1- Which of the following transactions would have the effect of lengthening the average duration of

assets in the banking book?

A : buying futures contracts on 30-year German Government bonds
B : selling futures contracts on 30-year German Government bonds
C : buying put options on 30-year German Government bonds
D : buying a 3x6 forward rate agreement
2- What is a ‘duration gap’?
A : the average maturity of liabilities on a balance sheet
B : the difference between the duration of assets and liabilities
C : the difference between the duration of the longest-held and shortest-held liabilities on the
D : the average maturity of the portfolio on the asset side of a balance sheet
3- Which statement about modern matched-maturity transfer pricing in banks is correct?
A : It is now a widely accepted standard that banks should use a single representative transfer
B : Modern matched-maturity pricing systems include an additional liquidity surcharge that is
C : Matched-maturity transfer prices should represent a weighted average cost of capital that
D : Modern matched-maturity systems differentiate transfer prices by the maturity of the
4- Supervisors would generally consider interest rate risk exposure in the banking book excessive
beginning at what level of losses given a +1- 200 bps market rate movement?
A : > 2% of 6 months forward earnings
B : > 20% of regulatory capital
C : <10% of regulatory capital
D : < 5% of 12 months forward earnings
5- Which one of the following statements is incorrect? Hedge accounting of an existing position no
longer applies when:
A : the trader acquires additional exposure in the hedged item.
B : the hedging instrument is sold, terminated or exercised.
C : the hedged item is sold or settled.
D : a hedge fails the effectiveness test.
6- Which of the following is a function of asset and liability management (ALM)?
A : coordinated limit management of a financial institution’s credit portfolio
B : running a matched trading book
C : monitoring credit quality of assets and establishing a early warning system
D : managing the financial risk of the bank by protecting it from the adverse effects of changing
7- Which of the following statements is correct?
A : Unilateral collateral obligations to sovereign counterparties provide liquidity to banks.
B : Under Basel III commercial banks are most likely to incur lower costs to service their sovereign
C : While banks usually do not call for collateral from sovereign counterparties, they must provide
D : Uncollateralised exposures to sovereign counterparties will not require additional regulatory
8- Which one of the following statements about interest rate movements is true?
A : An upward parallel shift of interest rates will cause a loss of income if the rate-sensitivity of a
B : A bank will lose income if it has more rate-sensitive liabilities than rate-sensitive assets.
C : Falling interest rates will always result in mark-to-market profits on short positions in fixed rate
D : Rising interest rates can result in mark-to-market losses on fixed-rate assets.
9- A euro zone-based bank that is asset-sensitive to market interest rate changes might reduce interest
rate risk by:
A : entering into a pay fixed I receive variable standard interest rate swap
B : entering into a receive fixed I pay variable standard interest rate swap
C : entering into a pay fixed / receive variable amortizing interest rate swap
D : entering into a GBP/USD FX swap
10- Which of the following statements about leverage ratios under Basel III is correct?
A : The leverage ratio is the ratio of the bank’s Tier 1 Capital to total assets of the bank, excluding
B : The purpose of introducing a leverage ratio is to avoid the build-up of excess leverage that
C : The leverage ratio under Basel III must be higher than 4%.
D : The leverage ratio is the ratio of the bank’s Tier 1 and Tier 2 Capital to total assets of the bank,
11- Complete the following sentence. If a bank has an asset repricing in 6 months funded by a liability
repriced in 3 months:
A : the bank would benefit from higher interest rates
B : the bank could hedge this interest rate risk with a 3x6 derivative
C : the bank will make mark-to-market losses if rates decrease
D : the bank could hedge this interest rate risk by selling a 6x9 derivative
12- The Liquidity Coverage Ratio (LCR) in Basel III:
A : is a new rule that compares liquid asset levels in banks to their available equity capital
B : spells out a modernized system for calculating the required minimum reserve that banks must
C : compares liquid and reliably liquidating assets to expected cash outflows from specified run-off
D : tied directly into the internal ratings-based approach for determining the liquidity of creditcounte
13- What is interest rate immunization in the context of bank gap management?
A : the strategy of holding more interest rate sensitive assets than interest rate sensitive liabilities
B : the strategy of holding fewer interest rate sensitive assets than interest rate sensitive liabilitie
C : reducing the size of the balance sheet
D : structuring a bank’s portfolio so that its net interest revenue and/or the market value of its
14- The weighted average duration of liabilities can be increased by:
A : buying additional 30-year German Government bonds
B : selling futures contracts on 30-year German Government bonds
C : buying futures contracts on 10-year German Government bonds
D : exercising an early repayment option on a long-term senior borrowing
15- Prudential regulation of banking book liquidity risk is dealt with by the Basel Committee (Basel II /
Basel III) in the context of:
A : capital adequacy regulations in Pillar 1
B : market risk and Tier 3 capital elements
C : internal management procedures subject to supervisory review in Pillar 2
D : market discipline, disclosure and transparency in Pillar 3
16- VaR increases with:
A : lower correlation of underlying risk factors
B : a shorter time horizon
C : a lower confidence level
D : a higher confidence level
17- Under Basel Rules, the Basic Indicator Approach is a regulatory framework for:
 A : liquidity risk
B : business risk
C : operational risk
D : funding risk
18- When considering interest rate risk in the banking book, retail demand deposits without fixed
contractual maturity:
A : should be assumed to have zero duration
B : should be treated like other instantly variable rate liabilities, such as overnight money market
C : should be assumed to have a low correlation with money market reference rates
D : represent a minor contributor to interest rate risk and can safely be disregarded
19- If the duration gap is zero, how will a small parallel shift in interest rates affect the market value of
the bank’s equity?
A : If interest rates rise, the market value of equity will increase
B : If interest rates rise, the market value of equity will decrease C. The bank is immunised from
C : The market value of equity will decrease due to an increase in interest rates
D : none of these
20- Which of the following statements is correct regarding duration?
A : It is a measure of the average price of a financial instrument.
B : It doesn’t take into account the timing and market value of cash flows.
C : It increases if the average coupon increases.
D : It decreases as maturity decreases
21- Using reprising gap analysis, a bank’s balance sheet is considered liability-sensitive to market interest
rate changes, if:
A : more liabilities than assets will be reprised in the near term
B : more assets than liabilities will be reprised in the near term
C : more assets than liabilities have variable rates or short residual maturities
D : non-interest bearing liabilities are greater than non-interest bearing assets
22- Which of the following statements about the Liquidity Coverage Ratio is correct?
A : The LCR is a measure to ensure that the reserve of high quality liquid assets is sufficient to
B : the ratio (cash outflow in a 30-day stress period divided by high quality liquid assets) has to be
C : Covered bonds are class 1 assets.
D : Obligations issued by central banks or government agencies are class 2 assets.
23- Which one of the following statements about mark-to-model valuation is correct?
A : Mark-to-model valuation is used for exchange-traded positions to ensure correct pricing.
B : Asset managers are not allowed to use mark-to-model valuation.
C : Mark-to-model valuation is used for complex financial instruments; it is always accurate and in
D : Mark-to-model valuation refers to prices determined by financial models, rather than actual
24- A closed position in a particular foreign currency exists:
A : when the net spot position plus the forward position plus the delta equivalent of the foreign
B : when the forward purchases of a foreign currency are equivalent to the equity position in that
C : when the reverse repurchases of foreign currency are equal to the forward purchases of the
D : when the maturity structure of the assets in one currency is closely matched to the maturity
25- Which of the following are all goals of the originator of securitized assets?
A : to increase funding diversification , to reduce funding costs, to achieve regulatory and
 B : to increase funding diversification , to reduce funding costs, to achieve regulatory and
C : to increase funding diversification , to reduce operational risk, to achieve regulatory and
D : to increase funding diversification , to reduce operational risk, to achieve regulatory and
26- Which of the following statements is correct?
A : With liquidity transfer pricing (LTP) banks attribute the costs, benefits and risks of liquidity to
B : With liquidity transfer pricing (LTP) banks are monitoring and diversifying their funding base
C : With liquidity transfer pricing (LTP) banks are agreeing with external liquidity providers on the fa
D : Liquidity transfer pricing charges providers of funds for the cost of liquidity and users of funds f
27- The Liquidity Coverage Ratio imposed by Basel III requires a bank:
A : to keep enough highly liquid assets to cover its net liabilities for the next 10 days to guard again
B : to keep enough highly liquid assets to cover its net liabilities for the next 30 days to guard again
C : to keep enough highly liquid assets to cover its net liabilities for the next 60 days to guard again
D : to retain enough liquidity to cover its assets against severe default risk
28- Does the slope of the interest yield curve typically have a substantial impact on a bank’s net interest
margin?
A : No, it doesn’t, since the slope of the yield cure is unrelated to the spread between short-term and
B : No, it doesn’t. There isn’t any link at all between the slope of the interest yield curve and a bank
C : Yes it does. In banking, long-term rates usually apply to bank deposits and money market
borrowings
D : Yes it does. Long-term rates usually apply to a bank’s assets (loans, securities, etc.) and the shor
29- A purchased 3X6 FRA should be reported in a gap report as
A : a given deposit with a term of six months
B : a taken deposit with a term of three months
C : a given deposit with a term of three months and a taken deposit with a term of six months
D : a taken deposit with a term of three months and a given deposit with a term of six months
30- What would be the strategy for a bank if it is unable to speculate on interest rates and/or unable to
absorb market risk?
A : to run a zero gap
B : to hold more interest rate sensitive assets than interest rate sensitive liabilities
C : to reduce the size of the balance sheet
D : to hold fewer interest rate sensitive assets than interest rate sensitive liabilities
31- Net funding requirements in liquidity management are determined by means of:
A : adding up expected vault cash outflows, ATMs and other cash points operated by the institution
acros
B : establishing a forward cash flow plan that takes account of all contractual and behavioral cash
flow
C : the net cash flow from investment activities in the IFRS consolidated Statement of Cash Flows for
pr
D : subtracting short-term liabilities from short-term assets
32- Which of the following both provide credit enhancement to a true-sale securitization?
A : reserve account and third-party insurance
B : subordinated tranches and creditworthiness of the originator
C : creditworthiness of the originator and third-party insurance
D : reserve account and interest rate hedging
33- Which of the following situations would be most likely to result in a negative mark-to-market for a
bank borrowing short term and lending long term?
A : credit spread tightening of the long term position
B : if the yield curve is inverted
C : if the yield curve becomes steeper
D : if there is a downward parallel shift in the yield curve
34- The primary issue for insuring prudent liquidity management in accord with the guidance provided
by the Basel Committee (Basel II I Basel III) is:
A : Tier 3 capital requirements held against liquidity risk.
B : The nature and amount of high quality liquid assets a bank holds.
C : Central bank internal management processes regarding open market operations.
D : The transparent disclosure of illiquid on-balance sheet liabilities.
35- Which of the following statements about Credit Default Swaps (CDS) is correct?
A : CDS are used to recover funds from defaulted swap counterparties.
B : CDS provide protection against specified credit events to the party receiving the CDS premium
payment
C : CDS provide protection against the default of the trade counterparty that buys the CDS.
D : CDS provide compensation to the protection buyer, should a specified credit event occur to a third
p
36- Which of the following is not the responsibility of the asset and liability committee (ALCO)?
A : ensure that compliance is carried out efficiently
B : set limits on borrowing in the short-term markets to fund long-term lending
C : develop, evaluate, monitor and approve strategies related to risk due to imbalances in the asset
D : report to the board of directors
37- Which of the following is part of the typical scope of Asset Liability Management (ALM)?
A : Selling distressed assets and investing in bank liabilities trading at distressed levels.
B : Making sure that fixed assets are depreciated according to the applicable tax code.
C : Planning the maturity structure and net funding requirements arising from banking book and
trading b
D : Planning the liability structure and net funding requirements arising from trading book assets carri
38- All other things being equal, if a bank borrows short and lends long what is the effect on the liquidity
risk of the bank?
A : positive
B : changes only when interest rates levels are high
C : negative
D : changes only when interest rates levels are low
39- Which of the following statements regarding economic capital is correct?
A : Economic capital is calculated externally and is the amount of capital the firm should have to
suppo
B : Economic capital is calculated on an expected shortfall basis with a specific time horizon and confi
C : Economic capital is used for measuring and reporting risks across a financial organization.
D : Economic capital is always lower than regulatory capital because of the more adequate modelling
of c
40- Who typically communicates the bank’s asset and liability management policy internally?
 A : the management board
B : the chief risk officer
C : the bank’s ALCO
D : the Risk and Capital Committee
41- You have prepared the following economic capital table for the next ALCO meeting: For which of the
following risks should you consider actions?
A : credit risk
B : interest rate risk
C : liquidity risk
D : currency risk
42- All other things being equal the interest rate risk of a fixed coupon bond is:
A : greater, the higher the coupon and the longer the term
B : greater, the lower the coupon and the longer the term
C : lower, the lower the coupon and the shorter the term
D : lower, the higher the coupon and the longer the term
43- You want to hedge your deposit against falling interest rates. Which of the alternatives below are
appropriate for this purpose?
A : Selling a Money Market Future and/or selling a Forward Rate Agreement
B : Buying a Money Market Future and/or buying a Forward Rate Agreement
C : Selling a Money Market Future and/or buying a Forward Rate Agreement
D : Buying a Money Market Future and/or selling a Forward Rate Agreement
44- If the yield curve is upward sloping, a bank would not profit from:
A : borrowing short and lending long
B : borrowing long and lending short
C : paying a higher rate on deposits than the market
D : increasing the bank leverage
45- Issues relating to the bank’s liquidity management are commonly discussed in:
A : the Asset Liability Management Committee (ALCO)
B : the Financial Resources and Compensation Committee
C : the Credit Committee
D : the Federal Open Market Committee
46- Which of the following transactions would have the effect of shortening the average duration of
liabilities in the banking book?
A : selling holdings of 30-year German Government bonds
B : replacing retail savings accounts with 3-month borrowings under repo
C : selling futures contracts on 30-year German Government bonds
D : placing a 20-year covered bond in the market
47- What is Funds Transfer Pricing in the ALM process?
A : A maturity analysis of a bank’s interest-bearing assets and interest-bearing liabilities.
B : A method used to measure how much each source of funding is contributing to overall
profitability.
C : A calculation of the spread between the duration of the interest-bearing assets and the interest
bear
D : The evaluation and management of the gap between a bank’s volume of loans and deposits.
48- Which of the following statements about the Net Stable Funding Ratio is correct?
A : Assets are classified with an available stable funding factor (ASF).
B : Liabilities are classified with a required stable funding factor (RSF).
C : The ratio of available funding to required funding has to be higher than 50%n
D : Equity has an available stable funding factor of 100%.
49- A bank expects interest rates to fall with a parallel downward shift in the yield curve. What action
should the bank take, if it wants to benefit from this view?
A : increase the maturity of its liabilities
B : reduce the maturity of its asset portfolio
C : run a zero gap
D : lengthen the maturity of its asset portfolio
50- Which of the following statements is correct?
A : Hedging a long bond position with payer’s swap involves basis risk
B : Hedging the credit risk of an asset swap package with a credit default swap has no basis risk
C : Basis risk is a result only of maturity mismatches
D : Basis risk is a result only of duration mismatches.
51- What is the purpose of the Liquidity Coverage Ratio?
A : to mitigate market replacement risk across markets
B : to eliminate funding mismatches by establishing a minimum acceptable amount of stable
C : to ensure that banks have enough high-quality liquid assets to survive a 30-day period of acute
D : to minimize duration risk on a bank’s assets over a one-year horizon
52- When constructing a gap report, how would a EUR 25,000,000.00 long position in 6x12 FRA be
categorized?
A : as a EUR 25,000,000.00 6-month liability and a EUR 25,000,000.00 12-month asset
B : as a EUR 25,000,000.00 12-month liability and a EUR 25,000,000.00 6-month asset
C : as a EUR 12,500,000.00 6-month liability and a EUR 12,500,000.00 12-month asset
D : as a EUR 12,500,000.00 6-month asset and a EUR 12,500,000.00 12-month liability
53- What would happen to a bank’s net interest income if it ran a zero gap in an environment of
decreasing interest rates?
A : Net interest income would increase slightly.
B : Net interest income would increase considerably.
C : Net interest income would decrease.
D : Net interest income would hardly change at all.
54- What is a hedge?
A : A means by which to reduce a risk
B : An equal and opposite risk
C : A riskless transaction
D : A means of cancelling a deal
55- Which of the following statements about hedge accounting is not correct?
A : A prerequisite for hedge accounting is that a hedging instrument is designated as an offset to
B : Hedge accounting enables gains and losses on a hedging instrument to be recognised in the
C : If one of the criteria for hedge accounting is no longer met, there is an option to discontinue
D : Strict criteria must be met at inception and throughout the term of the hedge relationship in
56- Which of the following statements does not explain why banks accept some amount of interest rate
risk?
A : In their function as intermediaries, banks must necessarily accept some degree of interest rate
B : Banks incur interest rate risk to increase income
C : Banks prefer c red it risk to market risk.
D : If banks failed to take on interest rate risk they would not be able to meet the needs of their
57- A payer’s 3-month USD LIBOR swap with a remaining term of five years must be reported as:
A : a five-year liability and a three-month asset
B : a five-year asset and a three-month liability
C : a five-year asset only
D : a three-month liability only
58- What is the principal risk identified by gap management reporting?
A : Currency risk
B : Interest rate risk
C : Operational risk
D : Credit risk
59- A Eurozone-based bank that is liability-sensitive to market interest rate changes might reduce
interest rate risk by:
A : entering into a pay fixed I receive variable standard interest rate swap
B : entering into a receive fixed I pay variable amortizing interest rate swap
C : entering into a EUR/USD FX swap
D : entering into a receive fixed I pay variable standard interest rate swap
60- A sold JUN 3-month STIR-future should be reported in the gap report as of 22 May:
A : as a given deposit with a term of one month and a taken deposit with a term of four months
B : as a taken deposit with a term of one month
C : as a taken deposit with a term of one month and a given deposit with a term of four months
D : as a given deposit with a term of four months
61- To establish and maintain a short position in deliverable securities, you must:
A : Sell
B : Sell and subsequently buy back
C : Sell and borrow
D : Sell, borrow and buy back simultaneously
62- What is the minimum basis on which a BCP should be updated and tested?
A : Every 6 months
B : Yearly
C : Whenever the BCP procedures are changed
D : Every 3 months
63- When performing a gap analysis, into which of the following time buckets should a 5-year floating
rate note with a 6-month LIBOR coupon be slotted?
A : the 6-month bucket
B : the 2.5-year bucket
C : the 5-year bucket
D : It should be weighted and apportioned in each of the time buckets in accord with the periodic
64- Risk capital is intended to ensure that an institution can:
 A: Survive a liquidity crisis
B: Absorb credit losses
C: Absorb any type of unexpected loss
D: Absorb any type of expected loss

Solutions

Sol. 1 : A Sol. 23 : D Sol. 45 : A

Sol. 2 : B Sol. 24 : A Sol. 46 : B

Sol. 3 : D Sol. 25 : B Sol. 47 : B

Sol. 4 : B Sol. 26 : A Sol. 48 : D

Sol. 5 : A Sol. 27 : B Sol. 49 : D

Sol. 6 : B Sol. 28 : D Sol. 50 : A

Sol. 7 : C Sol. 29 : C Sol. 51 : C

Sol. 8 : D Sol. 30 : A Sol. 52 : B

Sol. 9 : B Sol. 31 : B Sol. 53 : D

Sol. 10 : B Sol. 32 : A Sol. 54 : A

Sol. 11 : A Sol. 33 : C Sol. 55 : C

Sol. 12 : B Sol. 34 : B Sol. 56 : C

Sol. 13 : C Sol. 35 : D Sol. 57 : A

Sol. 14 : D Sol. 36 : C Sol. 58 : B

Sol. 15 : B Sol. 37 : C Sol. 59 : A

Sol. 16 : C Sol. 38 : C Sol. 60 : A

Sol. 17 : B Sol. 39 : C Sol. 61 : C

Sol. 18 : C Sol. 40 : C Sol. 62 : B

Sol. 19 : C Sol. 41 : C Sol. 63 : A

Sol. 20 : D Sol. 42 : B Sol. 64 : C

Sol. 21 : A Sol. 43 : D

Sol. 22 : A Sol. 44 : B