Question 1

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

Accepted Answer

Liquidity management is typically discussed and managed by the Asset Liability Management Committee (ALCO) in a bank. The Financial Resources and Compensation Committee focuses on the bank's capital and compensation issues, while the Credit Committee is responsible for making credit decisions. The Federal Open Market Committee sets monetary policy in the United States.

Question 2

Which of the following statements about requirements for dealing with limit violations is correct?
A) Financial institutions have to establish procedures for handling limit breaches that are in accordance with their decision-making hierarchy.
B) If a partial limit violation does not exceed the overall limit, no reaction is required.
C) The definition of escalation levels is not required in order to react appropriately to different sorts and intensities of limit breaches.
D) It is adequate and proper to define reactions only to standard cases of limit violations.

Accepted Answer

Financial institutions must establish procedures for dealing with limit breaches that follow their decision-making hierarchy, ensuring that the appropriate personnel are informed and that proper measures are taken. B is incorrect because any limit breach must be addressed, even those that do not exceed the overall limit. C is incorrect because defining escalation levels is critical in addressing limit breaches effectively. D is incorrect because it is necessary to account for various forms and severities of limit breaches in defining responses.

Question 3

The major difference between FRAs and futures is that FRAs are:
A) Exchange-traded
B) Margined
C) Standardized
D) Dealtoverthe counter

Accepted Answer

FRAs are traded over the counter, meaning the terms of the contract are negotiable between the two parties involved. Futures, on the other hand, are exchange-traded and standardized, meaning there is a set contract size, expiration date, and tick size. Futures are also margined, meaning traders must deposit initial margin to open a position.

Question 4

Under Basel rules, what is the meaning of RWA?
A) Risk Weighted Assets
B) Risk Weighted Average
C) Recovery Weighted Assets
D) Risk Weighted Adjustments

Accepted Answer

RWA stands for Risk Weighted Assets which is a measure of the risk of a bank's assets based on their credit risk. It is calculated by multiplying each type of asset by a risk weight, with riskier assets such as corporate loans having a higher weight than less risky assets such as government securities.

Question 5

As to general risk management principles, the Model Code mentions that the organizationalstructure should ensure independent risk management and controls. Which one of the following is not among those controls?
A) open and effective communication channels between all levels of staff and cross-functions should be maintained.
B) regular internal audits should be carried out together with trading and risk management to ensure early identification of internal control weaknesses
C) complete segregation of duties between the front, middle and back office activities
D) a separate system for independent monitoring to ensure compliance with the risk management framework should be in place

Accepted Answer

Regular internal audits should be independent and not carried out together with trading and risk management to ensure unbiased identification of internal control weaknesses.

Question 6

You are entering into a swap as a fixed rate receiver with Party A and into an offsetting position with party B. All other things being equal, which of the scenarios below will lead to the greatest increase in the sum of the Credit Value Adjustments for A and B?
A) upward shift of the swap curve and rating downgrade of party A
B) downward shift of the swap curve and rating downgrade of party A
C) downward shift of the swap curve and rating downgrade of party B
D) downward shift of the swap curve only

Accepted Answer

When there is a downward shift in the swap curve, it increases the market value of the fixed rate receiver position held by Party A, which in turn increases the Credit Value Adjustment (CVA) for Party A. Similarly, the offsetting position held by Party B also increases in value with the downward shift, resulting in an increase in their CVA. A rating downgrade of Party A would further increase their CVA, but since the offsetting position with Party B will also be impacted by the same downgrade, the net effect on the sum of CVAs will not be as significant as the impact of a downward shift in the swap curve. Therefore, option B would lead to the greatest increase in the sum of CVAs for both parties.

Question 7

What is a long strangle option strategy?
A) A short call option + short put option with a higher strike price than the call option
B) A long call option + long put option with a lower strike price than the call option
C) A short call option + short put option with a lower strike price than the call option
D) A long call option + short put option with higher strike price than the call option

Accepted Answer

A long strangle option strategy involves buying both a call option and a put option with the same expiration date, but with different strike prices. The strike prices should be far enough apart so that the underlying asset must make a significant move in either direction for the strategy to be profitable. In this case, a long call option and a long put option with a lower strike price than the call option is the correct choice as it allows the investor to profit from both upward and downward price movements of the underlying asset.

Question 8

If USD/JPY is quoted to you as 98.10-15 and USD/CHF as 0.9294-99, what is the rate at which you can buy CHF against JPY?
A) 105.50
B) 105.61
C) 10555
D) 0.009474

Accepted Answer

To find the rate at which you can buy CHF against JPY, we need to use the cross rate formula:

Cross Rate = (USD/JPY)/(USD/CHF)

Cross Rate = (98.10/100)/(0.9294/1)

Cross Rate = 1.054

Since we want to know the rate at which we can buy CHF against JPY, we need to invert the cross rate:

1/Cross Rate = 1/1.054

1/Cross Rate = 0.948

Therefore, we can buy CHF against JPY at a rate of 0.948 JPY/CHF, or approximately 105.61 CHF/JPY.

The correct answer is B.

Question 9

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 interestbearing liabilities.
D) The evaluation and management of the gap between a bank's volume of loans and deposits.

Accepted Answer

Funds Transfer Pricing (FTP) is a method used to measure how much each source of funding is contributing to overall profitability in the ALM process. It is used to allocate the cost of funds to the different business units within the bank and to assign a value to deposits and other funding sources. FTP takes into account the costs and risks associated with different sources of funding, as well as the profitability of the assets they support. A maturity analysis (A), duration analysis (C), and evaluation of loan and deposit volumes (D) are all important elements of the ALM process, but they are not specifically related to FTP.

Question 10

Assume the following scenario: Bank A bids for EUR 5,000,000.00 at 1.3592. Bank B offers EUR 10,000,000.00 at 1.3597. Broker XYZ quotes to the market EUR/USD 1.3592/97. Bank C takes the offer at 1.3597. What information is the broker obliged to reveal?
A) the name of Bank A and Bank B
B) the names of Bank B and Bank C
C) the amount that was bid but not the name of Bank A
D) the amount taken by Bank C as well as the amount that was bid

Accepted Answer

The answer of Assume the following scenario: Bank A bids...

Question 11

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 banks leverage

Accepted Answer

When the yield curve is upward sloping, long-term interest rates are higher than short-term rates. This means that borrowing long and lending short would result in a lower net interest margin for the bank, as the interest earned on the short-term loans would be less than the interest paid on the long-term borrowing. The other choices could still result in profits for the bank.

Question 12

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

Accepted Answer

Replacing retail savings accounts with 3-month borrowings under repo would shorten the duration of liabilities in the banking book as the maturity of the borrowings is shorter than that of the savings accounts. Selling holdings of 30-year German Government bonds, selling futures contracts on 30-year German Government bonds, and placing a 20-year covered bond in the market would not necessarily have the same effect on the duration of liabilities.

Question 13

What does the term "mine" mean when given in response to an FX spot quotation?
A) I buy the base currency at the bid rate.
B) I buy the base currency at the offer rate.
C) I buy the counter-currency at the offer rate.
D) I sell you the base currency at the bid rate,

Accepted Answer

When someone says "mine" in response to an FX spot quotation, it means they want to buy the base currency at the offer rate. This is because "mine" is a shorthand way of saying "give me your offer," which is the rate at which the dealer is willing to sell the base currency. Therefore, the correct answer is B - I buy the base currency at the offer rate.

Question 14

A short USD put/JPY call option:
A) Gives you the right but not the obligation to sell USD and buy JPY
B) Gives you the right but not the obligation to buy USD and sell JPY
C) Gives your counterparty the right but not the obligation to sell USD and buy JPY
D) Gives your counterparty the right but not the obligation to buy USD and sell JPY

Accepted Answer

The answer of A short USD put/JPY call option:
A) Gives...

Question 15

Which of the following correctly states the Model Code's recommendations regarding terms and documentation?
A) Such documentation should be bi-laterally signed by the dealers of both principals intending to transact business.
B) When using such agreements... the wording in the agreement must be changed to match the actual transaction details after trading.
C) Such documentation should be signed, in many cases before any applicable market transactions are entered into.
D) For instruments where standard terms do not exist, the Model Code recommends that no documentation should be used.

Accepted Answer

The Model Code recommends that such documentation should be signed, in many cases before any applicable market transactions are entered into.

Question 16

What is the documentation in which the parties agree to the terms that will govern future transactions?
A) standard settlement instructions
B) netting agreement
C) terms of engagement
D) master agreement

Accepted Answer

A master agreement is a document that sets out the general terms that will govern future transactions between parties. It is often used in the financial industry to streamline the process of entering into multiple transactions with the same counterparty. The master agreement typically includes provisions for netting, which allows for the offsetting of obligations between parties, as well as standard settlement instructions and other terms of engagement.

Question 17

Under Basel Securitization rules the highest potential risk weight is:
A) 350%
B) 750%
C) 1250%
D) 1500%

Accepted Answer

Basel Securitization rules assign risk weights to different types of assets based on their credit risk. The highest potential risk weight is 1250%, which applies to certain unrated securitization exposures with weak due diligence standards or where credit risk is difficult to assess. Choice A (350%) is too low and applies to rated senior tranches. Choice B (750%) applies to rated subordinated tranches or unrated senior tranches. Choice D (1500%) is not an option under Basel Securitization rules.

Question 18

What are de minimis claims?
A) claims of less than USD 100.00
B) claims of less than USD 1,000.00
C) claims of less than EUR 100.00
D) claims of less than EUR 1,000.00

Accepted Answer

De minimis claims refer to small claims that are deemed insignificant and are often not worth pursuing through legal channels. In the context of insurance, de minimis claims usually refer to claims of less than USD 1,000.00, although the specific threshold may vary depending on the policy and jurisdiction.

Question 19

If spot USD/HKD is 7.7600 and USD/SGD is 1.2350, what is SGD/HKD?
A) 9.5836
B) 6.2834
C) 0.1591
D) 0.1043

Accepted Answer

The answer of If spot USD/HKD is 7.7600 and USD/SGD...

Question 20

The market is quoting: 1-month (31-day) NOK     1.75¡ãk 3-month (91-day) NOK     2.05% What is the 1x3 rate in NOK?
A) 4.261%
B) 2.202%
C) 1.900%
D) 1.592%

Accepted Answer

To calculate the 1x3 rate in NOK, we need to use the formula: 
(1 + 91-day rate x 91/365) / (1 + 31-day rate x 31/365) - 1

Plugging in the given rates, we get: 
(1 + 0.0205 x 91/365) / (1 + 0.0175 x 31/365) - 1
= 1.00551585 / 1.0013726 - 1
= 0.00413325

Converting this to a percentage, we get: 
0.00413325 x 100 = 0.413325%

Therefore, the 1x3 rate in NOK is 2.05% + 0.413325% = 2.463325%. The closest answer option is B) 2.202%.

Exam 2: ACI Dealing Certificate-Part B

Issues relating to the bank's liquidity management are commonly discussed in:

Which of the following statements about requirements for dealing with limit violations is correct?

The major difference between FRAs and futures is that FRAs are:

Under Basel rules, what is the meaning of RWA?

As to general risk management principles, the Model Code mentions that the organizationalstructure should ensure independent risk management and controls. Which one of the following is not among those controls?

You are entering into a swap as a fixed rate receiver with Party A and into an offsetting position with party B. All other things being equal, which of the scenarios below will lead to the greatest increase in the sum of the Credit Value Adjustments for A and B?

What is a long strangle option strategy?

If USD/JPY is quoted to you as 98.10-15 and USD/CHF as 0.9294-99, what is the rate at which you can buy CHF against JPY?

What is Funds Transfer Pricing in the ALM process?

Assume the following scenario: Bank A bids for EUR 5,000,000.00 at 1.3592. Bank B offers EUR 10,000,000.00 at 1.3597. Broker XYZ quotes to the market EUR/USD 1.3592/97. Bank C takes the offer at 1.3597. What information is the broker obliged to reveal?

If the yield curve is upward sloping, a bank would not profit from:

Which of the following transactions would have the effect of shortening the average duration of liabilities in the banking book?

What does the term "mine" mean when given in response to an FX spot quotation?

A short USD put/JPY call option:

Which of the following correctly states the Model Code's recommendations regarding terms and documentation?

What is the documentation in which the parties agree to the terms that will govern future transactions?

Under Basel Securitization rules the highest potential risk weight is:

What are de minimis claims?

If spot USD/HKD is 7.7600 and USD/SGD is 1.2350, what is SGD/HKD?

The market is quoting: 1-month (31-day) NOK 1.75¡ãk 3-month (91-day) NOK 2.05% What is the 1x3 rate in NOK?