MBA542F Financial Risk Management (FRM) Lecture 20 Quiz
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Questions and Answers

What is the Basel Committee's definition of operational risk?

  • The risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events (correct)
  • The risk of loss resulting from natural disasters and terrorism
  • The risk of adverse change in the value of capital resources resulting from operational events
  • The risk of loss resulting from employee misconduct

    • Which of the following is NOT one of the categories of Operational Risk under BASEL II?

  • Terrorism/Vandalism
  • Software/Hardware failure
  • Business Disruptions and Systems Failure
  • Money laundering (correct)

    • What is the risk of loss resulting from employee theft and embezzlement categorized as?

  • Internal Fraud (correct)
  • External Fraud
  • Employee Practices and Work Place Safety
  • Rogue trader risk

    • Which of the following is NOT one of the three major operational risks for a bank?

    <p>Natural disasters</p> Signup and view all the answers

    According to the International Association of Insurance Supervisors, what is operational risk defined as?

    <p>The risk of adverse change in the value of capital resources resulting from operational events</p> Signup and view all the answers

    Which category of Operational Risk under BASEL II includes damage to physical assets?

    <p>Damage to Physical Assets</p> Signup and view all the answers

    What is the risk related to robbery, forgery, check kiting, and computer hacks categorized as?

    <p>External Fraud</p> Signup and view all the answers

    What is the risk related to misreporting, employee theft, and embezzlement categorized as?

    <p>Internal Fraud</p> Signup and view all the answers

    'Execution, delivery, and process management' is a part of which category of Operational Risk under BASEL II?

    <p>'Execution, delivery, and process management' falls under Business Disruptions and Systems Failure.</p> Signup and view all the answers

    'Organized crime' is associated with which type of operational risk?

    <p>'Organized crime' is associated with external fraud.</p> Signup and view all the answers

    What type of risk is associated with an employee taking unauthorized actions resulting in large losses?

    <p>Rogue trader risk</p> Signup and view all the answers

    Which organization faced a cyberattack affecting 143 million people in the United States in 2017?

    <p>Equifax</p> Signup and view all the answers

    What kind of information was obtained by hackers during the Equifax cyberattack?

    <p>Social security numbers and driver license numbers</p> Signup and view all the answers

    What defenses have been developed against cyber threats?

    <p>User account controls, cryptography, intruder detection software, and firewalls</p> Signup and view all the answers

    What led to a fine of about USD 2.8 billion for Volkswagen?

    <p>Failure to comply with U.S. emissions standards by cheating during emissions testing</p> Signup and view all the answers

    What is the risk associated with non-compliance to cheat and assisting clients with tax evasion?

    <p>Compliance Risk</p> Signup and view all the answers

    What did the hackers plan to embezzle from the Central Bank of Bangladesh through a series of international transactions?

    <p>USD 1 billion</p> Signup and view all the answers

    What was one of the most notorious incidents involving rogue trading activities?

    <p>The Barings Bank trader Nick Leeson case</p> Signup and view all the answers

    What organization incurred fines for failing to act in accordance with industry laws and regulations?

    <p>Volkswagen</p> Signup and view all the answers

    What kind of risk involves activities such as money laundering and terrorism financing?

    <p>Compliance Risk</p> Signup and view all the answers

    What is credit risk?

    <p>The risk of loss from the failure to make required payments on loans due to an entity</p> Signup and view all the answers

    What is credit default risk?

    <p>The risk of loss when the borrower is unable to pay the loan obligation in full or is 90 days past the due date</p> Signup and view all the answers

    What is concentration risk?

    <p>The risk arising from exposure to a single counterparty or sector, lacking diversification</p> Signup and view all the answers

    Which type of risk is associated with a country’s political instability and macroeconomic performance?

    <p>Country risk</p> Signup and view all the answers

    What is the probability that the lender will not receive the principal and interest payments of a debt required to service the debt extended to a borrower known as?

    <p>Credit risk</p> Signup and view all the answers

    What type of credit risk arises when a corporate or individual borrower fails to meet their debt obligations?

    <p>Credit risk</p> Signup and view all the answers

    What is the main focus of qualitative credit risk analysis?

    <p>Assessing the obligor's willingness to pay</p> Signup and view all the answers

    Which of the following is NOT a factor used to calculate economic capital for credit risk?

    <p>Level of Debt Obligation</p> Signup and view all the answers

    What aspect does the 'character' attribute assess in credit risk analysis?

    <p>Willingness to repay the loan</p> Signup and view all the answers

    In credit risk analysis, what does 'collateral' refer to?

    <p>Real cover for the loan</p> Signup and view all the answers

    What does 'Capacity' assess in credit risk analysis?

    <p>Ability to generate enough money to repay the loan</p> Signup and view all the answers

    Which type of credit analysis focuses more on asset quality and earnings capacity?

    <p>Financial Institution Credit Analysis</p> Signup and view all the answers

    What is the likelihood that a borrower will default on their loan obligations referred to as in credit risk analysis?

    <p>Probability of Default (POD)</p> Signup and view all the answers

    What is used to evaluate the amount of loss exposure that a lender is exposed to at any particular time in credit risk analysis?

    <p>Exposure at Default (EAD)</p> Signup and view all the answers

    What kind of information does quantitative credit risk analysis involve consideration of?

    <p>Past, current, and forecasted financial statements</p> Signup and view all the answers

    What are the limitations of financial statements in credit risk analysis?

    <p>They are merely historical in scope and subject to diverse interpretations</p> Signup and view all the answers

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