Question 1

Two financial institutions are facing different funding issues. Bank A, a mid-size regional bank is concerned that it has a shortfall in legal reserves for the day and is seeking an alternative to address this shortfall. Bank B, a small community bank, on the other hand, has recently experienced a much greater than anticipated shortfall in long term certificates of deposit (CD) renewals due to fierce local competition for retail deposits. Bank B has traditionally used stable CDs to fund its home mortgage portfolio. What is the most appropriate funding response of each of these two institutions considering timing and the availability of non-deposit funds?

Options :

A : Bank A should issue debentures and Bank B should fund itself through the CP market.

B : Bank A should borrow from the wholesale deposit market and Bank B should fund itself through the Eurocurrency deposit market.

C : Bank A should fund itself through the commercial paper (CP) market and Bank B should borrow from the Federal funds market.

D : Bank A should borrow from the Federal funds market and Bank B should borrow from the Federal Home Loan Banks.

Answer: D

Question 2

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 3

At inception, the tranches in a synthetic CDO are priced to earn a spread that is:

Options :

A : higher for senior tranches, as they represent a larger notional principal.

B : aggregate in amount to the premium paid to binary CDSs.

C : consistent with their seniority.

D : equal for each tranche.

Answer: C

Question 4

A significant challenge in estimating the legal loss module of an operational risk stress test is that:

Options :

A : there is a lag between the macroeconomic event itself and the incurrence of legal losses.

B : banks are minimally impacted by legal losses.

C : future litigation cases cannot be estimated.

D : operational risks and legal losses cannot be separated.

Answer: A

Question 5

The CRO of a regional bank expresses concern in a meeting of the risk team thatthe bank’s internal risk models are not adequately assessing potential randomextreme losses. A risk analyst asks if implementing a model based on extremevalue theory (EVT) would address the CRO’s concern. Which of the following iscorrect when applying EVT and examining distributions of losses exceeding a threshold value?

Options :

A : C To apply EVT, the underlying loss distribution must be either normal or lognormal.

B : value converges to a generalized Pareto distribution.

C : causes the reliability of the parameter estimates to increase.

D : to infinity, then the GEV essentially becomes a normal distribution.

Answer: B

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