Economics · Financial Markets

Evaluate the following statements regarding the risk management framework and specialized derivative instruments used by financial institutions: Statement 1. 'Value at Risk' (VaR) is a statistical technique used to measure and quantify the level of financial risk within a firm or investment portfolio over a specific time frame at a given confidence level. Statement 2. 'Stress Testing' involves simulating extreme market conditions that go beyond the normal distribution of returns to see how a portfolio behaves during a systemic crisis. Statement 3. An 'Interest Rate Cap' is a series of European call options (called caplets) on an interest rate, designed to protect a borrower with a floating rate loan from rising interest rates. Statement 4. An 'Interest Rate Floor' is a series of European put options (called floorlets) that provide a minimum interest rate for a lender who has provided a floating rate loan. Statement 5. An 'Interest Rate Collar' is created by simultaneously buying an interest rate cap and selling an interest rate floor, limiting the interest rate exposure within a specific range. Statement 6. The 'Notional Amount' in a derivative contract is the actual amount of cash that changes hands between the parties at every settlement period throughout the contract life. Statement 7. 'Standard Portfolio Analysis of Risk' (SPAN) is a system used by exchanges to calculate margin requirements for derivative positions by considering the worst-case loss scenario. Select the correct analysis: