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
What is the primary purpose of a Credit Valuation Adjustment (CVA)?
Answer: To account for the risk that a counterparty to a derivative may default before settlement
CVA is the market value of counterparty credit risk in a derivative contract, representing the cost of hedging against the possibility that the counterparty defaults before the contract matures.
A bank's Risk Appetite Statement (RAS) is most useful for:
Answer: Communicating to the board and staff the level of risk the bank is willing to accept
A RAS formally articulates the types and levels of risk a bank is willing to accept in pursuit of its strategic objectives, guiding decision-making at all levels.
In the context of interest rate risk, 'basis risk' refers to:
Answer: Imperfect correlation between rates on assets and hedging instruments that both reference different benchmarks
Basis risk arises when the interest rate on a hedging instrument (e.g., SOFR-linked swap) does not move in perfect lockstep with the rate on the hedged exposure (e.g., Prime-linked loan).
Which of the following is a key distinction between 'systemic risk' and 'systematic risk' in banking?
Answer: Systemic risk refers to contagion that can collapse the financial system; systematic risk is market-wide undiversifiable risk
Systemic risk is the risk that failure of one institution triggers cascading failures across the financial system, while systematic risk is the non-diversifiable market risk affecting all investments.
A bank runs a reverse stress test. The primary goal of this exercise is to:
Answer: Work backwards from a near-failure outcome to find scenarios that could cause it
Reverse stress testing starts with a defined outcome (e.g., business failure) and works backward to identify what combination of scenarios or events could cause it.
Under the standardized approach to credit risk in Basel III, which asset class typically receives a 0% risk weight?
Answer: Claims on OECD sovereign governments in domestic currency
Sovereign exposures to OECD governments denominated and funded in domestic currency receive a 0% risk weight under the standardized approach, reflecting their near-zero credit risk.
A bank with significant trading book positions must calculate capital for 'specific risk' separately from 'general market risk.' Specific risk capital charges cover:
Answer: Issuer-specific credit events that affect individual security prices
Specific risk capital covers losses from adverse price movements in individual securities due to issuer-specific factors like credit deterioration or default, distinct from general market moves.