CAIIB 2020 Bank Financial Management Mock Tests Set 10

According to current Basel Committee proposals, banks using the advanced measurement approach must calculate the operational risk capital charge at a:


Options are :

  • 99 percentile confidence level and a 1-year time horizon.
  • 99 percentile confidence level and a 3-year time horizon.
  • 99.9 percentile confidence level and a 1-year time horizon.
  • 99.9 percentile confidence level and a 5-year time horizon.

Answer :99.9 percentile confidence level and a 1-year time horizon.

The Basel definition of operational risk focuses on the risk of losses due to inadequate or failed processes, persons, and systems that cannot protect a company from outside events. The definition has been subject to criticism because it excludes:


Options are :

  • market and credit risks.
  • indirect losses.
  • failure of information technology operations.
  • impacts of natural disasters.

Answer :market and credit risks.

Which of the following measurement approaches for assessing operational risk would be most appropriate for small banks?


Options are :

  • Loss frequency approach.
  • Basic indicator approach.
  • Standardized approach.
  • Advanced measurement approach (AMA).

Answer :Basic indicator approach.

CAIIB 2020 Bank Financial Management Mock Tests Set 11

Which of the following statements about documentation of stress tests is most appropriate?


Options are :

  • Institutions are not concerned if their vendors document stress testing activities.
  • Institutions should incentivize documenting stress tests to increase efficiency.
  • Documentation is not useful for stress test developers, but it is important to senior management.
  • Documentation should not include a description of the types of stress tests and methodologies, but it should include a description of the key assumptions and limitations.

Answer :Institutions should incentivize documenting stress tests to increase efficiency.

Which of the following actions is least likely a component of the validation and independent review of stress tests?


Options are :

  • Using expert-based judgment.
  • Testing data during nonstress periods.
  • Communicating stress test results to all stress test users.
  • Reviewing the qualitative but not the judgmental aspects of stress tests.

Answer :Reviewing the qualitative but not the judgmental aspects of stress tests.

Which of the following statements best reflects the responsibilities of an internal audit?


Options are :

  • An internal audit should not assess the staff involved in stress testing activities.
  • An internal audit must independently assess each stress test used.
  • An internal audit should review the manner in which stress testing efficiencies are identified and tracked.
  • The internal audit function needs to be impartial but does not need to be independent.

Answer :An internal audit should review the manner in which stress testing efficiencies are identified and tracked.

CAIIB 2020 Bank Financial Management Mock Tests Set 12

Which of the following reasons best explains why institutions use reverse stress tests?


Options are :

  • To identify liquidity risk.
  • To identify risk concentrations.
  • To assess where multiple risks occur simultaneously.
  • To test events that threaten the viability of the institution.

Answer :To test events that threaten the viability of the institution.

Herstatt Risk is


Options are :

  • Default in making payment by banks to its customers
  • Default in making payment by banks to another bank
  • Risk of settlement between banks that may arise due to time difference
  • Risk of losses that may be incurred by banks in forex trade

Answer :Risk of settlement between banks that may arise due to time difference

As per Basel III the investment of a bank in the capital of a banking or financial or insurance entity is restricted to which of the following: (i) 10% of capital funds (after deductions) of the investing bank, (ii) 5% of the investee bank's equity capital, (iii) 30% of paid-up capital and reserves of the bank or 30% of paid-up capital of the company, whichever is lower


Options are :

  • Only (i) and (ii)
  • Only (i) and (iii)
  • Only (ii) and (iii)
  • (i), (ii) and (iii)

Answer :(i), (ii) and (iii)

CAIIB 2020 Bank Financial Management Mock Tests Set 13

Identify the Basel III norms from following that, recently RBI has extended the timeline for implementation for banks in India


Options are :

  • Minimum regulatory capital requirement
  • Market discipline
  • Holding the minimum capital to risk-weighted assets ratio to 10.25%
  • All the above

Answer :All the above

Under Basel 3 the risk weight for capital charge for Credit risk on the basis of standardized approach is ____ % for staff loans other than secured by superannuation benefits or mortgage of flats/house being eligible under regulatory retail portfolio


Options are :

  • 20%
  • 50%
  • 75%
  • 100%

Answer :75%

_______ refers to potential adverse impact on Net Interest Income or Net Income Margin or Market Value of Equity (MVE), caused by changes in market interest rates.


Options are :

  • Liquidity Risk
  • Interest Rate Risk
  • Market Risk
  • Operational Risk

Answer :Interest Rate Risk

CAIIB 2020 Bank Financial Management Mock Tests Set 14

The risk-free interest rate for 3 months for currency ‘A’ is lower than currency ‘B’ by x%. 3 months’ forward rates for currency ‘A’ is trading at a discount of y%. Given x>y, to take advantage of arbitrage you will.


Options are :

  • Deploy in currency ‘A’ ; arbitrage profit would be (x-y)
  • Deploy in currency ‘B’ ; arbitrage profit would be (y-x)
  • Deploy in currency ‘B'; arbitrage profit would be (x-y)
  • None of these

Answer :Deploy in currency ‘A’ ; arbitrage profit would be (x-y)

A disadvantage of using swaps to control interest rate risk is that


Options are :

  • swaps cannot be written for long horizons.
  • Swaps are more expensive than restructuring balance sheets.
  • Swaps, like forward contracts, lack liquidity.
  • All of the above are disadvantages of swaps.
  • Only (a) and (b) of the above are disadvantages of swaps.

Answer :Swaps, like forward contracts, lack liquidity.

Default risk in a forward contract:


Options are :

  • only applies to the short, who must make the cash payment at settlement.
  • only applies to the long, and is the probability that the short cannot acquire the asset for delivery.
  • is the risk to either party that the other party will not fulfill their contractual obligation.

Answer :is the risk to either party that the other party will not fulfill their contractual obligation.

CAIIB 2020 Bank Financial Management Mock Tests Set 2

Which of the following statements regarding differences between stress tests and economic capital (EC) methods is correct?


Options are :

  • Stress tests tend to analyze a shorter period of time compared to EC methods.
  • Stress tests tend to use ordinal rank arrangements, while EC methods use cardinal probabilities.
  • Stress tests tend to focus on unconditional scenarios, while EC methods tend to focus on conditional scenarios.
  • Stress tests tend to compute losses from the perspective of the market as opposed to EC methods that compute losses from an accounting perspective.

Answer :Stress tests tend to use ordinal rank arrangements, while EC methods use cardinal probabilities.

Which of the following statements regarding stress testing and value at risk (VaR) methods is correct?


Options are :

  • Cardinal probabilities are a key feature of stress testing.
  • Practically speaking, stress tests focus on many scenarios.
  • Both stress tests and VaR methods attempt to transform a scenario into a loss estimate.
  • For regulatory stress tests, generating hypothetical scenarios uses past history as a departure point.

Answer :Both stress tests and VaR methods attempt to transform a scenario into a loss estimate.

Which of the following statements regarding VaR models in stress tests is correct?


Options are :

  • The use of stressed inputs has been especially notable in the area of credit risk.
  • Financial institutions usually use a binomial model to simulate defaults and credit quality.
  • Assigning probabilities to outcomes often allows the results of stress tests to be generated.
  • If a scenario’s loss magnitude corresponds to a 95th percentile loss on a VaR loss distribution, then one would take a much higher loss in the economic capital (EC) model as a proxy for the stressed loss resulting from market risk.

Answer :Assigning probabilities to outcomes often allows the results of stress tests to be generated.

CAIIB 2020 Bank Financial Management Mock Tests Set 3

Which of the following items is not required to be used as a result of the changes to the Basel market risk capital framework and the changes outlined in Basel III?


Options are :

  • Stress tests.
  • Stressed inputs.
  • Stressed parameters.
  • Stressed simulations.

Answer :Stressed simulations.

Which of the following statements most likely describes an advantage of using stressed risk metrics?


Options are :

  • The risk metric will be more realistic.
  • The risk metric will be more conservative.
  • The risk metric will mirror the portfolio returns.
  • The risk metric will respond to current market conditions.

Answer :The risk metric will be more conservative.

Stress testing for a bank’s securitized exposures should primarily consider which of the following features?


Options are :

  • Credit ratings of issuers’ bonds.
  • Credit ratings of issuers’ bonds and quality of the underlying asset pool.
  • Quality of underlying asset pool, subordination level of tranches, and systematic market conditions.
  • Credit ratings of issuers’ bonds, quality of the underlying asset pool, and systematic market conditions.

Answer :Quality of underlying asset pool, subordination level of tranches, and systematic market conditions.

CAIIB 2020 Bank Financial Management Mock Tests Set 4

Which of the following statements related to stress test handling is correct?


Options are :

  • Hedging, through futures contracts, can result in significant loss if basis changes between the opening and closing of futures position.
  • Pipeline risk emerges only due to market conditions.
  • Reputational risk is not as important as contractual risk.
  • A bank with large exposures to counterparties should not be concerned about counterparties’ exposure to market conditions or specific assets.

Answer :Hedging, through futures contracts, can result in significant loss if basis changes between the opening and closing of futures position.

Which of the following statements related to conducting stress tests is incorrect?


Options are :

  • Basel II requires banks to undertake stress tests for assessing capital adequacy at least once a month.
  • Results of stress testing should be used for strategic business planning purposes.
  • Stress testing can use sensitivity analysis to assess risk.
  • Stress testing should be used to identify risk concentrations.

Answer :Basel II requires banks to undertake stress tests for assessing capital adequacy at least once a month.

The risk that a counterparty will fail to deliver its obligation is:


Options are :

  • settlement risk.
  • model risk.
  • delivery risk.
  • people risk.

Answer :settlement risk.

CAIIB 2020 Bank Financial Management Mock Tests Set 5

Which of the following statements is an example of basis risk? Purchasing:


Options are :

  • an oil contract with delivery in a different geographical region.
  • a commodity with a desired distant delivery with near-term contracts.
  • a Eurodollar contract, due to lack of commodity futures.
  • All of the above statements are correct.

Answer :All of the above statements are correct.

Match the following events to the corresponding risk type. 1. A rogue trader within an institution. 2. Stock XYZ decreases in price due to a market crisis. 3. Using a put option to hedge an equity exposure. 4. Counterparty sues bank to avoid meeting its obligations.


Options are :

  • 1: legal risk; 2: credit risk; 3: strategic risk; 4: credit risk.
  • 1: business risk; 2: market risk; 3: market risk; 4: settlement risk
  • 1: Operational risk; 2: equity price risk; 3: basis risk; 4: legal risk.
  • 1: reputation risk; 2: Basis risk; 3: credit risk; 4: legal risk.

Answer :1: Operational risk; 2: equity price risk; 3: basis risk; 4: legal risk.

External credit rating scales indicate:


Options are :

  • the probability of default or the probability of loss.
  • the probability of default but not the probability of loss.
  • the probability of loss but not the probability of default.
  • neither the probability of loss nor the probability default.

Answer :the probability of default or the probability of loss.

CAIIB 2020 Bank Financial Management Mock Tests Set 6

Which of the following items is not required to be used as a result of the changes to the Basel market risk capital framework and the changes outlined in Basel III?


Options are :

  • Stress tests.
  • Stressed inputs.
  • Stressed parameters.
  • Stressed simulations.

Answer :Stressed simulations.

Which of the following statements regarding stress testing and value at risk (VaR) methods is correct?


Options are :

  • Cardinal probabilities are a key feature of stress testing.
  • Practically speaking, stress tests focus on many scenarios.
  • Both stress tests and VaR methods attempt to transform a scenario into a loss estimate.
  • For regulatory stress tests, generating hypothetical scenarios uses past history as a departure point.

Answer :Both stress tests and VaR methods attempt to transform a scenario into a loss estimate.

Value at risk (VaR) is the:


Options are :

  • average loss exceeding a specified threshold.
  • maximum expected loss for a given confidence level.
  • the worst possible loss for an asset.
  • minimum expected loss for a given confidence level.

Answer :maximum expected loss for a given confidence level.

CAIIB 2020 Bank Financial Management Mock Tests Set 7

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