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NEW QUESTION 179
Which one of the following four formulas correctly identifies the expected loss for all credit instruments?
- A. Expected Loss = Probability of Default x Loss Given Default x Exposure at Default
- B. Expected Loss = Probability of Default x Loss Given Default / Exposure at Default
- C. Expected Loss = Probability of Default x Loss Given Default + Exposure at Default
- D. Expected Loss = Probability of Default x Loss Given Default - Exposure at Default
Answer: A
NEW QUESTION 180
Which of the following factors are typically included in standard operational risk definitions?
I. Human errors
II. Process failure
III. Systems failure
IV. Unexpected events
- A. I and II
- B. I, II and III
- C. I and IV
- D. II and III
Answer: B
NEW QUESTION 181
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
- A. I, III
- B. II, III
- C. I, II, III
- D. I, II
Answer: C
NEW QUESTION 182
To estimate the responsiveness of a particular equity portfolio to the overall market, a trader should use the
portfolio's
- A. VaR
- B. Beta
- C. Alpha
- D. CVaR
Answer: B
NEW QUESTION 183
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?
- A. Banks with a wide retail base are typically driven by contractual obligations and not simply relationship
considerations. - B. The way retail customers behave in relation to the retail banking products they hold often results in the
apparent contractual obligation of the parties providing a poor description of the actual nature of the
obligations. - C. Attracting and retaining customers often involves offering retail products whose features are different
from wholesale market products. - D. Pricing of retail products often has more to do with marketing considerations rather than prevailing
market price.
Answer: A
NEW QUESTION 184
Which of the following are conclusions that could be drawn from the shape of the statistical distribution of
losses that a bank might incur over a future time period?
I. In most years a bank would look more profitable than it will be on average.
II. Most of the time a sufficiently well capitalized bank will appear over-capitalized.
III. Bad years do not come along very often, but when they do they lead to enormous losses.
- A. I, III
- B. II, III
- C. I, II, III
- D. I, II
Answer: C
NEW QUESTION 185
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:
- A. In accordance with Basel II Accord, the operational risk function should report directly into the audit
function and strengthen that function. - B. This governance structure maintains an independent operational risk function.
- C. The operational risk function quickly inherits an existing reporting structure, established meeting
schedules and functional reporting cycles from the compliance function. - D. The operational risk function is closely linked in a partnership with the compliance function to leverage
data and assessment activities.
Answer: A
NEW QUESTION 186
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. II only
- B. I, II, and III
- C. I only
- D. I and IV
Answer: C
NEW QUESTION 187
Which one of the following four statements on the seniority of corporate bonds is incorrect?
- A. Senior bonds typically have lower credit spreads than junior bonds with the same maturity and payment
characteristics. - B. Junior bonds always pay higher coupons than subordinated bonds.
- C. Seniority refers to the priority of a bond in bankruptcy.
- D. In bankruptcy, holders of senior bonds are paid in full before any holders of subordinated bonds receive
payment.
Answer: B
NEW QUESTION 188
James manages a loans portfolio. He has to evaluate a large number of loans to choose which of them he will
keep in the bank's books. Which one of the following four loans would he be most likely to sell to another
bank?
- A. Loan to a commercial customer with a good payment history and collateral.
- B. Loan to a major customer who is also a director and a large owner.
- C. Loan made to a highly risky borrower that is fully collateralized by the customer's deposits.
- D. Loan to a borrower who has been delinquent previously, but now is performing as agreed.
Answer: A
NEW QUESTION 189
Which one of the following four relationships should be used to price equity forwards or futures?
- A. Equity forward or futures price = market equity price x (1 - risk-free rate - expected dividend rate)t
- B. Equity forward or futures price = market equity price x (1 + risk-free rate - expected dividend rate)t
- C. Equity forward or futures price = market equity price + (1 + risk-free rate - expected dividend rate)t
- D. Equity forward or futures price = market equity price + (1 + risk-free rate + expected dividend rate)t
Answer: B
NEW QUESTION 190
Using a forward transaction, Omega Bank buys 100 metric tones of aluminum for delivery in six-months' time.
However, after two months, the bank becomes concerned with the potential fluctuations in aluminum prices
and wants to hedge its potential exposure against a possible decline in aluminum prices. Which one of the
following four strategies could the bank use to offset the risk from its current exposure to aluminum as it sets
the price for selling the commodity in four-months' time?
- A. Buy an aluminum futures contract
- B. Sell an aluminum forward contract
- C. Buy an aluminum forward contract
- D. Sell an aluminum futures contract
Answer: D
NEW QUESTION 191
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?
- A. The trader can buy $100 in CDO's, and repo the CDO's to get back $60, plus interest.
- B. The trader can buy $100 in CDO's, and repo the CDO's to get back $80, less interest.
- C. The trader can buy $100 in CDO's, and repo the CDO's to get back $20, plus interest.
- D. The trader can buy $100 in CDO's, and repo the CDO's to get back $100, less interest.
Answer: B
NEW QUESTION 192
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. £900 million pounds
- B. £300 million pounds
- C. £500 million pounds
- D. £800 million pounds
Answer: B
NEW QUESTION 193
Bank Muri has $4 million in cash and $5 million in loans coming due tomorrow with an expected default rate
of 1%. The proceeds will be deposited overnight. The bank owes $ 9 million on a securities purchase that
settles in two days and pays off $8 million in commercial paper in three days that is not expected to renew. On
day 2, $1 million in loans is coming in with an expected default rate of 1% and on day 3, $2 million in loans is
coming in with expected default rate of 2%. How much should the bank plan to raise in order to avoid liquidity
problems?
- A. $500 million
- B. $550 million
- C. $508 million
- D. $510 million
Answer: D
NEW QUESTION 194
A risk associate evaluating his current portfolio of assets and liabilities wants to determine how sensitive this
portfolio is to changes in interest rates. Which one of the following four metrics is typically used for this
purpose?
- A. Duration of default
- B. Effective duration
- C. Macaulay duration
- D. Modified duration
Answer: D
NEW QUESTION 195
Altman's Z-score incorporates all the following variables that are predictive of bankruptcy EXCEPT:
- A. Return on total assets
- B. Sales to total assets
- C. Equity to debt
- D. Return on equity
Answer: D
NEW QUESTION 196
The Basel II Accord's operational risk definition excludes all of the following items EXCEPT:
- A. Geopolitical risk
- B. Legal risk
- C. Strategic risk
- D. Reputational risk
Answer: B
NEW QUESTION 197
In the United States, foreign exchange derivative transactions typically occur between
- A. All banks with international branches, where the risks become widely distributed based on trading
exposures. - B. A few large internationally active banks, where the risks become concentrated.
- C. Thrifts and large commercial banks, where the risks become isolated.
- D. Regional banks with international operations, where the risks depend on the specific derivative
transactions.
Answer: B
NEW QUESTION 198
Modified duration of a bond measures:
- A. The percentage change in a bond price when the yields change by 1%.
- B. The percentage change in a bond price when yields increase by 1 basis point.
- C. The present value of the future cash flows of a bond calculated at a yield equal to 1%.
- D. The change in value of a bond when yields increase by 1 basis point.
Answer: A
NEW QUESTION 199
Gamma Bank has $300 million in loans and $200 million in deposits. If the modified duration of the loans is
estimated to be 2, and the modified duration of the deposits is estimated to be 1, then the change in Gamma
Bank's equity value per 1% change in yield will be:
- A. -$2 million
- B. -$4 million
- C. -$3 million
- D. -$1 million
Answer: B
NEW QUESTION 200
Sam has hedged a portfolio of bonds against a small parallel shift in the yield curve using the duration
measure. What should Sam do to ensure that the portfolio is hedged against larger parallel shifts in the yield
curve?
- A. Take positions to reduce the duration
- B. Since the portfolio is duration hedged Sam does not need to take additional positions.
- C. Take positions to make the convexity zero
- D. Take positions to increase the duration
Answer: C
NEW QUESTION 201
The main building blocks of an operational risk framework include all of the following options EXCEPT:
- A. Compliance document preparation
- B. Risk and control self-assessment
- C. Scenario analysis
- D. Loss data collection
Answer: A
NEW QUESTION 202
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:
- A. The bank will have to pay lower interest rates to its depositors and would have to pay lower rates on its
debt to the extent the debt interest rate was linked to floating indices, or to the extent the debt used to
fund the loans was of a shorter maturity than the loans. - B. The bank will have to pay higher interest rates to its depositors and would have to pay higher rates on its
debt to the extent the debt interest rate was linked to floating indices, or to the extent the debt used to
fund the loans was of a shorter maturity than the loans. - C. The bank will have to pay lower interest rates to its depositors and would have to pay higher rates on its
debt to the extent the debt interest rate was linked to floating indices, or to the extent the debt used to
fund the loans was of a shorter maturity than the loans. - D. The bank will have to pay higher interest rates to its depositors and would have to pay lower rates on its
debt to the extent the debt interest rate was linked to floating indices, or to the extent the debt used to
fund the loans was of a shorter maturity than the loans.
Answer: B
NEW QUESTION 203
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. Loss given default.
- B. Probability of default.
- C. Duration of default.
- D. Exposure at default.
Answer: B
NEW QUESTION 204
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