nayizhenfeng

The correct answer is B

A credit institution is allowed to reduce its total operating risk charge by up to 20% through the use of insurance if it adopts the advanced measurement approach (AMA).

nayizhenfeng

AIM 4: Compute the capital charge for market risk and credit risk.

 

1、Given the following information what is the daily RAROC charge for market risk?

The appropriate adjustment factor for the day-to-day event risk that is not captured by the VAR model is 2.25.
The multiplier used to determine the unused portion of the VAR limit is 0.30.
The mulitiplier used to determine the charge for exceeding the VAR limit is 3.20.
The VAR limit over a 10-day period is $2,530,000.
The daily VAR is $950,000.
A) $3,040,000. 
 
B) $1,100,000. 
 
C) $2,587,500. 
 
D) $2,617,500. 

nayizhenfeng

The correct answer is D

The RAROC capital charge = F1(VAR) + F2(VAR limit – VAR) + F3 (VAR – VAR limit)

Where:
F1 = constant that adjusts for day to day event risk not captured in the VAR model
F2 = the multiplier used to determine the unused portion of the VAR limit
F3 = the multiplier used to determine the charge for exceeding the VAR limit

The question asks for the daily RAROC charge, so we need to first convert the 10-day VAR limit to a daily limit. $2,530,000 / √10 = $800,000

Thus the RAROC capital charge is:

2.25($950,000) + 0 + 3.20($950,000 - $800,000) = $2,617,500.

nayizhenfeng

2、A credit institution is allowed to reduce its total operating risk charge by up to 20% through the use of insurance if it adopts the:

A) basic indicator approach (BIA).
 
B) advanced measurement approach (AMA).
 
C) advanced standardized approach (ASA).
 
D) standardized approach (SA).

nayizhenfeng

AIM 3: Explain how capital is attributed to market, credit, and operational risk.

 

1、What is the major source of market risk for a bank?

A) Credit risk.
 
B) Gap risk.
 
C) Operational risk.
 
D) Exchange rate risk.

nayizhenfeng

AIM 2: Compute the RAROC for a loan.

 

1、Given the following information, calculate the RAROC.

Gross revenue: $8 million.
Interest expense: $4 million.
Economic capital: 10 million.
Return on invested economic capital: 500,000.
Operating costs associated with making the loan: $1.5 million.
Expected loss on the loan: 300,000.
A) 27%.
 
B) 42%.
 
C) 40%.
 
D) 5%.

nayizhenfeng

The correct answer is A

RAROC: (8 - 0.3 – 4 + 0.5 - 1.5) / 10 = 27%.

nayizhenfeng

2、A bank loan has expected gross revenue of $300,000, interest expense of $200,000, expected return on the $200,000 of economic capital of $20,000, expected loss on the loan of $10,000 and operating costs associated with the loan of $70,000. What is the risk adjusted return on capital (RAROC) for this loan?

A) 20%.
 
B) 10%.
 
C) 30%.
 
D) 55%.
 

nayizhenfeng

The correct answer is A

RAROC = (300 ? 200 ? 10 + 20 ? 70) / 200 = 20%.

nayizhenfeng

The correct answer is C

The primary purpose of operational risk economic capital is to protect the company against insolvency due to unexpected operational losses.