a precise measurement of loss but rather an estimate under certain confidence levels.

Question 16

The mean return on the AUD/USD is 0.314%, with a standard deviation of 1.867%. Calculate the one-day value-at-risk of an AUD1m position on the USD, using the parametric approach subject to a probability of 1%.

Accepted Answer

Using the parametric (or variance-covariance) approach to calculate the Value-at-Risk (VaR), we apply the formula: VaR = Z * σ * Position Size, where Z is the Z-score corresponding to the confidence level (for 1%, Z = 2.33), σ is the standard deviation, and Position Size is the size of the position in question. Given a mean return of 0.314% and a standard deviation of 1.867% for the AUD/USD, for an AUD1m position, the one-day VaR at 1% probability is calculated as follows: VaR = 2.33 * 1.867% * AUD1m = 2.33 * 0.01867 * AUD1m ≈ AUD0.04361m or AUD43,610. Therefore, the closest answer is B) AUD40.361m.

Question 17

The mean return on the AUD/USD is 0.314%, with a standard deviation of 1.867%. Calculate the one-day value-at-risk of an AUD1m position on the USD, using the parametric approach subject to a probability of 2.5%.

Accepted Answer

The correct answer is A because the one-day value-at-risk of an AUD1m position on the USD, using the parametric approach subject to a probability of 2.5%, is AUD3.656m. This is calculated as follows:VaR = (z * σ) * Xwhere:z is the z-score corresponding to the desired probability (in this case, 2.5%)σ is the standard deviation of the returnX is the position sizeIn this case, we have:z = -1.96 (from the standard normal distribution table)σ = 1.867%X = AUD1mTherefore, VaR = (-1.96 * 1.867%) * AUD1m = AUD3.656m

Question 18

Parametric value-at-risk:

Accepted Answer

Parametric value-at-risk (VaR) calculates VaR based on statistical measures, specifically the mean and standard deviation of asset returns, under the assumption of normal distribution of returns. This method does not involve revaluing portfolios for random scenarios or historical changes, nor is it particularly accurate for non-linear risk exposures without adjustments.

Question 19

Parametric value-at-risk:

Accepted Answer

Parametric value-at-risk (VaR) is known for being fast and simple to calculate because it relies on a statistical model that uses the mean and standard deviation of returns, assuming a normal distribution of returns. This approach is less computationally intensive compared to methods like Monte Carlo simulations or the historical method, which require more data and computing power.

Question 20

Based on the survey conduct in 1999 by Moosa and Knight, which of the statements below is incorrect?

Accepted Answer

The statement that a minority of users employ back testing and stress testing is incorrect. In fact, back testing and stress testing are commonly used practices among firms that employ value-at-risk (VaR) methodologies to ensure the accuracy and reliability of their risk assessments. These practices are integral to the risk management process, allowing firms to evaluate how well their VaR models predict potential losses and to assess the impact of extreme market conditions.

Quiz 12: Foreign Exchange Risk and Exposure

Uncertainty differs from risk in that the former:

The definition of risk includes:

Foreign exchange risk arises because of:

The USD/AUD exchange rate on 31 December 2002 was 0.5662 as compared with 0.5636 on the previous day. Calculate the daily return.

Calculate the mean return of the USD/AUD over this period. You have calculated the following daily returns for the USD/AUD.

Calculate the mean of the expected percentage change of the USD/AUD. An Australian investor buys a U.S. financial asset for USD at the time the asset is purchased is 0.8800. On maturity the exchange rate may assume one of several values according to the following probability distribution:

Calculate the variance of the expected percentage change of the USD/AUD. An Australian investor buys a U.S. financial asset for USD at the time the asset is purchased is 0.8800. On maturity the exchange rate may assume one of several values according to the following probability distribution:

Calculate the volatility of the USD/AUD over this period. You have calculated the following daily returns and the mean daily return for the USD/AUD.

Calculate the mean absolute deviation of the USD/AUD over this period. You have calculated the following daily returns and the mean daily return for the USD/AUD.

'Value-at-risk' refers to:

The main problem with the parametric approach to the calculation of value-at-risk is the assumption that the rate of return:

Distributions of financial returns are not normal because they:

The benefits offered by the value-at-risk methodology include:

Value-at-risk:

The mean return on the AUD/USD is 0.314%, with a standard deviation of 1.867%. Calculate the one-day value-at-risk of an AUD1m position on the USD, using the parametric approach subject to a probability of 1%.

The mean return on the AUD/USD is 0.314%, with a standard deviation of 1.867%. Calculate the one-day value-at-risk of an AUD1m position on the USD, using the parametric approach subject to a probability of 2.5%.

Parametric value-at-risk:

Parametric value-at-risk:

Based on the survey conduct in 1999 by Moosa and Knight, which of the statements below is incorrect?