CTP Financial Risk Management 2

Question 1

A company's Value at Risk (VaR) is $2 million at the 99% confidence level over a 1-day horizon. What does this mean?

Accepted Answer

There is a 1% chance losses will exceed $2M in a single day

Answer

VaR at 99% confidence means there is a 1% probability that losses will exceed the stated amount over the specified horizon.

Question 2

Which hedging instrument provides the most flexibility because it conveys the right but not the obligation to transact?

Accepted Answer

Option

Answer

Options grant the holder the right but not the obligation to buy or sell, providing flexibility that forward and futures contracts do not.

Question 3

Counterparty credit risk in derivatives is best mitigated by requiring the posting of:

Accepted Answer

Collateral under a Credit Support Annex (CSA)

Answer

A Credit Support Annex (CSA) attached to the ISDA Master Agreement requires counterparties to post collateral based on mark-to-market exposure.

Question 4

A company holds a portfolio of floating-rate liabilities and wants to convert them to fixed-rate obligations. Which instrument accomplishes this?

Accepted Answer

Enter a pay-fixed, receive-floating interest rate swap

Answer

In a pay-fixed, receive-floating swap, the company pays a fixed rate and receives floating, effectively converting its floating liability to a fixed obligation.

Question 5

Which of the following best describes basis risk in a hedging program?

Accepted Answer

The risk that the hedge instrument does not perfectly offset changes in the hedged item's value

Answer

Basis risk arises when the price movements of the hedging instrument and the hedged item are not perfectly correlated.

Certified Treasury Professional Exam Practice Test

Certified Treasury Professional Exam Practice Test

CTP Financial Risk Management 2