Ch 8: Firm-wide Risk Management Flashcards
(T or F) Credit risk is the risk loss due to movements in the level or volatility of market prices. Market risk is the risk of loss due to the fact that counterparties may be unwilling or unable to fulfill their contractual obligations.
a. Both statements are true
b. Only statement I. is true
c. Only statement II. is true
d. Both statements are false
d. Both statements are false
(T or F) Wrong-way trades are those where market risk amplifies credit risk.
True
(T or F) Derivatives policies can be set by anyone other than top management.
- False. policies should be set by top management
(T or F) Market risk is best measured as “value at risk” using probability analysis based on a common confidence interval and time horizon.
True
The risk of indirect losses to earnings arising from negative public opinion.
a. Credit risk
b. Operational risk
c. Market risk
d. Reputational risk
d. Reputational risk
Bank of England (BoE) described new lessons learned from the Barings failure. Enumerate.
- Duty to understand
- Clear responsibility
- Relevant internal controls
- Quick resolution of weakness
This describes the recommendation included in the CRMPG report that states that Financial institutions should obtain more information from their counterparties, especially when significant credit exposures are involved.
a. Risk management expertise b. Confidentiality c. Collateralization d. Information sharing
d. Information sharing
This describes the recommendation included in the CRMPG report that states that Institutions should recognize the cost of credit risk in capital charges and continuously monitor their exposures using, if possible, external valuation services. a. Valuation and exposure management b. Large exposure/risk reporting c. Liquidation-based estimates of exposure d. Management responsibilities
a. Valuation and exposure management
This describes the recommendation included in the CRMPG report that states that senior management should receive regular reports on large exposures. a. Valuation and exposure management b. Large exposure/risk reporting c. Liquidation-based estimates of exposure d. Management responsibilities
b. Large exposure/risk reporting
This describes the recommendation included in the CRMPG report that states that senior management should convey clearly its tolerance for risk, expressed in terms of potential losses. a. Valuation and exposure management b. Large exposure/risk reporting c. Liquidation-based estimates of exposure d. Management responsibilities
d. Management responsibilities
___ approves transactions, sets exposure limits, and monitors the exposure limits as well as the counterparty’s financial health
b. Risk manager
___ provides an independent review of business processes.
a. Treasury and trading
b. Risk manager
c. Line management
d. Audit function
d. Audit function
___ implements proprietary trading and hedging.
a. Treasury and trading
b. Risk manager
c. Line management
d. Audit function
a. treasury and trading
___ deals with businesses and product strategy
a. Treasury and trading
b. Risk manager
c. Line management
d. Audit function
c. Line management
(T or F) To maintain independence, risk managers should report not to traders but directly to top management.
TRUE
- The following are the responsibities of a chief risk officer EXCEPT
a. Establishing risk management policies, methodologies, and procedures consistent with firm-wide policies
b. Reviewing and approving models used for pricing and risk measurement
c. Measuring risk on a global basis as well as monitoring exposures and movements in risk factors
d. Dealing with trade processing and reconciliation as well as cash management
d. Dealing with trade processing and reconciliation as well as cash management. responsibility ng BACK OFFICE
Front office has expanded functions, which include risk measurement and control. Middle office is concerned with positioning and perhaps some local hedging, subject to position and VAR limits established by risk management.
a. Both statements are true
b. Only statement I. is true
c. Only statement II. is true
d. Both statements are false
d. baliktad
These limits are imposed to control trading risks.
- Stop-loss limits
- Exposure limits
- VAR limits
Restrictions on traders’ positions that are imposed after a trader has accumulated losses
a. Stop-loss limits
b. Exposure limits
a. Stop-loss limits
Limits that are systematically imposed on traders as a means to control losses before they occur.
a. Stop-loss limits
b. Exposure limits
b. Exposure limits
Enumerate the different types of credit lines
- Clean line
- Secured line
- Pre-settlement risk line
- Settlement risk line
Refers to unsecured exposure to counterparties which is basically an uncollateralized loan.
a. Clean line
b. Secured line
c. Pre-settlement risk line
d. Settlement risk line
a. Clean line
- Refers to the Bank’s credit risk on the interbank counterparty because of money market transactions which includes interbank loans, and placements or nostro balances in counterparty banks.
a. Sovereign risk
b. Interbank counterparty risk
c. Issuer risk
b. Interbank counterparty risk
- Refers to the Bank’s credit risk on the country as economic, political, and regulatory events may negatively influence its willingness or ability to repay its outstanding obligations.
a. Sovereign risk
b. Interbank counterparty risk
c. Issuer risk
a. Sovereign risk
Refers to the Bank’s credit risk on the underlying issuers of securities taken into the Bank’s trading and investment portfolios.
a. Sovereign risk
b. Interbank counterparty risk
c. Issuer risk
c. Issuer risk
I. Secured Risk Line refers to interbank lines which are collateralized by acceptable and properly valued securities or deposits in a specific currency.
II. Settlement risk is the risk the Bank’s counterparty fails or experiences a “credit event” prior to the settlement date of the transaction, and will be unable to fulfill the transaction.
III. Pre-settlement risk is the risk of loss on the settlement of transactions that involve a simultaneous exchange of value with a customer or counterparty, where verification of payment from the counterparty is not received until after the bank’s own payment is delivered.
a. I, II, and III are correct.
b. Only I. is correct.
c. Only II is correct.
d. Only II and III are correct
b. Only I. is correct (baliktad II. and III.)
