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Bfm
MODULE
B RISK MANAGEMENT
UNIT 8
Check Your Progress
A) Investment in Post Office time deposit is
(ii) Low-risk investment
(iii) Medium-risk investment
(iv) High-risk investment
Ans: Zero-risk
investment
B) Zero-risk investment implies
(ii) Investment in zero coupon bonds
(iii) Investment in government securities
(iv) Investment in bank fixed deposit
Ans: Zero
variation in cash flow from investment
C) Which of the following statements is correct?
(ii) Higher the risk-lower would be risk premium
(iii) Lower the risk-higher would be risk premium
(iv) None of the statements is correct
Ans: Higher the
risk-higher would be risk premium
D) Which of the following statements is correct?
(ii) Higher the risk in a business, higher would be
return expectation
(iii) Higher the risk in a business, higher would be
capital requirement and higher would be return expectation
(iv) None of the statements is correct
Ans: Higher the risk in a business,
higher would be capital requirement
E) What is most critical function of
Risk Management?
(ii)Identification
of risks
(iii)Estimating
the costs of risk
(iv)Measurement
of risk
Ans: Controlling the level of risk to
an organization's capacity
(A) Capital charge component of pricing accounts for
1.Cost of
capital
2.Internal
generation of capital
3.Loss
provision
Which of the following is True?
(i)All the
statements are correct
(ii)Statements
1 and 2 are correct
(iii)Statements
2 and 3 are correct
Statements 3
and 1 are correct
(B) Daily volatility of a stock is 0.5%. What is
its 10-day volatility?
(i)5%
(ii)0.25%
(iv)None of
these
1.58%
(C) Risk mitigation results in
1.Reduction of
downside potential
2.Reduction in
profit potential
Which of the following is True?
(ii)Statement 1
is correct
(iii)Statement
2 is correct
(iv)Both are
incorrect
All the
statements are correct
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Unit
9
Tick the Correct Answer
(A) Financial Risk is defined as
(ii)Uncertainties
that result in outright losses
(iii)Uncertainties
in cash flow
Variations in
net cash flows
(B) Strategic Risk is a type of
(i)Interest
rate risk
(ii)Operational
risk
(iii)Liquidity
risk
None of these
(C) A bank funds its assets from a pool of
composite liabilities. Apart from credit and operational risks, it faces
(ii)Mismatch
risk
(iii)Market
risk
(iv)Liquidity
risk
Basis risk
(D) A branch sanctions Rs 1 crore loan to a
borrower, which of the following risks the branch is taking
1.Liquidity
risk
2.Interest rate
risk
3.Market risk
4.Credit risk
5.Operational
risk
(i)All of them
(ii)1, 2 and 3
only
(iii)1, 4 and 5
only
1, 2, 4 and 5
only
(E) Premature payment of a term loan will result
in interest rate risk of type
(i)Basis risk
(ii)Yield curve
risk
(iv)Mismatch
risk
Answers to Terminal Questions
A.(iv),
B.(iv), C.(i), D.(iv), E.(iii)
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Unit
10
(A) Systemic risk is the risk of
(i)Failure of a
bank, which is not adhering to regulations
(ii)Failure of
two banks simultaneously due to bankruptcy of one bank
(iii)Where a
group of banks fail due to contagion effect
Failure of
entire banking system
(B) Central Bank Governors of G-10 countries
participate in the Basel Committee on Banking Supervision. Total number of
members:
(i) 10 (ii) 11 (iii) 12 (iv) 13
13
(C) 1988 Capital Accord framework accounted for
1.Credit risk
2.Market Risk
3.Operational risk
4.Defined
capital component
Which of the following is true?
(i)All of them
(iii)1, 3 and 4
(iv)1,2 and 3
1,2 and 4
(D) Back testing is done to
(i)Test a model
(iii)Record
performance
(iv)None of the
above
Compare model
results and actual performance
(E) Under Basel II, capital requirement under the
accord is
(i)The maximum
capital that is required to be maintained
(ii)The minimum
capital that is required to be maintained
(iv)None of the
above
The capital as
specified by the regulatory authority is required to be maintained
(F) Capital charge for credit risk requires input
for PD, LGD, HAD and M. Under advanced IRB approach, who provides the input for
LGD.
(ii)Supervisor
(iii)Function
provided by BCBS
(iv)None of the
above
Answers to
Terminal Questions
1. (iv), 2.(iv),
3.(ii), 4.(ii), 5.(iii), 6.(i)
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Unit
11
1.
A bank expects fall in price of a security if it sells it in the market. What
is the risk that the bank is facing?
(a) Market risk (b)
Operational risk
(c) Asset
liquidation risk (d)
Market liquidity risk
Asset
liquidation risk
2.
An 8-year 8% semi-annual bond has a BPV of Rs 125. The yield on the bond has
increased by 5 basis points. What is the profit or loss suffered due to
increase in yield?
(a) A profit of Rs 1000 (c) A profit of
Rs 625
(b) A loss of Rs 1000 (d) A
loss of Rs 625
A loss of Rs 625
3. 1 day VaR of a portfolio is Rs
500.000 with 95% confidence level. In a period of six months (125 working days)
how many times the loss on the portfolio may exceed Rs 500.000?
(a) 4 days (c) 6 days
(b) 5 days (d) 7 days
6
days
4.
A bank suffers loss due to adverse market movement of a security. The security
was how ever held beyond the defeasance period. What is the type of the risk
that the bank has suffered?
(a)
Market risk (b) Operational risk (c)
Market liquidation risk (d) Credit risk
5.
A bank holds a security that is rated A+. The rating of the security migrates
to A. What is the risk that the bank has faced?
(a) Market risk (c) Market liquidation
risk
(b) Operational risk (d) Credit
risk
Credit
risk
6.
A bond with remaining maturity of 5 years is presently yielding 6%. Its
modified duration is 5 years. What is its McCauley's duration?
(a) 5.05% (c) 5.30%
(b) 3.77% (d) 6.00%
5.30%
7. VaR is not enough to assess market
risk of a portfolio. Stress testing is desirable because
(a)It helps in
calibrating VaR module
(b)It helps as
an additional risk measure
(d)It is used
as VaR measure is not accurate enough
It helps in
assessing risk due to abnormal movement of market parameters
Answers to
Terminal Questions
1. (c), 2. (d), 3. (c), 4. (b),
5. (d), 6. (c), 7. (c)
UNIT 12
Terminal Questions
1.Which of the
following is not a type of credit risk?
(i)Default risk (ii)Credit spread risk
(iii) Intrinsic risk (iv) Basis risk
2.Risk
of a portfolio with
over exposure in
steel sector will be
(i)More than systematic risk
(ii)Equal to intrinsic risk
(iii)Less than intrinsic risk
(iv)None of these
3.
4.The risk that arises due to worsening
of credit quality is
(i)Intrinsic risk
(ii)Credit spread risk
(iii)Portfolio risk
(iv)Counterparty risk
5.In
order to develop our capability to actively manage our credit portfolio one
must have in place the
following:
following:
(a)Credit Rating Model (or models for
different categories of loans and advances)
(b)Develop and maintain necessary data
on defaults of borrowers rating category-wise, i.e.. 'Rating Migration'
(i)Both 1 and 2 are required
(ii)Only 1 is required
(iii)Only 2 is required
(iv)None of the above
6. The
model that combines five financial ratios using reported accounting information
and equity
values to produce an objective measure of borrower's financial health is
values to produce an objective measure of borrower's financial health is
(i)Altman's Z Score
(ii)'CreditMetrics'
(iii)CreditRisk+
(iv)None of the above.
7. A
transaction where financial securities are issued against the cash flow
generated from a pool of
assets is called
assets is called
(i)Securitization
(ii)Credit Default Swaps
(iii)Credit Linked Notes
(iv)Total Return Swaps
Answers to Questions
1.
iv, 2. i, 3. 21, 4. ii, 5. i,
.6. i, 7. I
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Unit 13
1.Operational Risk arises from
(a)Inadequate or failed internal
processes
(b)People and
systems
(c)External events
(d)Defaults
(e)Market price fluctuations
Which of the following is true
(i) All
of them
(ii) None
of them
(iii) (a),
(b) and (c)
(iv) (a),
(b) and (e)
2.The third Consultative Paper
recommended for
(a)Cause based classification (b)Effect based classification (c)Event based classification
For operational risk.
Which of the following is true
(i) (a)
(ii)None of them
(iii)(c)
(iv)(b)
3.Benefits of integrated risk framework
are
(a)To relate capital and reserves more
effectively to their actual level of risk exposure.
(b)To evaluate pricing decisions and
product profitability
(c)In making risk transfer decisions
Which of the following is true
(i)All of them
(ii)None of them
(ii) (a)and(b)
(iv) (b) and (c)
(ii) (a)and(b)
(iv) (b) and (c)
4.Rewards
of proper management of operational risks
are
(a)Lesser risk capital
(b)Cost reductions in operations
(c)Competitive edge
Which of the following is true
(i)All of them
(ii)None of them
(iii)(a), (b) and (c)
(iv)(a) and (b)
5.Given the following
Probability of occurrence = 4
Potential financial impact = 4
Impact of internal controls = 0%
What is the estimated level of
operational risk?
(a)3
(b)2
(c)0
(d)4
6.What is the beta factor for corporate
finance under Standardised
approach?
(a)15%
(b)18%
(c)12%
(d)None of the above
Answers to
Terminal Questions
1. (iii), 2. (iii), 3. (i), 4. (i), 5. (d), 6. (b)
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