Financial Risk Management Financial Risk Management 2

Question 1

What does the 'Greeks' measure Delta represent in options pricing?

Accepted Answer

The rate of change of option price relative to underlying asset price

Answer

Delta measures how much an option's price changes for a $1 move in the underlying asset's price.

Question 2

Which risk measure quantifies the potential loss beyond the Value at Risk (VaR) threshold?

Accepted Answer

Expected Shortfall (CVaR)

Answer

Expected Shortfall (Conditional VaR) measures the average loss in the tail beyond the VaR confidence level.

Question 3

A bank has a loan portfolio with a 99% 10-day VaR of $5 million. What does this mean?

Accepted Answer

There is a 1% chance losses will exceed $5M over 10 days

Answer

A 99% VaR of $5M means there is a 1% probability that losses will exceed $5M over the 10-day horizon.

Question 4

What is the primary purpose of a Credit Default Swap (CDS)?

Accepted Answer

To transfer credit risk from one party to another

Answer

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.

Question 5

Under Basel III, what is the minimum Common Equity Tier 1 (CET1) capital ratio requirement?

Accepted Answer

4.5%

Answer

Basel III requires banks to maintain a minimum CET1 ratio of 4.5% of risk-weighted assets.

Financial Risk Management Practice Test

Financial Risk Management Practice Test

Financial Risk Management Financial Risk Management 2