CISI Risk - Chapter 7

Question 1

What is a maturity ladder

Answer 1

Compares cash in-flows and out-flows

Question 2

How would a firm calculate their net funding requirements

Answer 2

Analysing its future cash flows based on assumptions about the future behavior of assets

Question 3

What kind of cash flows are unpreditable?

Answer 3

Derivative cash flows

Question 4

What is a contractual cash flow?

Answer 4

Cash flows which can be predictably estimated

Question 5

3 reasons why cash flows in a maturity ladder will differ from the actual cash reciepts

Answer 5

Not possible to estimate all cash flows - Derivatives are unpredictable
Credit risk - Risk weighted assets
Firm may not hold instrument until maturity

Question 6

What is asset liquidity risk?

Answer 6

Being unable to transform assets into cash within a preferred time period without incurring losses.

Question 7

What risk did Northern Rock suffer from ?

Answer 7

Liquidity

Question 8

How will firms experience losses from Liquidity risk/

Answer 8

Cost of borrowing to meet obligations or through contractual penalties for not paying when required

Question 9

What is liquidity gap analysis

Answer 9

Identifying mis-matches in company’s cash inflows and outflows

Question 9

two disadvantages of liquidity gap analysis

Answer 9

Not consider credit risk & Assumes all cash flows will occour

Question 10

What is Bid-Offer spread

Answer 10

Difference between the prices quoted by market makers.

Question 10

What is Market Depth

Answer 10

Measure of the volume of transactions needed to move prices. The deeper the market, the higher the volume needed to move prices

Question 11

One disadvantage of Market Depth

Answer 11

Market Depth can change very quickly

Question 11

If the market is “Deep” would there need to be a small or high amount of trading transactions in order to move the price point.

Answer 11

Lots

Question 12

What is Immediacy?

Answer 12

Measure of time to takes to achieve a deal in the market

Question 13

What is resilience?

Answer 13

How quickly prices return to equilibrium following a larger trade

Question 14

The more liquid the market, the faster/slower prices return to equilibrium?

Answer 14

Faster

Question 15

4 components to managing liquidity risk

Answer 15

• A bank must be able to readily determine its contractual liquidity position
• Overlay that view with assumptions about normal behavior
• Undertake stress testing
• Use the results to assess liquidity provision

Question 16

6 techniques to ensure it stays within risk appetite and profitability goals?

Answer 16

• setting and monitoring liquidity limits
• setting and monitoring counterparty credit limits
• performing scenario analyses
• using liquidity at risk techniques
• ensuring diversification, and
• considering behavioural analysis.

Question 17

3 drivers that increase the likelihood of liquidity risk

Answer 17

Market concerns over availability of credit
General Market and Economic Conditions
Global Shock

Question 18

Three specific scenarios provide useful benchmarks;

Answer 18

A banks going concern condition
A banks specific crisis
A general market crisis

Question 18

Liquidity risk can not be treated in isolation from what four risks

Answer 18

Credit
Market
Operational
Business

Question 19

If lots of shares of an equity are sold at once, what will likely happen to the shareprice?

Answer 19

It will fall

Question 20

The smaller the ratio, is the asset more or less liquid

Answer 20

More liquid

Question 21

What type of liquidity measurment is captured in brackets?

Answer 21

LaR (Liquidity at Risk)

Question 22

What is market dislocation?

Answer 22

No one will lend to anyone, regardless of the interest rates

Question 23

What are the 4 impacts of market dislocation

Answer 23

Companies find it harder to borrow
Consumers can’t obtain mortgages
Central banks can not use interest rates as a economic lever
Bank profits falls

Question 24

4 main funding methods for a bank

Answer 24

Wholesale money markets
Securitizations of loan portfolios
Retail deposits
Loan facilities with central bank