Financial Risk Management Flashcards
7 cards from real Banking Exam practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Financial Risk Management flashcards as text
A bank sells credit default swaps (CDS) to hedge its loan portfolio credit risk. What new risk does this strategy introduce?
Answer: Counterparty credit risk
Selling CDS introduces counterparty risk because if the CDS buyer defaults before a credit event occurs, the bank may not receive its hedging payment.
What does the Net Stable Funding Ratio (NSFR) primarily measure?
Answer: The adequacy of stable funding relative to illiquid assets over a one-year horizon
NSFR ensures banks have enough stable funding to support their long-term assets and activities over a one-year stressed period.
Which risk management approach involves identifying the scenarios that would cause a bank to fail and then assessing their likelihood?
Answer: Reverse stress testing
Reverse stress testing starts from a defined failure outcome and works backward to identify plausible scenarios that could cause it.
A bank's trading book position loses $2M when interest rates rise by 1 basis point. What risk metric does this describe?
Answer: DV01 (Dollar Value of 01)
DV01, or PVBP (Price Value of a Basis Point), measures the dollar change in a position's value for a one-basis-point move in interest rates.
Under the standardized approach to credit risk, which risk weight is typically assigned to residential mortgage loans in the U.S.?
Answer: 50%
Residential mortgages are generally assigned a 50% risk weight under the standardized approach, reflecting their lower risk compared to unsecured commercial loans.
What is 'wrong-way risk' in derivatives and counterparty credit risk management?
Answer: Risk that exposure to a counterparty increases when the counterparty's creditworthiness decreases
Wrong-way risk exists when the counterparty's credit quality deteriorates precisely when the bank's exposure to that counterparty is largest.
What is the primary function of a bank's risk appetite statement (RAS)?
Answer: To define the types and levels of risk the bank is willing to accept in pursuit of its strategy
A Risk Appetite Statement formally documents the aggregate level and types of risk a bank is willing to assume consistent with its business strategy and capital position.