From the bank's point of view, repricing the retail debt portfolio will introduce risks of fluctuations in:
I. Duration
II. Loss given default
III. Interest rates
IV. Bank spreads

• A.II
• B.I
• C.III, IV
• D.I, II

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What is the explanation offered by the liquidity preference theory for the upward sloping yield curve shape?

• A.The short term rates must fall enough to get some borrowers to borrow long-term and some lenders to
  lend short-term.
• B.The long term rates must rise enough to get some borrowers to borrow short-term and some lenders to
  lend long-term.
• C.The long term rates must rise enough to get some borrowers to borrow long-term and some lenders to
  lend short-term.
• D.The short term rates must rise enough to get some borrowers to borrow short-term and some lenders to
  lend long-term.

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Which one of the following four statements regarding commodity derivative risks is INCORRECT?

• A.Calendar spreads represent a special case of basis risk and occur when the relative prices of commodity
  futures do not come in alignment and the trader becomes exposed to the absolute price movements.
• B.In most commodities, the longest term contracts are the most volatile, while the shortest term forward
  contract are the least volatile.
• C.Some commodities can be both in backwardation and a have a strong seasonal element.
• D.Because of the different demand/supply balance in each region and the cost of transporting the oil
  between regions, a tanker of Brent crude oil in the UK will have a different value to a UK buyer than a
  tanker of Arab light crude oil in Singapore, which results in the basis risk.

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Banks duration match their assets and liabilities to manage their interest risk in their banking book. A bank has
$100 million in interest rate sensitive assets and $100 million in interest rate sensitive liabilities. Currently the
bank's assets have a duration of 5 and its liabilities have a duration of 2. The asset-liability management
committee of the bank is in the process of duration-matching. Which of the following actions would best
match the durations?

• A.Decrease the duration of liabilities by 1 and decrease the duration of assets by 1.
• B.Decrease the duration of liabilities by 1 and increase the duration of assets by 1.
• C.Increase the duration of liabilities by 2 and increase the duration of assets by 1.
• D.Increase the duration of liabilities by 2 and decrease the duration of assets by 1.

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Alpha Bank determined that Delta Industrial Machinery Corporation has 2% change of default on a one-year
no-payment of USD $1 million, including interest and principal repayment. The bank charges 3% interest rate
spread to firms in the machinery industry, and the risk-free interest rate is 6%. Alpha Bank receives both
interest and principal payments once at the end the year. Delta can only default at the end of the year. If Delta
defaults, the bank expects to lose 50% of its promised payment. Hence, the loss rate in this case will be

• A.1%
• B.5%
• C.3%
• D.10%

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