Question 1 ( Topic 1 )
Which one of the following four statements correctly defines credit risk?
A. Credit risk is the risk that complements market and liquidity risks.
B. Credit risk is a form of performance risk in contractual relationship.
C. Credit risk is the risk arising from execution of a company's strategy.
D. Credit risk is the risk that summarizes the exposures a company or firm assumes when it attempts to operate within a given field or industry.
Answer : B
Question 2 ( Topic 1 )
A credit analyst wants to determine a good pricing strategy to compensate for credit decisions that might have been made incorrectly. When analyzing her credit portfolio, the analyst focuses on the spreads in each loan to determine if they are sufficient to compensate the bank for all of the following costs and risks EXCEPT.
A. The marginal cost of funds provided.
B. The overhead cost of maintaining the loan and the account.
C. The inherent risk of lending to this borrower while providing a return on the risk capital used to the support the loan.
D. The opportunity cost of risk-adjusted marginal cost of capital.
Answer : D
Question 3 ( Topic 1 )
To estimate the interest charges on the loan, an analyst should use one of the following four formulas:
A. Loan interest = Risk-free rate - Probability of default x Loss given default + Spread
B. Loan interest = Risk-free rate + Probability of default x Loss given default + Spread
C. Loan interest = Risk-free rate - Probability of default x Loss given default - Spread
D. Loan interest = Risk-free rate + Probability of default x Loss given default - Spread
Answer : B
Question 4 ( Topic 1 )
Alpha Bank determined that Delta Industrial Machinery Corporation has 2% change of default on a one-year no-payment of USD $1 million, including interest and principal repayment. The bank charges 3% interest rate spread to firms in the machinery industry, and the risk-free interest rate is 6%. Alpha Bank receives both interest and principal payments once at the end the year. Delta can only default at the end of the year. If Delta defaults, the bank expects to lose 50% of its promised payment. Hence, the loss rate in this case will be
A. 1%
B. 3%
C. 5%
D. 10%
Answer : A
Question 5 ( Topic 1 )
Alpha Bank determined that Delta Industrial Machinery Corporation has 2% change of default on a one-year no-payment of USD $1 million, including interest and principal repayment. The bank charges 3% interest rate spread to firms in the machinery industry, and the risk-free interest rate is 6%. Alpha Bank receives both interest and principal payments once at the end the year. Delta can only default at the end of the year. If Delta defaults, the bank expects to lose 50% of its promised payment. What interest rate should
Alpha Bank charge on the no-payment loan to Delta Industrial Machinery Corporation?
A. 8%
B. 9%
C. 10%
D. 12%
Answer : C
Question 6 ( Topic 1 )
Alpha Bank determined that Delta Industrial Machinery Corporation has 2% change of default on a one-year no-payment of USD $1 million, including interest and principal repayment. The bank charges 3% interest rate spread to firms in the machinery industry, and the risk-free interest rate is 6%. Alpha Bank receives both interest and principal payments once at the end the year. Delta can only default at the end of the year. If Delta defaults, the bank expects to lose 50% of its promised payment.
What may happen to the Delta's initial credit parameter and the value of its loan if the machinery industry experiences adverse structural changes?
A. Probability of default and loss at default may decrease simultaneously, while duration rises causing the loan value to decrease.
B. Probability of default and loss at default may decrease simultaneously, while duration falls causing the loan value to decrease.
C. Probability of default and loss at default may increase simultaneously, while duration rises causing the loan value to decrease.
D. Probability of default and loss at default may increase simultaneously, while duration falls causing the loan value to decrease.
Answer : D
Question 7 ( Topic 1 )
Alpha Bank determined that Delta Industrial Machinery Corporation has 2% change of default on a one-year no-payment of USD $1 million, including interest and principal repayment. The bank charges 3% interest rate spread to firms in the machinery industry, and the risk-free interest rate is 6%. Alpha Bank receives both interest and principal payments once at the end the year. Delta can only default at the end of the year. If Delta defaults, the bank expects to lose 50% of its promised payment. Six months after Alpha
Bank provides USD $1 million loan to the Delta Industrial Machinery Corporation, a new competitor enters the machinery industry, causing Delta to adjust its prices and mark down the value of its inventory. Hence, the probability of default increases from 2% to 10% and the loss given default increases from 50% to 75%. If Alpha Bank can reprice the loan, what should the new rate be?
A. 10%
B. 13%
C. 16.5%
D. 20.5%
Answer : D
Question 8 ( Topic 1 )
Which one of the following four model types would assign an obligor to an obligor class based on the risk characteristics of the borrower at the time the loan was originated and estimate the default probability based on the past default rate of the members of that particular class?
A. Dynamic models
B. Causal models
C. Historical frequency models
D. Credit rating models
Answer : C
Question 9 ( Topic 1 )
Which one of the following four models is typically used to grade the obligations of small- and medium-size enterprises?
A. Causal models
B. Historical frequency models
C. Credit scoring models
D. Credit rating models
Answer : C
Question 10 ( Topic 1 )
A credit associate extending a loan to an obligor suspects that the obligor may change his behavior after the loan has been originated. The obligor in this case may use the loan proceeds for purposes not sanctioned by the lender, thereby increasing the risk of default.
Hence, the credit associate must estimate the probability of default based on the assumptions about the applicability of the following tendency to this lending situation:
A. Speculation
B. Short bias
C. Moral hazard
D. Adverse selection
Answer : C
Question 11 ( Topic 1 )
A bank customer chooses a mortgage with low initial payments and payments that increase over time because the customer knows that she will have trouble making payments in the early years of the loan. The bank makes this type of mortgage with the same default assumptions uses for ordinary mortgages, thus underestimating the risk of default and becoming exposed to:
A. Moral hazard
B. Adverse selection
C. Banking speculation
D. Sampling bias
Answer : B
Question 12 ( Topic 1 )
The potential failure of a manufacturer to honor a warranty might be called ____, whereas the potential failure of a borrower to fulfill its payment requirements, which include both the repayment of the amount borrowed, the principal and the contractual interest payments, would be called ___.
A. Credit risk; market risk
B. Market risk; credit risk
C. Credit risk; performance risk
D. Performance risk; credit risk
Answer : D
Question 13 ( Topic 1 )
Which one of the following four options does NOT represent a benefit of compensating balances to the bank?
A. Compensating balances allow the bank to net some of the exposure they may have in case of default, by taking funds from these specific deposit account one the borrower defaults.
B. Since the compensating balances cannot be withdrawn at short notice, if at all, they are not considered transaction accounts and are able to provide a stable funding to the bank, reducing its reliance on more volatile external inter-bank based funding sources.
C. Compensation balances influence the expected loss rate of the bank given the default obligor and improve capital structure by controlling obligor type and avoiding payment delays.
D. Since the compensating balances reduce the next amount lent to the borrower, the earned return on the loan is increased, further widening the bank's interest rate margin and profitability.
Answer : C
Question 14 ( Topic 1 )
According to a Moody's study, the most important drivers of the loss given default historically have been all of the following EXCEPT:
I. Debt type and seniority -
II. Macroeconomic environment -
III. Obligor asset type -
IV. Recourse -
A. I
B. II
C. I, II
D. III, IV
Answer : D
Question 15 ( Topic 1 )
A credit rating analyst wants to determine the expected duration of the default time for a new three-year loan, which has a 2% likelihood of defaulting in the first year, a 3% likelihood of defaulting in the second year, and a 5% likelihood of defaulting the third year.
What is the expected duration for this three-year loan?
A. 1.5 years
B. 2.1 years
C. 2.3 years
D. 3.7 years
Answer : C
Question 16 ( Topic 1 )
Of all the risk factors in loan pricing, which one of the following four choices is likely to be the least significant?
A. Probability of default
B. Duration of default
C. Loss given default
D. Exposure at default
Answer : B
Question 17 ( Topic 1 )
By lowering the spread on lower credit quality borrowers, the bank will typically achieve all of the following outcomes EXCEPT:
A. Aggressively courting of new business
B. Lower probability of default
C. Rapid growth
D. Higher losses in case of default
Answer : B
Question 18 ( Topic 1 )
In the United States, Which one of the following four options represents the largest component of securitized debt?
A. Education loans
B. Credit card loans
C. Real estate loans
D. Lines of credit
Answer : C
Question 19 ( Topic 1 )
From the bank's point of view, repricing the retail debt portfolio will introduce risks of fluctuations in:
I. Duration -
II. Loss given default -
III. Interest rates -
IV. Bank spreads -
A. I
B. II
C. I, II
D. III, IV
Answer : D
Question 20 ( Topic 1 )
Altman's Z-score incorporates all the following variables that are predictive of bankruptcy
EXCEPT:
A. Return on total assets
B. Sales to total assets
C. Equity to debt
D. Return on equity
Answer : D
Question 21 ( Topic 1 )
Counterparty credit risk assessment differs from traditional credit risk assessment in all of the following features EXCEPT:
A. Exposures can often be netted
B. Exposure at default may be negatively correlated to the probability of default
C. Counterparty risk creates a two-way credit exposure
D. Collateral arrangements are typically static in nature
Answer : D
Question 22 ( Topic 1 )
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
Answer : D
Question 23 ( Topic 1 )
A financial analyst is trying to distinguish credit risk from market risk. A $100 loan collateralized with $200 in stock has limited ___, but an uncollateralized obligation issued by a large bank to pay an amount linked to the long-term performance of the Nikkei 225
Index that measures the performance of the leading Japanese stocks on the Tokyo Stock
Exchange likely has more ___ than ___.
A. Legal risk; market risk; credit risk
B. Market risk; market risk; credit risk
C. Market risk; credit risk; market risk
D. Credit risk, legal risk; market risk
Answer : B
Question 24 ( Topic 1 )
Which one of the following four statements regarding counterparty credit risk is
INCORRECT?
A. Counterparty credit risk refers to the inability to realize gains in a contract with a counterparty due to its default.
B. The exposure at default is variable due to fluctuations in swap valuations.
C. The exposure at default can be negatively correlated to probability of default.
D. Dynamic collateral provisions often increase counterparty risk considerably.
Answer : B
Question 25 ( Topic 1 )
A credit risk analyst is evaluating factors that quantify credit risk exposures. The risk that the borrower would fail to make full and timely repayments of its financial obligations over a given time horizon typically refers to:
A. Duration of default.
B. Exposure at default.
C. Loss given default.
D. Probability of default.
Answer : D
Question 26 ( Topic 1 )
Which one of the following four options correctly identifies the core difference between bonds and loans?
A. These instruments receive a different legal treatment.
B. These instruments have different pricing drivers.
C. These instruments cannot be used to estimate credit capital under provisions of the Basel II Accord.
D. These instruments are subject to different credit counterparty regulations.
Answer : A
Question 27 ( Topic 1 )
Which one of the following four formulas correctly identifies the expected loss for all credit instruments?
A. Expected Loss = Probability of Default x Loss Given Default x Exposure at Default
B. Expected Loss = Probability of Default x Loss Given Default + Exposure at Default
C. Expected Loss = Probability of Default x Loss Given Default - Exposure at Default
D. Expected Loss = Probability of Default x Loss Given Default / Exposure at Default
Answer : A
Question 28 ( Topic 1 )
Gamma Bank provides a $100,000 loan to Big Bath retail stores at 5% interest rate (paid annually). The loan is collateralized with $55,000. The loan also has an annual expected defaultrate of 2%, and loss given default at 50%. In this case, what will the bank's exposure at default (EAD) be?
A. $25,000
B. $50,000
C. $75,000
D. $105,000
Answer : B
Question 29 ( Topic 1 )
Gamma Bank provides a $100,000 loan to Big Bath retail stores at 5% interest rate (paid annually). The loan is collateralized with $55,000. The loan also has an annual expected default rate of 2%, and loss given default at 50%. In this case, what will the bank's expected loss be?
A. $500
B. $750
C. $1,000
D. $1,300
Answer : A
Question 30 ( Topic 1 )
Gamma Bank provides a $100,000 loan to Big Bath retail stores at 5% interest rate (paid annually). The loan also has an annual expected default rate of 2%, and loss given default at 50%. In this case, what will the bank's expected loss be? What is the expected loss of this loan?
A. $300
B. $550
C. $750
D. $1,050
Answer : D
Question 31 ( Topic 1 )
Which of the following attributes are typical for early models of statistical credit analysis?
A. These models assumed the default of any obligor was independent of the default of any other.
B. The underlying default assumptions were analytically inconvenient.
C. The underlying default assumptions failed to develop relatively simple formulas for the determination of portfolio credit risk.
D. These models effectively incorporated herd behavior.
Answer : A
Question 32 ( Topic 1 )
A credit analyst wants to determine if her bank is taking too much credit risk. Which one of the following four strategies will typically provide the most convenient approach to quantify the credit risk exposure for the bank?
A. Assessing aggregate exposure at default at various time points and at various confidence levels
B. Simplifying individual credit exposures so that they can be combined into a simplified expression of portfolio risk for the bank
C. Using stress testing techniques to forecast underlying macroeconomic factors and bank's idiosyncratic risks
D. Analyzing distribution of bank's credit losses and mapping credit risks at various statistical levels
Answer : A
Question 33 ( Topic 1 )
When looking at the distribution of portfolio credit losses, the shape of the loss distribution is ___ , as the likelihood of total losses, the sum of expected and unexpected credit losses, is ___ than the likelihood of no credit losses.
A. Symmetric; less
B. Symmetric; greater
C. Asymmetric; less
D. Asymmetric; greater
Answer : D
Question 34 ( Topic 1 )
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.
Answer : B
Question 35 ( Topic 1 )
To manage its credit portfolio, Beta Bank can directly sell the following portfolio elements:
I. Bonds -
II. Marketable loans -
III. Credit card loans -
A. I
B. II
C. I, II
D. II, III
Answer : C
Question 36 ( Topic 1 )
As DeltaBank explores the securitization business, it is most likely to embrace securitization to:
I. Bring transparency to the bank's balance sheet
II. Create a new profit center for the bank
III. Strategically release risk capital and regulatory capital for redeployment
IV. Generate cash for additional debt origination
A. I, III
B. II, IV
C. I, II, III
D. II, III, IV
Answer : D
Question 37 ( Topic 1 )
After entering the securitization business, Delta Bank increases its cash efficiency by selling off the lower risk portions of the portfolio credit risk. This process ___ risk on the residual pieces of the credit portfolio, and as a result it ___ return on equity for the bank.
A. Decreases; increases;
B. Increases; increases;
C. Increases; decreases;
D. Decreases; increases;
Answer : B
Question 38 ( Topic 1 )
Which of the following risk types are historically associated with credit derivatives?
I. Documentation risk -
II. Definition of credit events -
III. Occurrence of credit events
IV. Enterprise risk -
A. I, IV
B. I, II
C. I, II, III
D. II, III, IV
Answer : C
Question 39 ( Topic 1 )
The pricing of credit default swaps is a function of all of the following EXCEPT:
A. Probability of default
B. Duration
C. Loss given default
D. Market spreads
Answer : B
Question 40 ( Topic 1 )
To safeguard its capital and obtain insurance if the borrowers cannot repay their loans,
Gamma Bank accepts financial collateral to manage its credit risk and mitigate the effect of the borrowers' defaults. Gamma Bank will typically accept all of the following instruments as financial collateral EXCEPT?
A. Unrated bonds issued and traded on a recognized exchange
B. Equities and convertible bonds included in a main market index
C. Commercial debts owed to a company in a form of receivables
D. Mutual fund shares and similar unit investment vehicles subject to daily quotes
Answer : C
Question 41 ( Topic 1 )
Except for the credit quality of the Credit Default Swap protection seller, the following relationship correctly approximates the yield on a risk-free instrument:
A. Bond + CDS
B. Bond + CDS + Market Spread
C. Bond - CDS
D. Bond - CDS - Market spread
Answer : A
Question 42 ( Topic 1 )
Which of the following factors can cause obligors to default at the same time?
I. Obligors may be harmed by exposures to similar risk factors simultaneously.
II. Obligors may exhibit herd behavior.
III. Obligors may be subject to the sampling bias.
IV. Obligors may exhibit speculative bias.
A. I
B. II, III
C. I, II
D. III, IV
Answer : C
Question 43 ( Topic 1 )
After entering the securitization business, Delta Bank increases its cash efficiency by selling off the lower risk portions of the portfolio credit risk. This process ___ return on equity for the bank, because the cash generated by the risk-transfer and the overall ___ of the bank's exposure to the risk.
A. Increases; increase;
B. Increases; reduction;
C. Decreases; increase;
D. Decreases; reduction;
Answer : B
Question 44 ( Topic 1 )
When a credit risk manager analyzes default patterns in a specific neighborhood, she finds that defaults are increasing as the stigma of default evaporates, and more borrowers default. This phenomenon constitutes
A. Moral hazard
B. Speculative bias
C. Herd behavior
D. Adverse selection
Answer : C
Question 45 ( Topic 1 )
ThetaBank has extended substantial financing to two mortgage companies, which these mortgage lenders use to finance their own lending. Individually, each of the mortgage companies has an exposure at default (EAD) of $20 million, with a loss given default (LGD) of 100%, and a probability of default of 10%. ThetaBank's risk department predicts the joint probability of default at 5%. If the default risk of these mortgage companies were modeled as independent risks, what would be the probability of a cumulative $40 million loss from these two mortgage borrowers?
A. 0.01%
B. 0.1%
C. 1%
D. 10%
Answer : C
Question 46 ( Topic 1 )
ThetaBank has extended substantial financing to two mortgage companies, which these mortgage lenders use to finance their own lending. Individually, each of the mortgage companies have an exposure at default (EAD) of $20 million, with a loss given default
(LGD) of 100%, and a probability of default of 10%. ThetaBank's risk department predicts the joint probability of default at 5%. If the default risk of these mortgage companies were modeled as independent risks, the actual probability would be underestimated by:
A. 1%
B. 2%
C. 3%
D. 4%
Answer : D
Question 47 ( Topic 1 )
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?
I. 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
A. I
B. I, II
C. II, III
D. III, IV
Answer : B
Question 48 ( Topic 1 )
Which one of the following four metrics represents the difference between the expected loss and unexpected loss on a credit portfolio?
A. Credit VaR
B. Probability of default
C. Loss given default
D. Modified duration
Answer : A
Question 49 ( Topic 1 )
Gamma Bank is active in loan underwriting and securitization business, and given its collective credit exposure, it will be typically most interested in the following types of portfolio credit risk:
I. Expected loss -
II. Duration -
III. Unexpected loss -
IV. Factor sensitivities -
A. I
B. II
C. I, III
D. I, III, IV
Answer : D
Question 50 ( Topic 1 )
To quantify the aggregate average loss for the credit portfolio and its possible constituent subportfolios, a credit portfolio manager should use the following metric:
A. Credit VaR
B. Expected loss
C. Unexpected loss
D. Factor sensitivity
Answer : B
Question 51 ( Topic 1 )
Which one of the following four alternatives lists the three most widely traded currencies on the global foreign exchange market, as of April 2007, in the decreasing order of market share? EUR is the abbreviation of the European euro, JPY is for the Japanese yen, and
USD is for the United States dollar, respectively.
A. JPY, EUR, USD
B. USD, EUR, JPY
C. USD, JPY, EUR
D. EUR, USD, JPY
Answer : B
Question 52 ( Topic 1 )
An asset manager for a large mutual fund is considering forward exchange positions traded in a clearinghouse system and needs to mitigate the risks created as a result of this operation. Which of the following risks will be created as a result of the forward exchange transaction?
A. Exchange rate risk
B. Exchange rate and interest rate risk
C. Credit risk
D. Exchange rate and credit risk
Answer : B
Question 53 ( Topic 1 )
Which one of the following statements correctly identifies risks in foreign exchange forwards?
A. Short-term forward price fluctuations are driven by changes in the spot exchange rate, since most inter-country interest rates differentials are significant, and the effect of compounding is large for short periods of time.
B. Short-term forward price fluctuations are driven by changes in the spot exchange rate, since most inter-country interest rates differentials are small, and the effect of compounding is small for short periods of time.
C. Long-term forward price fluctuations are driven by changes in the spot exchange rate, since most inter-country interest rates differentials are small, and the effect of compounding is large for short periods of time.
D. Long-term forward price fluctuations are driven by changes in the spot exchange rate, since most inter-country interest rates differentials are significant, and the effect of compounding is small for short periods of time.
Answer : B
Question 54 ( Topic 1 )
Which one of the four following statements regarding foreign exchange (FX) swap transactions is INCORRECT?
A. FX swap is a common short-term transaction.
B. FX swap is normally used for hedging various currency positions.
C. FX swap generates more exchange rate risk than simple forward transactions.
D. FX swap is generally used to for funding foreign currency balances and currency speculation.
Answer : C
Question 55 ( Topic 1 )
To hedge a foreign exchange exposure on behalf of a client, a small regional bank seeks to enter into an offsetting foreign exchange transaction. It cannot access the large and liquid interbank market open primarily to larger banks. At which one of the following exchanges can the smaller bank trade the currency futures contracts?
I. The Tokyo Futures Exchange -
II. The Euronext-Liffe Exchange -
III. The Chicago Mercantile Exchange
A. I
B. III
C. II, III
D. I, II, III
Answer : D
Question 61 ( Topic 1 )
Which one of the following four statements correctly describes an American call option?
A. An American call option gives the buyer of that call option the right to buy the underlying instrument on any date up to and including the expiry date.
B. An American call option gives the buyer of that call option the right to sell the underlying instrument on any date up to and including the expiry date.
C. An American call option gives the buyer of that call option the right to buy the underlying instrument on the expiry date.
D. An American call option gives the buyer of that call option the right to sell the underlying instrument on the expiry date.
Answer : C
Question 62 ( Topic 1 )
According to the largest global poll of foreign exchange market participants, which one of the following four global financial institutions was the most active participant in the global foreign exchange market?
A. Citibank
B. UBS AG
C. Deutsche Bank
D. Barclays Capital
Answer : C
Question 63 ( Topic 1 )
In analyzing market option pricing dynamics, a risk manager evaluates option value changes throughout the entire trading day. Which of the following factors would most likely affect foreign exchange option values?
I. Change in the value of the underlying
II. Change in the perception of future volatility
III. Change in interest rates -
IV. Passage of time -
A. I, II
B. I, II, III
C. II, III
D. I, II, III, IV
Answer : D
Question 64 ( Topic 1 )
Which one of the following four statements about the relationship between exchange rates and option values is correct?
A. As the dollar appreciates relative to the pound, the right to buy dollars at a fixed pound exchange rate decreases.
B. As the dollar appreciates relative to the pound, the right to buy dollars at a fixed pound exchange rate increases.
C. As the dollar depreciates relative to the pound, the right to buy dollars at a fixed pound exchange rate increases.
D. As the dollar appreciates relative to the pound, the right to sell dollars at a fixed pound exchange rate increases.
Answer : B
Question 65 ( Topic 1 )
Which one of the following four statements does identify correctly the relationship between the value of an option and perceived exchange rate volatility?
A. With increases in perceived future foreign exchange volatility, the value of all foreign exchange
B. As the perceived future foreign exchange volatility decreases, the value of all options increases.
C. As the perceived future foreign exchange volatility increases, the value of all options increases.
D. Option values can only change due to the factors related to the demand for specific options
Answer : C
Question 66 ( Topic 1 )
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
Answer : B
Question 67 ( Topic 1 )
A risk manager is considering how to best quantify option price dynamics using mathematical option pricing models. Which of the following variables would most likely serve as an input in these models?
I. Implicit parameter estimate based on observed market prices
II. Estimates of sensitivity of option prices to parameter changes
III. Theoretical option determination based on assumptions
A. I, III
B. II
C. II, III
D. I, II, III
Answer : D
Question 68 ( Topic 1 )
Which one of the following four parameters is NOT a required input in the Black-Scholes model to price a foreign exchange option?
A. Underlying exchange rates
B. Underlying interest rates
C. Discrete future stock prices
D. Option exercise price
Answer : C
Question 69 ( Topic 1 )
Which one of the following four variables of the Black-Scholes model is typically NOT known at a point in time?
A. The underlying relevant exchange rates
B. The underlying interest rates
C. The future volatility of the exchange rates
D. The time to maturity
Answer : C
Question 70 ( Topic 1 )
A risk manager analyzes a long position with a USD 10 million value. To hedge the portfolio, it seeks to use options that decrease JPY 0.50 in value for every JPY 1 increase in the long position. At first approximation, what is the overall exposure to USD depreciation?
A. His overall portfolio has the same exposure to USD as a portfolio that is long USD 5 million.
B. His overall portfolio has the same exposure to USD as a portfolio that is long USD 10 million.
C. His overall portfolio has the same exposure to USD as a portfolio that is short USD 5 million.
D. His overall portfolio has the same exposure to USD as a portfolio that is short USD 10 million.
Answer : A
Question 71 ( Topic 1 )
A risk manager has a long forward position of USD 1 million but the option portfolio decreases JPY 0.50 for every JPY 1 increase in his forward position. At first approximation, what is the overall result of the options positions?
A. The options positions hedge the forward position by 25%.
B. The option positions hedge the forward position by 50%.
C. The option positions hedge the forward position by 75%.
D. The option positions hedge the forward position by 100%.
Answer : B
Question 72 ( Topic 1 )
Which one of the following four statements correctly defines an option's delta?
A. Delta measures the expected decline in option with time and is usually expressed in years.
B. Delta measures the effect of 1 bp in interest rate change on the option price.
C. Delta is the multiplier that best approximates the short-term change in the value of an option.
D. Delta measures the impact of volatility on the price of an option.
Answer : C
Question 73 ( Topic 1 )
In the United States, during the second quarter of 2009, transactions in foreign exchange derivative contracts comprised approximately what proportion of all types of derivative transactions between financial institutions?
A. 2%
B. 7%
C. 25%
D. 43%
Answer : B
Question 74 ( Topic 1 )
Which of the following statements about the interest rates and option prices is correct?
A. If rho is positive, rising interest rates increase option prices.
B. If rho is positive, rising interest rates decrease option prices.
C. As interest rates rise, all options will rise in value.
D. As interest rates fall, all options will rise in value.
Answer : A
Question 75 ( Topic 1 )
To estimate a partial change in option price, a risk manager will use the following formula:
A. Partial change in option price = Delta x Change in underlying price
B. Partial change in option price = Delta x (1+ Change in underlying price)
C. Partial change in option price = Delta x Gamma x Change in underlying price
D. Partial change in option price = Delta x Gamma x (1+ Change in underlying price)
Answer : A
uestion 76 ( Topic 1 )
Which one of the following four statements on factors affecting the value of options is correct?
A. As volatility rises, options increase in value.
B. As time passes, options will increase in value.
C. As interest rates rise and option's rho is positive, option prices will decrease.
D. As the value of underlying security increases, the value of the put option increases.
Answer : A
Question 77 ( Topic 1 )
A risk manager is analyzing a call option on the GBP with a vega of 0.02. When the perceived future volatility increases by 1%, the call option
A. Increases in value by 0.02.
B. Increases in value by 2.
C. Decreases in value by 0.02.
D. Decreases in value by 2.
Answer : A
Question 78 ( Topic 1 )
Typically, which one of the following four option risk measures will be used to determine the number of options to use to hedge the underlying position?
A. Vega
B. Rho
C. Delta
D. Theta
Answer : C
Question 79 ( Topic 1 )
Which one of the following four statements correctly defines chooser options?
A. The owner of these options decides if the option is a call or put option only when a predetermined date is reached.
B. These options represent a variation of the plain vanilla option where the underlying asset is a basket of currencies.
C. These options pay an amount equal to the power of the value of the underlying asset above the strike price.
D. These options give the holder the right to exchange one asset for another.
Answer : A
Question 80 ( Topic 1 )
Which one of the following four exotic option types has another option as its underlying asset, and as a result of its construction is generally believed to be very difficult to model?
A. Spread options
B. Chooser options
C. Binary options
D. Compound options
Answer : D
International Certificate in Banking Risk and Regulation Questions + Answers
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