［2008］Topic 70: The Report of the Counterparty Risk Management Policy Group following, complex, across, common, market

nayizhenfeng

 

AIM 1: Identify the similarities across past major financial shocks.

1、Which of the following is NOT one of the three traits common to past major financial shocks?

A) Reliance on overly complex pricing models. 

B) A lack of market liquidity. 

C) A sharp decline in asset prices due to a triggering event. 

D) Leverage concerns.

nayizhenfeng

 

The correct answer is A

 

The three common traits associated with past major financial shocks are:

1、a triggering event leads to a sharp decline in asset prices.

2、liquidity pressures.

3、leverage concerns.

nayizhenfeng

 

 

2、Which of the following are common traits of past financial shocks?

      I. There is an event that sets off a sharp decline in asset prices.

     II. A large number of firms fail or go out of business.

    III. Institutions become reluctant to grant credit.

    IV. A large number of firms seek to sell risky assets, leading to an excess supply of liquidity.

 

A) I, II, and III. 

B) II, III, and IV.  

C) I, II, and IV. 

D) I and III.

 

nayizhenfeng

 

The correct answer is D

 

There are three common traits among past financial shocks: a triggering event sets off a sharp decline in asset prices, firms sell risky assets, causing market liquidity to effectively dry up, and institutions question previously granted margin, and become reluctant to grant additional margin. Note that a financial crisis does not necessitate a large number of firms going out of business (it may only be one or two major firms), and it is excessive d

nayizhenfeng

 

AIM 2: List and discuss fundamental approaches that anticipate financial shocks and limit their severity.

1、The single most important factor in determining whether a financial disturbance becomes a systematic financial shock is:

A) credit risk. 

B) the dependence across institutions on similar valuation models. 

C) the evaporation of market liquidity.

D) the failure of most risk measures to capture tail events. 

nayizhenfeng

 

 The correct answer is A

 

Credit risk is the single most important factor in determining whether a financial disturbance becomes a systematic financial shock. Lack of liquidity is the second most important factor.

nayizhenfeng

 

AIM 3: List and discuss recommendations and guiding principles concerning risk management and risk related disclosure practices, financial infrastructure, complex financial products, and other emerging issues in financial markets.

 

1、Which of the following is the most effective way to address differences in counterparty credit quality?

A) Including a force majeure provision in a derivative transaction.  

B) Using netting arrangements.  

C) Using sophisticated credit pricing models.  

D) Establishing initial margin requirements. 

nayizhenfeng

 

The correct answer is D

 

Using collateral is an effective way to address differences in counterparty transparency and credit quality, and initial margin requirements are one of the key forms of collateral (see Recommendation 5 in CRMPG II report). Note that using credit pricing models and netting arrangements are also important credit risk mitigants, however, the models will help determine credit exposure, while netting arrangements will match payments to reduce exposure – neither addresses credit quality differences. A force majeure provision addresses contract terms in the event of an earthquake, war, terrorist attack, or other disaster.

nayizhenfeng

 

2、Which of the following describes the most effective means to address the industry-wide problem of unsigned confirmations for credit derivatives?

A) Eliminate the practice of trade assignments.  

B) Pre-trade reviews.  

C) Use of collateral. 

D) Straight-through processing. 

nayizhenfeng

 

The correct answer is D

 

Unsigned confirmations refer to the operational breakdown where transactions are not agreed to or recognized in writing. It is an industry wide problem that represents a major operational risk. Straight-through processing (STP) refers to the automation of trading systems where confirmation matching would be automatic.