BMO Risk Management & Mitigation 3

Question 1

BMO is considering expanding its mortgage portfolio in a region experiencing rapid house price inflation. Which risk is MOST elevated in this scenario?

Accepted Answer

Collateral risk

Answer

When property values are inflated, collateral supporting mortgages may be overvalued, creating collateral risk if prices correct and borrowers default.

Question 2

A key control in preventing rogue trader risk is:

Accepted Answer

Mandatory vacation policies and job rotation

Answer

Mandatory vacations force others to cover a trader's book, revealing hidden positions or unauthorized activity that might otherwise remain concealed.

Question 3

What does 'tail risk' refer to in risk management?

Accepted Answer

The risk of rare but severe loss events in the tail of a probability distribution

Answer

Tail risk refers to the probability of extreme loss events that occur in the far ends (tails) of a return distribution, often underestimated by standard models.

Question 4

BMO's risk committee reviews a scenario where a major counterparty defaults simultaneously with a market downturn. This is an example of:

Accepted Answer

Correlation risk / wrong-way risk

Answer

Wrong-way risk occurs when counterparty credit exposure and the probability of counterparty default are positively correlated, worsening losses.

Question 5

Which of the following is an example of a Key Risk Indicator (KRI)?

Accepted Answer

The number of failed transaction settlements per week

Answer

KRIs are forward-looking metrics that signal increasing risk exposure; failed settlements indicate potential operational or counterparty issues before they escalate.

(BMO) Bank of Montreal Assessment Practice Test

(BMO) Bank of Montreal Assessment Practice Test

BMO Risk Management & Mitigation 3