To manage its credit portfolio, Beta Bank can directly sell the following portfolio elements:
A. Bonds
II. Marketable loans
III. Credit card loans
B. I
C. II
D. I, II
E. II, III
Which one of the following changes would typically increase the price of a fixed income instrument, such as a bond?
A. Decrease in inflation rates in a country.
B. Increase in time to maturity.
C. Increase in risk premium.
D. Increase in demand for goods and services.
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.
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
Foreign exchange rates are determined by various factors. Considering the drivers of exchange rates, which one of the following changes would most likely strengthen the value of the USD against other foreign currencies?
A. The expected US inflation rate increases
B. The global demand for US products decreases
C. The economic performance in the US weakens
D. The US current account surplus increases
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.
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.
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
Which one of the following four option types has two strike prices?
A. Asian options
B. American options
C. Range options
D. Shout options
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
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