Financial Risk Management Flashcards
7 cards from real Financial Risk Management practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Financial Risk Management flashcards as text
What does the 'Greeks' measure Delta represent in options pricing?
Answer: The rate of change of option price relative to underlying asset price
Delta measures how much an option's price changes for a $1 move in the underlying asset's price.
Which risk measure quantifies the potential loss beyond the Value at Risk (VaR) threshold?
Answer: Expected Shortfall (CVaR)
Expected Shortfall (Conditional VaR) measures the average loss in the tail beyond the VaR confidence level.
A bank has a loan portfolio with a 99% 10-day VaR of $5 million. What does this mean?
Answer: There is a 1% chance losses will exceed $5M over 10 days
A 99% VaR of $5M means there is a 1% probability that losses will exceed $5M over the 10-day horizon.
What is the primary purpose of a Credit Default Swap (CDS)?
Answer: To transfer credit risk from one party to another
A CDS allows one party (protection buyer) to transfer the credit risk of a reference entity to the protection seller in exchange for periodic payments.
Under Basel III, what is the minimum Common Equity Tier 1 (CET1) capital ratio requirement?
Answer: 4.5%
Basel III requires banks to maintain a minimum CET1 ratio of 4.5% of risk-weighted assets.
Which of the following best describes 'basis risk' in a hedging strategy?
Answer: The imperfect correlation between the hedging instrument and the hedged exposure
Basis risk arises when the hedging instrument does not perfectly track the exposure being hedged, leaving residual risk.
What is the Sharpe Ratio used to measure in portfolio risk management?
Answer: Risk-adjusted return per unit of total risk
The Sharpe Ratio measures excess return (above the risk-free rate) per unit of total portfolio standard deviation.
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