FIN F414: FINANCIAL RISK ANALYTICS AND MANAGEMENT

MID-SEM EXAMINATION (CLOSED BOOK) – SECOND SEMESTER 2022-23

Duration = 90 Minutes Total Points = 100 == 30% of the course weight

I. Answer all the following multiple-choice question. Each question carries 3 points
1) Which of the following is(are) true?
A) The general VaR models in practice are designed for holding period of 1 years
and historical data of 10 days
B) Full revaluation method is one of the methods for VaR, which uses
sensitivities of the portfolio to calculate impact of VaR
C) VaR is aggregated linearly across the constituent portfolios
D) Expected shortfall VaR is always greater than percentile based VaR

2) What is the correct interpretation of a $3M overnight VaR Figure with 99% confidence level
on a long-portfolio? The institution can be expected to…..?
A) gain at least $3M in 1 out of next 100 days
B) lose at least $3M in 95 out of next 100 days
C) lose at least $3M in 1 out of next 100 days
D) gain at most $3M in 95 out of next 100 days
3) Assume a credit exposure of $1mn has a recovery rate (RR) is 75%. If the probability
of default (PD) is 2%, what is the expected loss (EL) of this exposure?
A) $15,000
B) $5,000
C) $20,000
D) $10,000
E) None of the above
4) Theta…………….when options are at the money, and ………….. when options are in
and out-of-the money.
A) Increases, decreases
B) Decreases, increases
C) Increases, increases
D) Decreases, decreases
E) None of the above
5) A .....................................-neutral strategy removes the risk that is due to the
underlying price moves, but it does not hedge the other risks that derivatives face.
A) Gamma Neutral
B) Vega Neutral
C) Delta Neutral
D) None of the above

6) Volatility surface will have huge impact on …………………Options.

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 A) In the money options
B) At the money options
C) Out of the money options
D) All the above
E) None of the above

7) The standard commodity basket costs €450 in the Europe and the same baskets costs
in India ₹40170. Find out the exchange rate between INR and Euro from and Indian
perspective in terms of direct quote.
A) ₹89.2667
B) $89.2667
C) €0.0112
D) $0.0112
E) €89.2667
F) ₹0.0112
G) None of the above

8) …………provides an estimate of the likelihood that a borrower will be unable to meet

its obligations.
A) Exposure at default
B) Loss given default
C) Probability of default
D) Expected loss
E) None of the above

II. Answer all the following short answer/fill in the blank type questions. Each question carries 4 points
1) Mr. FRAM lent ₹100 to Mr. DRM three months back by taking a XYZ share which was
trading on BPHC exchange at ₹120 as the collateral. Unfortunately, today Mr. DRM has
defaulted the loan. Mr. FRAM liquidated the XYZ share which is trading at ₹100 today on
BPHC. 1-year discount rate is 6%. Using this information, find out the Mr. FRAM’s LGD.
2) Assume that each US dollar is exchanging with Indian rupees at ₹75.25. Mr. John is a forex
trader on New York Exchange and he is a resident of USA. His line manager called him up
and asked to find out what is the “PIP” in the case of USD-INR based on the aforementioned
exchange rate. Assume that you are the Mr. John and find out the “PIP”?

3) India’s current real interest rate is -2% p.a. (i.e. minus two percent per annum) and the
expected inflation rate 6% p.a. Find out the nominal interest rate.

4) If country A’s currency is not convertible at all into country B’s currency but it is convertible
into global currency such as dollar. In this special case how a forex trader or for that matter
any investor or trader can strategies to reduce the forex exposure between country A & B?
(Clue: Name the instrument or strategy)

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5) An increase (decrease) in the expected inflation rate in a country will cause a proportionate
increase (decrease) in the interest rate in the country is known as ..........effect.

6) ……… is the difference between the expected price of a trade and the price at which the
trade is executed?

III. FRAM Ltd is one of the India pharmaceutical company and it is listed on BPHC
exchange. Recently, it started producing and selling covid-19 vaccine in India, U.K., and
U.S.A. Given that it is generating revenue from three different countries, therefore, there will
be foreign exchange risk is involved. Explain the kinds of foreign exchange risk FRAM ltd
faces in this business. (10 Points)

IV. Explain the following three exotic options (15 points)

a. Quanto Options
b. Asian Options
c. shout Options

$
V. Suppose i $ =5 % , i £=8 % spot price in terms of dollar per pound ∨S=$ 1.50 and the one
£
year forward (dollar per pound) rate is F=$ 1.48 .This is clearly indicating that

[ ]F
( 1+i$ ) < S ( 1+ i £ ). Given that it is violating the interest rate parity (IRPT) condition then
immediately the astute traders will carry out the covered interest rate arbitrage (CIA)
transactions and eventually these transactions lead to restoration of IRPT between two
countries. Specify the kind of changes that led to restoration of IRPT condition in terms of
interest rates and exchange rates in this context (10 points).

VI. Let’s assume that Mr. FRAM has 1000 SBIN shares and its current price is 550 and
annual volatility is 15%. Assume that there are 250 trading or business days per year.
Calculate a ten (10) day VaR with 99 percentile using the above information. (7 Points)

VII. Assume that XYZ bank had given a loan amount of ₹6,00,000 to MR. FRAM to
purchase the car but unfortunately Mr. FRAM could not pay any EMI (equated monthly
instalments). Therefore, bank acquired the car and went for auction. Car was sold for
₹4,35,000 in the auction and it took three months to recover this amount. The bank also
incurred ₹25,000 expenses towards auction process and legal expenses. Assume the discount
rate is 7.5% per annum. Find out the Loss Given Default (LGD) on this transaction. No
partial marks will be awarded. All the numbers should be rounded to two decimals (10
Points)

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