Question 1

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.

Options :

A : Frequently; typically

B : Hardly ever; typically

C : Frequently; rarely

D : Hardly ever; rarely

Answer: A

Question 2

Which type of risk does a bank incur on loans that are in the "pipeline", i.e loans that are in

the process of origination but not yet originated?

Options :

A : Interest rate risk and credit risk

B : Interest rate risk only

C : Credit Risk only

D : The bank does not incur any risk since the loan is not yet originated

Answer: A

Question 3

BetaFin, a financial services firm, does not have retail branches, but has fixed income,

equity, and asset management divisions. Which one of the four following risk and control

self-assessment (RCSA) methods fits the firm's operational risk framework the best?

Options :

A : RCSA questionnaire approach

B : RCSA workshop approach

C : RCSA loss data approach

D : RCSA scenario analysis approach

Answer: B

Question 4

When a credit risk manager analyzes default patterns in a specific neighborhood, she finds that defaults are increasing as the stigma of default evaporates, and more borrowers default. This phenomenon constitutes

Options :

A : Moral hazard

B : Speculative bias

C : Herd behavior

D : Adverse selection

Answer: C

Question 5

Unico Bank, concerned with managing the risk of its trading strategies, wants to implement

the trading strategy that exposes the bank to the lowest market risk. Which one of the

following four strategies should Unico take to limit its risk exposure?

Options :

A :

A matched book strategy that allows the trading desk to match all customer positions

immediately with an equal and opposite position by trading internally or with another bank.

B :

A covering strategy that manages positions in the product by executing covering deals

or hedging deal at the discretion of the trading des.

C :

A passive hedging strategy that allows the traders to price transactions with customers

and other banks, at the relevant bid price on the market.

D :

A market-maker strategy that allows the traders to quote a buy and sell price to

customers and other banks and to trade at the relevant price on the sell side of the market.

Answer: A

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