CRA Financial Risk Assessment 3

Question 1

Which risk measure is most appropriate for capturing the financial impact of rare, catastrophic events that fall outside normal statistical distributions?

Accepted Answer

Extreme Value Theory (EVT)

Answer

Extreme Value Theory specifically models the tail behavior of loss distributions, making it suitable for assessing rare, high-severity financial risks.

Question 2

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?

Accepted Answer

Gamma

Answer

Gamma measures the rate of change of delta with respect to the underlying asset price, indicating how rapidly delta-hedging requirements will shift.

Question 3

In the context of market risk, what does 'basis risk' refer to?

Accepted Answer

The risk that a hedge instrument does not move perfectly in sync with the hedged position

Answer

Basis risk arises when the hedging instrument and the underlying exposure do not move in perfect correlation, leaving residual risk even after hedging.

Question 4

A bank calculates its Tier 1 Capital Ratio as 8.5% against a regulatory minimum of 6%. What does this ratio primarily measure?

Accepted Answer

Core capital relative to risk-weighted assets

Answer

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.

Question 5

Which financial risk assessment framework maps risks by likelihood and impact magnitude on a two-dimensional grid?

Accepted Answer

Risk Heat Map

Answer

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.

(CRA) Certified Risk Architect Practice Test

(CRA) Certified Risk Architect Practice Test

CRA Financial Risk Assessment 3