BMO Risk Management & Mitigation 2

Question 1

A bank's Value at Risk (VaR) model at the 99% confidence level predicts a maximum daily loss of $5 million. What does this mean?

Accepted Answer

There is a 1% chance the daily loss will exceed $5M

Answer

VaR at 99% confidence means there is a 1% probability that losses will exceed the stated threshold on any given day.

Question 2

Which risk mitigation strategy involves transferring risk to a third party through contractual agreements?

Accepted Answer

Risk transfer

Answer

Risk transfer shifts the financial burden of a loss to another party, commonly via insurance policies or derivative contracts.

Question 3

BMO's credit risk team notices that a corporate borrower's debt-to-EBITDA ratio has risen from 3x to 6x over 12 months. The most appropriate immediate action is to:

Accepted Answer

Place the loan on the watchlist and request updated financials

Answer

A deteriorating leverage ratio warrants closer monitoring via watchlisting and gathering current financial data before taking more drastic action.

Question 4

What is the primary purpose of a bank's Internal Capital Adequacy Assessment Process (ICAAP)?

Accepted Answer

To assess whether the bank holds sufficient capital for all material risks

Answer

ICAAP is a self-assessment process where banks evaluate their capital adequacy relative to their overall risk profile, going beyond minimum regulatory requirements.

Question 5

A trader at BMO enters into an interest rate swap where the bank pays fixed and receives floating. If interest rates fall significantly, the bank faces:

Accepted Answer

A loss because fixed payments exceed floating receipts

Answer

When rates fall, the floating leg the bank receives decreases while fixed payments remain constant, resulting in a net loss.

(BMO) Bank of Montreal Assessment Practice Test

(BMO) Bank of Montreal Assessment Practice Test

BMO Risk Management & Mitigation 2