According to Basel II what constitutes Tier 3 capital?

• A.Debt capital that can only be used to support market risk in the trading book of the bank.
• B.Subordinated debt issues that pay interest.
• C.Hybrid debt capital instruments that are similar to equity.
• D.Preference shares that confer on issuers the right to defer payment of a fixed dividend.

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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.III, IV
• C.I, II
• D.I

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Arnold Wu owns a floating rate bond. He is concerned that the rates may fall in the future decreasing his
payment amount. Which of the following instruments should he buy to hedge against the fall in interest rates?

• A.Index amortizing swap
• B.Interest rate cap
• C.Interest rate floor
• D.Interest rate swap that receives floating and pays fixed

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Bank G has a 1-year VaR of USD 20 million at 99% confidence level while bank H has a 1-year VaR of USD
10 million at 95% confidence level. Which bank is in a more risky position as measured by VaR?

• A.Both banks are equally risky since the measurements are with the same confidence level.
• B.Bank G is taking twice the risk of bank H as measured by VaR.
• C.Since the confidence levels are not the same we cannot make any conclusions.
• D.Bank H is taking twice the risk of bank G as measured by VaR.

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A trader attempts to hold long positions when markets are rising and hold short positions when markets are
falling. Which one of the following four trading styles is she likely to use?

• A.Black box trading
• B.Contrarian trading
• C.Technical trading
• D.Market timing trading

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