1. What does market risk primarily refer to in banking?
A. Risk arising from internal fraud
B. Risk related to operational failures
C. Risk of losses due to changes in market prices
D. Risk due to customer default
Market risk refers to the potential for losses in a bank's portfolio due to changes in market prices, such as interest rates, exchange rates, equity prices, and commodity prices.
2. Which of the following is an example of market risk for banks?
A. Employee embezzlement
B. Loss due to fluctuation in interest rates
C. Default by a borrower
D. Cyberattack on bank systems
Market risk arises from changes in market variables. Interest rate changes can affect bond portfolios, loans, and investments, making it a primary source of market risk for banks.
3. Which statement correctly describes market risk management in banks?
A. It involves identifying, measuring, monitoring, and controlling potential losses from market fluctuations
B. It deals only with operational losses from employees
C. It is concerned with credit assessment of borrowers
D. It focuses exclusively on liquidity risk
Market risk management includes identifying sources of market risk, measuring potential impact, monitoring exposures, and implementing controls to mitigate losses due to market movements.
4. Which of the following factors contributes to market risk?
A. Customer default on loans
B. Operational failures in bank branches
C. Employee negligence
D. Fluctuations in interest rates, foreign exchange rates, and equity prices
Market risk arises due to changes in market variables such as interest rates, exchange rates, and equity or commodity prices, which affect the value of a bank's trading and investment portfolios.
5. Value at Risk (VaR) is commonly used in banks to:
A. Measure creditworthiness of borrowers
B. Estimate potential losses in trading portfolios due to market risk
C. Monitor operational efficiency of bank branches
D. Assess customer satisfaction
Value at Risk (VaR) is a statistical technique used to measure and quantify the potential loss in value of a portfolio due to market risk over a defined period for a given confidence interval.
6. What is the primary purpose of a market risk management framework in banks?
A. To manage operational failures
B. To ensure compliance with tax regulations
C. To systematically identify, measure, monitor, and control market risk
D. To improve customer satisfaction
A market risk management framework provides a structured approach for banks to identify, quantify, monitor, and mitigate losses arising from changes in market variables such as interest rates, exchange rates, and equity prices.
7. Which of the following is a key component of a market risk management framework?
A. Customer grievance redressal system
B. Policies, procedures, limits, and reporting mechanisms
C. Employee training on operational tasks
D. Branch expansion planning
Key components of a market risk management framework include defined policies, operational procedures, risk limits, measurement tools, and reporting systems to manage and control market risk exposure.
8. In a typical bank, which department is primarily responsible for managing market risk?
A. Treasury/Risk Management Department
B. Retail Banking Department
C. Human Resources Department
D. IT Department
The Treasury or Risk Management Department is responsible for monitoring and managing market risk, as it deals with trading and investment portfolios exposed to interest rate, foreign exchange, and other market risks.
9. Which of the following best describes the organizational structure for market risk management in banks?
A. Operational staff reporting directly to branch managers
B. Customer service teams managing risk portfolios
C. External auditors controlling risk decisions
D. A dedicated risk management unit reporting independently to senior management or board
Banks typically maintain a dedicated market risk management unit that reports independently to senior management or the board to ensure objectivity and effective control over market risk exposures.
10. Why is independence of the market risk management unit important in banks?
A. To reduce operational costs
B. To ensure unbiased assessment and control of risk exposures
C. To increase branch profitability
D. To handle customer complaints more effectively
Independence ensures that the market risk unit can objectively monitor, measure, and control risk exposures without influence from profit-generating departments, thereby strengthening the bank’s overall risk management framework.
11. What is the first step in managing market risk in banks?
A. Risk Identification
B. Risk Measurement
C. Risk Reporting
D. Risk Mitigation
Risk identification is the first step in market risk management, where banks determine the sources and types of market risk that their trading and investment portfolios are exposed to.
12. Which of the following is an example of risk identification in market risk?
A. Calculating the Value at Risk (VaR)
B. Setting risk limits for trading desks
C. Reporting risk exposures to senior management
D. Identifying exposure to interest rate fluctuations in the bond portfolio
Risk identification involves recognizing areas where the bank may be exposed to market risk, such as interest rate, foreign exchange, equity, or commodity price changes affecting its portfolio.
13. What is the main purpose of market risk measurement?
A. To reduce operational costs
B. To quantify potential losses from market fluctuations
C. To improve customer service
D. To enhance employee efficiency
Market risk measurement aims to quantify the potential financial impact of market price movements on the bank’s portfolio, enabling informed decisions on risk limits and capital allocation.
14. Which of the following is a commonly used technique for measuring market risk?
A. Credit scoring
B. Operational risk mapping
C. Value at Risk (VaR) analysis
D. Employee performance evaluation
Value at Risk (VaR) is a statistical technique used to estimate the maximum potential loss in a portfolio over a defined period and confidence level due to market movements.
15. Which of the following data is essential for measuring market risk?
A. Employee attendance records
B. Branch operational costs
C. Customer satisfaction scores
D. Historical market prices, portfolio positions, and volatility
Measuring market risk requires historical data on market prices, portfolio positions, and volatility to calculate potential losses and perform risk modeling like VaR or stress testing.
16. What is the main purpose of risk monitoring in banks?
A. To identify new customers
B. To track the bank's exposure to market risk continuously
C. To reduce operational costs
D. To monitor employee performance
Risk monitoring ensures that the bank continuously tracks exposures to market variables such as interest rates, foreign exchange, and equity prices to prevent unexpected losses.
17. Which of the following is a key tool used for monitoring market risk?
A. Customer feedback surveys
B. Branch operational checklists
C. Daily risk reports, limit tracking, and Value at Risk (VaR) reports
D. Employee performance appraisals
Monitoring market risk involves using tools such as daily risk reports, tracking exposures against established limits, and evaluating Value at Risk (VaR) to ensure adherence to the risk framework.
18. What does risk control in market risk management aim to achieve?
A. Limit the potential losses from market fluctuations
B. Improve customer service
C. Increase branch profitability
D. Enhance employee efficiency
Risk control focuses on implementing measures such as exposure limits, hedging strategies, and stop-loss policies to minimize potential financial losses due to market movements.
19. Which of the following is a common method for controlling market risk in banks?
A. Employee training programs
B. Customer service enhancements
C. Branch network expansion
D. Setting risk limits and using derivatives for hedging
Banks control market risk by setting risk limits for trading desks, using derivatives like forwards, futures, and options to hedge exposures, and enforcing stop-loss measures.
20. Why is continuous monitoring and control important for market risk?
A. To improve branch operations
B. To prevent unexpected losses and ensure compliance with risk limits
C. To enhance customer satisfaction
D. To reduce operational costs
Continuous monitoring and control help the bank detect deviations from established risk limits promptly and take corrective actions to avoid significant financial losses due to market volatility.
21. What is the main purpose of market risk reporting in banks?
A. To track employee performance
B. To monitor customer complaints
C. To inform senior management about current risk exposures and potential losses
D. To manage branch operations
Market risk reporting provides senior management and the board with accurate and timely information on the bank's exposure to market risk, facilitating informed decision-making and compliance with regulatory requirements.
22. Which of the following is typically included in market risk reports?
A. Employee training schedules
B. Customer satisfaction metrics
C. Branch profitability
D. Portfolio exposures, risk limits, Value at Risk (VaR), and stress test results
Market risk reports provide details such as current portfolio exposures, compliance with risk limits, Value at Risk (VaR), and results from stress tests or scenario analysis to inform management decisions.
23. Why is managing trading liquidity important in market risk management?
A. To reduce employee workload
B. To ensure the bank can meet obligations without significant losses
C. To improve customer service
D. To expand branch network
Managing trading liquidity ensures that the bank can quickly convert assets to cash or settle positions to meet its obligations, reducing the risk of losses during market stress or volatility.
24. Which of the following actions helps in managing trading liquidity risk?
A. Hiring more branch staff
B. Conducting customer surveys
C. Maintaining liquid assets and monitoring funding gaps
D. Reducing loan disbursals
Managing trading liquidity involves maintaining sufficient liquid assets and closely monitoring funding gaps to ensure the bank can meet its short-term obligations even under market stress.
25. How often should market risk reports and liquidity positions typically be reviewed?
A. Once a year
B. Quarterly only
C. Only when a loss occurs
D. Daily for trading desks and periodically for senior management
Daily monitoring is crucial for trading desks to track exposures and liquidity, while senior management reviews periodic consolidated reports to make strategic risk decisions and ensure regulatory compliance.
26. What is the primary objective of market risk mitigation in banks?
A. To increase branch profitability
B. To reduce potential losses arising from market fluctuations
C. To improve customer service
D. To enhance operational efficiency
Market risk mitigation aims to implement strategies and controls that minimize the impact of market price movements on the bank’s trading and investment portfolios.
27. Which of the following is a common technique for mitigating market risk?
A. Increasing customer deposits
B. Expanding branch network
C. Using derivatives such as forwards, futures, options, and swaps
D. Employee performance appraisal
Banks use derivatives like forwards, futures, options, and swaps to hedge against adverse movements in interest rates, foreign exchange, equity, and commodity prices, effectively reducing market risk.
28. Which of the following strategies helps in mitigating interest rate risk?
A. Increasing branch deposits
B. Expanding loan portfolio
C. Hiring more staff in treasury
D. Using interest rate swaps and duration matching
Interest rate swaps allow banks to exchange fixed and floating rate cash flows, while duration matching ensures that assets and liabilities react similarly to interest rate changes, mitigating interest rate risk.
29. How can foreign exchange risk be mitigated in banks?
A. Increasing domestic loans
B. Using forward contracts, currency swaps, and options
C. Hiring more foreign staff
D. Expanding branch network abroad
Banks mitigate foreign exchange risk by using hedging instruments such as forward contracts, currency swaps, and options to protect against adverse movements in exchange rates.
30. Why is diversification an important risk mitigation strategy for market risk?
A. To reduce operational workload
B. To increase branch profitability
C. To spread exposures across different assets and markets, reducing impact of a single market movement
D. To improve customer satisfaction
Diversification reduces the risk that losses in one asset or market will significantly affect the overall portfolio by spreading exposures across multiple instruments, sectors, or geographies.
31. A bank holds a bond portfolio worth ₹10 crore with a 1-day standard deviation of returns of 0.5%. What is the 1-day Value at Risk (VaR) at 99% confidence level? (Use z = 2.33)
A. ₹1.16 crore
B. ₹0.50 crore
C. ₹0.116 crore
D. ₹0.05 crore
VaR = Portfolio Value × Standard Deviation × z = 10,00,00,000 × 0.005 × 2.33 = ₹1,16,500 ≈ ₹0.116 crore.
32. A bank has assets of ₹50 crore with a duration of 4 years and liabilities of ₹40 crore with a duration of 2 years. If the interest rate rises by 1%, what is the approximate change in the bank’s equity value?
33. A bank has USD 1 million receivable after 3 months. The spot rate is ₹83/USD, and the 3-month forward rate is ₹84/USD. What is the gain/loss if the bank hedges using a forward contract?
A. Loss of ₹1 lakh
B. No gain or loss
C. Loss of ₹0.5 lakh
D. Gain of ₹1 lakh
Gain/Loss = (Forward Rate - Spot Rate) × USD Exposure = (84 - 83) × 10,00,000 = ₹10,00,000 gain. Since forward contract locks in ₹84/USD, the bank gains ₹10 lakh if spot remains at ₹83.
34. A bank holds 2,000 shares of a company priced at ₹500 each. If the share price drops by 5%, what is the market loss?
A. ₹25,000
B. ₹50,000
C. ₹50,000
D. ₹5,00,000
Market loss = Number of shares × Price × % drop = 2,000 × 500 × 0.05 = ₹50,000.
35. A bank has a bond portfolio worth ₹20 crore with an annual interest rate sensitivity (modified duration) of 3. If interest rates rise by 2%, what is the approximate loss?
A. ₹0.3 crore
B. ₹1.2 crore
C. ₹2 crore
D. ₹0.12 crore
Loss ≈ Portfolio Value × Duration × Rate Change = 20 crore × 3 × 0.02 = ₹1.2 crore.
36. A bank has a portfolio worth ₹5 crore. The daily standard deviation of returns is 0.8%. Calculate the 1-day VaR at 95% confidence level (z = 1.65).
A. ₹0.20 crore
B. ₹0.33 crore
C. ₹0.08 crore
D. ₹0.066 crore
VaR = Portfolio × Std Dev × z = 5,00,00,000 × 0.008 × 1.65 ≈ ₹66,000 = ₹0.066 crore.
37. A bank has USD 500,000 payable after 2 months. Spot rate = ₹82/USD, forward rate = ₹81.5/USD. What is the forward hedge gain/loss?
39. A bank holds 1,000 shares of a stock priced ₹200 each. Expected standard deviation of returns = 3%. Calculate 1-day VaR at 99% confidence level (z = 2.33).
A. ₹13,980
B. ₹11,000
C. ₹15,000
D. ₹13,980
VaR = Number of shares × Price × Std Dev × z = 1,000 × 200 × 0.03 × 2.33 ≈ ₹13,980.
40. A bank’s EUR 200,000 receivable is due in 1 month. Spot = ₹90/EUR, forward = ₹91/EUR. Gain/loss if hedged using forward?
