Updated: Aug 28, 2025
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1. John owns a bond portfolio worth $2 million with duration of 10. What positions must he take to hedge this portfolio against a small parallel shifts in the term structure.
A) Short position worth $20 million with duration of 1.
B) Long position worth $2 million with duration of 10.
C) Short position worth $2 million with duration of 10.
D) Long position worth $20 million with duration of 1.
2. In hedging transactions, derivatives typically have the following advantages over cash instruments:
I. Lower credit risk
II. Lower funding requirements
III. Lower dealing costs
IV.
Lower capital charges
A) II, IV
B) I, III
C) I, II
D) I, II, III, IV
3. As an example of the balance sheet effect, if rates rise, Delta Bank can expect:
A) Its fixed rate assets to drop in value, although that effect will be offset by a reduction in the value of its fixed rate liabilities.
B) Its fixed rate assets to increase in value, although that effect will be offset by a reduction in the value of its fixed rate liabilities.
C) Its fixed rate assets to increase in value, while that effect will be amplified by a reduction in the value of its fixed rate liabilities.
D) Its fixed rate assets to drop in value, while that effect will be amplified by a reduction in the value of its fixed rate liabilities.
4. Suppose that a regulator deems all corporate debt to have the same risk level. Which of the following behavior of banks would be an example of regulatory arbitrage?
A) Banks shift their exposure to more risky corporate debt.
B) Banks increase their exposure to corporate debt.
C) Banks shift their exposure to less risky corporate debt.
D) Banks decrease their exposure to corporate debt.
5. What is a common implicit assumption that is made when computing VaR using parametric methods?
A) The expected returns are constant, but the standard deviation changes over time.
B) The mean of and the standard deviations of returns are both constant.
C) The mean and standard deviation of returns change periodically in response to crises.
D) The standard deviations of returns are constant, but the mean changes over time.
Solutions:
Question # 1 Answer: C | Question # 2 Answer: D | Question # 3 Answer: A | Question # 4 Answer: A | Question # 5 Answer: B |
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