2016-FRR Online Practice Questions and Answers

To quantify the aggregate average loss for the credit portfolio and its possible constituent subportfolios, a credit portfolio manager should use the following metric:

A. Credit VaR

B. Expected loss

C. Unexpected loss

D. Factor sensitivity

Which one of the following four statements correctly defines credit risk?

A. Credit risk is the risk that complements market and liquidity risks.

B. Credit risk is a form of performance risk in contractual relationship.

C. Credit risk is the risk arising from execution of a company's strategy.

D. Credit risk is the risk that summarizes the exposures a company or firm assumes when it attempts to operate within a given field or industry.

To hedge equity exposure without buying or selling shares of stock or otherwise rebalancing the portfolio, a risk manager could initiate

A. A short total return swap position.

B. A long total return swap position.

C. A short debt-for-equity swap.

D. A long debt-for-equity swap.

Interest rate swaps are:

A. Exchange traded derivative contracts that allow banks to take positions in future interest rates.

B. OTC derivative contracts that allow banks and customers to obtain the risk/reward profile of long-term interest rates without relying on long-term funding.

C. Exchange traded derivative contracts that allow banks and customers to obtain the risk/reward profile of long-term interest rates without having to use long-term funding.

D. OTC derivative contracts that allow banks to take positions in series of future exchange rates.

Which of the following statements describes correctly the objectives of position mapping?

I. For VaR calculations, mapping converts positions based on their deltas to underlying factor risks.

II. Position mapping models risk factors affecting the value of a position as combination of core risk factors used in the VaR calculations.

III. Position mapping groups similar positions into one group based on the closeness of their respective VaR.

IV.

Position mapping reduces the possible number of risk factors to a computationally manageable level.

A.

I and II

B.

II and IV

C.

I, II and III

D.

II, III, and IV

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?

A. Short-sell physical gold and take a long position in the futures contract

B. Take a long position in physical gold and short-sell the futures contract

C. Short-sell both physical gold and futures contract

D. Take long positions in both physical gold and futures contract

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?

A. $20

B. $50

C. $100

D. $150

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.

A.

I, II

B.

I, II, III

C.

II, III

D.

II

Which one of the following four attributes would likely help a trader using exchange-traded options to establish a leveraged position?

A. Higher degrees of exposure at less cash cost

B. Unlimited losses for long option positions

C. Option positions have the same credit risks as a margined long forward.

D. Option positions have the same cash risks as a margined short futures purchase.

The retail banking business of BankGamma has an expected P and L of $50 million and a VaR of $100 million. The bank seeks to diversify its revenue, and is considering the opportunity to acquire a credit card business with an expected P and L of $50 million and a VaR of $150 million. What will be the overall RAROC if the bank acquires the new business?

A. 33.3%.

B. 50%.

C. 58%.

D. 72%.

According to Basel II what constitutes Tier 1 capital?

A. Equity capital and core capital

B. Profits to reserves and innovative Tier 1 capital

C. Equity capital and accrued profits to reserves

D. Core capital and innovative Tier 1 capital.

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 $100, less 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 $60, plus interest.

D. The trader can buy $100 in CDO's, and repo the CDO's to get back $20, plus interest.

US based Alpha Bank holds European corporate bonds and US inflationndexed Treasury notes in its investment portfolio. This investment portfolio is not exposed to changes in which of the following?

A. Foreign exchange rates

B. Credit spread on the corporate bonds

C. Equity values

D. European interest rates

Which one of the four following statements about the Risk Adjusted Return on Capital (RAROC) is correct? RAROC is the ratio of:

A. Risk to the profitability of a trading portfolio or a business unit within the bank.

B. Value-at-risk to the profitability of a trading portfolio or a business unit.

C. Profitability to the expected return of a trading portfolio or bank business unit.

D. Profitability to the risk of a trading portfolio or bank business unit.

Securitization is the process by which banks:

I. IssueIssue bonds where the payment of interest and repayment of principal on the bonds depends on the cash flow generated by a pool of bank assets.

II. Issue bonds where the bank has transferred its legal right to payment of interest and repayment of principal to bondholders.

III.

Sell illiquid assets.

A.

I, II

B.

I

C.

I, III

D.

I, II, III