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The potential failure of a manufacturer to honor a warranty might be called ____, whereas the potential failure of a borrower to fulfill its payment requirements, which include both the repayment of the amount borrowed, the principal and the contractual interest payments, would be called ___.
Which one of the following four metrics represents the difference between the expected loss and unexpected loss on a credit portfolio?
Which one of the following four formulas correctly identifies the expected loss for all credit instruments?
A trader for EtaBank wants to take a leveraged position in Collateralized Debt Obligations. If these CDOs can be used in a repo transaction at a 20% haircut, what is the maximum leverage factor for a transaction with the CDOs?
If a bank is long £500 million pounds, short £300 million in delta-equivalent pound options, and long £100 million in pound-denominated stocks, what is the amount of pound exposure that would be shown in the aggregated risk reports?
A bank customer expecting to pay its Brazilian supplier BRL 100 million asks Alpha Bank to buy Australian dollars and sell Brazilian reals. Alpha bank does not hold reals so it asks for a quote to buy Brazilian reals in the market. The market rate is 100. The bank quotes a selling rate of 101 to its customer and sells the real at this quoted price. Then the bank immediately buys the real at the market rate and completes foreign exchange matched transaction. What is the impact of this transaction on the bank's risk profile?
When considering the advantages of operational risk function owned by the Chief Compliance Officer in a financial institution, an operational risk manager consultant suggests that this governance approach will have all of the following advantages except:
BetaFin has decided to use the hybrid RCSA approach because it believes that it fits its operational framework. Which of the following could be reasons to use the hybrid RCSA method?
I. BetaFin has previously created series of RCSA workshops, and the results of these workshops can be used to design the questionnaires.
II. BetaFin believes that using the questionnaire approach should be more useful.
III. BetaFin had used the questionnaire approach successfully for certain businesses and the workshop approach for others.
IV. BetaFin had already implemented a sophisticated RCSA IT-system.
Suppose Delta Bank enters into a number of long-term commercial and retail loans at fixed rate prevailing at the time the loans are originated. If the interest rates rise:
The Basel II Accord's operational risk definition excludes all of the following items EXCEPT:
To estimate the price of gold forwards, an investment analyst focuses on the cost of holding physical gold (bullion) and the cost of shorting the same. Given that physical gold spot price is $1,000, the annual risk-free rate is 5%, and the gold lease rate equals 2% annually, the analyst's best estimate of the gold forward price to equal
To hedge equity exposure without buying or selling shares of stock or otherwise rebalancing the portfolio, a risk manager could initiate
Unico Bank, concerned with managing the risk of its trading strategies, wants to implement the trading strategy that exposes the bank to the lowest market risk. Which one of the following four strategies should Unico take to limit its risk exposure?
A corporate bond was trading with 2%probability of default and 60% loss given default. Due to the credit crisis the probability of default increased to 10% and the loss given default increased to 100%. Assuming that the risk premium remained the same how did the credit spread change?
John owns a bond portfolio worth $2 million with duration of 10. What positions must he take to hedge this portfolio against a small parallel shifts in the term structure.
Which one of the following four statements best describes challenges of delta-normal method of mapping options positions?
Delta-normal method understates
Which of the following statements about the option gamma is correct? Gamma is the
I. Second derivative of the option value with respect to the volatility.
II. Percentage change in option value per percentage change in the price of the underlying instrument.
III. Second derivative of the value function with respect to the price of the underlying instrument.
IV. Rate of change of the option delta with respect to changes in the underlying price.
James Johnson manages a bond portfolio with all investment grade bonds. Adding which of the following bonds would minimize the credit risk of his portfolio?
The exercise for an American type option prior to expiration day is virtually certain in the following case:
A large multinational bank is concerned that their duration measures may not be accurate since the yield curve shifts are not parallel. Which of the following statements would be typically observed regarding variability of interest rates?
In the United States, stock investors must comply with the Regulation T of the Federal Reserve Bank and may borrow up to ___ of the value of the securities from their brokers.
An options trader for a large institutional investor takes a long equity option position. Which of the following risks need to be considered when taking this position?
I. All the risks of underlying equities
II. Perceived volatility changes
III. Future dividends yields
IV. Risk-free interest rates
A credit risk analyst is evaluating factors that quantify credit risk exposures. The risk that the borrower would fail to make full and timely repayments of its financial obligations over a given time horizon typically refers to:
Which one of the following four statements regarding bank's exposure to credit and default risk is INCORRECT?
Foreign exchange rates are determined by various factors. Considering the drivers of exchange rates, which one of the following changes would most likely strengthen the value of the USD against other foreign currencies?
Which of the following risk types are historically associated with credit derivatives?
I. Documentation risk
II. Definition of credit events
III. Occurrence of credit events
IV. Enterprise risk
Alpha Bank determined that Delta Industrial Machinery Corporation has 2% change of default on a one-year no-payment of USD $1 million, including interest and principal repayment. The bank charges 3% interest rate spread to firms in the machinery industry, and the risk-free interest rate is 6%. Alpha Bank receives both interest and principal payments once at the end the year. Delta can only default at the end of the year. If Delta defaults, the bank expects to lose 50% of its promised payment.
What may happen to the Delta's initial credit parameter and the value of its loan if the machinery industry experiences adverse structural changes?
The value of which one of the following four option types is typically dependent on both the final price of its underlying asset and its own price history?
According to a Moody's study, the most important drivers of the loss given default historically have been all of the following EXCEPT:
I. Debt type and seniority
II. Macroeconomic environment
III. Obligor asset type
IV. Recourse
Which one of the following four options correctly identifies the core difference between bonds and loans?
Which one of the following four options is NOT a typical component of a currency swap?
The pricing of credit default swaps is a function of all of the following EXCEPT:
The risk management department of VegaBank wants to set guidelines on commodity carry trades. Which of the following strategies should she pursue to achieve a profitable commodity carry?
I. Buy short-term commodity futures and sell longer-dated position when the curve is in contango.
II. Buy short-term commodity futures and sell longer-dated position when the curve is in backwardation.
III. Buy long-term commodity futures and sell shorter-dated positions when the curve is in contango.
IV. Buy long-term commodity futures and sell shorter-dated positions when the curve is in backwardation.
The operational risk policy should include:
I. The firm's definition of risk
II. The governance of operational risk including who owns it, what it owns, and how issues should be escalated
III. The main activities and elements that are managed by the operational risk function
An associate from the finance group has been identified as an operational risk coordinator (ORC) for her department. To fulfill her ORC responsibilities the associate will need to:
I. Provide main communication contact with operational risk department
II. Provide main reporting contact with audit department
III. Coordinate collection of key risk indicators in her area
IV. Coordinate training and awareness activities in her area
Which one of the four following statements about consortium databases is correct?
Consortium databases
What are the add-on losses faced by a bank that is going bankrupt?
I. The discount accepted by the bank for selling its assets in a fire sale.
II. The increased cost of funding liabilities in a financially distressed situation.
III. The reduction in the present value of future growth opportunities.
IV. Loss of goodwill and intangible assets.
Which one of the following four statements about planning for the operational risk framework is INCORRECT?
Which of the following assets on the bank's balance sheet has greatest endogenous liquidity risk?
Which one of the following four statements correctly identifies disadvantages of using the economic capital?
Which one of the four following statements about technology systems for managing operational risk event data is incorrect?
Which of the following statements is a key difference between customer loans and interbank loans?
On January 1, 2010 the TED (treasury-euro dollar) spread was 0.4%, and on January 31, 2010 the TED spread is 0.9%. As a risk manager, how would you interpret this change?
TESTED 02 May 2024