CBP Financial Risk Management 2

Question 1

A bank's Value at Risk (VaR) at the 99% confidence level over a 10-day horizon is $5 million. What does this mean?

Accepted Answer

There is a 1% chance losses will exceed $5M over 10 days

Answer

The bank will lose exactly $5M in 10 days

Answer

The bank's expected loss over 10 days is $5M

Answer

There is a 99% chance losses will exceed $5M

Question 2

Which stress testing approach applies historical market scenarios (e.g., the 2008 financial crisis) directly to the current portfolio?

Accepted Answer

Historical simulation

Answer

Monte Carlo simulation

Answer

Sensitivity analysis

Answer

Reverse stress testing

Question 3

Credit Default Swaps (CDS) are primarily used by banks to:

Accepted Answer

Transfer credit risk to a third party

Answer

Increase interest rate exposure

Answer

Hedge foreign exchange risk

Answer

Reduce liquidity requirements

Question 4

The Liquidity Coverage Ratio (LCR) requires banks to hold enough High Quality Liquid Assets (HQLA) to survive a stress scenario of how many days?

Accepted Answer

30 days

Answer

7 days

Answer

14 days

Answer

90 days

Question 5

In the context of market risk, 'Greeks' refer to:

Accepted Answer

Sensitivity measures of option prices to various factors

Answer

Credit rating agencies in Europe

Answer

Regulatory capital ratios under Basel III

Answer

Counterparty default probability metrics

Question 6

Which risk arises when a bank cannot easily sell or liquidate an asset without significantly affecting its price?

Accepted Answer

Market liquidity risk

Answer

Funding liquidity risk

Answer

Operational risk

Answer

Settlement risk

Question 7

A bank with a Tier 1 Capital Ratio of 7% under Basel III would be classified as:

Accepted Answer

Adequately capitalized

Answer

Well-capitalized

Answer

Undercapitalized

Answer

Critically undercapitalized