Bank Risks Management

FNCE627 BANK RISKS MANAGEMENT

Quiz 1

Instructions

1 Circle the most relevant answer.

2 Each question carries 2 marks.

3 This is a closed-book quiz.

4 Unless otherwise specified, interest rates are in annual percentages and bonds pay

semiannual coupons

5 The following formulas may be useful to you:

Matric no. Name

1 Under Basel II, a bank is free to choose its own

A Capital adequacy level

B Credit exposure risk level

C Definitions of risk components PD, EAD, LGD and M

D Range of risk components

2 LGD is dependent on many factors except

A How much the bank can recover from a defaulted exposure

B The discount rate of cash flows received in recovery

C The quantum of exposure at the time of default

D The costs involved in recovery

3 Under Basel II, provision for loan losses

A Is dependent on the bank’s own estimates

B Is dependent on how loans are classified

C Cannot be certain as it is dependent on PD

D Will no longer be an issue

4 Under Basel II, the concept of credit risk is about

A A borrower’s failure to repay

B A borrower not performing according to the loan contract

C How to derive the correct PD

D Assign a credit rating to every exposure

5 Unexpected Loss UL is not about

A Losses that cannot