Financial Risk Assessment Flashcards
7 cards from real CRA 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 Assessment flashcards as text
Which risk measure is most appropriate for capturing the financial impact of rare, catastrophic events that fall outside normal statistical distributions?
Answer: Extreme Value Theory (EVT)
Extreme Value Theory specifically models the tail behavior of loss distributions, making it suitable for assessing rare, high-severity financial risks.
A risk architect is evaluating an option position. Which Greek measures the sensitivity of the option's delta to changes in the underlying asset price?
Answer: Gamma
Gamma measures the rate of change of delta with respect to the underlying asset price, indicating how rapidly delta-hedging requirements will shift.
In the context of market risk, what does 'basis risk' refer to?
Answer: The risk that a hedge instrument does not move perfectly in sync with the hedged position
Basis risk arises when the hedging instrument and the underlying exposure do not move in perfect correlation, leaving residual risk even after hedging.
A bank calculates its Tier 1 Capital Ratio as 8.5% against a regulatory minimum of 6%. What does this ratio primarily measure?
Answer: Core capital relative to risk-weighted assets
The Tier 1 Capital Ratio measures core capital (common equity and retained earnings) relative to risk-weighted assets, reflecting the bank's ability to absorb losses.
Which financial risk assessment framework maps risks by likelihood and impact magnitude on a two-dimensional grid?
Answer: Risk Heat Map
A risk heat map plots risks on a grid with likelihood on one axis and impact on the other, providing a visual prioritization tool for risk management.
What is the primary purpose of a Net Interest Margin (NIM) analysis in financial risk assessment?
Answer: To evaluate a bank's profitability from interest-bearing activities relative to interest rate risk exposure
NIM analysis evaluates how effectively a bank generates profit from its interest-bearing assets versus liabilities, directly reflecting its interest rate risk management.
Which scenario best illustrates 'wrong-way risk' in a derivatives transaction?
Answer: A counterparty's credit quality deteriorates precisely when the derivative has its highest positive value to you
Wrong-way risk occurs when counterparty credit quality is negatively correlated with the exposure value, meaning the counterparty is most likely to default when you have the most to lose.