Q223. 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?

Q224. A bank customer can use either a plain vanilla option or an option contract with volumetric flexibility to reduce the following risks:
I. Market Risk
II. Basis Risk
III. Operational Risk

Q225. 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?

Q226. Suppose that a regulator deems all corporate debt to have the same risk level. Which of the following behavior
of banks would be an example of regulatory arbitrage?

Q227. Which one of the following four statements regarding commodity derivative risks is INCORRECT?

Q228. 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 exposure at default (EAD) be?

Q229. The retail banking business of BankGamma has an expected P & L of $50 million and a VaR of $100 million.
The bank seeks to diversify its revenue, and is considering the opportunity to acquire a credit card business with an expected P & L of $50 million and a VaR of $150 million. What will be the overall RAROC if the bank acquires the new business?

Q230. By foreign exchange market convention, spot foreign exchange transactions are to be exchanged at the spot date based on the following settlement rule:

Q231. Which of the following are typical properties of a statistical distribution of potential losses that a bank might
sustain over a period of time?
I. The range of possible losses above the average loss is much greater than those below the average loss.
II. The loss that is most likely to occur is below the average loss.
III. The loss that is most likely to occur is above the average loss.

Q232. An asset-sensitive bank will have a ___ cumulative gap and will benefit from ___ interest rates.

Q233. To quantify the aggregate average loss for the credit portfolio and its possible constituent subportfolios, a credit portfolio manager should use the following metric:

Q234. A governance, risk, and compliance strategy can help a bank to avoid:
I. Incomplete analysis of risks
II. Misperception of risk exposures
III. Duplication of effort
IV. Contradictory reporting

Q235. 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.

Q236. A trader for EtaBank wants to take a leveraged position in Collateralized Debt Obligations. These CDOs can be used in a repurchase transaction at a 20% haircut. Starting with $100 worth of CDOs, which one of the following four positions would completely utilize the available leverage?

Q237. In analyzing the historical performance of a financial product, you are concerned about “fat tails”, the probability of extreme returns compared to realized returns. Which of the following measures should you use to determine if the product return distribution of the product has “fat tails”?