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NEW QUESTION # 124
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 short USD 5 million.
- C. His overall portfolio has the same exposure to USD as a portfolio that is short USD 10 million.
- D. His overall portfolio has the same exposure to USD as a portfolio that is long USD 10 million.
Answer: A
NEW QUESTION # 125
What is generally true of the relationship between a bond's yield and it's time to maturity when the yield curve
is upward sloping?
- A. The longer the time to maturity of the bond, the lower its yield.
- B. The shorter the time to maturity of the bond, the higher its yield.
- C. There is no relationship between the two
- D. The longer the time to maturity of the bond, the higher its yield.
Answer: D
NEW QUESTION # 126
Which one of the following four examples would not be considered a typical source of market risk?
- A. The JPY depreciating against the USD.
- B. Unexpected changes in the term structure of interest rates.
- C. Increased default rate on commercial mortgages due to higher interest rates.
- D. Changes in the oil price due to the discovery of new oil fields.
Answer: C
Explanation:
Market risk typically involves risks that affect the entire market or market segment. These include:
* Unexpected changes in the term structure of interest rates:
* This affects the prices of bonds and other interest-rate-sensitive securities.
* The JPY depreciating against the USD:
* This is an example of foreign exchange risk, which is a type of market risk.
* Changes in the oil price due to the discovery of new oil fields:
* This affects commodities markets and can have broader economic implications.
* Increased default rate on commercial mortgages due to higher interest rates:
* This is more of a credit risk than market risk. It specifically relates to the creditworthiness of borrowers rather than the overall market movements.
Thus, the increased default rate on commercial mortgages due to higher interest rates is not a typical source of market risk.
ReferencesSource: How Finance Works
NEW QUESTION # 127
Which of the following statements defines Value-at-risk (VaR)?
- A. VaR is the maximum likely loss on a financial instrument or a portfolio of financial instruments over a
given time period with a given degree of probabilistic confidence. - B. VaR is the maximum of past losses over a given period of time.
- C. VaR is the worst possible loss on a financial instrument or a portfolio of financial instruments over a
given time period. - D. VaR is the minimum likely loss on a financial instrument or a portfolio of financial instruments with a
given degree of probabilistic confidence.
Answer: A
NEW QUESTION # 128
Which one of the following changes would typically increase the price of a fixed income instrument, such as a bond?
- A. Decrease in inflation rates in a country.
- B. Increase in time to maturity.
- C. Increase in demand for goods and services.
- D. Increase in risk premium.
Answer: A
Explanation:
A decrease in inflation rates typically leads to an increase in the price of fixed income instruments like bonds.
Lower inflation increases the real value of the fixed payments received from bonds, making them more attractive to investors and driving up their prices.
NEW QUESTION # 129
A credit associate extending a loan to an obligor suspects that the obligor may change his behavior after the
loan has been originated. The obligor in this case may use the loan proceeds for purposes not sanctioned by the
lender, thereby increasing the risk of default. Hence, the credit associate must estimate the probability of
default based on the assumptions about the applicability of the following tendency to this lending situation:
- A. Speculation
- B. Short bias
- C. Moral hazard
- D. Adverse selection
Answer: C
NEW QUESTION # 130
In additional to the commodity-specific risks, which of the following risks represent the main commodity
derivative risks?
I. Basis
II. Term
III. Correlation
IV. Seasonality
- A. II, III
- B. I, II, III, IV
- C. I, II
- D. I, IV
Answer: B
NEW QUESTION # 131
Which one of the following four statements regarding bank's exposure to credit and default risk is
INCORRECT?
- A. In debt management, the value of any loan exposure will change typically in a fashion similar the same
way that an equity investment can. - B. Default risk cannot be hedged away fully, and it will always exist for the holder of the credit or for the
person insuring against the credit or default event. - C. The more the bank diversifies its credit portfolio, the better spread its credit risks become.
- D. In debt management, the goal is to minimize the effect of any defaults.
Answer: A
NEW QUESTION # 132
Which of the following statements describes correctly the objectives of position mapping ?
- A. II and IV
- B. Position mapping groups similar positions into one group based on the closeness of their respective VaR.
- C. Position mapping reduces the possible number of risk factors to a computationally manageable level.
- D. I and II
- E. I, II and III
- F. For VaR calculations, mapping converts positions based on their deltas to underlying factor risks.
- G. Position mapping models risk factors affecting the value of a position as combination of core risk factors used in the VaR calculations.
- H. II, III, and IV
Answer: F
Explanation:
Position mapping is used in risk management to simplify the assessment of risks associated with various positions. The objectives of position mapping are:
* For VaR (Value at Risk) calculations, it converts positions based on their deltas to underlying factor risks. This means mapping the positions to their underlying risk factors to make the complex position simpler to manage and evaluate.
* Position mapping models risk factors affecting the value of a position as a combination of core risk factors used in the VaR calculations. This involves breaking down the complex risk factors into more manageable and fundamental risk components that can be easily analyzed.
By focusing on these two objectives, position mapping helps in both simplifying the risk assessment process and in ensuring that the primary risk factors are correctly identified and managed.
NEW QUESTION # 133
Securitization is the process by which banks
I. Issue 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, III
- B. I
- C. I, II
- D. I, III
Answer: A
Explanation:
Securitization is a financial process used by banks to improve their liquidity and manage risk. The process involves the following steps:
I: Issuing Bonds: Banks issue bonds where the payment of interest and repayment of principal on the bonds depend on the cash flow generated by a pool of bank assets. This means that the assets (like loans) are used to back the bonds, and the revenue from these assets is used to pay bondholders.
II: Transfer of Legal Rights: When banks issue these bonds, they transfer their legal right to payment of interest and repayment of principal to bondholders. This transfer ensures that bondholders have a claim on the cash flows generated by the pooled assets, reducing the bank's risk exposure.
III: Selling Illiquid Assets: By securitizing assets, banks can sell off illiquid assets (like loans) and convert them into liquid securities (like bonds) that can be traded in the financial markets. This improves the bank's liquidity position by turning assets that are difficult to sell individually into marketable securities.
References: Based on "How Finance Works" document, securitization involves issuing bonds backed by asset pools, transferring legal payment rights, and selling illiquid assets to improve liquidity.
NEW QUESTION # 134
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.
- A. I, II, and IV
- B. II and III
- C. I and IV
- D. I
Answer: C
NEW QUESTION # 135
Forward rate agreements (FRA) are:
- A. OTC derivative contracts that allow banks and customers to obtain the risk/reward profile of long-term
interest rates by relying on long-term funding. - B. Exchange traded derivative contracts that allow banks to take positions in future exchange rates.
- C. OTC derivative contracts that allow banks to take positions in forward interest rates.
- D. Exchange traded derivative contracts that allow banks to take positions in forward interest rates.
Answer: C
NEW QUESTION # 136
Which one of the following statements regarding collateralized mortgage obligations (CMO) is incorrect?
- A. CMOs have senior tranches which are considered short-term, low-risk instruments by banks
- B. CMOs are pools of mortgages that are divided according to the timing of cash flows.
- C. CMOs are generally less risky investment than CDOs.
- D. CMOs are asset-backed securities that have pools of collateralized debt obligations (CDOs) as
underlying collateral.
Answer: D
NEW QUESTION # 137
The exercise for an American type option prior to expiration day is virtually certain in the following case:
- A. In the event of a low dividend for an in-the-money call option
- B. In the event of a high dividend for an in-the-money call option
- C. In the event of a low dividend for an in-the-money put option
- D. In the event of a high dividend for an in-the-money put option
Answer: B
NEW QUESTION # 138
As DeltaBank explores the securitization business, it is most likely to embrace securitization to:
I. Bring transparency to the bank's balance sheet
II. Create a new profit center for the bank
III. Strategically release risk capital and regulatory capital for redeployment
IV. Generate cash for additional debt origination
- A. I, II, III
- B. II, IV
- C. II, III, IV
- D. I, III
Answer: C
NEW QUESTION # 139
Bank Zilo has $2 million in cash and $10 million in loans coming due tomorrow with an expected default rate of 1%. The proceeds will be deposited overnight. The bank owes $ 10 million on a securities purchase that settles in two days and pays off $9 million in commercial paper in three days that is not expected to renew.
How much money should the bank plan to raise so as to avoid a liquidity problem?
- A. $650 million
- B. $710 million
- C. $700 million
- D. $712 million
Answer: C
Explanation:
Bank Zilo needs to carefully manage its liquidity to avoid potential problems. Here's the detailed analysis:
* Current Cash: $2 million
* Loans Due Tomorrow: $10 million (with an expected 1% default rate, meaning 99% will be repaid)
* Expected Loan Repayment: $10 million * 99% = $9.9 million
* Total Cash Available Tomorrow: $2 million + $9.9 million = $11.9 million However, the bank has significant obligations coming up:
* Securities Purchase (in 2 days): $10 million
* Commercial Paper Maturing (in 3 days): $9 million
Given these commitments, the bank needs to ensure it has enough liquidity:
* Total Obligations in 3 Days: $10 million (securities) + $9 million (commercial paper) = $19 million
* Shortfall: $19 million - $11.9 million = $7.1 million
Therefore, to avoid a liquidity problem, the bank should plan to raise at least $7.1 million.
References: The calculation aligns with the principles outlined in "How Finance Works" on managing liquidity needs and planning for upcoming financial obligations.
NEW QUESTION # 140
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. Credit risk, legal risk; market risk
- B. Market risk; market risk; credit risk
- C. Market risk; credit risk; market risk
- D. Legal risk; market risk; credit risk
Answer: B
NEW QUESTION # 141
The market risk manager of SigmaBank is concerned with the value of the assets in the bank's trading book.
Which one of the four following positions would most likely be not included in that book?
- A. 10,000 shares of IBM worth $10,000,000.
- B. 300,000 options on IBM shares worth $10,000,000.
- C. $10,000,000 bond issued by IBM worth $11,000,000.
- D. $10,000,000 loan to IBM worth $9,800,000.
Answer: D
Explanation:
A $10,000,000 loan to IBM worth $9,800,000 would most likely not be included in the trading book. Loans held to maturity are generally part of the banking book rather than the trading book, which typically includes assets intended for trading and short-term profit.
NEW QUESTION # 142
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. Exposure at default.
- C. Probability of default.
- D. Duration of default.
Answer: C
Explanation:
* The probability of default (PD) refers to the likelihood that a borrower will fail to meet its debt obligations over a specific time horizon. This is a core component in quantifying credit risk exposures.
* Duration of default is not a commonly used term in credit risk analysis.
* Exposure at default (EAD) measures the total value at risk in the event of default but does not directly refer to the likelihood of default.
* Loss given default (LGD) measures the portion of the exposure that is lost when a borrower defaults but does not indicate the likelihood of default.
References:
* How Finance Works: "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 the probability of default."
NEW QUESTION # 143
Which one of the following statements describes Macauley's duration?
- A. The weighted average life of the bond payments.
- B. The change in value of a bond when yields increase by 1 basis point.
- C. The percentage change in a bond price when the yields change by 1%.
- D. The present value of the future cash flows of a bond calculated at a yield equal to 1%.
Answer: A
NEW QUESTION # 144
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. 3.7 years
- B. 1.5 years
- C. 2.1 years
- D. 2.3 years
Answer: D
NEW QUESTION # 145
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