CBP Financial Risk Management 3

Question 1

Which of the following best describes 'tail risk' in financial risk management?

Accepted Answer

The risk of extreme losses beyond the VaR threshold

Answer

Tail risk refers to the probability of extreme loss events that occur in the 'tails' of a probability distribution, beyond typical VaR estimates.

Question 2

Under the Internal Ratings-Based (IRB) approach in Basel III, which parameter represents the percentage of an exposure that is lost if a borrower defaults?

Accepted Answer

Loss Given Default (LGD)

Answer

Loss Given Default (LGD) is the proportion of the exposure that is not recovered after a borrower defaults, accounting for collateral and recovery rates.

Question 3

A bank enters into a cross-currency swap to convert fixed USD payments into fixed EUR payments. What primary risk does this hedge?

Accepted Answer

Foreign exchange and interest rate risk

Answer

Cross-currency swaps simultaneously hedge both currency exchange risk and interest rate risk by swapping principal and interest in different currencies.

Question 4

In risk management, 'Expected Shortfall' (ES) is considered superior to VaR because it:

Accepted Answer

Captures the average loss beyond the VaR threshold

Answer

Expected Shortfall (also called Conditional VaR) averages all losses beyond the VaR confidence threshold, giving a better picture of tail risk magnitude.

Question 5

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

Accepted Answer

The number of failed trade settlements per week

Answer

Failed trade settlements are a KRI for operational risk because they signal process failures, system errors, or human mistakes in the trade lifecycle.

(CBP) Certified Banking Professional Practice Test

(CBP) Certified Banking Professional Practice Test

CBP Financial Risk Management 3