MCQ Risk - Chapter 7 Flashcards
Which of the following would NOT be considered when using the method of ‘expected future funding requirement’ to analyse funding liquidity risk?
A
Historical patterns
B
Cost of the analysis
C
High level business projections
D
Customer assessment
Explanation - Correct Answer: B
The cost of the exercise is more than justified by the possession of the information that the exercise reveals.
Which of the following is a limitation of bid-offer spreads?
A
They cannot be used to analyse market liquidity
B
They include transaction costs
C
They are difficult to understand
D
They are unpredictable
Explanation - Correct Answer: B
Limitation is that transaction costs are included as well as liquidity of the market.
Which of the following is the best definition of market dislocation?
A
When market liquidity disappears
B
When market liquidity slows
C
When market liquidity is isolated from other risks
D
When market liquidity is kick-started by the Bank of England
Explanation - Correct Answer: A
Market dislocation is when market liquidity disappears and no-one will lend, regardless of price.
What financial quantities form the distribution for LaR?
A
Historical funding requirements
B
Predicted future funding requirements
C
Statistical analysis
D
Stress testing
Explanation - Correct Answer: A
Historical funding requirements in terms of their size and frequency.
A
Bid is the buy price
B
Offer is the ask price
C
Wider spreads mean less competition
D
Smaller spreads mean less liquid markets
D
Smaller spreads mean less liquid markets
What can liquidity at risk (LAR) distribution show?
Max penalty a firm will face for failing to meet contractual obligations
Max loss that can occour with a specified confidence over a period of three years
The value of all direct losses over a time period
A firms likely funding requirement over a given time period at different confidenmce levels
