ARM Financial Risk Management 3

Question 1

Which of the following strategies is specifically designed to use financial derivatives to offset potential losses from price movements?

Accepted Answer

Hedging with derivatives

Answer

Retention

Answer

Diversification

Answer

Risk avoidance

Question 2

Portfolio diversification reduces financial risk primarily by:

Accepted Answer

Reducing unsystematic (idiosyncratic) risk by spreading investments across assets that do not move perfectly together

Answer

Eliminating systematic market risk through asset selection

Answer

Guaranteeing that portfolio losses will not exceed a predetermined threshold

Answer

Concentrating capital in the highest-returning asset class

Question 3

Risk-Adjusted Return on Capital (RAROC) is used in financial risk management to:

Accepted Answer

Compare the profitability of activities or business lines after accounting for the risk they consume

Answer

Calculate the accounting profit margin before tax and interest

Answer

Determine regulatory capital requirements under Basel III

Answer

Measure the speed at which a company recovers from a financial loss

Question 4

Credit derivatives such as credit default swaps (CDS) are primarily used to:

Accepted Answer

Transfer credit risk from one party to another without transferring the underlying asset

Answer

Convert equity investments into fixed-income instruments

Answer

Hedge against interest rate changes in a loan portfolio

Answer

Provide insurance-like protection against operational losses

Question 5

Collateral in credit risk management serves primarily to:

Accepted Answer

Provide the lender with an asset claim to recover losses if the borrower defaults

Answer

Reduce the administrative burden of credit monitoring

Answer

Increase the borrower's credit rating with rating agencies

Answer

Allow the lender to charge higher interest rates on secured loans

Question 6

The Basel Accords, published by the Basel Committee on Banking Supervision, primarily establish:

Accepted Answer

Minimum capital adequacy requirements and risk management standards for banks worldwide

Answer

International accounting standards for financial statement preparation

Answer

Exchange rate policies among member central banks

Answer

Disclosure requirements for publicly traded companies under securities law

Question 7

Enterprise-wide stress testing helps organizations primarily by:

Accepted Answer

Identifying potential vulnerabilities across the entire balance sheet under severe adverse scenarios to support capital planning

Answer

Confirming that historical average losses will not be exceeded in the next fiscal year

Answer

Eliminating the need for scenario analysis in individual business units

Answer

Certifying compliance with GAAP financial reporting requirements