EMT Practice Test

1. Question Content...

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Question1: Most loans and deposits in the interbank market have a maturity of:

Question2: Which of the following statements are reasons for mathematical valuation and risk assessment models to be misleading or inaccurate?
I. There could be missing factors in models.
II. The data used as input for the model could be bad or wrong.
III. Model results could be misinterpreted.
IV. There could be errors in the derivation of the model.

Question3: Which one of the following four attributes would likely help a trader using exchange-traded options to establish a leveraged position?

Question4: Which one of the following four statements best describes challenges of delta-normal method of mapping options positions?
Delta-normal method understates

Question5: To estimate the price of gold forwards, an investment analyst focuses on the cost of holding physical gold (bullion) and the cost of shorting the same. Given that physical gold spot price is $1,000, the annual risk-free rate is 5%, and the gold lease rate equals 2% annually, the analyst's best estimate of the gold forward price to equal

Question6: Banks duration match their assets and liabilities to manage their interest risk in their banking book. Currently, the bank's assets and liabilities both have a duration of 10. To hedge against the risk of decreasing interest rates, the bank should
I. Increase the duration of the liabilities
II. Increase the duration of the assets
III. Decrease the duration of the liabilities
IV. Decrease the duration of the assets

Question7: Except for the credit quality of the Credit Default Swap protection seller, the following relationship correctly approximates the yield on a risk-free instrument:

Question8: As Japan ___ its budget deficits and ___ its dependence on debt, the Japanese currency, JPY, would ___ in value against other currencies.

Question9: BetaFin has decided to use the hybrid RCSA approach because it believes that it fits its operational framework. Which of the following could be reasons to use the hybrid RCSA method?
I. BetaFin has previously created series of RCSA workshops, and the results of these workshops can be used to design the questionnaires.
II. BetaFin believes that using the questionnaire approach should be more useful.
III. BetaFin had used the questionnaire approach successfully for certain businesses and the workshop approach for others.
IV. BetaFin had already implemented a sophisticated RCSA IT-system.

Question10: Which of the following statements regarding CDO-squared is correct?
I. CDO-squared use other CDOs and CMOs as collateral.
II. Risk assessment of CDO-squared is almost impossible due to their complexity.
III. CDO-squared have lower credit risk than CMOs but higher than CDOs.

Question11: Bank Zilo has $2 million in cash and $10 million in loans coming due tomorrow with an expected default rate of 1%. The proceeds will be deposited overnight. The bank owes $ 10 million on a securities purchase that settles in two days and pays off $9 million in commercial paper in three days that is not expected to renew.
How much money should the bank plan to raise so as to avoid a liquidity problem?

Question12: Short-selling is typically associated with the following risks:
I. Potential for extreme losses
II. Risk associated with the availability of shares to borrow
III. Market behavior risk
IV. Liquidity risk

Question13: Gamma Bank has a significant number of retail customers and finds its balance sheet shape and structure difficult to manage. Which one of the following characteristics of a bank with wide retail operations is INCORRECT?

Question14: Which one of the four following statements regarding minimum loss data standards is not correct?

Question15: In the United States, foreign exchange derivative transactions typically occur between

Question16: A bank customer expecting to pay its Brazilian supplier BRL 100 million asks Alpha Bank to buy Australian dollars and sell Brazilian reals. Alpha bank does not hold Brazilian reals so it asks for a quote to buy Brazilian reals in the market. The market rate is 100. The bank quotes a selling rate of 101 to its customer, sells the reals, and receives AUD 1,010,000. To perform foreign exchange matched position trading, the banks should

Question17: Which of the following statements about endogenous and exogenous types of liquidity are accurate?
I. Endogenous liquidity is the liquidity inherent in the bank's assets themselves.
II. Exogenous liquidity is the liquidity provided by the bank's liquidity structure to fund its assets and maturing liabilities.
III. Exogenous liquidity is the non-contractual and contingent capital supplied by investors to support the bank in times of liquidity stress.
IV. Endogenous liquidity is the same as funding liquidity.

Question18: Modified duration of a bond measures:

Question19: To estimate a partial change in option price, a risk manager will use the following formula:

Question20: A bank customer chooses a mortgage with low initial payments and payments that increase over time because the customer knows that she will have trouble making payments in the early years of the loan. The bank makes this type of mortgage with the same default assumptions uses for ordinary mortgages, thus underestimating the risk of default and becoming exposed to:

Question21: Which of the following reports have been suggested by the FDIC that banks should produce in addition to the usual probabilistic analysis and stress tests in order to gauge liquidity issues?
I. Cash flow gaps
II. Funding availability
III. Critical assumptions used in credit projections

Question22: Asset and liability management is typically concerned with all of the following activities:
I. Maintaining the desired liquidity structure of the bank.
II. Managing the factors affecting the structure and composition of a bank's balance sheet.
III. Effectively transferring the interest rate risk in the banking book to the investment bank at a fair transfer price.
IV. Focusing on the circumstances impacting the stability of income the bank generates over time.

Question23: A risk analyst is considering how to reduce the bank's exposure to rising interest rates. Which of the following strategies will help her achieve this objective?
I. Reducing the average repricing time of its loans
II. Increasing the average repricing time of its deposits
III. Entering into interest rate swaps
IV. Improving earnings capacity and increasing intermediated funds

Question24: A key function of treasuries in commercial/retail banks is:
I. To manage the interest margin of the banks.
II. To focus on underwriting risk.
III. To ensure strong earnings.
IV. To increase profit margins.

Question25: The exercise for an American type option prior to expiration day is virtually certain in the following case:

Question26: A risk associate evaluating his current portfolio of assets and liabilities wants to determine how sensitive this portfolio is to changes in interest rates. Which one of the following four metrics is typically used for this purpose?

Question27: The operational risk policy should include:
I. The firm's definition of risk
II. The governance of operational risk including who owns it, what it owns, and how issues should be escalated III. The main activities and elements that are managed by the operational risk function

Question28: The value of which one of the following four option types is typically dependent on both the final price of its underlying asset and its own price history?

Question29: Which one of the following statements about futures contracts is correct?
I. Futures contracts are subject to the same risks as the underlying instruments.
II. Futures contracts have additional interest rate risk die to the future delivery date.
III. Futures contracts traded in a clearinghouse system are exposed to credit risk with numerous counterparties.

Question30: If a bank is long £500 million pounds, short £300 million in delta-equivalent pound options, and long £100 million in pound-denominated stocks, what is the amount of pound exposure that would be shown in the aggregated risk reports?

Question31: Which of the following are conclusions that could be drawn from the shape of the statistical distribution of losses that a bank might incur over a future time period?
I. In most years a bank would look more profitable than it will be on average.
II. Most of the time a sufficiently well capitalized bank will appear over-capitalized.
III. Bad years do not come along very often, but when they do they lead to enormous losses.

Question32: James Johnson has a $1 million long position in ThetaGroup with a VaR of 0.3 million, and $1 million long position in VolgaCorp with a VaR of 0.4 million. The returns of the two companies have zero correlation.
What is the portfolio VaR?

Question33: Securitization is the process by which banks
I. Issue bonds where the payment of interest and repayment of principal on the bonds depends on the cash flow generated by a pool of bank assets.
II. Issue bonds where the bank has transferred its legal right to payment of interest and repayment of principal to bondholders.
III. Sell illiquid assets.

Question34: A corporate bond was trading with 2%probability of default and 60% loss given default. Due to the credit crisis the probability of default increased to 10% and the loss given default increased to 100%. Assuming that the risk premium remained the same how did the credit spread change?

Question35: Which one of the four following statements about technology systems for managing operational risk event data is incorrect?

Question36: Which one of the following four models is typically used to grade the obligations of small- and medium-size enterprises?

Question37: The skewness of ABC company's stock returns equal -1.5. What is the correct interpretation of this?

Question38: Which of the following statements presents an advantage of using risk and control self-assessments (RCSA) in the operational risk framework?
I. RCSA provides very accurate scoring of risks and controls due to its subjective nature.
II. RCSA program provides insight into risks that exist in a firm, but that may or may not have occurred before.
III. RCSA program can produce biased but transparent operational risk reporting.
IV. RCSA program allows each department to take ownership of its own risks and controls.

Question39: Gamma Bank provides a $100,000 loan to Big Bath retail stores at 5% interest rate (paid annually). The loan is collateralized with $55,000. The loan also has an annual expected default rate of 2%, and loss given default at
50%. In this case, what will the bank's expected loss be?

Question40: Floating rate bonds typically have ________ duration which means they have ________ sensitivity to interest rate changes.

Question41: When looking at the distribution of portfolio credit losses, the shape of the loss distribution is ___ , as the likelihood of total losses, the sum of expected and unexpected credit losses, is ___ than the likelihood of no credit losses.

Question42: To estimate the interest charges on the loan, an analyst should use one of the following four formulas:

Question43: Alpha Bank determined that Delta Industrial Machinery Corporation has 2% change of default on a one-year no-payment of USD $1 million, including interest and principal repayment. The bank charges 3% interest rate spread to firms in the machinery industry, and the risk-free interest rate is 6%. Alpha Bank receives both interest and principal payments once at the end the year. Delta can only default at the end of the year. If Delta defaults, the bank expects to lose 50% of its promised payment.
What may happen to the Delta's initial credit parameter and the value of its loan if the machinery industry experiences adverse structural changes?

Question44: A bank owns a portfolio of bonds whose composition is shown below.

What is the modified duration of the portfolio?

Question45: Jack Richardson wants to compute the 1-month VaR of a portfolio with a market value of USD 10 million, with an average monthly return of 1% and average monthly standard deviation of 1.5%. What is the portfolio VaR at 99% confidence level?
Probability Cumulative Normal distribution
0.90 1.282
0.91 1.341
0.92 1.405
0.93 1.476
0.94 1.555
0.95 1.645
0.96 1.751
0.97 1.881
0.98 2.054
0.99 2.326

Question46: Which one of the following four alternatives lists the three most widely traded currencies on the global foreign exchange market, as of April 2007, in the decreasing order of market share? EUR is the abbreviation of the European euro, JPY is for the Japanese yen, and USD is for the United States dollar, respectively.

Question47: A bank customer expecting to pay its Brazilian supplier BRL 100 million asks Alpha Bank to buy Australian dollars and sell Brazilian reals. Alpha bank does not hold reals so it asks for a quote to buy Brazilian reals in the market. The market rate is 100. The bank quotes a selling rate of 101 to its customer and sells the reals at this quoted price. Then the bank immediately buys the real at the market rate and completes foreign exchange matched transaction. What is the financial impact of this transaction for Alpha bank?

Question48: To protect the oranges harvest price level, a farmer needs to take a hedge position. Provided that he produces the amount he hedged, which one of the following four strategies will allow the farmer to accomplish his goal?

Question49: In the United States, during the second quarter of 2009, transactions in foreign exchange derivative contracts comprised approximately what proportion of all types of derivative transactions between financial institutions?

Question50: Which one of the following four statements correctly describes an American call option?

Question51: Which one of the four following statements about Basis point values is correct?
Basis point value:

Question52: Which one of the following four statements about the "market-maker" trading strategy is INCORRECT?

Question53: Gamma Bank provides a $100,000 loan to Big Bath retail stores at 5% interest rate (paid annually). The loan also has an annual expected default rate of 2%, and loss given default at 50%. In this case, what will the bank's expected loss be? What is the expected loss of this loan?

Question54: Which one of the following four statements about hedging is INCORRECT?

Question55: To estimate the responsiveness of a particular equity portfolio to the overall market, a trader should use the portfolio's

Question56: Arnold Wu owns a floating rate bond. He is concerned that the rates may fall in the future decreasing his payment amount. Which of the following instruments should he buy to hedge against the fall in interest rates?

Question57: A credit analyst wants to determine if her bank is taking too much credit risk. Which one of the following four strategies will typically provide the most convenient approach to quantify the credit risk exposure for the bank?

Question58: What are the add-on losses faced by a bank that is going bankrupt?
I. The discount accepted by the bank for selling its assets in a fire sale.
II. The increased cost of funding liabilities in a financially distressed situation.
III. The reduction in the present value of future growth opportunities.
IV. Loss of goodwill and intangible assets.

Question59: In additional to the commodity-specific risks, which of the following risks represent the main commodity derivative risks?
I. Basis
II. Term
III. Correlation
IV. Seasonality

Question60: Which of the following statements regarding bonds is correct?
I. Interest rates on bonds are typically stated on an annualized rate.
II. Bonds can pay floating coupons that are directly linked to various interest rate indices.
III. Convertible bonds have an element of prepayment risk.
IV. Callable bonds have an element of equity risk.

Question61: A portfolio consists of two floating rate bonds and one fixed rate bond.

Based on the information below, modified duration of this portfolio is

Question62: Which one of the four following statements about drawdowns is correct?

Question63: Which one of the four following statements describes a specific characteristic of risk and control self-assessments (RCSA) which distinguishes it from both control assessments and risk and control assessments?

Question64: A bank customer expecting to pay its Brazilian supplier BRL 100 million asks Alpha Bank to buy Australian dollars and sell Brazilian reals. Alpha bank does not hold reals so it asks for a quote to buy Brazilian reals in the market. The market rate is 100. The bank quotes a selling rate of 101 to its customer and sells the real at this quoted price. Then the bank immediately buys the real at the market rate and completes foreign exchange matched transaction. What is the impact of this transaction on the bank's risk profile?

Question65: A credit risk analyst is evaluating factors that quantify credit risk exposures. The risk that the borrower would fail to make full and timely repayments of its financial obligations over a given time horizon typically refers to:

Question66: What are some of the drawbacks of correlation estimates? Which of the following statements identifies major problems with correlation calculations?
I. Correlation estimates are not able to capture increases in factor co-movements in extreme market scenarios.
II. Correlation estimates tend to be unstable.
III. Historical correlations may not forecast future correlations correctly.
IV. Correlation estimates assume normally distributed returns.

Question67: Which one of the following statements is an advantage of using implied volatility as an input when calculating VaR?

Question68: In early March, an energy trader takes a long position in natural gas futures for delivery in June, and hedges this exposure by taking a position in futures for July delivery. These trades were executed on the expectation that over time, the relative prices of the June and July contracts will come into alignment, the movement in these two contracts will largely mirror each other, and as a result of this, the net exposure is minimized and the position is protected against absolute price movements. However, if the two relative prices do not come into alignment with each other due to the scarcity of any of the two traded contracts in the futures market, the trader is likely to become exposed to the

Question69: Which of the following assets on the bank's balance sheet has greatest endogenous liquidity risk?

Question70: Gamma Bank has $300 million in loans and $200 million in deposits. If the modified duration of the loans is estimated to be 2, and the modified duration of the deposits is estimated to be 1, then the change in Gamma Bank's equity value per 1% change in yield will be:

Question71: The market risk manager of SigmaBank is concerned with the value of the assets in the bank's trading book.
Which one of the four following positions would most likely be not included in that book?

Question72: Which one of the four following activities is NOT a component of the daily VaR computing process?

Question73: A credit portfolio manager analyzes a large retail credit portfolio. Which of the following factors will represent typical disadvantages of market-linked credit risk drivers?
I. Need to supply a large number of input parameters to the model
II. Slow computation speed due to higher simulation complexity
III. Non-linear nature of the model applicable to a specific type of credit portfolios IV. Need to estimate a large number of unknown variable and use approximations

Question74: DeltaFin wants to develop a control scoring method for its RCSA program. Which of the following statements regarding scoring methods are correct?
I. DeltaFin can develop a control scoring method that assesses both the design and the performance of the control.
II. DeltaFin can combine the design and performance scores for each control to produce an overall control effectiveness score.
III. DeltaFin can use the control performance scores to compute an overall risk severity score.
IV. DeltaFin can determine its own appropriate control scoring method.

Question75: An asset and liability manager for a large financial institution has to recognize that retail products ___ include embedded options, which are often not rationally exercised, while wholesale products ___ carry penalties for repayment or include rights to terminate wholesale contracts on very different terms than are common in retail products.

Question76: In its VaR calculations, JPMorgan Chase uses an expected tail-loss methodology which approximates losses at the 99% confidence level. This methodology consists of two subsequent steps to estimate the VaR. Which of the following explains this two-step methodology?

Question77: After entering the securitization business, Delta Bank increases its cash efficiency by selling off the lower risk portions of the portfolio credit risk. This process ___ return on equity for the bank, because the cash generated by the risk-transfer and the overall ___ of the bank's exposure to the risk.

Question78: Gamma Bank is active in loan underwriting and securitization business, and given its collective credit exposure, it will be typically most interested in the following types of portfolio credit risk:
I. Expected loss
II. Duration
III. Unexpected loss
IV. Factor sensitivities

Question79: Which one of the following four statements about regulatory capital for a bank is accurate?

Question80: To reduce the variability of net interest income, Gamma Bank can swap positions that make its duration gap equal to

Question81: A customer asks a broker employed by AlphaBank to buy Eureka Corporation bonds for her account. While this trade was executed correctly and the bonds were bought, the trade was mistakenly accounted for as a sell order. If the price of Eureka Corporation bonds goes up, this trade would result in a significantly larger loss than if the market had remained stable. However, if the market drops, the customer will benefit from the incorrect accounting and gain from this trade. This trading scenario can serve as an example that

Question82: Which one of the following is a reason for a bank to keep a commercial loan in its portfolio until maturity?
I. Commercial loans usually have attractive risk-return profile.
II. Commercial loans are difficult to sell due to non standard features.
III. Commercial loans could be used to maintain good relations with important customers.
IV. The credit risk in commercial loans is low.

Question83: US-based BetaBank have accumulated Japanese yen, Japanese government bonds, options on Japanese yen, and positions in commodities that have a positive correlation with yen. Which one of the four following non-statistical risk measures could be used to evaluate the BetaBank's exposure to the Japanese economy?

Question84: Which one of the following four statements about equity indices is INCORRECT?

Question85: Which of the following are the most common methods to increase liquidity in stressed conditions?
I. Selling or securitizing assets.
II. Obtaining additional credit lines.
III. Securing a better credit rating.

Question86: Which one of the following statements describes Macauley's duration?

Question87: Why do regulatory standards impose formulaic capital calculations for all of the banks activities?
I. If the banks use different models it is difficult for a regulator to compare results across banks.
II. By imposing standardized calculations regulators can make sure that banks are not missing key risks in their calculations.
III. By imposing standardized calculations regulators can make sure that banks do not use capital calculations to game the banking regulation system.

Question88: Mega Bank holds a $250 million mortgage loan portfolio, which reprices every 5 years at LIBOR + 10%. The bank also has $150 million in deposits that reprices every month at LIBOR + 3%. What is the amount of Mega Bank's rate sensitive assets?

Question89: Returns on two assets show very strong positive linear relationship. Their correlation should be closest to which of the following choices?

Question90: What is the order in which creditors and shareholders get repaid in the event of a bank liquidation?

Question91: For two variables, which of the following is equal to the average product of the deviations from their respective means?

Question92: ThetaBank has extended substantial financing to two mortgage companies, which these mortgage lenders use to finance their own lending. Individually, each of the mortgage companies has an exposure at default (EAD) of $20 million, with a loss given default (LGD) of 100%, and a probability of default of 10%. ThetaBank's risk department predicts the joint probability of default at 5%. If the default risk of these mortgage companies were modeled as independent risks, what would be the probability of a cumulative $40 million loss from these two mortgage borrowers?

Question93: Which of the activities represent examples of market manipulation?

Question94: Which one of the following four statements regarding counterparty credit risk is INCORRECT?

Question95: To manage its credit portfolio, Beta Bank can directly sell the following portfolio elements:
I. Bonds
II. Marketable loans
III. Credit card loans

Question96: Which one of the following four exotic option types has another option as its underlying asset, and as a result of its construction is generally believed to be very difficult to model?

Question97: Which one of the following four statements regarding commodity derivative risks is INCORRECT?

Question98: Which one of the following four statements correctly defines credit risk?

Question99: Which of the following measure describes the symmetry of a statistical distribution?

Question100: To improve the culture and awareness of the operational risk, Gamma Bank's CRO decides to promote three activities within her organization. Which one of the following four activities is NOT typically used to develop an operational risk framework?

Question101: A corporate bond gives a yield of 6%. A same maturity government bond yields 2%. The probability of the corporate bond defaulting is 2.5%. In case of default, investors expect to lose 60% of their investment. The risk premium in the credit spread is:

Question102: A bank has a Var estimate of $100 million. It is considering a new transaction which has a correlation of 0.35 with the current portfolio and a standalone VaR estimate of $5 million. What would be the new VaR for the bank if it carried out the transaction?

Question103: A large energy company has a recurring foreign currency demands, and seeks to use options with a pay-off based on the average price of the underlying asset on either a few specific chosen dates or all dates within a specific pricing window. Which one of the following four option types would most likely meet these specific foreign currency demands?

Question104: Which among the following are shortfalls of the static liquidity ladder model?
I. The static model gives a liquidity estimate only after the bank faces the liquidity problem.
II. The static model can only make projections over a few days.
III. The static model does not incorporate uncertainty in the analysis.

Question105: Altman's Z-score incorporates all the following variables that are predictive of bankruptcy EXCEPT:

Question106: Which one of the following four factors typically drives the pricing of wholesale products?

Question107: Alpha Bank estimates its 1-month, 95% VaR is 30 million EUR. This means that in the next month, there is a

Question108: Which statements correctly describe the features of using subscription databases for operational loss data analysis?
Subscription databases
I. Provide central data repositories and benchmarking services to their members.
II. Can provide insight into whether the losses in a firm reflect the usual losses in their industry.
III. Assist with mapping the events to the appropriate business lines, risk categories and causes.
IV. Reflect only events that are interesting to the press and are reported in the press.

Question109: An endowment asset manager with a focus on long/short equity strategies is evaluating the risks of an equity portfolio. Which of the following risk types does the asset manager need to consider when evaluating her diversified equity portfolio?
I. Company-specific projected earnings and earnings risk
II. Aggregate earnings expectations
III. Market liquidity
IV. Individual asset volatility

Question110: Which of the following statements explain how securitization makes the retail assets highly liquid and the balance sheet easier to manage?
I. By securitizing assets any lack of capital can be accommodated by selling the securitized bonds.
II. Any need to diversify credit risk can be achieved by selling bank's own securitized bonds and buying other bonds that increase diversification.
III. Securitization could be used to promote hedging by using limited market instruments.

Question111: From the bank's point of view, repricing the retail debt portfolio will introduce risks of fluctuations in:
I. Duration
II. Loss given default
III. Interest rates
IV. Bank spreads

Question112: A risk associate responsible for the operational risk function wants to evaluate the upward reporting governance structure and to assess its critical features. Which one of the four attributes does not represent a critical feature of the upward reporting governance structure?

Question113: Which of the following bank events could stress the bank's liquidity position?
I. Maturing of bank debt
II. Repurchase agreements
III. Futures margins
IV. Staff turnover

Question114: To hedge a foreign exchange exposure on behalf of a client, a small regional bank seeks to enter into an offsetting foreign exchange transaction. It cannot access the large and liquid interbank market open primarily to larger banks. At which one of the following exchanges can the smaller bank trade the currency futures contracts?
I. The Tokyo Futures Exchange
II. The Euronext-Liffe Exchange
III. The Chicago Mercantile Exchange

Question115: According to the largest global poll of foreign exchange market participants, which one of the following four global financial institutions was the most active participant in the global foreign exchange market?

Question116: Beta Insurance Company is only allowed to invest in investment grade bonds. To maximize the interest income, Beta Insurance Company should invest in bonds with which of the following ratings?

Question117: Bank Milo has $4 million in cash and $5 million in loans coming due tomorrow with an expected default rate of 1%. The proceeds will be deposited overnight. The bank owes $ 9 million on a securities purchase that settles in two days and pays off $8 million in commercial paper in three days that is not expected to renew. On what days does the bank face negative cumulative liquidity?

Question118: To estimate the forward price of oil, a commodity trader would most likely use the following pricing relationship:

Question119: An associate from the finance group has been identified as an operational risk coordinator (ORC) for her department. To fulfill her ORC responsibilities the associate will need to:
I. Provide main communication contact with operational risk department
II. Provide main reporting contact with audit department
III. Coordinate collection of key risk indicators in her area
IV. Coordinate training and awareness activities in her area

Question120: Over a long period of time DeltaBank has amassed a large equity option position. Which of the following risks should be considered in this transaction?
I. Counterparty risk on long OTC option positions
II. Counterparty risk on short OTC option positions
III. Counterparty risk on long exchange-traded option positions
IV. Counterparty risk on short exchange-traded option positions

Question121: Interest rate swaps are:

Question122: Which one of the following statements correctly identifies risks in foreign exchange forwards?

Question123: Which of the following attributes of duration gap model typically cause criticism?
I. Basis risk
II. Errors in the linear model
III. Costs of immunization
IV. Constant nature of calculation

Question124: What is the role of market risk management function within a bank?
I. Control and minimize the risks the bank should take.
II. Establish a comprehensive market risk policy framework.
III. Define, approve and monitor risk limits.
IV. Perform stress tests and other qualitative risk assessments.

Question125: Which of the following would a bank resort to as a "lender of last resort" in the event of an extreme liquidity crisis?

Question126: According to Basel II what constitutes Tier 2 capital?

Question127: Which one of the following four regulatory drivers for operational risk management includes risk and control requirements for financial statements in the United States?

Question128: Which one of the following four statements about economic capital of a bank is correct?

Question129: Which of the following statements about the option gamma is correct? Gamma is the
I. Second derivative of the option value with respect to the volatility.
II. Percentage change in option value per percentage change in the price of the underlying instrument.
III. Second derivative of the value function with respect to the price of the underlying instrument.
IV. Rate of change of the option delta with respect to changes in the underlying price.

Question130: Which one of the following four statements on factors affecting the value of options is correct?

Question131: After entering the securitization business, Delta Bank increases its cash efficiency by selling off the lower risk portions of the portfolio credit risk. This process ___ risk on the residual pieces of the credit portfolio, and as a result it ___ return on equity for the bank.

Question132: Which of the following factors would typically increase the credit spread?
I. Increase in the probability of default of the issuer.
II. Decrease in risk premium.
III. Decrease in loss given default of the issuer.
IV. Increase in expected loss.

Question133: A financial analyst is trying to distinguish credit risk from market risk. A $100 loan collateralized with $200 in stock has limited ___, but an uncollateralized obligation issued by a large bank to pay an amount linked to the long-term performance of the Nikkei 225 Index that measures the performance of the leading Japanese stocks on the Tokyo Stock Exchange likely has more ___ than ___.

Question134: Bank Alpha is making a decision about lending 10-year loans in a sector that is fairly illiquid and is looking at various options to fund the loans. Which of the following options to fund the loans exhibits the most exogenous liquidity risk?

Question135: Which of the following statements about the interest rates and option prices is correct?

Question136: When considering the advantages of operational risk function owned by the Chief Compliance Officer in a financial institution, an operational risk manager consultant suggests that this governance approach will have all of the following advantages except:

Question137: Which one of the following four alternatives correctly identifies the purpose of a clearinghouse in trading activities?

Question138: Which one of the following four statements correctly defines chooser options?

Question139: By lowering the spread on lower credit quality borrowers, the bank will typically achieve all of the following outcomes EXCEPT:

Question140: Which one of the following four statements presents a challenge of using external loss databases in the operational risk framework?

Question141: Which of the following are typical properties of a statistical distribution of potential losses that a bank might sustain over a period of time?
I. The range of possible losses above the average loss is much greater than those below the average loss.
II. The loss that is most likely to occur is below the average loss.
III. The loss that is most likely to occur is above the average loss.

Question142: To hedge equity exposure without buying or selling shares of stock or otherwise rebalancing the portfolio, a risk manager could initiate

Question143: Bank G has a 1-year VaR of USD 20 million at 99% confidence level while bank H has a 1-year VaR of USD
10 million at the same confidence level. Which bank is in a more risky position as measured by VaR?

Question144: What is a common implicit assumption that is made when computing VaR using parametric methods?

Question145: Banks duration match their assets and liabilities to manage their interest risk in their banking book. A bank has
$100 million in interest rate sensitive assets and $100 million in interest rate sensitive liabilities. Currently the bank's assets have a duration of 5 and its liabilities have a duration of 2. The asset-liability management committee of the bank is in the process of duration-matching. Which of the following actions would best match the durations?