CRO Market & Credit Risk Analysis 2

Question 1

A portfolio has a 1-day 99% VaR of $2 million. Under Basel III, what is the minimum capital requirement multiplier applied to the VaR figure for market risk?

Accepted Answer

3x

Answer

Basel III requires a minimum multiplication factor of 3x applied to the VaR figure when calculating market risk capital requirements.

Question 2

Which credit risk model distinguishes between default risk and migration risk, treating rating transitions as a Markov chain?

Accepted Answer

CreditMetrics

Answer

CreditMetrics, developed by JP Morgan, models credit risk through rating migrations modeled as a Markov chain, capturing both default and downgrade risk.

Question 3

Duration gap analysis in a bank measures the sensitivity of net worth to interest rate changes. A positive duration gap means the bank's assets have a longer duration than liabilities, implying:

Accepted Answer

Net worth falls when rates rise

Answer

A positive duration gap means assets lose more value than liabilities when rates rise, reducing net worth.

Question 4

In the Merton structural credit model, the probability of default is driven primarily by:

Accepted Answer

The ratio of asset value to debt face value and asset volatility

Answer

The Merton model treats equity as a call option on firm assets; default probability depends on the distance between asset value and debt threshold relative to asset volatility.

Question 5

Stressed VaR (SVaR) as introduced under Basel 2.5 requires banks to calibrate VaR using data from:

Accepted Answer

A continuous 12-month period of significant financial stress

Answer

Basel 2.5 requires SVaR to be computed using a 12-month stressed historical period, typically including the 2007-2009 financial crisis.

(CRO) Chief Risk Officer Certification Practice Test

(CRO) Chief Risk Officer Certification Practice Test

CRO Market & Credit Risk Analysis 2