CRO Market & Credit Risk Analysis 3

Question 1

Under the Fundamental Review of the Trading Book (FRTB), the internal models approach replaces VaR with which primary risk measure?

Accepted Answer

Expected Shortfall (ES) at 97.5%

Answer

FRTB replaces VaR with Expected Shortfall at the 97.5% confidence level to better capture tail risk.

Question 2

In credit portfolio management, 'wrong-way risk' (WWR) occurs when:

Accepted Answer

Counterparty exposure and counterparty credit quality deteriorate simultaneously

Answer

Wrong-way risk arises when the exposure to a counterparty increases at the same time the counterparty's creditworthiness decreases.

Question 3

A bond portfolio manager uses key rate duration (KRD) to hedge interest rate risk. What does KRD measure that standard duration does not?

Accepted Answer

Sensitivity to changes at specific maturities along the yield curve

Answer

Key rate duration measures price sensitivity to changes at individual points on the yield curve, capturing non-parallel (twist and butterfly) shifts.

Question 4

Which approach to credit risk measurement explicitly models the loss distribution using a Poisson process for default events and is best suited for large, granular retail portfolios?

Accepted Answer

CreditRisk+

Answer

CreditRisk+ uses a Poisson distribution to model default events and is designed for homogeneous, granular portfolios rather than concentrated corporate exposures.

Question 5

Market risk capital under the Basel standardized approach uses a 'sensitivities-based method' (SBM). Which Greeks are directly used in computing risk charges under SBM?

Accepted Answer

Delta, Vega, and Curvature (proxy for Gamma)

Answer

The SBM under FRTB uses delta sensitivities, vega sensitivities, and a curvature risk charge as a proxy for gamma/higher-order risks.

(CRO) Chief Risk Officer Certification Practice Test

(CRO) Chief Risk Officer Certification Practice Test

CRO Market & Credit Risk Analysis 3