116. Suppose that A and B are random variables, each follows a standard normal distribution, and the covariance between A and B is 0.35. What is the variance of (3A+2B)?

a.       14.47

b.       17.20

c.       9.20

d.       15.10

117. The surplus of a pension fund is most important for

a.       a defined benefit fund.

b.       a defined contribution fund.

c.       a sponsoring company with strong financial status that operates in different industries.

d.       a young work force.

118. Which of the following statements about liquidity risk elasticity (LRE) is incorrect?

a.       LRE is primarily useful for examining marginal changes in funding costs on a net asset/liability position

b.       In calculating the sensitivity of a firm’s net assets to a change in its funding liquidity premium, LRE assumes a parallel shift in funding costs across all maturities.

c.       The LRE is only reliable for small changes in interest costs.

d.       The LRE is a cash flow liquidity risk measure, not a present value liquidity risk measure.

119. Your bank is using the Black-Scholes model for valuation and pricing of exchange rate options with implied volatility of the at-the money options imputed from the market quotes. However, the research staff is now suggesting that exchange rate markets are exhibiting a volatility smile and the existing valuations are incorrect. As a risk manager, you will be more concerned in which of the following situations?

a.       When the portfolio mainly consists of at-the-money long calls and puts.

b.       When the portfolio mainly consists of short put positions in deep out-of money options.

c.       When the portfolio mainly consists of short positions in at-the-money calls and puts.

d.       When the portfolio mainly consists of long call positions in deep out-of-money options.

120. What does a hypothesis test at the 5% significance level mean?

a.       P (not reject H₀ | H₀ is true)=0.05

b.       P (not reject H₀ | H₀ is false)=0.05

c.       P (reject H₀ | H₀ is true)=0.05

d.       P (reject H₀ | H₀ is false)=0.05