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?
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:
A credit portfolio manager analyzes a large retail credit portfolio. Which of the following factors will represent typical disadvantages of market-linked credit risk drivers?
I. Need to supply a large number of input parameters to the model
II. Slow computation speed due to higher simulation complexity
III. Non-linear nature of the model applicable to a specific type of credit portfolios
IV. Need to estimate a large number of unknown variable and use approximations
Which one of the following four statements correctly describes an American call option?
All of the four following exotic options are path-independent options, EXCEPT:
Which of the following factors would typically increase the credit spread?
I. Increase in the probability of default of the issuer.
II. Decrease in risk premium.
III. Decrease in loss given default of the issuer.
IV. Increase in expected loss.
Which one of the following four exotic option types has another option as its underlying asset, and as a result of its construction is generally believed to be very difficult to model?
Which one of the following four metrics represents the difference between the expected loss and unexpected loss on a credit portfolio?
Of all the risk factors in loan pricing, which one of the following four choices is likely to be the least significant?
Which one of the following four global markets for financial assets or instruments is widely believed to be the most liquid?
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?
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.
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?
Which one of the following four model types would assign an obligor to an obligor class based on the risk characteristics of the borrower at the time the loan was originated and estimate the default probability based on the past default rate of the members of that particular class?
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?
Bank Sigma takes a long position in the oil futures market that requires a 2% margin, i.e., the bank has to deposit 2% of the value of the contract with the broker. The futures contracts were priced at $50 per barrel (bbl) at inception, and rose by $5 to $55. The VaR on the position is estimated to be $10. What is the return on this transaction on a risk adjusted basis?
Gamma Bank has a significant number of retail customers and finds its balance sheet shape and structure difficult to manage. Which one of the following characteristics of a bank with wide retail operations is INCORRECT?
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.
In hedging transactions, derivatives typically have the following advantages over cash instruments:
I. Lower credit risk
II. Lower funding requirements
III. Lower dealing costs
IV. Lower capital charges
DeltaFin wants to develop a control scoring method for its RCSA program. Which of the following statements regarding scoring methods are correct?
I. DeltaFin can develop a control scoring method that assesses both the design and the performance of the control.
II. DeltaFin can combine the design and performance scores for each control to produce an overall control effectiveness score.
III. DeltaFin can use the control performance scores to compute an overall risk severity score.
IV. DeltaFin can determine its own appropriate control scoring method.
Mega Bank holds a $250 million mortgage loan portfolio, which reprices every 5 years at LIBOR + 10%. The bank also has $150 million in deposits that reprices every month at LIBOR + 3%. What is the amount of Mega Bank's rate sensitive liabilities?
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.
According to the principles of the Basel II Accord, the implementation and relative weights of the elements of the operational risk framework depend on:
I. The culture of the financial institution
II. Regulatory drivers
III. Business drivers
IV. The bank's reporting currency
A bank has a large number of auto loans and would prefer to sell them to raise cash for more funding. However, selling individual auto loans is difficult. What could the bank do?
Why do regulatory standards impose formulaic capital calculations for all of the banks activities?
I. If the banks use different models it is difficult for a regulator to compare results across banks.
II. By imposing standardized calculations regulators can make sure that banks are not missing key risks in their calculations.
III. By imposing standardized calculations regulators can make sure that banks do not use capital calculations to game the banking regulation system.
US-based BetaBank have accumulated Japanese yen, Japanese government bonds, options on Japanese yen, and positions in commodities that have a positive correlation with yen. Which one of the four following non-statistical risk measures could be used to evaluate the BetaBank's exposure to the Japanese economy?
Which one of the following four statements regarding the current value of a transaction and its purposes is INCORRECT?
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.
Alpha Bank, a small bank,has a long position with larger BetaBank and has an identical short position with another larger bank GammaBank. Each large bank requires a 20% initial collateral to support the trade. As prices fluctuate in either direction, one large bank will require additional collateral from the small bank, while the risk of loss to the other large bank will increase. By running the trades through a clearinghouse, the small bank can achieve all of the following objectives EXCEPT:
The Treasury function of a bank typically manages all of the following components EXCEPT:
Which one of the following four statements represents the advantages of the historical sim-ulation method when calculating VaR?
Which of the following statements is a key difference between customer loans and interbank loans?
Which one of the following four statements represents a possible disadvantage of using total return swap to manage equity portfolio risks?
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.
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.
Alpha Bank estimates that the annualized standard deviation of its portfolio returns equal 30%; The daily volatility of the portfolio is closest to which of the following?
A bank customer can use either a plain vanilla option or an option contract with volumetric flexibility to reduce the following risks:
I. Market Risk
II. Basis Risk
III. Operational Risk
Which one of the following statements is an advantage of using implied volatility as an input when calculating VaR?
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 statements best describes challenges of delta-normal method of mapping options positions?
Delta-normal method understates
To achieve leverage in long positions, a bank can use the following strategy:
I. Securities may be purchased with borrowed funds using a bank loan from the broker.
II. Securities may be borrowed on margin by taking a loan from a broker.
III. Securities may be purchased and used in a repo transaction to generate cash for further security purchases.
IV. The bank may enter into a derivative transaction, such as a total return swap, that requires little to no collateral but mimics the performance of a long or short position in the underlying instrument.
On January 1, 2010 the TED (treasury-euro dollar) spread was 0.9%, and on January 31, 2010 the TED spread is 0.4%. As a risk manager, how would you interpret this change?
A multinational bank just bought two bonds each worth $10,000. One of the bonds pays a fixed interest of 5% semi-annually and the other pays LIBOR semi-annually. The six month LIBOR is at 5% currently. The risk manager of the bank is concerned about the sensitivity to interest rates. Which of the following statements are true?
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.
Which one of the following four relationships should be used to price equity forwards or futures?
Which one of the following four statements about preferred shares is INCORRECT?