Risk Analysis and Management Exam Solutions
Course Introduction
Risk Analysis and Management is a comprehensive course that explores the identification, assessment, and mitigation of potential risks that organizations may face. Through a combination of theoretical frameworks and practical case studies, students learn to evaluate various types of risks including financial, operational, strategic, and reputational and implement effective risk management strategies. The course covers essential tools such as risk assessment matrices, probability analysis, and risk response planning, equipping students with the skills necessary to anticipate uncertainties and make informed decisions to protect organizational value.
Recommended Textbook
Financial Institutions Management A Risk Management Approach 8th Edition by Saunders
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26 Chapters
2787 Verified Questions
2787 Flashcards
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Page 2
Chapter 1: Why Are Financial Institutions Special
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97 Verified Questions
97 Flashcards
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Sample Questions
Q1) Pension and mutual funds have a lower correlation between the maturities of their assets and liabilities than do commercial banks and thrifts.
A)True
B)False
Answer: False
Q2) The passage of legislation to ensure that FIs are meeting the needs of their local communities is an example of entry regulation.
A)True
B)False
Answer: False
Q3) Services provided by depository institutions have become relatively less significant as a portion of all services provided by FIs.
A)True
B)False
Answer: True
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Chapter 2: Financial Services: Depository Institutions
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Sample Questions
Q1) National-chartered commercial banks are most likely to be regulated by
A)the FDIC only.
B)the FDIC and the Federal Reserve System.
C)the Federal Reserve System only.
D)the FDIC, the Federal Reserve System, and the Comptroller of the Currency.
E)the Federal Reserve System and the Comptroller of the Currency.
Answer: D
Q2) Large money center banks finance most of their activities by using retail consumer deposits as the primary source of funds.
A)True
B)False
Answer: False
Q3) Which of the following FIs does not provide a business lending function?
A)Depository institutions.
B)Insurance companies.
C)Finance companies.
D)Pension funds.
E)Mutual funds.
Answer: E
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Page 4
Chapter 3: Financial Services: Finance Companies
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75 Verified Questions
75 Flashcards
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Sample Questions
Q1) Prior to the financial crisis that began in 2007, finance companies
A)had experienced slow asset growth because of the upcoming economic slowdown.
B)had found subprime lending to be a risk-free method to achieve growth.
C)had experienced strong profit and loan growth, especially those companies that lend to less risky customers.
D)had experienced strong success in the area of electronic lending.
E)had avoided takeover attempts by other financial institutions.
Answer: C
Q2) The typical customer of a payday lender has income of between $25,000 and $50,000 per year.
A)True
B)False
Answer: True
Q3) As an industry, finance companies have escaped the merger and consolidation activity that has affected nearly every other sector of the financial services industry. A)True
B)False
Answer: False
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Chapter 4: Financial Services: Securities Brokerage and Investment Banking
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111 Verified Questions
111 Flashcards
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Sample Questions
Q1) The largest category of liabilities of broker-dealers as of the beginning of 2012 was A)bank loans payable.
B)securities sold under repurchase agreements.
C)payables to customers.
D)short positions in securities and commodities.
E)payables to non-customers.
Q2) How much money does NetChoice, Inc. receive?
A)$150,000,000.
B)$157,500,000.
C)$112,000,000.
D)$125,000,000.
E)$105,000,000.
Q3) The objective of the investment function of securities firms (funds management) is to allocate assets so that they outperform relative risk-return performance benchmark.
A)True
B)False
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6
Chapter 5: Financial Services: Mutual Funds and Hedge Funds
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112 Verified Questions
112 Flashcards
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Sample Questions
Q1) Which of the following hedge fund objectives would be classified under the "more risky" category?
A)Distressed securities funds.
B)Fund of funds.
C)Opportunistic funds.
D)Emerging markets funds.
E)Special situations funds.
Q2) The front-end load on these type of shares is charged on new sales and is not generally incurred when these shares are exchanged for another mutual fund within the same fund family.
A)Class A shares.
B)Class B shares.
C)Class C shares.
D)Class D shares.
E)Either Class A or Class C shares.
Q3) Long-term mutual funds invest primarily in long-term, fixed-income securities such as corporate and/or government bonds.
A)True
B)False
Page 7
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Chapter 6: Financial Services: Insurance
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100 Verified Questions
100 Flashcards
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Sample Questions
Q1) Loss exposures faced by insurers in accident and health lines are more similar to those faced by traditional life insurance than by property-casualty insurance.
A)True
B)False
Q2) The expected loss potential is more difficult to determine with low-severity, high-frequency events.
A)True B)False
Q3) An insurance policy that often is the least expensive to the insured because of the policy does not include a savings plan is called A)term life.
B)universal life.
C)whole life.
D)endowment life.
E)variable life.
Q4) Loss adjustment expenses refer to the costs surrounding the loss settlement process.
A)True B)False
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Chapter 7: Risks of Financial Institutions
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111 Flashcards
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Sample Questions
Q1) The risk that a computer system may malfunction during the processing of data is an example of operational risk.
A)True
B)False
Q2) A U.S. bank has 40 million in assets and 50 million in CDs. All other assets and liabilities are in U.S. dollars. This bank is
A)net long 10 million.
B)net short 10 million.
C)neither short nor long in .
D)net long - 10 million.
E)net short - 10 million.
Q3) Individuals have an advantage over FIs in that individuals more easily can diversify away some of the credit risk of their asset portfolios.
A)True
B)False
Q4) Event risks often cause sudden and unanticipated changes in financial market conditions.
A)True
B)False
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Chapter 8: Interest Rate Risk I
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110 Verified Questions
110 Flashcards
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Sample Questions
Q1) If an FI's repricing gap is less than zero, then
A)it is deficient in its required reserves.
B)it is deficient in its capital ratio requirement.
C)its liability costs are more sensitive to changing market interest rates than are its asset yields.
D)its liability costs are less sensitive to changing market interest rates than are its asset yields.
E)the duration of the FI's liabilities exceeds the duration of FI's assets.
Q2) The repricing gap does not accurately measure FI interest rate risk exposure because
A)FIs cannot accurately predict the magnitude change in future interest rates.
B)FIs cannot accurately predict the direction of change in future interest rates.
C)accounting systems are not accurate enough to allow the calculation of precise gap measures.
D)it does not recognize timing differences in cash flows within the same maturity grouping.
E)equity is omitted.
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Chapter 9: Interest Rate Risk II
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Sample Questions
Q1) Attempts to satisfy the objectives of shareholders and regulators requires the bank to use the same duration match in the protection of net worth from interest rate risk.
A)True
B)False
Q2) Larger coupon payments on a fixed-income asset cause the present value weights of the cash flows to be lower in the duration calculation.
A)True
B)False
Q3) What is the duration of the above Treasury note? Use the asked price to calculate the duration. Recall that Treasuries pay interest semiannually.
A)3.86 years.
B)1.70 years.
C)2.10 years.
D)1.90 years.
E)3.40 years.
Q4) In most countries FIs report their balance sheet using market value accounting. A)True
B)False
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Chapter 10: Credit Risk: Individual Loan Risk
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112 Flashcards
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Sample Questions
Q1) LIBOR, the London Interbank Offered Rate, is the rate for short-term interbank dollar loans in the domestic money-center bank market.
A)True
B)False
Q2) Which of the following loan applicant characteristics is not relevant in the credit approval decision?
A)Leverage position of the borrower.
B)Borrower income.
C)Value of collateral.
D)Borrower reputation.
E)None of the above.
Q3) From the perspective of an FI, which of the following is an advantage of a floating-rate loan?
A)Stable interest payments will be received throughout the loan period.
B)The pre-specified interest rate remains in force over the loan contract period no matter what happens to market interest rates.
C)The bank can request repayment of a loan at any time in the contract period.
D)The default risk is completely eliminated.
E)The interest rate risk is transferred to the borrower.
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Page 12
Chapter 11: Credit Risk: Loan Portfolio and Concentration
Risk
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59 Verified Questions
59 Flashcards
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Sample Questions
Q1) Which model involves estimating the systematic loan loss risk of a particular sector or industry relative to the loan loss risk of an FI's total loan portfolio?
A)CreditMetrics.
B)Credit Risk +.
C)Loan loss ratio-based model.
D)KMV portfolio manager model.
E)Loan volume-based model.
Q2) As part of measuring unobservable default risk between borrowers, the Moody's Analytics model decomposes asset returns into
A)credit risk and market risk.
B)systematic risk and unsystematic risk.
C)market risk and sovereign risk.
D)regional risk and maturity risk.
E)systematic risk and default risk.
Q3) The all-in-spread (AIS) used in the Moody's Analytics model is the difference between the interest rate on a loan and the prime lending rate at the time the loan was originated.
A)True
B)False
Page 13
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Chapter 12: Liquidity Risk
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100 Flashcards
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Sample Questions
Q1) Because cash reserves at the Federal Reserve do not earn interest, DIs do not hold any excess cash reserves beyond the minimum requirements.
A)True
B)False
Q2) Purchased liquidity risk management usually involves purchased funds such as fed funds, repurchase agreements and CDs.
A)True B)False
Q3) Hedge funds are not susceptible to liquidity risk or a liquidity crisis.
A)True
B)False
Q4) What will be the size of the bank if a purchased liquidity management strategy is adopted?
A)$9 million.
B)$11 million.
C)$12 million.
D)$14 million.
E)$15 million.
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Page 14
Chapter 13: Foreign Exchange Risk
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100 Verified Questions
100 Flashcards
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Sample Questions
Q1) Assume that instead of investing in Euro bonds at a fixed rate of 6.5 percent, the FI invests them in variable rates of LIBOR + 1.5 percent, reset every six months. The current LIBOR rate is 5 percent. LIBOR at the end of six months is 5.5 percent. Assume both interest and principal will be reinvested in six months. Assume the spot exchange rate is 1.75/$. What should be the one-year forward rate in order for the bank to earn a spread of 1 percent?
A) 1.7344/$.
B) 1.7418/$.
C) 1.7478/$.
D) 1.7750/$.
E) 1.7842/$.
Q2) According to PPP, the new exchange rate of Russian rubles to U.S. dollars is
A)0.15.
B)0.1425.
C)0.141.
D)0.1605.
E)0.159.
Q3) Violation of the interest rate parity theorem would allow arbitrage profits.
A)True B)False
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Chapter 14: Sovereign Risk
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90 Verified Questions
90 Flashcards
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Sample Questions
Q1) Sovereign country risk is largely independent of the credit standing of the foreign borrower.
A)True
B)False
Q2) CRA statistical credit scoring models are very adept at capturing political risk events such as strikes, elections, corruption, etc.
A)True
B)False
Q3) Traditional country risk analysis (CRA) that is based on discriminant statistical models often suffers from problems of using data that is not current.
A)True
B)False
Q4) The advantage to the lender (purchaser) of a Brady bond versus a loan to a foreign country is that U.S. Treasury bonds serve as collateral for Brady bonds.
A)True
B)False
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Page 16
Chapter 15: Market Risk
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Sample Questions
Q1) What is the value of delta for the respective positions of the two currencies in dollars?
A)-$200,000,000 and -$50,000,000.
B)-$21,524 and -$261,930.
C)-$21,524 and -$50,000,000.
D)-$200,000,000 and -$261,640.
E)-$21,524 and -$317,642.
Q2) The JPM RiskMetrics model is based on the assumption of a binomial distribution of asset returns.
A)True
B)False
Q3) Considering the Capital Asset Pricing Model, which of the following observations is incorrect?
A)In a well-diversified portfolio, unsystematic risk can be largely diversified away.
B)Systematic risk is considered to be a diversifiable risk.
C)Total risk is the sum of systematic risk and unsystematic risk.
D)Systematic risk reflects the co-movement of a stock with the market portfolio.
E)Unsystematic risk is specific to the firm.
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Chapter 16: Off-Balance-Sheet Risk
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107 Verified Questions
107 Flashcards
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Sample Questions
Q1) The Federal Reserve requires banks to complete schedule L with their quarterly call reports to list the notional size and variety of off-balance-sheet activities.
A)True
B)False
Q2) If an option's price increases 1.4 percent for every 2 percent change in the price of the underlying security, what is the value of the option's delta?
A)0.60.
B)1.40.
C)0.70.
D)2.00.
E)3.00.
Q3) Loan commitment activities increase the insolvency exposure of FIs that engage in such activities.
A)True
B)False
Q4) Settlement risk on wire transfers involves intraday credit risk.
A)True
B)False
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Chapter 17: Technology and Other Operational Risks
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108 Flashcards
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Sample Questions
Q1) If AC<sub>X + Y</sub> < AC<sub>X</sub> + AC<sub>Y</sub>, where AC is average production cost and X and Y are products, economies of scope are present.
A)True
B)False
Q2) By how much should operating costs of the combined entity (Bank A + Bank B) be reduced in order to stay competitive in the local market, ceteris paribus?
A)$900,000.
B)$600,000.
C)$500,000.
D)$400,000.
E)$300,000.
Q3) Wholesale cash management services allow corporate customers to minimize cash balances and to monitor quickly cash transactions and balances. A)True
B)False
Q4) The operational risk faced by an FI includes sources other than technology. A)True
B)False
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Chapter 18: Liability and Liquidity Management
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Sample Questions
Q1) Since 1998, interest rate variability in the fed funds market has decreased because A)fewer institutions were allowed to participate in the fed funds market.
B)of the introduction of lagged reserve accounting.
C)new securities were approved that participants can use instead of fed funds to meet liquidity needs.
D)of the introduction of contemporaneous reserve accounting.
E)more participants were allowed to enter the fed funds market.
Q2) The minimum average daily reserves required in a maintenance period is a percentage of the daily average demand deposits held by a bank during the computation period.
A)True
B)False
Q3) Which of the following is considered to be the most liquid asset?
A)T-notes.
B)T-bills.
C)Cash.
D)T-bonds.
E)Wholesale CDs.
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Chapter 19: Deposit Insurance and Other Liability
Guarantees
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Sample Questions
Q1) During the 1980s, a high proportion of brokered deposits at a DI became an early warning signal of its risk for failure.
A)True
B)False
Q2) If regulators provide more protection against bank runs, the incidence of moral hazard is likely to increase.
A)True
B)False
Q3) As a result of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), the deposit insurance fund for the savings and loan industry has been combined with the deposit insurance fund for the commercial banking industry.
A)True
B)False
Q4) Currently in the U.S., deposit insurance premiums increase with the amount of risk of the institution.
A)True
B)False
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Chapter 20: Capital Adequacy
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Sample Questions
Q1) One function of bank capital is to protect uninsured depositors, bondholders, and creditors in the event of insolvency and liquidation.
A)True B)False
Q2) The market value of capital is equal to market value of assets minus the market value of liabilities.
A)True B)False
Q3) The Tier I leverage ratio measures the amount of an FI's total capital relative to total assets.
A)True B)False
Q4) The primary role of capital for an FI is to assure the highest possible return on equity for its shareholders.
A)True B)False
Q5) FDICIA required that banks and thrifts adopt the same capital requirements. A)True B)False
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Chapter 21: Product and Geographic Expansion
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Sample Questions
Q1) If Bank 1 is acquired by Bank 2, what is the impact on the market's HHI?
A)An increase in the HHI of 1600.
B)An increase in the HHI of 625.
C)An increase in the HHI of 1563.
D)A decrease in the HHI of 222.
E)A decrease in the HHI of 360.
Q2) Which of the following is not a reasonable argument for the increase in the number of banks that can compete in security underwriting activities?
A)Small firms gain increased access to the capital markets.
B)Lower commission and fee expense for firms issuing securities.
C)Issuing firms realize an increase in the degree of underpricing of new issues.
D)The market for securities underwriting will see a decline in market concentration.
E)More competition will increase the new issue proceeds to the issuing firm.
Q3) Banks have been permitted to acquire existing investment banks since 1997.
A)True
B)False
Q4) Tie-ins and third-party loans are prohibited by current bank regulations.
A)True
B)False
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Chapter 22: Futures and Forwards
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Sample Questions
Q1) The use of futures contracts by banks is subject to risk-based capital guidelines through the off-balance-sheet risk calculations for risk-based capital.
A)True
B)False
Q2) A conversion factor often is used to determine the invoice price on a futures contract when a bond other than the benchmark bond is delivered to the buyer.
A)True
B)False
Q3) What is the number of T-Bill futures contracts necessary to hedge the balance sheet if the duration of the deliverable T-bills is 0.25 years and the current price of the futures contract is $98 per $100 face value?
A)6,212 contracts.
B)6,805 contracts.
C)6,900 contracts.
D)7,112 contracts.
E)7,327 contracts.
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Chapter 23: Options, Caps, Floors, and Collars
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Sample Questions
Q1) The gain to the writer of a bond option is unlimited.
A)True
B)False
Q2) Hedging the FI's interest rate risk by buying a put option on a bond is an attractive alternative to a manager.
A)True
B)False
Q3) Given this information, what type of T-bond option, and how many options should be purchased, to hedge this investment?
A)792 put options.
B)792 call options.
C)942 put options.
D)942 call options.
E)554 put options.
Q4) Options become more valuable as the variability of interest rates decreases. A)True
B)False
Q5) Buying a cap is like buying insurance against a decrease in interest rates. A)True
B)False
25
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Chapter 24: Swaps
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Sample Questions
Q1) The Wall Street Reform and Consumer Protection Act of 2010 established comprehensive regulation of over-the-counter (OTC) derivatives including swaps.
A)True
B)False
Q2) The type of swap that is in the largest segment of the global swap market is
A)a commodity swap.
B)a credit swap.
C)a currency swap.
D)an equity swap.
E)an interest rate swap.
Q3) Swaps create value if
A)relative prices differ across markets.
B)there are barriers to entry in some markets.
C)information is costly.
D)All of the above.
E)None of the above.
Q4) A pure credit swap will reduce interest rate risk.
A)True
B)False
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Chapter 25: Loan Sales
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Sample Questions
Q1) The definition of a highly leveraged transaction (HLT) loan as adopted by U.S. bank regulators in 1989 includes
A)doubling the borrower's liabilities which results in a leverage ratio higher than 50 percent.
B)involving a buyout, acquisition, or recapitalization.
C)results in a leverage ratio higher than 75 percent.
D)All of the above.
E)Only two of the above.
Q2) Closed-end bank loan mutual funds are restricted to investing in loans only through the loan resale or secondary market.
A)True
B)False
Q3) Which observation is true of vulture funds?
A)Their decisions based on developing and maintaining long-term relationships.
B)Their sole agenda is to helping the distressed firm to survive.
C)Their investments are always passive.
D)They are relationship based, not transaction driven.
E)In a restructuring, they are looking for a return on capital invested.
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Chapter 26: Securitization
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Sample Questions
Q1) Why do garbage class bonds often have a negative duration?
A)The value of the returns in this bond class increases when interest rates increase.
B)It gives the rights to collateralization.
C)Bond values fall with interest rate increases.
D)It gives rights to reinvestment income on the cash flows in the CMO trust.
E)Significant risk premium required by the uninsured depositors.
Q2) CMOs are typically created from existing GNMA pass-through securities that are held in trust.
A)True
B)False
Q3) The discount effect and the prepayment effect are negatively correlated in their impact on the value of a principal-only (PO) mortgage-backed strip security.
A)True
B)False
Q4) One advantage of asset securitization to a bank is the ability to originate new assets before the original assets have matured.
A)True
B)False
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