Financial regulators in a European country are considering banning trading in highly complex derivative instruments that are not settled through a centralized clearinghouse.

This ban can result in:

I. The value of the country’s currency dropping

II. Counterparties involved in trading of these derivative instruments failing to fulfill their obligations

III. The business model relying on these instruments failing

IV. Certain activities becoming illegal

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A bank has a large number of auto loans and would prefer to sell them to raise cash for more funding. However, selling individual auto loans is difficult.

What could the bank do?

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What are the add-on losses faced by a bank that is going bankrupt?

I. The discount accepted by the bank for selling its assets in a fire sale.

II. The increased cost of funding liabilities in a financially distressed situation.

III. The reduction in the present value of future growth opportunities.

IV. Loss of goodwill and intangible assets.

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In additional to the commodity-specific risks, which of the following risks represent the main commodity derivative risks?

I. Basis

II. Term

III. Correlation

IV. Seasonality

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Which of the following are conclusions that could be drawn from the shape of the statistical distribution of losses that a bank might incur over a future time period?

I. In most years a bank would look more profitable than it will be on average.

II. Most of the time a sufficiently well capitalized bank will appear over-capitalized.

III. Bad years do not come along very often, but when they do they lead to enormous losses.

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Bank Muri has $4 million in cash and $5 million in loans coming due tomorrow with an expected default rate of 1%. The proceeds will be deposited overnight. The bank owes $ 9 million on a securities purchase that settles in two days and pays off $8 million in commercial paper in three days that is not expected to renew. On day 2, $1 million in loans is coming in with an expected default rate of 1% and on day 3, $2 million in loans is coming in with expected default rate of 2%.

How much should the bank plan to raise in order to avoid liquidity problems?

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An endowment asset manager with a focus on long/short equity strategies is evaluating the risks of an equity portfolio.

Which of the following risk types does the asset manager need to consider when evaluating her diversified equity portfolio?

I. Company-specific projected earnings and earnings risk

II. Aggregate earnings expectations

III. Market liquidity

IV. Individual asset volatility

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As Japan ___ its budget deficits and ___ its dependence on debt, the Japanese currency, JPY, would ___ in value against other currencies.

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

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A risk associate responsible for the operational risk function wants to evaluate the upward reporting governance structure and to assess its critical features.

Which one of the four attributes does not represent a critical feature of the upward reporting governance structure?

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