Financial Risk Management Financial Risk Management 4

Question 1

Which of the following is an example of operational risk as defined by Basel II/III?

Accepted Answer

A rogue trader executes unauthorized trades that result in large losses

Answer

Operational risk includes losses from inadequate internal processes, people, and systems — unauthorized trading by an employee falls squarely in this category.

Question 2

What is the 'carry trade' and what is its primary risk?

Accepted Answer

Borrowing in a low-yield currency to invest in a high-yield currency; primary risk is sudden exchange rate reversal

Answer

A carry trade borrows cheaply in a low-rate currency to invest in a higher-yielding one, but is vulnerable to sudden currency depreciation that wipes out accumulated carry.

Question 3

A portfolio manager wants to reduce interest rate duration without selling bonds. Which derivative strategy is most appropriate?

Accepted Answer

Enter a payer interest rate swap (pay fixed, receive floating)

Answer

In a payer swap, the manager pays fixed and receives floating, which offsets the fixed-rate exposure of the bond portfolio and reduces duration.

Question 4

What does 'model risk' refer to in financial risk management?

Accepted Answer

The risk of loss due to incorrect or misused pricing or risk models

Answer

Model risk is the potential for financial loss resulting from errors in model development, implementation, or inappropriate application of a model.

Question 5

Under the standardized approach for credit risk in Basel III, how are risk weights primarily determined?

Accepted Answer

External credit ratings from recognized rating agencies

Answer

The standardized approach uses external credit ratings from recognized agencies (like Moody's and S&P) to assign risk weights to different exposures.

Financial Risk Management Practice Test

Financial Risk Management Practice Test

Financial Risk Management Financial Risk Management 4