Financial Risk Management Financial Risk Management MCQ 4

Question 1

A firm enters a 5-year interest rate swap, paying fixed and receiving floating. If interest rates rise unexpectedly, the firm's position will:

Accepted Answer

Gain value because floating receipts increase

Answer

A pay-fixed, receive-floating swap benefits from rising rates because the floating leg increases in value while the fixed payments remain constant.

Question 2

Which of the following best defines 'concentration risk' in a loan portfolio?

Accepted Answer

Risk arising from a single counterparty or sector representing a disproportionately large share of exposures

Answer

Concentration risk refers to excessive exposure to a single borrower, industry, or geography, which can lead to large correlated losses if that segment experiences stress.

Question 3

The 'Greeks' in options risk management — delta, gamma, vega, theta, and rho — measure sensitivity to which respective market factors?

Accepted Answer

Underlying price, curvature of delta, implied volatility, time decay, interest rates

Answer

Delta measures sensitivity to underlying price; gamma to changes in delta; vega to implied volatility; theta to time decay; rho to interest rates.

Question 4

In the Merton structural credit model, default occurs when:

Accepted Answer

The market value of assets falls below the face value of debt at maturity

Answer

The Merton model treats equity as a call option on firm assets; default is triggered when the asset value at debt maturity is less than the debt's face value.

Question 5

A portfolio has a correlation of 1.0 between all assets. What is the diversification benefit?

Accepted Answer

No diversification benefit

Answer

When correlations are perfectly positive (1.0), all assets move identically, so combining them provides no reduction in risk relative to holding any single asset.

Financial Risk Management Practice Test

Financial Risk Management Practice Test

Financial Risk Management Financial Risk Management MCQ 4