Financial Risk Management Advanced

Question 1

Under the Basel III framework, what is the minimum Common Equity Tier 1 (CET1) capital ratio required for banks?

Accepted Answer

4.5%

Answer

Basel III sets the minimum CET1 ratio at 4.5% of risk-weighted assets, with an additional 2.5% capital conservation buffer on top.

Question 2

Which risk measure captures the expected loss in the tail of the distribution beyond the VaR threshold?

Accepted Answer

Expected Shortfall (CVaR)

Answer

Expected Shortfall (also called CVaR or ES) is the average of losses that exceed the VaR threshold, capturing tail risk more fully than VaR alone.

Question 3

A $100M bond portfolio has a modified duration of 6 and yields rise by 50 bps. What is the approximate price change?

Accepted Answer

-$3,000,000

Answer

Price change ≈ -Modified Duration × ΔYield × Portfolio Value = -6 × 0.005 × $100M = -$3M.

Question 4

In the context of credit risk, what does the Loss Given Default (LGD) represent?

Accepted Answer

The fraction of exposure lost when a borrower defaults

Answer

LGD is the proportion of the exposure at default that is not recovered after the borrower defaults, typically expressed as 1 minus the recovery rate.

Question 5

Which stress testing approach involves applying a consistent set of severe but plausible macroeconomic scenarios to a portfolio?

Accepted Answer

Scenario analysis

Answer

Scenario analysis stress tests a portfolio using coherent macroeconomic narratives (e.g., recession, rate spike) rather than changing one variable at a time.

Financial Risk Management Practice Test

Financial Risk Management Practice Test

Financial Risk Management Advanced