Principles of Quantitative Development

QUIZ

1. What are the main categories of risk that banks strive to manage?
2. Classify the following events into the three types of risk:
   • (a) Because of the 9/11 attack, the stock market takes a dip. The value of your portfolio goes down.
   • (b) Because of an earthquake in Taiwan, your counterparty suffers a catastrophic collapse from which they cannot recover. You lose money.
   • (c) Because of the same earthquake, your Taiwan operations suffer prolonged closure. You cannot access your counterparty information and you lose money.
3. What are the strategies to mitigate the risks involved in each of the scenarios in question 2?
4. Prove mathematically that taking a two-day average of the first-order market sensitivities in P/L explanation is equivalent to considering the second-order sensitivities.
5. What is the difference between the product control and the market risk management given that both of them worry about trade PVs?
6. Check your understanding of the following business units and their functions:
   • (a) Rates management
   • (b) Credit risk management
   • (c) Static data management
   • (d) Market risk – analytics
   • (e) Documentation.
7. What is the difference between credit risk and settlement risk?

¹ See Quiz question.