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 is the primary purpose of a 'collar' options strategy in risk management?
Answer: To cap both downside losses and upside gains within a defined range
A collar combines a protective put (limits downside) with a covered call (caps upside), creating a range of outcomes for the hedger.
How does the 'Net Stable Funding Ratio' (NSFR) address bank liquidity risk?
Answer: It requires banks to fund long-term assets with stable, longer-term funding sources
The NSFR requires banks to maintain a stable funding profile over a one-year horizon, ensuring long-term assets are funded by stable, longer-duration liabilities.
A credit analyst notices that a bond's credit spread has widened from 150 bps to 300 bps. Which scenario most likely caused this?
Answer: Market participants now perceive higher default risk for the issuer
Credit spread widening reflects increased market perception of default risk — investors demand more compensation for holding the bond over risk-free assets.
What is 'concentration risk' in a loan portfolio and how is it typically managed?
Answer: Excessive exposure to a single borrower, sector, or geography; managed through diversification and limits
Concentration risk arises from outsized exposure to a single borrower, industry, or region, and is managed through diversification strategies and internal exposure limits.
Under the Historical Simulation method for VaR, how are future portfolio losses estimated?
Answer: By applying today's portfolio weights to historically observed risk factor changes
Historical Simulation re-prices today's portfolio using actual historical changes in risk factors (e.g., rates, FX, prices), generating an empirical distribution of P&L.
What is 'counterparty credit risk' (CCR) in the context of OTC derivatives?
Answer: The risk that the counterparty to a derivative contract defaults before final settlement
CCR is the risk that a counterparty to an OTC derivative defaults before the contract matures, causing a loss equal to the contract's replacement cost if in-the-money.
Which risk governance principle requires that the risk management function be independent from business lines that generate risk?
Answer: Three Lines of Defense model
The Three Lines of Defense model separates risk-taking (1st line), risk oversight (2nd line), and independent assurance (3rd line/internal audit) to prevent conflicts of interest.
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