Question 1

Assuming a loan portfolio of L, a recovery rate of RR, and the percentage of losses on a portfolio less than V(T, X), which of the following formulas is used to estimate credit VaR?

Options :

A : L × (1 − RR) × V(T, X).

B : L × (1 − RR) / V(T, X).

C : L × (RR) × V(T, X).

D : V(T, X) / [L × (1 − RR)].

Answer: A

Question 2

Which of the following statements concerning the calculation of value at a node in a fixed-income binomial interest rate tree is most accurate? The value at each node is the:

Options :

A : average of the present values of the two possible values from the next period.

B : present value of the two possible values from the next period.

C : average of the future values of the two possible values from the next period.

D : sum of the present values of the two possible values from the next period.

Answer: A

Question 3

The Black-Scholes-Merton option pricing model is not appropriate for valuing options on corporate bonds because corporate bonds:

Options :

A : have credit risk.

B : have an upper price bound.

C : are not priced by arbitrage.

D : have constant price volatility.

Answer: B

Question 4

Which of the following statements is most accurate regarding risks incurred by retail lenders?

Options :

A : Refinancing a mortgage when rates decrease is an example of asset valuation risk.

B : Reputation risk is more of a concern for the borrower rather than the lender.

C : Credit risk relates to the potential for a lender to default on their obligation.

D : Business risk relates to the day-to-day operational risks of the business.

Answer: A

Question 5

Which of the following statements regarding scenario analysis workshops and brainstorming sessions at a large bank is most accurate?

Options :

A : The most common procedure is to withhold a “preparation pack” of documents from participants and distribute them after the generation phase to minimize any bias introduced to the sessions.

B : The participants in the workshops and sessions should be taken from a full range of seniority levels within the different business units.

C : The facilitators of the workshops and sessions should be taken from the board of directors and senior management.

D : The assumptions used in scenario analysis can only be based on real-life data.

Answer: D

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