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

VaR at 99% confidence means there is a 1% probability that losses will exceed the stated amount over the specified horizon.

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

Historical simulation replays actual past market movements against the current portfolio to estimate potential losses.

Question 3

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

Accepted Answer

Transfer credit risk to a third party

Answer

A CDS allows the protection buyer to transfer the credit risk of a reference entity to the protection seller in exchange for periodic premiums.

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

Under Basel III, the LCR requires banks to maintain HQLA sufficient to cover net cash outflows over a 30-day stress period.

Question 5

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

Accepted Answer

Sensitivity measures of option prices to various factors

Answer

The Greeks (Delta, Gamma, Vega, Theta, Rho) measure how an option's price changes in response to changes in underlying variables.

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