ThetaBank has extended substantial financing to two mortgage companies, which these mortgage lenders use
to finance their own lending. Individually, each of the mortgage companies has an exposure at default (EAD)
of $20 million, with a loss given default (LGD) of 100%, and a probability of default of 10%. ThetaBank's risk
department predicts the joint probability of default at 5%. If the default risk of these mortgage companies were
modeled as independent risks, what would be the probability of a cumulative $40 million loss from these two
mortgage borrowers?

• A.1%
• B.0.1%
• C.10%
• D.0.01%

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The skewness of ABC company's stock returns equal -1.5. What is the correct interpretation of this?

• A.It indicates higher relative probability of extreme events than non-extreme events compared to estimates
  from a normal distribution.
• B.It indicates higher relative probability of negative returns compared to estimates derived from a normal
  distribution.
• C.It indicates lower probability of extreme negative events compared to the normal distribution.
• D.It indicates that the returns are indeed normally distributed.

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A risk manager has a long forward position of USD 1 million but the option portfolio decreases JPY 0.50 for
every JPY 1 increase in his forward position. At first approximation, what is the overall result of the options
positions?

• A.The option positions hedge the forward position by 50%.
• B.The options positions hedge the forward position by 25%.
• C.The option positions hedge the forward position by 100%.
• D.The option positions hedge the forward position by 75%.

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Which of the following reports have been suggested by the FDIC that banks should produce in addition to the
usual probabilistic analysis and stress tests in order to gauge liquidity issues?
I. Cash flow gaps
II. Funding availability
III. Critical assumptions used in credit projections

• A.I, II, III
• B.I, II
• C.I
• D.I, III

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To hedge equity exposure without buying or selling shares of stock or otherwise rebalancing the portfolio, a
risk manager could initiate

• A.A short total return swap position.
• B.A long debt-for-equity swap.
• C.A long total return swap position.
• D.A short debt-for-equity swap.

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