ICBRR Online Practice Questions and Answers

A credit portfolio manager analyzes a large retail credit portfolio. Which of the following factors will represent typical disadvantages of market-linked credit risk drivers?

A. Need to supply a large number of input parameters to the model II. Slow computation speed due to higher simulation complexity III. Non-linear nature of the model applicable to a specific type of credit portfolios IV. Need to estimate a large number of unknown variable and use approximations

B. I

C. I, II

D. II, III

E. III, IV

Which one of the following four statements regarding bank's exposure to credit and default risk is INCORRECT?

A. The more the bank diversifies its credit portfolio, the better spread its credit risks become.

B. In debt management, the value of any loan exposure will change typically in a fashion similar the same way that an equity investment can.

C. In debt management, the goal is to minimize the effect of any defaults.

D. Default risk cannot be hedged away fully, and it will always exist for the holder of the credit or for the person insuring against the credit or default event.

Which one of the following four mathematical option pricing models is used most widely for pricing European options?

A. The Black model

B. The Black-Scholes model

C. The Garman-Kohlhagen model

D. The Heston model

All of the following performance statistics typically benefit country's creditworthiness EXCEPT:

A. Low unemployment

B. Low inflation

C. High degrees of investment

D. Low degrees of savings

Bank customers traditionally trade commodity futures with banks in order to achieve which of the following goals?

A. To express their own price views

II. To reverse undesired short-term exposure created from fixed commodity sales III. To reach short-term budgetary targets

B. I

C. II

D. I, III

E. I, II, III

Which of the following statements defines Value-at-risk (VaR)?

A. VaR is the worst possible loss on a financial instrument or a portfolio of financial instruments over a given time period.

B. VaR is the minimum likely loss on a financial instrument or a portfolio of financial instruments with a given degree of probabilistic confidence.

C. VaR is the maximum of past losses over a given period of time.

D. VaR is the maximum likely loss on a financial instrument or a portfolio of financial instruments over a given time period with a given degree of probabilistic confidence.

For two variables, which of the following is equal to the average product of the deviations from their respective means?

A. Standard deviation

B. Kurtosis

C. Correlation

D. Covariance

In its VaR calculations, JPMorgan Chase uses an expected tail-loss methodology which approximates losses at the 99% confidence level. This methodology consists of two subsequent steps to estimate the VaR. Which of the following explains this two-step methodology?

A. After VaR is computed at the 97% confidence level, the expected tail loss in excess of that confidence level is determined, which is then compared with the VaR estimate at the 99% confidence level.

B. After VaR is computed at the 99% confidence level, the expected tail loss in excess of that confidence level is determined, which is then compared with the VaR estimate at the 98% confidence level.

C. After VaR is computed at the 99% confidence level, the expected tail loss in excess of that confidence level is determined, which is then compared with the VaR estimate at the 99% confidence level.

D. After VaR is computed at the 1% confidence level, the expected tail loss in excess of that confidence level is determined, which and is then compared with the VaR estimate at the 98% confidence level.

Securitization is the process by which banks

A. Issue bonds where the payment of interest and repayment of principal on the bonds depends on the cash flow generated by a pool of bank assets.

II. Issue bonds where the bank has transferred its legal right to payment of interest and repayment of principal to bondholders.

III. Sell illiquid assets.

B. I, II

C. I

D. I, III

E. I, II, III

How could a bank's hedging activities with futures contracts expose it to liquidity risk?

A. The futures hedge may not work due to the widening of basis which could result in a loss for the bank.

B. Prices may move such that a loss results on the hedge.

C. Since futures require margins which are settled every day, the bank could find itself scrambling for funds.

D. The bank could get exposed to liquidity risk since futures trade on an exchange.