Operational risk team for a large international bank is implementing business continuity planning (BCP). Which of the following BCP activities fall within the definition of operational risk and represent Basel II Accord's operational risk categories:
I. Damage to Physical Assets
II. Business Disruption and System Failures
III. Social Distancing Requirements
IV. Potential for Extreme Losses
Which of the following statements explain how securitization makes the retail assets highly liquid and the balance sheet easier to manage?
I. By securitizing assets any lack of capital can be accommodated by selling the securitized bonds.
II. Any need to diversify credit risk can be achieved by selling bank's own securitized bonds and buying other bonds that increase diversification.
III. Securitization could be used to promote hedging by using limited market instruments.
AlphaBank's management is evaluating how changes in its business environment could materially impact risk categories. As a result, bank's management decides to implement the structure, which facilitates the discussion in an integrative context, spanning market, credit, and operational risk factors, and encourages transparency and communication between risk disciplines. Which one of the following four approaches should the management choose to achieve this strategic goal?
The data available to estimate the statistical distribution of bank losses is difficult to assemble for which of the following reasons?
I. The needed data is vast in quantity.
II. The data requires bringing together significantly different measures of risk.
III. Some risks are difficult to quantify and hence the data might involve subjective elements.
A trader for EtaBank wants to take a leveraged position in Collateralized Debt Obligations. These CDOs can be used in a repurchase transaction at a 20% haircut. Starting with $100 worth of CDOs, which one of the following four positions would completely utilize the available leverage?
Asset and liability management is typically concerned with all of the following activities:
I. Maintaining the desired liquidity structure of the bank.
II. Managing the factors affecting the structure and composition of a bank's balance sheet.
III. Effectively transferring the interest rate risk in the banking book to the investment bank at a fair transfer price.
IV. Focusing on the circumstances impacting the stability of income the bank generates over time.
Which of the following statements presents an advantage of using risk and control self-assessments (RCSA) in the operational risk framework?
I. RCSA provides very accurate scoring of risks and controls due to its subjective nature.
II. RCSA program provides insight into risks that exist in a firm, but that may or may not have occurred before.
III. RCSA program can produce biased but transparent operational risk reporting.
IV. RCSA program allows each department to take ownership of its own risks and controls.
A bank considers issuing new capital to increase its Tier 1 capital levels. Which of the following financial instruments would most likely to be considered?
Company A needs to provide a risk probability/frequency score for its RCSA program. If the event is likely to happen once in 2 years, then the frequency score will be equal to:
To ensure good risk management which of the following should be true about the CRO role and function?
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.
Which one of the following four statements regarding the basic Net Interest Income model is INCORRECT?
Which one of the following four statements correctly identifies the Basel II Accord's definition of operational risk?
Mega Bank has $100 million in deposits on which it pays 3% interest, and $20 million in equity on which it pays no interest. The loan portfolio of $120 million earns an average rate of 10%. If the rates remain the same, what is the net interest income of Mega Bank?
Mega Bank has $100 million in deposits on which it pays 3% interest, and $20 million in equity on which it pays no interest. The loan portfolio of $120 million earns an average rate of 10%. If the rates remain the same and Mega Bank is able to earn the same net interest income in perpetuity at a 5% discount rate, what will the present value of this holding be?
A risk analyst at EtaBank wants to estimate the risk exposure in a leveraged position in Collateralized Debt Obligations. These particular CDOs can be used in a repurchase transaction at a 20% haircut. If the VaR on a $100 unleveraged position is estimated to be $30, what is the VaR for the final, fully leveraged position?
Which one of the following four statements about market risk is correct? Market risk is
Which one of the following four mathematical option pricing models is used most widely for pricing European options?
Which one of the following four statements on the seniority of corporate bonds is incorrect?
Gamma Bank provides a $100,000 loan to Big Bath retail stores at 5% interest rate (paid annually). The loan is collateralized with $55,000. The loan also has an annual expected default rate of 2%, and loss given default at 50%. In this case, what will the bank's exposure at default (EAD) be?
Which one of the following four alternatives lists the three most widely traded currencies on the global foreign exchange market, as of April 2007, in the decreasing order of market share? EUR is the abbreviation of the European euro, JPY is for the Japanese yen, and USD is for the United States dollar, respectively.
To estimate the interest charges on the loan, an analyst should use one of the following four formulas:
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 statements does identify correctly the relationship between the value of an option and perceived exchange rate volatility?
Gamma Bank is active in loan underwriting and securitization business, and given its collective credit exposure, it will be typically most interested in the following types of portfolio credit risk:
I. Expected loss
II. Duration
III. Unexpected loss
IV. Factor sensitivities
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?
In the United States, during the second quarter of 2009, transactions in foreign exchange derivative contracts comprised approximately what proportion of all types of derivative transactions between financial institutions?
For which one of the following four reasons do corporate customers use foreign exchange derivatives?
I. To lock in the current value of foreign-denominated receivables
II. To lock in the current value of foreign-denominated payables
III. To lock in the value of expected future foreign-denominated receivables
IV. To lock in the value of expected future foreign-denominated payables
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
A credit analyst wants to determine if her bank is taking too much credit risk. Which one of the following four strategies will typically provide the most convenient approach to quantify the credit risk exposure for the bank?
An asset manager for a large mutual fund is considering forward exchange positions traded in a clearinghouse system and needs to mitigate the risks created as a result of this operation. Which of the following risks will be created as a result of the forward exchange transaction?
A risk manager is considering how to best quantify option price dynamics using mathematical option pricing models. Which of the following variables would most likely serve as an input in these models?
I. Implicit parameter estimate based on observed market prices
II. Estimates of sensitivity of option prices to parameter changes
III. Theoretical option determination based on assumptions
A credit rating analyst wants to determine the expected duration of the default time for a new three-year loan, which has a 2% likelihood of defaulting in the first year, a 3% likelihood of defaulting in the second year, and a 5% likelihood of defaulting the third year. What is the expected duration for this three-year loan?
Which one of the following four statements regarding counterparty credit risk is INCORRECT?
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?
What does correlation between two variables measure?
Which of the following statements represents a methodological difference between variance-covariance and full revaluation methods?
Unico Delta stock is trading at $20 per share, its annualized dividend yield is 5% and the 12-month LIBOR is 3%. Given these statistics, the 12-month futures contact will trade at:
What do option deltas measure?
Rising TED spread is typically a sign of increase in what type of risk among large banks?
I. Credit risk
II. Market risk
III. Liquidity risk
IV. Operational risk
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?
Which of the following risk measures are based on the underlying assumption that interest rates across all maturities change by exactly the same amount?
I. Present value of a basis point.
II. Yield volatility.
III. Macaulay's duration.
IV. Modified duration.
Which of the following statements regarding collateralized debt obligations (CDOs) is correct?
I. CDOs typically have loans or bonds as underlying collateral.
II. CDOs generally less risky than CMOs.
III. There is a correlation among defaults in the CDO collateral which should be considered in valuation of these complex instruments.
Since most consumers of natural gas do not have the ability to store it, they contract with gas suppliers to receive a flow of natural gas equal to a specific number of MMBT's per day (MMBT is millions of British Termal Units, the unit in which gas futures are quoted on the U.S. markets). To protect against price increases with a bank, the natural gas consumer, concerned with the average price over the course of the month, will use the following contracts:
Which one of the following four relationships should be used to price equity forwards or futures?
In early March, an energy trader takes a long position in natural gas futures for delivery in June, and hedges this exposure by taking a position in futures for July delivery. These trades were executed on the expectation that over time, the relative prices of the June and July contracts will come into alignment, the movement in these two contracts will largely mirror each other, and as a result of this, the net exposure is minimized and the position is protected against absolute price movements. However, if the two relative prices do not come into alignment with each other due to the scarcity of any of the two traded contracts in the futures market, the trader is likely to become exposed to the
What are some of the drawbacks of correlation estimates? Which of the following statements identifies major problems with correlation calculations?
I. Correlation estimates are not able to capture increases in factor co-movements in extreme market scenarios.
II. Correlation estimates tend to be unstable.
III. Historical correlations may not forecast future correlations correctly.
IV. Correlation estimates assume normally distributed returns.
Which one of the following four statements represents a possible disadvantage of using total return swap to manage equity portfolio risks?
When the cost of gold is $1,100 per bullion and the 3-month forward contract trades at $900, a commodity trader seeks out arbitrage opportunities in this relationship. To capitalize on any arbitrage opportunities, the trader could implement which one of the following four strategies?
Which one of the following four interest rate related yield curves is used to revalue loan and deposit positions in banks?
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.