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Learning Objectives: Describe the customer relationship cycle and discuss the trade-off between creditworthiness and profitability. Discuss the benefits of risk-based pricing of financial services. Questions: 25.7.1. Faced with rising consumer debt and cost-cutting pressures, a retail bank is...

Learning Objectives: Define and describe credit risk scoring model types, key variables, and applications. Discuss the key variables in a mortgage credit assessment and describe the use of cutoff scores, default rates, and loss rates in a credit scoring model. Discuss the measurement and...

Learning Objectives: Analyze the credit risks and other risks generated by retail banking. Explain the differences between retail credit risk and corporate credit risk. Discuss the “dark side” of retail credit risk and the measures that attempt to address the problem. Questions: 25.5.1...

Learning Objectives: Calculate the debt value adjustment (DVA) and explain how stressing DVA enters into aggregating stress tests of CCR. Describe the common pitfalls in stress testing CCR. Questions: 25.4.1. Xavier Bank, Inc. (the Bank) has financial exposure to four counterparties: Alpha...

Learning Objective: Calculate the value of a bond based on the coupon and yield. Questions: 25.1.1. Dew Capital LP has invested funds in zero-coupon government bonds with a face value of $1,000. The yield curve benchmark presents the following spot rates: Assuming there is no arbitrage...

Learning Objectives: Describe a stress test that can be performed on CVA. Calculate the stressed CVA and the stress loss on CVA. Questions: 25.3.1. A financial institution is conducting a CVA stress test in a market risk context. Initially, the exposure (EE with netting) of Counterparty 1 is...

Learning Objectives: Describe a stress test that can be performed on a loan portfolio and on a derivative portfolio. Calculate the stressed expected loss, the stress loss for the loan portfolio, and the stress loss on a derivative portfolio. Questions: 25.2.1. The bank has conducted stress...

Learning Objectives: Differentiate among current exposure, peak exposure, expected exposure, and expected positive exposure. Explain the treatment of counterparty credit risk (CCR) both as a credit risk and as a market risk and describe its implications for trading activities and risk management...

Learning Objectives: Explain how forecasts are generated from ARMA models. Describe the role of mean reversion in long-horizon forecasts. Explain how seasonality is modeled in a covariance-stationary ARMA. Questions: 25.9.1. An analyst at Derivatech Hedge Fund is tasked with assessing the...

Learning Objectives: Define and describe the properties of autoregressive moving average (ARMA) processes. Describe the application of AR, MA, and ARMA processes. Describe the Box-Pierce Q-statistic and the Ljung-Box Q statistic. Questions: 25.8.1. An analyst at a bank’s trading desk is...

Learning Objectives: Define the autocovariance function and the autocorrelation function (ACF). Define and describe the properties of autoregressive (AR) processes. Define and describe the properties of moving average (MA) processes. Questions: 25.7.1. A financial analyst is analyzing the...

Learning Objectives: Calculate changes in the short-term, medium-term, and long-term interest rate factors under the Gauss+ model. Explain how the parameters of the Gauss+ model can be estimated from empirical data. Questions: 25.8.1. The dynamics for the medium-term factor mt are given by...

Learning Objectives: Describe the structure of the Gauss+ model and discuss the implications of this structure for the model’s ability to replicate empirically observed interest rate dynamics. Compare and contrast the dynamics, features, and applications of the Vasicek model and the Gauss+...

Learning Objectives: Describe the challenges a financial institution could face when calculating confidence intervals for VaR. Discuss the challenges in benchmarking VaR models and various approaches proposed to overcome them. Questions: 25.6.1. You are the Chief Risk Officer at a...

Learning Objectives: Describe some important considerations for a bank in assessing the conceptual soundness of a VaR model during the validation process. Explain how to conduct sensitivity analysis for a VaR model, and describe the potential benefits and challenges of performing such an...

Learning Objectives: Describe the bootstrapping method and its advantage over Monte Carlo simulation. Describe pseudo-random number generation. Describe situations where the bootstrapping method is ineffective. Describe the disadvantages of the simulation approach to financial problem solving...

Learning Objectives: Describe the basic steps to conduct a Monte Carlo simulation and illustrate how this simulation method is used to approximate moments or other quantities. Describe ways to reduce Monte Carlo sampling error. Explain the use of antithetic and control variates in reducing Monte...

Learning Objectives: Differentiate between deterministic and stochastic cash flows and provide examples of each. Interpret the term structure of expected cash flows and cumulative cash flows. Questions: 25.4.1. A commercial bank is managing its liquidity risk and needs to classify its cash...

Learning Objectives: Identify and explain the uses and sources of intraday liquidity. Discuss the governance structure of intraday liquidity risk management. Differentiate between methods for tracking intraday flows and monitoring risk levels. Questions: 25.3.1. You are the Treasurer of...

Learning Objectives: Evaluate the characteristics of sound Early Warning Indicators (EWI) measures. Identify EWI guidelines from banking regulators and supervisors (OCC, BCBS, Federal Reserve). Discuss the applications of EWIs in the context of the liquidity risk management process. Questions...