Banking Exam Financial Risk Management 4

Question 1

A bank sells credit default swaps (CDS) to hedge its loan portfolio credit risk. What new risk does this strategy introduce?

Accepted Answer

Counterparty credit risk

Answer

Selling CDS introduces counterparty risk because if the CDS buyer defaults before a credit event occurs, the bank may not receive its hedging payment.

Question 2

What does the Net Stable Funding Ratio (NSFR) primarily measure?

Accepted Answer

The adequacy of stable funding relative to illiquid assets over a one-year horizon

Answer

NSFR ensures banks have enough stable funding to support their long-term assets and activities over a one-year stressed period.

Question 3

Which risk management approach involves identifying the scenarios that would cause a bank to fail and then assessing their likelihood?

Accepted Answer

Reverse stress testing

Answer

Reverse stress testing starts from a defined failure outcome and works backward to identify plausible scenarios that could cause it.

Question 4

A bank's trading book position loses $2M when interest rates rise by 1 basis point. What risk metric does this describe?

Accepted Answer

DV01 (Dollar Value of 01)

Answer

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.

Question 5

Under the standardized approach to credit risk, which risk weight is typically assigned to residential mortgage loans in the U.S.?

Accepted Answer

50%

Answer

Residential mortgages are generally assigned a 50% risk weight under the standardized approach, reflecting their lower risk compared to unsecured commercial loans.

Banking Exam Practice Test

Banking Exam Practice Test

Banking Exam Financial Risk Management 4