Question 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.

Options :

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 2

Alpha Bank, a small bank,has a long position with larger BetaBank and has an identical

short position with another larger bank GammaBank. Each large bank requires a 20% initial

collateral to support the trade. As prices fluctuate in either direction, one large bank will

require additional collateral from the small bank, while the risk of loss to the other large

bank will increase. By running the trades through a clearinghouse, the small bank can

achieve all of the following objectives EXCEPT:

Options :

A : Eliminating the collateral requirement

B : Protecting itself against increases in future collateral demands

C : Protecting against the risk of the failure of one of the large banks

D : Mitigating option hedging risks and altering margin requirement

Answer: D

Question 3

Which one of the following four statements represents a possible disadvantage of using

total return swap to manage equity portfolio risks?

Options :

A :

Similar to the formal portfolio rebalancing strategy, the total return receiver needs to

modify the size of the trading position.

B :

The total return receiver needs to incur the transaction costs of establishing an equity

position.

C :

Similar to an equity forward position, the total return receiver does not get paid the

dividend.

D : The total return receiver does not have any voting rights.

Answer: C

Question 4

A risk analyst at EtaBank wants to estimate the risk exposure in a leveraged position in

Collateralized Debt Obligations. These particular CDOs can be used in a repurchase

transaction at a 20% haircut. If the VaR on a $100 unleveraged position is estimated to be

$30, what is the VaR for the final, fully leveraged position?

Options :

A : $20

B : $50

C : $100

D : $150

Answer: D

Question 5

Which among the following are shortfalls of the static liquidity ladder model?

I. The static model gives a liquidity estimate only after the bank faces the liquidity problem.

II. The static model can only make projections over a few days.

III. The static model does not incorporate uncertainty in the analysis.

Options :

A : I, II

B : I, III

C : I, II, III

D : III

Answer: C

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