2016-FRR Online Practice Questions and Answers

A risk manager analyzes a long position with a USD 10 million value. To hedge the portfolio, it seeks to use options that decrease JPY 0.50 in value for every JPY 1 increase in the long position. At first approximation, what is the overall exposure to USD depreciation?

A. His overall portfolio has the same exposure to USD as a portfolio that is long USD 5 million.

B. His overall portfolio has the same exposure to USD as a portfolio that is long USD 10 million.

C. His overall portfolio has the same exposure to USD as a portfolio that is short USD 5 million.

D. His overall portfolio has the same exposure to USD as a portfolio that is short USD 10 million.

A bank customer chooses a mortgage with low initial payments and payments that increase over time because the customer knows that she will have trouble making payments in the early years of the loan. The bank makes this type of mortgage with the same default assumptions uses for ordinary mortgages, thus underestimating the risk of default and becoming exposed to:

A. Moral hazard

B. Adverse selection

C. Banking speculation

D. Sampling bias

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

A.

I

B.

II

C.

I, III

D.

I, III, IV

Which of the following statements regarding bonds is correct?

I. Interest rates on bonds are typically stated on an annualized rate.

II. Bonds can pay floating coupons that are directly linked to various interest rate indices.

III. Convertible bonds have an element of prepayment risk.

IV.

Callable bonds have an element of equity risk.

A.

I only

B.

I and II

C.

I, II, and III

D.

II, III, and IV

A financial analyst is trying to distinguish credit risk from market risk. A $100 loan collateralized with $200 in stock has limited ___, but an uncollateralized obligation issued by a large bank to pay an amount linked to the long-term performance of the Nikkei 225 Index that measures the performance of the leading Japanese stocks on the Tokyo Stock Exchange likely has more ___ than ___.

A. Legal risk; market risk; credit risk

B. Market risk; market risk; credit risk

C. Market risk; credit risk; market risk

D. Credit risk, legal risk; market risk

A risk manager has a long forward position of USD 1 million but the option portfolio decreases JPY 0.50 for every JPY 1 increase in his forward position. At first approximation, what is the overall result of the options positions?

A. The options positions hedge the forward position by 25%.

B. The option positions hedge the forward position by 50%.

C. The option positions hedge the forward position by 75%.

D. The option positions hedge the forward position by 100%.

When a credit risk manager analyzes default patterns in a specific neighborhood, she finds that defaults are increasing as the stigma of default evaporates, and more borrowers default. This phenomenon constitutes

A. Moral hazard

B. Speculative bias

C. Herd behavior

D. Adverse selection

Alpha Bank estimates its 1-month, 95% VaR is 30 million EUR. This means that in the next month, there is a

A. 95% chance that AlphaBank can lose more than 30 million EUR.

B. 95% chance that AlphaBank will lose exactly 30 million EUR.

C. 95% chance that AlphaBank can lose at most 30 million EUR.

D. 95% chance that AlphaBank will at least lose 30 million EUR.

Which one of the four following aspects of legal risk is NOT included in the Basel II Accord?

A. Exposure to fines

B. Private settlements

C. Punitive damages resulting from supervisory actions

D. Negative publicity resulting from reputational damages

As an example of the balance sheet effect, if rates rise, Delta Bank can expect:

A. Its fixed rate assets to increase in value, although that effect will be offset by a reduction in the value of its fixed rate liabilities.

B. Its fixed rate assets to drop in value, although that effect will be offset by a reduction in the value of its fixed rate liabilities.

C. Its fixed rate assets to increase in value, while that effect will be amplified by a reduction in the value of its fixed rate liabilities.

D. Its fixed rate assets to drop in value, while that effect will be amplified by a reduction in the value of its fixed rate liabilities.