After entering the securitization business, Delta Bank increases its cash efficiency by selling off the lower risk portions of the portfolio credit risk. This process ___ risk on the residual pieces of the credit portfolio, and as a result it ___ return on equity for the bank.
To hedge a foreign exchange exposure on behalf of a client, a small regional bank seeks to enter into an offsetting foreign exchange transaction. It cannot access the large and liquid interbank market open primarily to larger banks. At which one of the following exchanges can the smaller bank trade the currency futures contracts?
I. The Tokyo Futures Exchange
II. The Euronext-Liffe Exchange
III. The Chicago Mercantile Exchange
Which one of the following statements correctly identifies risks in foreign exchange forwards?
Which one of the following four global markets for financial assets or instruments is widely believed to be the most liquid?
Which one of the following four statements regarding bank's exposure to credit and default risk is INCORRECT?
Which of the following statements about the interest rates and option prices is correct?
All of the following performance statistics typically benefit country's creditworthiness EXCEPT:
A risk manager is analyzing a call option on the GBP with a vega of 0.02. When the perceived future volatility increases by 1%, the call option
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. Hence, the loss rate in this case will be
From the bank's point of view, repricing the retail debt portfolio will introduce risks of fluctuations in:
I. Duration
II. Loss given default
III. Interest rates
IV. Bank spreads
In analyzing market option pricing dynamics, a risk manager evaluates option value changes throughout the entire trading day. Which of the following factors would most likely affect foreign exchange option values?
I. Change in the value of the underlying
II. Change in the perception of future volatility
III. Change in interest rates
IV. Passage of time
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?
Gamma Bank provides a $100,000 loan to Big Bath retail stores at 5% interest rate (paid annually). 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 expected loss be? What is the expected loss of this loan?
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
In the United States, foreign exchange derivative transactions typically occur between
To improve the culture and awareness of the operational risk, Gamma Bank's CRO decides to promote three activities within her organization. Which one of the following four activities is NOT typically used to develop an operational risk framework?
Which one of the following statements regarding collateralized mortgage obligations (CMO) is incorrect?
If the yield on the 3-month risk free bonds issued by the U.S government is 0.5%, and the 3-month LIBOR rate is 2.5%, what is the TED spread?
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?
SigmaBank has many branches that offer the same products and services. Which one of the four following statement presents an advantage of using RCSA questionnaire approach in the SigmaBank's operational risk framework?
Which of the following about the ratios between various Tiers of capital is not a requirement of the Basel Committee?
All of the following factors generally explain the equity bid-offer spread in a market EXCEPT:
Which of the following statements describes a bank's reasons to set risk limits?
I. To control and minimize a bank's current risk exposure.
II. To predict future risks.
III. To allocate risks to business units.
IV. To keep risk within tolerance levels.
Which of the following are the most common methods to increase liquidity in stressed conditions?
I. Selling or securitizing assets.
II. Obtaining additional credit lines.
III. Securing a better credit rating.
A hedge fund trader buys options to establish an exposure in the currency market, thereby effectively removing the risk of being able to participate in a gapping market. In this case the options premium represents the price paid for eliminating the execution risk of
Which one of the four following aspects of legal risk is NOT included in the Basel II Accord?
Which one of the following four statements about the "market-maker" trading strategy is INCORRECT?
Bank Omega is using futures contracts on a well capitalized exchange to hedge its market risk exposure. Which of the following could be reasons that expose the bank to liquidity risk?
I. The bank may not be able to unwind the futures contracts before expiration.
II. Prices may move such that a loss results on the hedge.
III. Since futures require margins which are settled every day, the bank could find itself scrambling for funds.
IV. Exchange margin requirements could change unexpectedly.
Which one of the four following non-statistical risk measures are typically not used to quantify market risk?
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.
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.
Short-selling is typically associated with the following risks:
I. Potential for extreme losses
II. Risk associated with the availability of shares to borrow
III. Market behavior risk
IV. Liquidity risk
Which one of the following four statements regarding floating rate bonds is incorrect?
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
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 one of the following is a reason for a bank to keep a commercial loan in its portfolio until maturity?
I. Commercial loans usually have attractive risk-return profile.
II. Commercial loans are difficult to sell due to non standard features.
III. Commercial loans could be used to maintain good relations with important customers.
IV. The credit risk in commercial loans is low.
Samuel Teng owns a portfolio of bonds and is trying to compute the convexity of his portfolio. Which of the following choices equals the convexity of Samuel's portfolio?
Banks duration match their assets and liabilities to manage their interest risk in their banking book. Currently, the bank's assets and liabilities both have a duration of 10. To hedge against the risk of decreasing interest rates, the bank should
I. Increase the duration of the liabilities
II. Increase the duration of the assets
III. Decrease the duration of the liabilities
IV. Decrease the duration of the assets
An endowment asset manager with a focus on long/short equity strategies is evaluating the risks of an equity portfolio. Which of the following risk types does the asset manager need to consider when evaluating her diversified equity portfolio?
I. Company-specific projected earnings and earnings risk
II. Aggregate earnings expectations
III. Market liquidity
IV. Individual asset volatility
To estimate the forward price of oil, a commodity trader would most likely use the following pricing relationship:
Which one of the following four statements represents the advantages of the historical sim-ulation method when calculating VaR?
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