Financial Risk Management Flashcards
7 cards from real CBP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Financial Risk Management flashcards as text
Which of the following best describes 'tail risk' in financial risk management?
Answer: The risk of extreme losses beyond the VaR threshold
Tail risk refers to the probability of extreme loss events that occur in the 'tails' of a probability distribution, beyond typical VaR estimates.
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?
Answer: Loss Given Default (LGD)
Loss Given Default (LGD) is the proportion of the exposure that is not recovered after a borrower defaults, accounting for collateral and recovery rates.
A bank enters into a cross-currency swap to convert fixed USD payments into fixed EUR payments. What primary risk does this hedge?
Answer: Foreign exchange and interest rate risk
Cross-currency swaps simultaneously hedge both currency exchange risk and interest rate risk by swapping principal and interest in different currencies.
In risk management, 'Expected Shortfall' (ES) is considered superior to VaR because it:
Answer: Captures the average loss beyond the VaR threshold
Expected Shortfall (also called Conditional VaR) averages all losses beyond the VaR confidence threshold, giving a better picture of tail risk magnitude.
Which of the following is an example of a Key Risk Indicator (KRI) for operational risk?
Answer: The number of failed trade settlements per week
Failed trade settlements are a KRI for operational risk because they signal process failures, system errors, or human mistakes in the trade lifecycle.
A bank holds a large position in 10-year Treasury bonds. If interest rates rise by 100 basis points, the primary risk the bank faces is:
Answer: Duration-driven price decline
Longer-duration bonds have greater price sensitivity to interest rate changes; a 100 bps rise will cause significant mark-to-market losses for a 10-year Treasury portfolio.
The Net Stable Funding Ratio (NSFR) is designed to ensure that banks:
Answer: Fund long-term assets with stable funding sources over a one-year horizon
The NSFR requires banks to maintain a stable funding profile relative to their long-term assets and activities over a one-year horizon to reduce funding risk.