CRO Financial Risk Assessment & Mitigation 2

Question 1

A bank's trading book shows a 10-day 99% VaR of $5M. Under Basel III, what is the minimum regulatory capital requirement for market risk using the internal models approach?

Accepted Answer

$5M multiplied by a factor of at least 3

Answer

Basel III requires market risk capital to be at least 3 times the 10-day 99% VaR (the multiplication factor), plus any surcharge.

Question 2

Which stress testing approach applies historical market shocks (e.g., the 2008 financial crisis) directly to a current portfolio?

Accepted Answer

Historical scenario analysis

Answer

Historical scenario analysis replays actual past market events against the current portfolio to estimate potential losses.

Question 3

A CRO notices that two credit exposures are highly positively correlated. How does this affect portfolio credit risk compared to uncorrelated exposures?

Accepted Answer

It increases portfolio risk because defaults are likely to occur simultaneously

Answer

High positive correlation means obligors tend to default together, concentrating losses and increasing tail risk in the portfolio.

Question 4

What is the primary purpose of a credit default swap (CDS) in financial risk mitigation?

Accepted Answer

To transfer the credit risk of a reference entity to a protection seller

Answer

A CDS allows the protection buyer to transfer the default risk of a reference entity by paying periodic premiums to a protection seller.

Question 5

Under the Expected Shortfall (ES) measure, what does the metric represent?

Accepted Answer

The average loss in the worst (1-confidence level) percent of scenarios

Answer

ES (also called CVaR) is the conditional expectation of loss given that losses exceed the VaR threshold, capturing tail risk beyond VaR.

(CRO) Chief Risk Officer Certification Practice Test

(CRO) Chief Risk Officer Certification Practice Test

CRO Financial Risk Assessment & Mitigation 2