Prepayment Risk Assessment Task

Finance
FNCE4036El12

Part A Multiple-Choice Questions
1. d) Prepayment Risk
2. a) It includes all the contracts the bank enters into as part of its trading operations.
3. c) Riegel-Neal Act
4. c) Risk Averaging
5. b) (ii)
6. a) Operational risk is relatively easier to avoid as compared to credit risk.
7. c) Reduction
8. b) They play a primary role in implementing the ERM.
9. b) Determining risk appetite
10. d) Outsourcing some of the production processes
11. b) b) Mutual funds provide a higher level of diversification
12. a) A dollar – neutral fund
13. c) Increases in longevity affect the profitability of annuity contracts negatively and the
profitability of life insurance contracts positively
14. d) None of the above (that is, ALL are a type of annuity contract)
15. c) Investors who hold a long position in an American call option on the stock
16. c) If the current price of the underlying asset is $8.
17. d) The greater of (i), (ii), and (iii)
18. b) They bear relevant credit risk
19. a) Asian Option
20. c) Buying a put on the stock

Part B Problems and Short Answer Questions
Answer 1.
Year
S&P/TSX
Venture
Composite Deviations Deviations^2
2002 3.66% -34.73% 0.121
2003 63.24% 24.85% 0.062
2004 4.40% -33.99% 0.116
2005 22.62% -15.77% 0.025
2006 33.59% -4.80% 0.002
2007 –4.94% -43.33% 0.188
2008 –71.93% -110.32% 1.217
2009 90.80% 52.41% 0.275
2010 50.45% 12.06% 0.015
2011 –35.07% -73.46% 0.540
2012 – 16.88% -55.27% 0.305
2013 –21.8% -60.19% 0.362
2014 –25% -63.39% 0.402
SUM 3.628
1) Probabaility of return less than 51.51% in a year.
Data Point = 51.51%
Mean Return = 38.39%
Standard Deviation =
SQRT (SUM/n-
1)
Standard Deviation = 54.99%
Z = (51.51%- 38.39%)/54.99%
Z = 0.238588834
Probability = 99.762%