Financial Risk Management Financial Risk Management MCQ 3

Question 1

A credit default swap (CDS) buyer pays a premium to the seller. In exchange, the seller agrees to:

Accepted Answer

Make a payment to the buyer if a specified credit event occurs on the reference entity

Answer

In a CDS, the protection seller compensates the buyer for losses if a defined credit event (such as default or restructuring) occurs on the reference entity.

Question 2

Which of the following is a key limitation of the historical simulation method for VaR estimation?

Accepted Answer

It assumes the historical period is representative of future conditions

Answer

Historical simulation relies on past return data, which may not capture future market regimes or tail events that have not yet occurred, making it backward-looking.

Question 3

What does the 'duration' of a bond primarily measure?

Accepted Answer

The sensitivity of the bond's price to changes in yield

Answer

Duration (specifically modified duration) measures the percentage change in a bond's price for a 1% change in yield, making it a key interest rate risk metric.

Question 4

In the context of market risk, 'basis risk' refers to:

Accepted Answer

The risk that a hedging instrument does not perfectly offset the exposure being hedged

Answer

Basis risk arises when the price movements of the hedging instrument and the underlying exposure are not perfectly correlated, leaving residual risk in the hedged position.

Question 5

Which regulatory framework introduced the concept of 'Tier 1' and 'Tier 2' capital for banks?

Accepted Answer

Basel I Accord

Answer

The Basel I Accord (1988) introduced the Tier 1 and Tier 2 capital classification, along with the 8% minimum capital-to-risk-weighted-assets ratio.

Financial Risk Management Practice Test

Financial Risk Management Practice Test

Financial Risk Management Financial Risk Management MCQ 3