Risk Management 2

Question 1

What is interest rate risk?

Answer 1

The risk that changes in interest rates will negatively affect the value of financial assets.

Question 2

True or False: Interest rate risk only affects fixed-income securities.

Answer 2

False

Question 3

Fill in the blank: The primary goal of interest rate risk management is to ______ the impact of interest rate fluctuations on an institution’s financial performance.

Answer 3

mitigate

Question 4

What are the two main types of interest rate risk?

Answer 4

Market risk and cash flow risk.

Question 5

What does ALM stand for in finance?

Answer 5

Asset and Liability Management.

Question 6

Multiple Choice: Which of the following is a common tool used in interest rate risk management? A) Interest rate swaps B) Mortgages C) Stocks

Answer 6

A) Interest rate swaps

Question 7

What does performance reporting in financial institutions typically include?

Answer 7

Metrics on profitability, risk exposure, and compliance with regulations.

Question 8

True or False: Performance reporting is only relevant for internal stakeholders.

Answer 8

False

Question 9

Explain the term ‘duration’ in the context of interest rate risk.

Answer 9

Duration measures the sensitivity of a bond’s price to changes in interest rates.

Question 10

What is the purpose of a gap analysis in ALM?

Answer 10

To assess the timing differences between assets and liabilities.

Question 11

Multiple Choice: Which of the following is NOT a performance indicator? A) Return on Equity B) Net Interest Margin C) Inflation Rate

Answer 11

C) Inflation Rate

Question 12

Fill in the blank: A _______ is a financial derivative that allows two parties to exchange cash flows based on different interest rates.

Answer 12

swap

Question 13

What is the primary objective of Asset and Liability Management?

Answer 13

To manage risks that arise from mismatches between assets and liabilities.

Question 14

True or False: Effective interest rate risk management can lead to improved capital management.

Answer 14

True

Question 15

What is ‘repricing risk’?

Answer 15

The risk that interest rates will change before a financial institution can reprice its assets and liabilities.

Question 16

Multiple Choice: Which method is commonly used to measure interest rate risk? A) Value at Risk B) Return on Assets C) Debt to Equity Ratio

Answer 16

A) Value at Risk

Question 17

Fill in the blank: A ________ report provides insights into the financial performance of an organization over a specified period.

Answer 17

performance

Question 18

What is the significance of the yield curve in interest rate risk management?

Answer 18

It shows the relationship between interest rates and different maturities of debt.

Question 19

True or False: Hedging can completely eliminate interest rate risk.

Answer 19

False

Question 20

What does the term ‘liquidity risk’ refer to?

Answer 20

The risk that an institution will not be able to meet its short-term financial obligations.

Question 21

Multiple Choice: What is typically included in a financial institution’s asset-liability committee discussions? A) Marketing strategies B) Interest rate risk exposure C) Employee benefits

Answer 21

B) Interest rate risk exposure

Question 22

Fill in the blank: The _______ ratio is a key metric in performance reporting that indicates a company’s profitability relative to its total assets.

Answer 22

return on assets

Question 23

What is ‘basis risk’?

Answer 23

The risk that the relationship between interest rates on different instruments will change.

Question 24

True or False: Performance reporting is essential for regulatory compliance.

Answer 24

True

Question 25

What role do financial derivatives play in interest rate risk management?

Answer 25

They are used to hedge against fluctuations in interest rates.