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CISI – Managing Operational Risk in Financial Institutions – Joshua – Quiz 4
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Question 1 of 10
1. Question
Interest rates are particularly important to companies and governments because they are the key ingredient in the cost of a capital When interest rates increase, the impact can be significant on borrowers. Interest rates also affect prices in other financial markets, so their impact is far-reaching. What then are the factors that influence the level of market interest rates? (Select all that applies
Correct
Interest rates are particularly important to companies and governments because they are the key ingredient in the cost of capital. Most companies and governments require debt financing for expansion and capital projects. When interest rates increase, the impact can be significant on borrowers. Interest rates also affect prices in other financial markets, so their impact is far-reaching. Factors that influence the level of market interest rates include:
Expected levels of inflation
General economic conditions
Monetary policy and the stance of the central bank
Foreign exchange market activity
Foreign investor demand for debt securities
Levels of sovereign debt outstanding
Financial and political stabilityIncorrect
Interest rates are particularly important to companies and governments because they are the key ingredient in the cost of capital. Most companies and governments require debt financing for expansion and capital projects. When interest rates increase, the impact can be significant on borrowers. Interest rates also affect prices in other financial markets, so their impact is far-reaching. Factors that influence the level of market interest rates include:
Expected levels of inflation
General economic conditions
Monetary policy and the stance of the central bank
Foreign exchange market activity
Foreign investor demand for debt securities
Levels of sovereign debt outstanding
Financial and political stability -
Question 2 of 10
2. Question
Factors that influence the level of interest rates also influence exchange rates among floating or market-determined currencies.Currencies are very sensitive to changes or anticipated changes in interest rates and to sovereign risk factors. The following are the key drivers that affect exchange rates except
Correct
Foreign exchange rates are determined by supply and demand for currencies.Supply and demand, in turn, are influenced by factors in the economy, foreign trade, and the activities of international investors.
Capital flows, given their size and mobility, are of great importance in determining exchange rates. Some of the key drivers that affect exchange rates include:
• Interest rate differentials net of expected inflation
• Trading activity in other currencies
• International capital and trade flows
• International institutional investor sentiment
• Financial and political stability
• Monetary policy and the central bank
• Domestic debt levels (e.g., debt-to-GDP ratio)
• Economic fundamentalsIncorrect
Foreign exchange rates are determined by supply and demand for currencies.Supply and demand, in turn, are influenced by factors in the economy, foreign trade, and the activities of international investors.
Capital flows, given their size and mobility, are of great importance in determining exchange rates. Some of the key drivers that affect exchange rates include:
• Interest rate differentials net of expected inflation
• Trading activity in other currencies
• International capital and trade flows
• International institutional investor sentiment
• Financial and political stability
• Monetary policy and the central bank
• Domestic debt levels (e.g., debt-to-GDP ratio)
• Economic fundamentals -
Question 3 of 10
3. Question
Which of the following options below define Absolute risk?
Correct
Absolute risk (also known as delta risk) arises from exposure to changes in the price of the underlying asset or index.
Incorrect
Absolute risk (also known as delta risk) arises from exposure to changes in the price of the underlying asset or index.
-
Question 4 of 10
4. Question
Foreign exchange risk can arise from the following except
Correct
Foreign exchange risk can arise from transaction exposure, translation exposure, strategic exposure, or as a result of commodity-based pricing. It may also have a competitive component.
Incorrect
Foreign exchange risk can arise from transaction exposure, translation exposure, strategic exposure, or as a result of commodity-based pricing. It may also have a competitive component.
-
Question 5 of 10
5. Question
Although it might be possible to manage interest rate exposure without derivatives, legal, tax, and regulatory ramifications must be taken into consideration, particularly in foreign countries or for cross-border transactions. Which of the following techniques could be used to reduce interest rate exposure?
Correct
Although it might be possible to manage interest rate exposure without derivatives, legal, tax, and regulatory ramifications must be taken into consideration, particularly in foreign countries or for cross-border transactions. These may prohibit such
transactions or reduce or eliminate the benefit. The following techniques have been used to reduce interest rate exposure and the resulting need for derivatives:
• Global cash netting/in-house bank
• Inter-company lending
• Embedded options in debt
• Changes to payment schedules
• Asset–liability managementIncorrect
Although it might be possible to manage interest rate exposure without derivatives, legal, tax, and regulatory ramifications must be taken into consideration, particularly in foreign countries or for cross-border transactions. These may prohibit such
transactions or reduce or eliminate the benefit. The following techniques have been used to reduce interest rate exposure and the resulting need for derivatives:
• Global cash netting/in-house bank
• Inter-company lending
• Embedded options in debt
• Changes to payment schedules
• Asset–liability management -
Question 6 of 10
6. Question
The following are the participants in the commodity market except
Correct
Participants in the commodities markets generally fall into one of two broad classifications. Dealers make prices to others and often trade speculatively. End users and suppliers are in the commodity business, directly or indirectly, and usually hedge to protect against price and supply fluctuations. These main market participants are:
• Commodity dealers that are active market participants on behalf of their own organizations or clients. Dealers include financial institutions, major commodity producers, commodity trading houses, and commodity trading advisors (CTAs). Speculators exploit arbitrage opportunities or inefficiencies and in doing so provide additional liquidity.
• Consumers of commodities, including manufacturers, refineries, and wholesalers. Commodity consumers are exposed to rising commodities prices that increase costs of manufacture or production and reduce profit.
• Suppliers of commodities, including farmers and growers, and mining and exploration companies. Suppliers typically require protection against decreases in the market price of a commodity that reduce revenues. Commodity producers often cite commodity
price risk as the most critical factor to their economic survival.Incorrect
Participants in the commodities markets generally fall into one of two broad classifications. Dealers make prices to others and often trade speculatively. End users and suppliers are in the commodity business, directly or indirectly, and usually hedge to protect against price and supply fluctuations. These main market participants are:
• Commodity dealers that are active market participants on behalf of their own organizations or clients. Dealers include financial institutions, major commodity producers, commodity trading houses, and commodity trading advisors (CTAs). Speculators exploit arbitrage opportunities or inefficiencies and in doing so provide additional liquidity.
• Consumers of commodities, including manufacturers, refineries, and wholesalers. Commodity consumers are exposed to rising commodities prices that increase costs of manufacture or production and reduce profit.
• Suppliers of commodities, including farmers and growers, and mining and exploration companies. Suppliers typically require protection against decreases in the market price of a commodity that reduce revenues. Commodity producers often cite commodity
price risk as the most critical factor to their economic survival. -
Question 7 of 10
7. Question
The following are the positive attributes that an organization must develop in order for it to achieve a strong risk culture except?
Correct
Positive attributes of a strong risk culture include:
⦁ Commonality of purpose, values and ethics: The extent to which an employee’s individual interests, values and ethics are aligned with the organization’s risk strategy, appetite, tolerance and approach.
⦁ Universal adoption and application: Whether risk is considered in all activities, from strategic planning to day-to-day operations, in every part of the organization.
⦁ A learning organization: How and if the collective ability of the organization to manage risk more effectively is continuously improving.
⦁ Timely, transparent and honest communications: People are comfortable talking openly and honestly about risk, using a common risk vocabulary that promotes shared understanding.Incorrect
Positive attributes of a strong risk culture include:
⦁ Commonality of purpose, values and ethics: The extent to which an employee’s individual interests, values and ethics are aligned with the organization’s risk strategy, appetite, tolerance and approach.
⦁ Universal adoption and application: Whether risk is considered in all activities, from strategic planning to day-to-day operations, in every part of the organization.
⦁ A learning organization: How and if the collective ability of the organization to manage risk more effectively is continuously improving.
⦁ Timely, transparent and honest communications: People are comfortable talking openly and honestly about risk, using a common risk vocabulary that promotes shared understanding. -
Question 8 of 10
8. Question
In developing an appropriate charter for a board risk management committee, what processes should be considered to enable the committee effectively discharge its obligations? (Select all that applies)
Correct
In developing an appropriate charter for a board risk management committee regard should be given to certain processes that enable effective discharge of charter obligations. These include, but may not necessarily be limited to:
• Establishing a direct reporting line between the committee and the most senior risk executive in the insurer
• Scheduling regular one-on-one meetings between the chair of the committee and the most senior risk executive outside of formal committee meetings
• Setting aside time in formal meetings for private meetings without executive management being present.Incorrect
In developing an appropriate charter for a board risk management committee regard should be given to certain processes that enable effective discharge of charter obligations. These include, but may not necessarily be limited to:
• Establishing a direct reporting line between the committee and the most senior risk executive in the insurer
• Scheduling regular one-on-one meetings between the chair of the committee and the most senior risk executive outside of formal committee meetings
• Setting aside time in formal meetings for private meetings without executive management being present. -
Question 9 of 10
9. Question
Care should be taken when constructing incentive programs that include a component aimed at improving risk management practices or extracting value through better risk management. The following are key considerations except?
Correct
Improving risk management practices or extracting value through better risk management. Key considerations include:
• Getting the balance right and, for example, ensuring that the relative size of the incentive for improving risk management does in fact motivate targeted individuals and/or groups
• Deciding which individuals or groups to include. If senior management reward systems are not inclusive of a risk management goal then the insurer will struggle to evolve its ERM framework
• Ensuring that incentive programs are targeted at the appropriate level of staff and that they do not have unintended consequences. For example, linking staff incentives to results of staff surveys/feedback is likely to skew the results of the surveys.Incorrect
Improving risk management practices or extracting value through better risk management. Key considerations include:
• Getting the balance right and, for example, ensuring that the relative size of the incentive for improving risk management does in fact motivate targeted individuals and/or groups
• Deciding which individuals or groups to include. If senior management reward systems are not inclusive of a risk management goal then the insurer will struggle to evolve its ERM framework
• Ensuring that incentive programs are targeted at the appropriate level of staff and that they do not have unintended consequences. For example, linking staff incentives to results of staff surveys/feedback is likely to skew the results of the surveys. -
Question 10 of 10
10. Question
The insurer’s risk function should therefore develop close, transparent and systematic relationships with functions such as strategy, finance, product development, IT, legal and human resources, amongst others. Which of the following are the ways that the insurer’s risk function can become involved in new activities? (Select all that applies)
Correct
The insurer’s risk function should therefore develop close, transparent and systematic relationships with functions such as strategy, finance, product development, IT, legal and human resources, amongst others.
There are a number of ways that the insurer’s risk function can become involved in new activities, including:
• Involvement in due diligence work where the skills of the actuary and other risk management professionals can be utilised to help identify and assess risks and to assist with valuation and modelling aspects
• Working with the insurer’s strategy team to ensure the strategy incorporates an appropriate assessment of risks attaching to the chosen strategic direction
• Preparing and/or facilitating risk assessments for major projects or new product launches
• Managing and coordinating engagement with relevant supervisors with respect to pursuit of new activitiesIncorrect
The insurer’s risk function should therefore develop close, transparent and systematic relationships with functions such as strategy, finance, product development, IT, legal and human resources, amongst others.
There are a number of ways that the insurer’s risk function can become involved in new activities, including:
• Involvement in due diligence work where the skills of the actuary and other risk management professionals can be utilised to help identify and assess risks and to assist with valuation and modelling aspects
• Working with the insurer’s strategy team to ensure the strategy incorporates an appropriate assessment of risks attaching to the chosen strategic direction
• Preparing and/or facilitating risk assessments for major projects or new product launches
• Managing and coordinating engagement with relevant supervisors with respect to pursuit of new activities