CRO Financial Risk Assessment & Mitigation 3

Question 1

A firm's net interest margin is declining as rates rise because its liabilities reprice faster than its assets. What type of interest rate risk does this describe?

Accepted Answer

Repricing risk

Answer

Repricing risk arises from timing differences in when assets and liabilities reprice to current market rates, affecting net interest income.

Question 2

Which collateral arrangement in an OTC derivative contract requires daily posting of collateral based on mark-to-market changes?

Accepted Answer

Variation margin

Answer

Variation margin is exchanged daily (or intraday) to reflect changes in the fair value of outstanding derivative contracts.

Question 3

A CRO is evaluating a structured product backed by subprime mortgages. Which risk arises specifically from the fact that mortgage borrowers can prepay their loans?

Accepted Answer

Prepayment risk

Answer

Prepayment risk is the risk that mortgage borrowers will repay principal earlier than expected, typically when rates fall, reinvesting proceeds at lower yields.

Question 4

In a risk-adjusted performance measurement framework, what does RAROC stand for and what does its numerator represent?

Accepted Answer

Risk-Adjusted Return on Capital; after-tax risk-adjusted net income

Answer

RAROC = (Risk-Adjusted Net Income) / Economic Capital, enabling comparison of returns across business lines with different risk profiles.

Question 5

What is 'wrong-way risk' in counterparty credit risk management?

Accepted Answer

The exposure to a counterparty increases precisely when that counterparty is more likely to default

Answer

Wrong-way risk occurs when exposure and counterparty credit quality deteriorate together, compounding potential losses (e.g., buying protection from a bank on that bank's own debt).

(CRO) Chief Risk Officer Certification Practice Test

(CRO) Chief Risk Officer Certification Practice Test

CRO Financial Risk Assessment & Mitigation 3