MBA 527: Risk Management in Banking-Take – Home Final Exam

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Q1: What are the main goals of financial regulation? [5 POINTS]

Q2: Assume that a portfolio consists of two assets. Asset A has an allocation of 80% and a standard deviation of 16% while asset B has an allocation of 20% and a standard deviation of 25% with a correlation coefficient between asset A and asset B of 0.6. Please calculate the standard deviation of the portfolio. [10 POINTS]

Q3: Please list key material risks of a standard bank? (Both financial and non-financial risks) Does the ranking (or importance) of these risks change for each bank? [10 POINTS]

Q4: What are the key differences between Credit and Market risks? [5 POINTS]

Q5: Please calculate the VaR of the position using the information provided below. Assume you have a well-diversified $500,000 portfolio of stocks with a daily standard deviation of 2%. If we assume 95% confidence and normally distribution, what is the daily VaR and 5-days VaR? [10 POINTS]

Q6: What is operational risk and what are the categories of operational risks based on Basel Committee? [5 POINTS]

Q7: During model validation process, what are the model ratings? If a model is rated “Needs moderate enhancements”, can the model owner use the model? [10 POINTS]

Q8: What is “change log” and why it is important? [5 POINTS]

Q9: What is Third-party Risk Management? [5 POINTS]

Q10: On the second day of the course, the documentary we have watched, “Trillion Dollar Bet,” was describing the development of the Black-Scholes (or Black-Scholes-Merton) model, which was a key development in theoretical finance and earned Nobel prizes for two of its developers. The following is a list of questions regarding the material covered in the video. Please answer them with short responses. [15 POINTS]

1.What was the discovery that revolutionized finance? What was the key insight about the relationship between the risk of a stock and the risk of an option that allowed for this discovery?

2.What is traded on the Chicago Mercantile Exchange?

3.What is an option?

4.What feature of options made Myron Scholes excited these investment instruments?

5.What is dynamic hedging, what does it involve, and why is it useful? (Note – this is probably the most difficult question on this list.)

6.What was the practical problem with Black and Scholes’ equations?

7.Did this model require traders to trade more frequently or less frequently in order to control or manage their investment risks? What effect did this have on the size of the market for “derivatives”?

Q11: What is effective challenge and how does it depend on incentives, competence, and influence? [10 POINTS]

Q12: What is the main difference between Resolution Scenario and Recovery Scenarios? [10 POINTS]

MBA 527 – Risk Management in Banking – Take home final examination

This project is based on the topic of risk management. In comprises of total 12 questions. Each of the questions is to be answered most appropriately. Question 10 in based on the case study. There is a list of seven questions that are needed to be answered. Prepare brief and most accurate answers to the questions.

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