Question 1

A customer asks a broker employed by AlphaBank to buy Eureka Corporation bonds for her account. While this trade was executed correctly and the bonds were bought, the trade was mistakenly accounted for as a sell order. If the price of Eureka Corporation bonds goes up, this trade would result in a significantly larger loss than if the market had remained stable. However, if the market drops, the customer will benefit from the incorrect accounting and gain from this trade. This trading scenario can serve as an example that

Options :

A : Market risk in this transaction can magnify operational risk.

B : Credit risk in this transaction can magnify operational risk.

C : Liquidity risk in this transaction can magnify operational risk.

D : Strategic risk in this transaction can magnify operational risk.

Answer: A

Question 2

Gamma Bank is operating in a highly volatile interest rate environment and wants to

stabilize its net income by shifting the sources of its earnings from interest rate sensitive

sources to less interest rate sensitive sources. All of the following strategies can help

achieve this objective EXCEPT:

Options :

A : Charge bank fees for underwriting loans

B : Provide trust, asset management, and trading services to customers

C : Extend different types of credit

D : Originate more floating interest rate loans

Answer: D

Question 3

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

Options :

A : Moral hazard

B : Speculative bias

C : Herd behavior

D : Adverse selection

Answer: C

Question 4

According to Basel II what constitutes Tier 3 capital?

Options :

A : Subordinated debt issues that pay interest.

B : Debt capital that can only be used to support market risk in the trading book of the bank.

C : Preference shares that confer on issuers the right to defer payment of a fixed dividend.

D : Hybrid debt capital instruments that are similar to equity.

Answer: B

Question 5

Which one of the following four statements correctly identifies the Basel II Accord'sdefinition of operational risk?

Options :

A : Operational risk is all the risk that is not captured by market and credit risks.

B : Operational risk is the risk of loss resulting from inadequate or failed processes, peopleand systems or from external events.

C : Operational risk is a risk arising from execution of a company-s business functions.

D : Operational risk is a form of risk that summarizes the risks a company or firmundertakes when it attempts to operate within a given field or industry.

Answer: B

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