Name: Roll No:

Quiz
Financial Risk Management

 Please circle clearly and unambiguously the CLOSEST RESPONSE to each question.
There MAY NOT be a PERFECT RESPONSE.
 There is only ONE CORRECT answer per question.

1. A portfolio of derivatives on a stock has a delta of 2400 and a gamma of –10. An option on the
stock with a delta of 0.5 and a gamma of 0.04 can be traded. What position in the option is
necessary to make the portfolio gamma neutral?
a. Long position in 250 options
b. Short position in 250 options
c. Long position in 20 options
d. Short position in 20 options

2. What does rho measure?

a. The rate of change of delta with the asset price
b. The rate of change of the portfolio value with the passage of time
c. The sensitivity of a portfolio value to interest rate changes
d. None of the above

3. Which of the following describes delta?

a. The ratio of the option price to the stock price
b. The ratio of the stock price to the option price
c. The ratio of a change in the option price to the corresponding change in the stock price
d. The ratio of a change in the stock price to the corresponding change in the option price

4. The volatility of a stock is 18% per year. Which is closest to the volatility per month?
a. 1.5%
b. 3.0%
c. 5.2%
d. 6.3%

5. A call option on a stock has a delta of 0.3. A trader has sold 1,000 options. What position
should the trader take to hedge the position?
a. Sell 300 shares
b. Buy 300 shares
c. Sell 700 shares
d. Buy 700 shares

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6. Which of the following measures the rate of change of the value of the portfolio with respect to
volatility?
a. Vega
b. Gamma
c. Theta
d. Delta

7. Which of the following is true?

a. Expected shortfall is always less than VaR
b. Expected shortfall is always greater than VaR
c. Expected shortfall is sometimes greater than VaR and sometimes less than VaR
d. Expected shortfall is a measure of liquidity risk whereas VaR is a measure of market
risk

8. Which of the following describes stressed VaR?

a. It is based on movements in market variables in stressed market conditions
b. It is VaR with a very high confidence level
c. It is VaR multiplied by a factor of 3
d. None of the above

9. What is the method of testing how often a VaR with a certain confidence level was exceeded in
the past called?
a. Stress testing
b. Back testing
c. EWMA
d. The model-building approach

10. Which of the following is true of the historical simulation method for calculating VaR?
a. It fits historical data on the behavior of variables to a normal distribution
b. It fits historical data on the behavior of variables to a lognormal distribution
c. It assumes that what will happen in the future is a random sample from what has
happened in the past
d. It uses Monte Carlo simulation to create random future scenarios

11. Which of the following is true of the 99.9% value at risk?

a. There is 1 chance in 10 that the loss will be greater than the value of risk
b. There is 1 chance in 100 that the loss will be greater than the value of risk
c. There is 1 chance in 1000 that the loss will be greater than the value of risk
d. None of the above

12. What does theta measure?

a. The rate of change of delta with the asset price
b. The rate of change of the portfolio value with the passage of time
c. The sensitivity of a portfolio value to interest rate changes
d. None of the above

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13. Which of the following could NOT be a delta-neutral portfolio?
a. A long position in call options plus a short position in the underlying stock
b. A short position in call options plus a short position in the underlying stock
c. A long position in put options and a long position in the underlying stock
d. A long position in a put option and a long position in a call option

14. If a $0.5 increase in the price of gold leads to the portfolio decreasing in value by $100, the
delta of the portfolio is
a. -200
b. 200
c. 50
d. 100

15. Which statement accurately describes Delta hedging a short option position?
a. Delta hedging involves buying after a price decline and selling after a price increase,
following a "buy low, sell high" strategy.
b. Delta hedging involves buying after a price increase and selling after a price decline,
following a "sell low, buy high" strategy.
c. The total costs incurred in delta hedging are generally far from the theoretical price of
the option.
d. None of the above.