BFM CAIIB

MODULE-B
 Q. A 10 year 12% semi - annual bond @ market yield of
8.520% has a price of Rs. 116.16, which rises to Rs.
BFM CQ 117.45 at a yield of 8.320%. What is the BPV of the bond?
a) Rs. 64.5 per Rs. 1,000 of book value
b) Rs. 6.40 per Rs. 1,000 of book value
c) Rs. 0.64 per Rs. 1,000 of book value.
d) None of These

BPV is Change in price (market value) So one basis point change in yield = 0.20
by 1 basis point change in yield divided by 20
(market) = 0.01 %
Here change in price is =∆V*0.01/∆Y
= 117.45 - 116.16 So as we divide price change also by 20
= 1.29 = 1.29 / 20
And change in yield = 0.0645
= 8.520 - 8.320 That 0.0645 BPV face (book) value of 1000
= 0.20 = Rs. 64.5 at book value at 1000
For Discount on JAIIB CAIIB Courses, Use Special Code: Y195

Q. What is 'CORDEX India’?

a) A company initiated by the Indian Banks' Association (IBA) to
collect external loss data from banks across India.
b) A company initiated by the Indian Banks' Association (IBA) to
collect financial performance data from banks across India.
c) A company established by the Reserve Bank of India (RBI) to
gather loss data from banks across India.
d) A company established by the Indian Institute of Banking &
Finance (IIBF) to collect profit data from banks across India.
Under the Advanced Measurement Approach (AMA) requirements,
the Indian Banks' Association (IBA) initiated CORDEX India to
collect external loss data from banks in the country.
Q. Capital charge component of pricing
accounts for:
1. Cost of capital
2. Internal generation of capital
3. Loss provision
Which of the following is true?
(i) All the statements are correct
(ii) Statements 1 and 2 are correct
(iii)Statements 2 and 3 are correct
(iv)Statements 3 and 1 are correct
 Q. Daily volatility of a stock is 0.5%. What is its
10-day volatility?
(i) 5%
(ii) 0.25%
(iii) 1.58%
(iv) None of these
Volatility over a time horizon ‘T’ = Daily Volatility × Square root of ‘T’
Q. Risk mitigation results in:
1. Reduction of downside potential
2. Reduction in profit potential
Which of the following is true?
(i) All the statements are correct
(ii) Statement 1 is correct
(iii) Statement 2 is correct
(iv) Both are incorrect
Q. From 1st April, 2020, RBI has mandated the
Banks to link their interest rates on Retail Loans
to an external benchmark developed
by___________or to RBI’s Repo Rate.
(i) FEDAI
(ii) FIMMDAI
(iii) Financial Benchmark India Pvt. Ltd
(iv) Clearing Corporation of India Ltd.
 Risk Pricing

Pricing, therefore, should take into account the following:

1. Cost of Deployable Funds
2. Operating Expenses
3. Loss Probabilities
4. Capital Charge
5. Profit Margin or Return on Networth
It should also be mentioned here that the cost of funds
should correspond to the term for which it is deployed. This
is because five-year funds may have a different cost than
one-year funds due to time value of money.
 Risk Pricing
Banks should ensure that the following costs and factors have to be
loaded in the interest rate that is chargeable to the borrower:
1. Cost of Deposits (it may be average cost or marginal cost as per
RBI’s norms)
2. Negative impact arising out of CRR contribution made with RBI.
Since, RBI is not giving any interest on this portion, this negative
impact has to be loaded in the lending rates.
3. Operating Expenses (Bank specific or product specific as per RBI’s
norms)
4. Probability of Default (Bank specific or product specific as per RBI’s
norms)
5. Capital Charge (Bank specific or product specific as per RBI’s
norms)
6. Profit margin or Return on networth.
Risk and
Basic Risk
Management
Framework
BFM UNIT-11
For Discount on JAIIB CAIIB Courses, Use Special Code: Y195

Q.1 When compared to Return of Equity and

Return on Asset, RAROC is a better performance
measure because, ______________________.
a) It takes into account the dividend declared by
the organization.
b) It takes into account future performance of
the organization.
c) It estimates the future performance based on
past trends.
d) It taken into account the risk undertaken by
the Organization to get the returns.
For Discount on JAIIB CAIIB Courses, Use Special Code: Y195

Q.2 Capital charge component of pricing

accounts for:
1. Cost of capital
2. Internal generation of capital
3. Loss provision
Which of the following is true?
(i) All the statements are correct
(ii) Statements 1 and 2 are correct
(iii)Statements 2 and 3 are correct
(iv)Statements 3 and 1 are correct
 For Discount on JAIIB CAIIB Courses, Use Special Code: Y195

Q.3 Daily volatility of a stock is 0.5%. What is its

10-day volatility?
(i) 5%
(ii) 0.25%
(iii) 1.58%
(iv) None of these
Volatility over a time horizon ‘T’ = Daily Volatility × Square root of ‘T’
For Discount on JAIIB CAIIB Courses, Use Special Code: Y195

Q.4 Risk mitigation results in:

1. Reduction of downside potential
2. Reduction in profit potential
Which of the following is true?
(i) All the statements are correct
(ii) Statement 1 is correct
(iii) Statement 2 is correct
(iv) Both are incorrect
For Discount on JAIIB CAIIB Courses, Use Special Code: Y195

Q.5 From 1st April, 2020, RBI has mandated the

Banks to link their interest rates on Retail Loans
to an external benchmark developed
by___________or to RBI’s Repo Rate.
(i) FEDAI
(ii) FIMMDAI
(iii) Financial Benchmark India Pvt. Ltd
(iv) Clearing Corporation of India Ltd.
 Organisation for Risk
Management

Risk Management Committee of senior- Risk management

Board of Directors Committee of the level executives, also support
Board called as Sub-Groups group/department

Asset-Liability
Committee (ALCO)

Credit Risk
Management
Committee (CRMC)
Operational Risk
Management
Committee (ORMC)
Q what is mean?
Ans: 3214/26=123.62
Q. Calculate variance?
Ans: Variance=sum square of
deviation/no. of observations
=2150.16/26=82.70
Q. Calculate volatility?
Ans: Square root of variance
=√82.70
=9.09
Q. Calculate Daily volatility?
Ans: 9.09/√26=9.09/5.10
=1.78
Q. Calculate 25 days
volatility?
Ans: DV*√T= 1.78*√25
= 1.78*5= 8.91
 For Discount on JAIIB CAIIB Courses, Use Special Code: Y195

Closing price of share of Global Auto Ltd are given below

BFM MCQ for a period of Jan 2022.
Day Closing price Day Closing price
1-Jan-2022 15 6-Jan-2022 50

C.P. Mean Deviatio SD (d2) 2-Jan-2022 20 7-Jan-2022 60

n 3-Jan-2022 25 8-Jan-2022 75
15 40 -25 625 4-Jan-2022 30
20 40 -20 400 5-Jan-2022 45
25 40 -15 225 Q.1 What is the mean of the closing
30 40 -10 100 price of Global Auto Ltd for the given
45 40 +5 25
period?
50 40 +10 100 a) 38 Mean= total of closing price/no of
60 40 +20 400 b) 36 observations
=320/8=40
75 40 +35 1225 c) 40
320 3100 d) 42
 For Discount on JAIIB CAIIB Courses, Use Special Code: Y195

Closing price of share of Global Auto Ltd are given below

BFM MCQ for a period of Jan 2022.
Day Closing price Day Closing price
1-Jan-2022 15 6-Jan-2022 50

C.P. Mean Deviatio SD (d2) 2-Jan-2022 20 7-Jan-2022 60

n 3-Jan-2022 25 8-Jan-2022 75
15 40 -25 625 4-Jan-2022 30
20 40 -20 400 5-Jan-2022 45
25 40 -15 225 Q.2 What is the variance in the price of
30 40 -10 100 Global Auto Ltd for the given period?
45 40 +5 25 a) 380.5
50 40 +10 100
b) 387.5
60 40 +20 400 variance = square deviation (d2)/no
75 40 +35 1225
c) 392.5 of observations
320 3100 d) 381.5 =3100/8=387.5
 For Discount on JAIIB CAIIB Courses, Use Special Code: Y195

Closing price of share of Global Auto Ltd are given below

BFM MCQ for a period of Jan 2022.
Day Closing price Day Closing price
1-Jan-2022 15 6-Jan-2022 50

C.P. Mean Deviatio SD (d2) 2-Jan-2022 20 7-Jan-2022 60

n 3-Jan-2022 25 8-Jan-2022 75
15 40 -25 625 4-Jan-2022 30
20 40 -20 400 5-Jan-2022 45
25 40 -15 225 Q.3 What is the volatility in the price of
30 40 -10 100 Global Auto Ltd for the given period?
45 40 +5 25 a) 19.685
50 40 +10 100
b) 20.435 volatility = √ variance
60 40 +20 400
75 40 +35 1225
c) 18.205 =√387.5=19.685

320 3100 d) 21.825

 For Discount on JAIIB CAIIB Courses, Use Special Code: Y195

Closing price of share of Global Auto Ltd are given below

BFM MCQ for a period of Jan 2022.
Day Closing price Day Closing price
1-Jan-2022 15 6-Jan-2022 50

C.P. Mean Deviatio SD (d2) 2-Jan-2022 20 7-Jan-2022 60

n 3-Jan-2022 25 8-Jan-2022 75
15 40 -25 625 4-Jan-2022 30
20 40 -20 400 5-Jan-2022 45
25 40 -15 225 Q.4 What is the Daily volatility in the
30 40 -10 100 price of Global Auto Ltd for the given
45 40 +5 25
period?
50 40 +10 100 a) 5.8230 Daily volatility = Volatility of 8
days/√ no of observations
60 40 +20 400 b) 54.545 =19.685/√8=19.685/2.8284=6.9597
75 40 +35 1225 c) 6.9597
320 3100 d) 19.685
 For Discount on JAIIB CAIIB Courses, Use Special Code: Y195

Closing price of share of Global Auto Ltd are given below

BFM MCQ for a period of Jan 2022.
Day Closing price Day Closing price
1-Jan-2022 15 6-Jan-2022 50

C.P. Mean Deviatio SD (d2) 2-Jan-2022 20 7-Jan-2022 60

n 3-Jan-2022 25 8-Jan-2022 75
15 40 -25 625 4-Jan-2022 30
20 40 -20 400 5-Jan-2022 45
25 40 -15 225 Q.5 What is the Monthly volatility in the
30 40 -10 100 price of Global Auto Ltd for the given
period? (Trading days in a month:25)
45 40 +5 25
a) 1.39 Montly volatility = DV*√ 25
50 40 +10 100
b) 34.8 =6.9597*5=34.7985
60 40 +20 400
c) 32.5
75 40 +35 1225
320 3100
d) 1.62
Q. Enterprise Risk Management released by
COSO as framework to
a) Institutionalize as risk alert system to manage
the risk better at an incipient stage
b) Drive their initiatives in risk management
c) Suggest a template for identification of Risk
d) Set standard for internal risk management
measurement

For Discount on JAIIB CAIIB Courses, Use Special Code: Y195

Risks in
Banking
Business
BFM UNIT-12
Q.1 An entity has a credit sale of Rs. 20 crores for the
financial year ended 31st March, 2024. The profit on the
sales is 10%. The entity has booked a profit of Rs. 2 crores
as on 31/03/24 on the credit sales before actually getting the
cash from the debtors. From the statement, it can be
deduced that the firm is following_______
(i) Cash system of accounting.
(ii) Discounting system of accounting
(iii) Accrual system of accounting.
(iv) Forecast system of account.
Q.2 Which of the following best describes 'Funding Risk'?
A) Risk arising from a bank's inability to meet its financial obligations
due to sudden withdrawal of funds.
B) Risk associated with an increase in interest rates impacting the
bank's profitability.
C) Risk of not being able to liquidate assets quickly enough to meet
cash flow requirements.
D) Risk arising from the crystallization of contingent liabilities due to
customer defaults.
Answer: A) Risk arising from a bank's inability to meet its financial
obligations due to sudden withdrawal of funds.
Q.3 Which of the following is an example of a physical risk
associated with climate change?
A) Reduction in financial valuation of fossil fuel companies
B) Introduction of subsidies for energy-efficient goods
C) Damage to property due to floods and landslides
D) Increase in credit ratings of companies using green energy
Answer: C) Damage to property due to floods and landslides
Q.4 Time Risk primarily deals with:
A) Unexpected increase in operational costs.
B) Non-receipt of expected inflows due to performing assets turning
into non-performing assets.
C) Fluctuations in foreign exchange rates.
D) The impact of regulatory changes on bank operations.
Answer: B) Non-receipt of expected inflows due to performing
assets turning into non-performing assets.
Q.5 Transition risks in the context of climate change are mainly
concerned with:
A) Sudden onset of extreme weather events
B) Financial losses due to technological failure
C) Economic impact of shifting towards a low-carbon economy
D) Risks from geopolitical tensions
Answer: C) Economic impact of shifting towards a low-carbon
economy
Q.6 A customer, Mr. Sharma, has a fixed deposit of ₹10 lakhs maturing in
Bank X at an interest rate of 6% per annum. Upon maturity, Mr. Sharma
notices that Bank X is now offering 5.25% for a similar deposit tenor, while
Bank Y is offering 5.75% for the same tenor. Mr. Sharma is considering
transferring his deposit to Bank Y to take advantage of the higher rate.
What type of risk is Bank X facing in this scenario, and why?
A) Credit Risk - because Mr. Sharma might default on his existing deposit.
B) Reinvestment Risk - because Bank X might have to reinvest the
returned deposit amount at a lower interest rate.
C) Liquidity Risk - because Bank X might face a sudden outflow of funds.
D) Interest Rate Risk - because Bank Y's higher rate may impact Bank X's
overall profitability.
Answer: B) Reinvestment Risk - because Bank X might have to reinvest
the returned deposit amount at a lower interest rate.
Q.7 Call Risk is associated with:
A) The inability of a bank to call back loans from customers.
B) The potential inability to undertake profitable business
opportunities due to liquidity issues.
C) Losses arising from interest rate changes impacting callable
bonds.
D) The risk of customers withdrawing large amounts of deposits
simultaneously.
Answer: B) The potential inability to undertake profitable business
opportunities due to liquidity issues.
Q.8 Which of the following is NOT a driver of transition risks?
A) Technological advances in non-fossil fuel use
B) Changes in public sentiment and investor behavior
C) Geographical location of a business
D) Implementation of climate-related mitigation policies
Answer: C) Geographical location of a business
Q.9 Premature payment of a term loan will result in interest
rate risk of type:
(i) Basis risk
(ii) Yield curve risk
(iii) Embedded option risk
(iv) Mismatch risk
Q.10 Climate-related mitigation policies may include all of the
following EXCEPT:
A) Reduction in the financial valuation of businesses impacting the
climate negatively
B) Downgrade in credit ratings of non-compliant companies
C) Use of geo-engineering to directly alter weather patterns
D) Introduction of subsidies for energy-efficient processes
Answer: C) Use of geo-engineering to directly alter weather patterns
Risks in Banking
Business
BFM UNIT-12
Q. What are the two broad channels through which climate-
related risks impact the financial sector?
A. Economic risks and political risks
B. Physical risks and transition risks
C. Policy risks and technological risks
D. Geographic risks and sentiment risks
Answer: B. Physical risks and transition risks
Q. Which of the following best describes physical risks related
to climate change?
A. Risks arising from changes in weather patterns and extreme
climate events
B. Risks arising from regulatory changes in mitigating greenhouse
gas emissions
C. Risks related to technological advancements in non-fossil fuel
adoption
D. Risks arising from shifts in public sentiment regarding climate
policies
Answer: A. Risks arising from changes in weather patterns and
extreme climate events
Q. A financial institution faces economic losses due to
increased frequency of floods in a particular region where it has
several insured properties. This is an example of:
A. Transition risk
B. Physical risk
C. Policy risk
D. Sentiment risk
Answer: B. Physical risk
Q. How can climate-related mitigation policies impact
businesses?
A. By increasing business valuation through the promotion of fossil
fuels
B. By reducing the need for technological advancements
C. By potentially downgrading credit ratings of businesses
contributing to climate change
D. By eliminating public sentiment shifts against climate policies
Answer: C. By potentially downgrading credit ratings of
businesses contributing to climate change
Q. What role do technological advances play in addressing
transition risks?
A. Increase the cost of using non-fossil fuels
B. Reduce greenhouse gas emissions and promote energy
transitions
C. Create barriers for businesses to adopt efficient processes
D. Intensify chronic climate-related risks like rising sea levels
Answer: B. Reduce greenhouse gas emissions and promote
energy transitions
Q. What is one way shifts in public sentiment can impact the
financial system?
A. Increase adoption of inefficient processes
B. Reduce the importance of climate mitigation policies
C. Influence consumer and investor behavior, affecting market
stability
D. Eliminate physical risks associated with climate change
Answer: C. Influence consumer and investor behavior, affecting
market stability
Q. Which of the following are key drivers of transition risks?
Climate-related mitigation policies
Technological advances
Shifts in public sentiment
A. Only 1 and 2
B. Only 2 and 3
C. Only 1 and 3
D. All 1, 2, and 3
Answer: D. All 1, 2, and 3
Q.1 All assets and liabilities in banking book have the which
of the following characteristics:
1. They are normally held until maturity.
2. Accrual system of accounting is applied.
3. They are not subjected to MTM (mark to market) exercise.
4. They attract capital charge on credit risk and not on
market risk.
a) Only 2 and 3
b) Only 1, 2 and 3
c) Only 1 and 4
d) All 1 to 4
Q.2 As per RBI norms, the investments classified
under Held for Trading category would be those from
which the bank expects to make a gain by the
movement in the interest rates/ market rates. These
securities are to be sold within:
a) 30 days.
b) 60 days.
c) 90 days.
d) 120 days.
Q.3 Case Study: A large commercial bank, DEF Bank, holds a significant position in foreign
exchange assets within its trading book. The bank regularly engages in trading these assets to
take advantage of short-term market movements. Recently, there has been a sudden
devaluation of a foreign currency in which the bank holds a substantial position. Due to this
adverse movement, the market value of these assets has declined significantly. Additionally,
one of the bank's major counterparties has defaulted on a foreign exchange contract, resulting
in potential financial loss. To manage these risks, the bank's risk management team has been
instructed to closely monitor the market conditions and review the creditworthiness of its
counterparties.
Question: Which of the following risks did DEF Bank experience in the given scenario?
A. Only Operational Risk due to system failures and human errors.
B. Only Liquidity Risk due to low trading volumes in the market.
C. Both Market Risk due to adverse price movements and Credit Risk due to counterparty
default.
D. Only Interest Rate Risk due to changes in fixed income securities.
Answer: C. Both Market Risk due to adverse price movements and Credit Risk due to
counterparty default.
Q.4 Trading book is mainly exposed to market risk,
including:
a) Liquidation Risk
b) Default Or Credit Risk
c) Operational Risk
d) Strategic risk
Q.5 Which of the following is an example of Yield Curve Risk?
A) A bank experiencing losses due to the prepayment of loans
before maturity.
B) A bank being exposed to variations in NII due to the non-renewal
of maturing deposits.
C) A bank facing fluctuations in NII due to assets and liabilities
being priced based on different maturity benchmarks.
D) A bank experiencing a reduction in earnings due to a decline in
interest rates on fixed deposits.
Answer: C) A bank facing fluctuations in NII due to assets and
liabilities being priced based on different maturity benchmarks.
Q.6 Embedded Option Risk is primarily associated with:
A) Changes in market interest rates leading to premature withdrawal
of term deposits.
B) Variation in reinvestment rates due to fluctuations in the market.
C) The difference between earning assets and paying liabilities in a
declining interest rate scenario.
D) Changes in yield curves due to different benchmarks for assets
and liabilities.
Answer: A) Changes in market interest rates leading to premature
withdrawal of term deposits.
Q.7 Which type of risk arises from the uncertainty regarding
the interest rate at which future cash flows can be
reinvested?
A) Embedded Option Risk
B) Reinvestment Risk
C) Yield Curve Risk
D) Net Interest Position Risk
Answer: B) Reinvestment Risk
Q.8 Net Interest Position Risk affects banks when:
A) Banks cannot re-invest maturing deposits at the same or better
rates.
B) Market interest rates decline, impacting the earnings of the bank
due to a higher proportion of earning assets compared to paying
liabilities.
C) Customers exercise the option to withdraw deposits prematurely.
D) There is a mismatch in cash flows due to differing maturity
benchmarks for assets and liabilities.
Answer: B) Market interest rates decline, impacting the earnings of
the bank due to a higher proportion of earning assets compared to
paying liabilities.
Q.9 GHI Bank has a significant portfolio of fixed-rate assets and floating-
rate liabilities. The bank recently provided a two-year term loan at a fixed
interest rate of 7% funded by a liability with a six-month maturity period
that is tied to the market rate. Over time, market interest rates have risen,
causing the bank's cost of funding to increase. However, the income from
the fixed-rate loan remains unchanged. This situation has led to a
contraction in the bank's Net Interest Margin (NIM).
Question: What type of risk is GHI Bank primarily exposed to in this
scenario?
A. Basis Risk due to changes in the difference between asset and liability
rates.
B. Gap or Mismatch Risk due to the difference in the maturity and repricing
of assets and liabilities.
C. Credit Risk due to the potential default of the loan borrower.
D. Operational Risk due to failures in monitoring interest rate movements.
Q.10 JKL Bank has a composite liability portfolio that includes both fixed and
floating-rate deposits. It recently issued a loan linked to the Repo Linked Lending
Rate (RLLR) at an interest rate of 6%, funded by two-year fixed deposits at 5%. If
the repo rate decreases from 4% to 3.5%, the loan rate will decrease accordingly,
reducing the bank's interest income. However, the cost of funding from the fixed
deposits remains the same. This variation in the impact of interest rate changes
on assets and liabilities affects the bank's profitability.
Question: Which risk is JKL Bank primarily exposed to in this scenario?
A. Credit Risk, due to the borrower's inability to repay the loan at a lower interest
rate.
B. Liquidity Risk, as the bank may not have enough funds to meet its obligations.
C. Basis Risk, due to the differential impact of interest rate changes on assets and
liabilities.
D. Reinvestment Risk, because the bank may need to reinvest the funds at a lower
interest rate.
Altman's Z Score Model
▪ Altman's Z-Score model is a
numerical measurement that is used
to predict the chances of a business
going bankrupt within 12 months.
▪ The model was developed by
American finance professor
Edward Altman in 1968 as a measure
of the financial stability of companies.
Altman's Z Score model on various Accounting Ratios
Accounting Ratios Code Weight

Working Capital/Total Assets X1 1.2

Retained Earnings/Total Assets X2 1.4

Earning before interest & Tax/ Total Assets X3 3.3

Market Value of equity/Total Liability (Long X4 0.6

Term Debt)
Sales/Total Assets X5 1.0
Altman's Z Score Formula

Long Term
Debt/Liability
 Z Score Benchmarks
Firm could go to
distress or green
zone

Less than More than

1.81 – 3.0
1.81 3.0

Chances of
Financially Strong
bankruptcy within
12 months
Q. XYZ Ltd shared following information: earnings before
tax and interest are Rs. 650,000. Their revenues (sales)
are Rs. 857,000 while total assets amount to Rs.
1,200,000 with liabilities being Rs. 320,000. Book value
of equity stands at Rs. 7,00,000. Retained earnings are
Rs. 135,000 and working capital is at Rs. 400,000.
Calculate their Altman z-score and outlook of their
business.
Accounting Ratios W (Rs. Lakh) B W*B
Working Capital/Total Assets X1 1.2 4/12 0.34 0.408
Retained Earnings/Total Assets X2 1.4 1.35/12 0.113 0.158
Earning before interest & Tax/ X3 3.3 6.5/12 0.54 1.782
Total Assets
Market Value of equity/Total X4 0.6 7/3.2 2.19 1.314
Liability (Long Term Debt)
Sales/Total Assets X5 1.0 8.57/12 0.714 0.714
Altman's Z Score 4.376
 BFM
COMPANY 2018 2019 2020 2021
Q. What % of companies
were in rating grade of A
1 AA AAA AA AA
or above during the year
2 A AA A AAA
2018?
3 BB BBB A AA
4 B BB B BB Ans. 50% (5/10 – company
5 C C BB C 1, 2, 7, 9, 10)
6 A B C D
7 A BB B D
8 BB C C B
9 A C BB D
10 A BB BB C
 BFM
COMPANY 2018 2019 2020 2021
Q. What percent of
companies remained in
1 AA AAA AA AA
same rating category
2 A AA A AAA
during 2020 over 2019?
3 BB BBB A AA
4 B BB B BB Ans. 20% (2/10- company
5 C C BB C 8, 10)
6 A B C D
7 A BB B D
8 BB C C B
9 A C BB D
10 A BB BB C
 BFM
COMPANY 2018 2019 2020 2021
Q. In 2021, in which rating
maximum no of company
1 AA AAA AA AA
were their?
2 A AA A AAA
3 BB BBB A AA Ans. D (6-7-9)
4 B BB B BB
5 C C BB C
6 A B C D
7 A BB B D
8 BB C C B
9 A C BB D
10 A BB BB C
 BFM
COMPANY 2018 2019 2020 2021
Q. If rating C is high risk
and rating D is default,
1 AA AAA AA AA
what % of portfolio was in
2 A AA A AAA
the year 2021?
3 BB BBB A AA
4 B BB B BB Ans. 50% (5-6-7-9-10)
5 C C BB C
6 A B C D
7 A BB B D
8 BB C C B
9 A C BB D
10 A BB BB C
 BFM
COMPANY 2018 2019 2020 2021
Q. Which company has
shown improvement in
1 AA AAA AA AA
rating regularly over the
2 A AA A AAA
entire period of 4 years
3 BB BBB A AA
4 B BB B BB Ans. Company-3
5 C C BB C
6 A B C D
7 A BB B D
8 BB C C B
9 A C BB D
10 A BB BB C
 BFM
COMPANY 2018 2019 2020 2021
Q. Which is the worst
performing year on the
1 AA AAA AA AA
basis of portfolio rating?
2 A AA A AAA
3 BB BBB A AA Ans. 2021
4 B BB B BB
5 C C BB C
6 A B C D
7 A BB B D
8 BB C C B
9 A C BB D
10 A BB BB C
 CASE STUDY
Bank CET1 Net Profit (In Crores)
i. SBI 5.6% 400
ii. BOB 6.2% 900
iii. PNB 6.9% 800
iv. UBI 7.3% 700
v. BOI 8.2% 1100
Based on the given data, answer the following questions:

Q.1 How much dividend SBI can

distribute to its shareholders’ as per
Basel III norms ? (In crores) (1 mark)
a) 0
b) 50
c) 100
d) 20
 CASE STUDY
Bank CET1 Net Profit (In Crores)
i. SBI 5.6% 400
ii. BOB 6.2% 900
iii. PNB 6.9% 800
iv. UBI 7.3% 700
v. BOI 8.2% 1100
Based on the given data, answer the following questions:

Q.2 How much amount PNB cannot

distribute as per Basel III norms ? (In
crores) (2 marks)
a) 480
b) 800
c) 320
d) 400
 CASE STUDY
Bank CET1 Net Profit (In Crores)
i. SBI 5.6% 400
ii. BOB 6.2% 900
iii. PNB 6.9% 800
iv. UBI 7.3% 700
v. BOI 8.2% 1100
Based on the given data, answer the following questions:

Q.3 What amount BOB can conserve

as per Basel III norms ? (In crores) (1
mark)
a) 900
b) 180
c) 450
d) 720
 CASE STUDY
Bank CET1 Net Profit (In Crores)
i. SBI 5.6% 400
ii. BOB 6.2% 900
iii. PNB 6.9% 800
iv. UBI 7.3% 700
v. BOI 8.2% 1100
Based on the given data, answer the following questions:

Q.4 How much dividend UBI can

distribute to its shareholders’ as per
Basel III norms ? (In crores) (1 mark)
a) 540
b) 700
c) 280
d) 420
Indian Bank wants to invest Rs. 5 crores. It has the option to make
investments in the following two securities. The expected return is given
as follows:-
Q.1 If the time value of money is
Return on Return on not taken into account, what will be
Investment 1 Investment 2 the rate of return on Investment 1?
Year (in lakh) (in lakh) a) 8%
b) 9%
1 40 30
c) 8.5%
2 40 50 d) 8.8%

3 40 60 Solution:-
Investment 1:- Average return = 200 / 5 = 40
4 40 50 lakh
Therefore,
5 40 30
Rate of return = 40 lakh / 5 crore = 8 %

Total 200 lakh 220 lakh

Answer the questions based on

the above-given data:-
Indian Bank wants to invest Rs. 5 crores. It has the option to make
investments in the following two securities. The expected return is given
as follows:-
Q.2 If the time value of money is not
Return on Return on taken into account, what will be the
Investment 1 Investment 2 rate of return on Investment 2?
Year (in lakh) (in lakh) a) 8%
b) 8.8%
1 40 30
c) 9%
2 40 50 d) 8.5%

3 40 60 Solution:-
Investment 2:- Average return = 220 / 5 = 44
4 40 50 lakh
Therefore,
5 40 30
Rate of return = 44 lakh / 5 crore = 8.8 %

Total 200 lakh 220 lakh

Answer the questions based on

the above-given data:-
Indian Bank wants to invest Rs. 5 crores. It has the option to make
investments in the following two securities. The expected return is given
as follows:-
Q.3 Out of these two investments which
Return on Return on one would be more preferable for the
Investment 1 Investment 2 Bank?
Year (in lakh) (in lakh) a) Investment 2 because it provides a
higher return
1 40 30
b) Investment 1 because it provides a
2 40 50 stable return
c) It is as per the discretion of the bank
3 40 60 whether to go for Investment 1 or 2
4 40 50 d) Insufficient Information

5 40 30 Solution:-
As we can see in the given data, the return on
investment 1 is stable i.e. 40 lakh each year
Total 200 lakh 220 lakh
for 5 years whereas the return on investment 2
is highly volatile, so investment 1 would be
Answer the questions based on
more preferable for the bank.
the above-given data:-
Indian Bank wants to invest Rs. 5 crores. It has the option to make
investments in the following two securities. The expected return is given
as follows:-
Q.4 If the return from both the
Return on Return on investments is taken as equal taking into
Investment 1 Investment 2 account the risk associated with
Year (in lakh) (in lakh) volatility, what is the risk-adjusted rate of
return?
1 40 30
a) 8.8%
2 40 50 b) 0.8%
c) 9%
3 40 60 d) 8%
4 40 50

5 40 30 Solution:-
As we have considered the risk associated
with the volatility, we will choose investment 1
Total 200 lakh 220 lakh
as it is more preferable over investment 2.
Therefore, the RIsk adjusted rate of return is
Answer the questions based on
8%.
the above-given data:-
Indian Bank wants to invest Rs. 5 crores. It has the option to make
investments in the following two securities. The expected return is given
as follows:-
Q.5 What is the risk premium?
Return on Return on a) 8%
Investment 1 Investment 2 b) 8.8%
Year (in lakh) (in lakh) c) 0.8%
d) 9%
1 40 30

2 40 50 Solution:-
Risk premium = Gap of rate of return of
3 40 60 investments
ATQ,
4 40 50 Risk premium = 8.8% - 8% = 0.8 %
5 40 30

Total 200 lakh 220 lakh

Answer the questions based on

the above-given data:-
Q. What is ‘Model Risk’?
A. The inability of a model to identify parameters influencing a
variable
B. The gap between the predicted value through a model and the
actual observed value
C. The use of incorrect parameters to derive values in a model
D. The failure to design a statistically valid model
Answer: B. The gap between the predicted value through a
model and the actual observed value
Q. Which of the following is a major cause of model risk?
A. Over-reliance on statistical data
B. Simplification by ignoring one or more parameters
C. Frequent updates to model assumptions
D. Use of advanced mathematical relationships
Answer: B. Simplification by ignoring one or more parameters
Q. A bank’s risk assessment model fails to predict the correct
risk levels during a financial crisis due to outdated assumptions.
This is an example of:
A. Statistical error
B. Assumption-related model risk
C. Data insufficiency
D. Outlier judgment error
Answer: B. Assumption-related model risk
Q. Why should model validation be carried out by personnel not
involved in model design?
A. To ensure compliance with statistical standards
B. To avoid bias and ensure an objective validation process
C. To reduce the complexity of the model
D. To simplify the backtesting process
Answer: B. To avoid bias and ensure an objective validation
process
Q. Which of the following is NOT a common reason for model
risk?
A. Errors in statistical techniques
B. Ignoring relevant parameters
C. Insufficient backtesting
D. Use of advanced mathematical functions
Answer: D. Use of advanced mathematical functions
Q. What is the primary purpose of backtesting in model
validation?
A. To identify the profit potential of the model
B. To test the accuracy of the model's predictions against actual
outcomes
C. To ensure the inclusion of outliers in model design
D. To modify model assumptions to match desired outcomes
Answer: B. To test the accuracy of the model's predictions
against actual outcomes
Q. Model risk can arise from which of the following factors?
1. Outdated assumptions
2. Insufficient data points
3. Ignoring outliers
4. Errors in statistical techniques
A. Only 1 and 2
B. Only 2 and 4
C. Only 1, 2, and 4
D. All 1, 2, 3, and 4
Answer: D. All 1, 2, 3, and 4
Q. How does model risk affect pricing models?
A. Leads to misclassification of outliers
B. Affects profit and loss due to incorrect predictions
C. Fails to incorporate backtesting mechanisms
D. Prevents the use of statistical techniques
Answer: B. Affects profit and loss due to incorrect predictions
Q. If climate change leads to a downgrade in the rating of high-
carbon-emitting industries and subsidies are provided to
environmentally sustainable industries, what type of risk is this
classified as?
(A) Credit Risk
(B) Market Risk
(C) Transition Risk
(D) Operational Risk
Answer:
(C) Transition Risk
Bank of India has paid-up capital of Rs. 125 cr, free reserves of Rs. 255
cr, provisions and contingencies reserves of Rs. 300 cr, revaluation
reserve of Rs. 220 cr, Perpetual non-cumulative preference share of
Rs. 435 cr and subordinated debt of Rs. 175 cr. The risk-weighted
assets for credit and operational risk are Rs. 9000 cr and for market
risk Rs.3000 cr.
Based on the above-given information, answer the following
questions:-
Q.1 Calculate Tier-1 Capital. (1 mark) Solution:-

(a)1035 Tier-1 = Paid-up capital + free reserves +

(b)380 perpetual non-cumulative preference shares +
(c)936 revaluation reserve at 55% Discount
(d)815
(e)914 Tier-1 = 125 + 255 + 435 + (45% of 220)
= 125 + 255 + 435 + 99
= 914 Crore
 Bank of India has paid-up capital of Rs. 125 cr, free reserves of Rs. 255
cr, provisions and contingencies reserves of Rs. 300 cr, revaluation
reserve of Rs. 220 cr, Perpetual non-cumulative preference share of
Rs. 435 cr and subordinated debt of Rs. 175 cr. The risk-weighted
assets for credit and operational risk are Rs. 9000 cr and for market
risk Rs.3000 cr.
Based on the above-given information, answer the following
questions:-
Q.2 Calculate the amount of Tier-2 Capital. Solution:-
mark)
Tier-2 = Provisions and contingencies
a) 475 reserves OR (1.25% of risk-weighted assets),
b) 325 whichever is lower + Subordinated debt+
c) 215 revaluation reserve at 55% Discount
d) 425 Tier-2 = 300 Or (1.25% of
e) 375 credit+operational+market risk weighted
assets) + 175+ (55% of 220)
= 300 Or (1.25% of 12000) + 175+121
= (300 Or 150) + 175+121
= 150 + 175+121
= 446 Crore
 Bank of India has paid-up capital of Rs. 125 cr, free reserves of Rs. 255
cr, provisions and contingencies reserves of Rs. 300 cr, revaluation
reserve of Rs. 220 cr, Perpetual non-cumulative preference share of
Rs. 435 cr and subordinated debt of Rs. 175 cr. The risk-weighted
assets for credit and operational risk are Rs. 9000 cr and for market
risk Rs.3000 cr.
Based on the above-given information, answer the following
questions:-
Q.3 Calculate the amount of capital fund. Solution:-

a) 934 Total Capital Fund = Tier-1 + Tier-2

b) 1061
c) 1143 ATQ,
d) 1261 Total Capital Fund = 914 + 446
e) 1360 = 1360
 Bank of India has paid-up capital of Rs. 125 cr, free reserves of Rs. 255
cr, provisions and contingencies reserves of Rs. 300 cr, revaluation
reserve of Rs. 220 cr, Perpetual non-cumulative preference share of
Rs. 435 cr and subordinated debt of Rs. 175 cr. The risk-weighted
assets for credit and operational risk are Rs. 9000 cr and for market
risk Rs.3000 cr.
Based on the above-given information, answer the following
questions:- Solution:-

Q.4 What is the capital adequacy ratio of Capital adequacy ratio ={ (Tier-1 + Tier-2)/Total
the bank? (1 mark) risk weighted assets}*100

a) 10.4 ATQ,
b) 10.6
c) 11.3 Capital adequacy ratio = (914+446)/12000
d) 10.1 = (1360/12000)*100
e) None of the above = 11.33%
 Bank of India has paid-up capital of Rs. 125 cr, free reserves of Rs. 255
cr, provisions and contingencies reserves of Rs. 300 cr, revaluation
reserve of Rs. 220 cr, Perpetual non-cumulative preference share of
Rs. 435 cr and subordinated debt of Rs. 175 cr. The risk-weighted
assets for credit and operational risk are Rs. 9000 cr and for market
risk Rs.3000 cr.
Based on the above-given information, answer the following
questions:-
Q.5 What is the minimum capital required Solution:-
to support credit and operational risk? (1
mark) As per RBI, banks have to maintain a capital
adequacy ratio of 9%.
a) 1260 So, In the case of supporting credit and
b) 810 operational risk, banks will have to maintain 9%
c) 270 of credit and operational risk-weighted assets.
d) 540
e) 840 ATQ,

Capital required = 9% of credit and operational

risk-weighted assets
= 9% of 9000
= 810 Crore
Q. Which of the following best differentiates Funding Liquidity
Risk from Market Liquidity Risk?
a)Funding Liquidity Risk pertains to the inability to offset
positions at market prices, while Market Liquidity Risk
pertains to the inability to meet cash flow obligations.
b)Funding Liquidity Risk relates to meeting expected and
unexpected cash flow needs, while Market Liquidity Risk
relates to the inability to liquidate assets without disrupting
market prices.
c)Funding Liquidity Risk arises due to interest rate fluctuations,
while Market Liquidity Risk arises due to foreign exchange
market volatility.
d)Funding Liquidity Risk is caused by market disruptions, while
Market Liquidity Risk is caused by operational failures.
OPERATIONAL RISK – CLASSIFICATION
▪ Cause-based
1. People oriented causes – negligence, incompetence,
insufficient training, integrity, key man.
2. Process oriented (Transaction based) causes – business
volume fluctuation, organizational complexity, product
complexity, and major changes.
3. Process oriented (Operational control based) causes –
inadequate segregation of duties, lack of management
supervision, inadequate procedures.
4. Technology oriented causes – poor technology and
telecom, obsolete applications, lack of automation,
information system complexity, poor design, development
and testing.
5. External causes – natural disasters, operational failures
of a third party, deteriorated social or political context.
OPERATIONAL RISK – CLASSIFICATION
Effect-based
1. Legal liability
2. Regulatory, compliance and taxation penalties
3. Loss or damage to assets
4. Restitution
5. Loss of recourse
6. Write-downs

▪2nd Consultative Paper of Basel II suggested

classifying operational risks based on 'Causes' and
'Effects.'
OPERATIONAL RISK – CLASSIFICATION
Event-based
1. Internal Fraud
2. External Fraud
3. Employment practices and workplace safety
4. Clients, products and business practices
5. Damage to physical assets
6. Business disruption and system failures
7. Execution, delivery and process management

3rd Consultative Paper recommended event-

based classification.
• Case Study on Liquidity Management
Q.1 What is the minimum percentage
• XYZ Bank is a globally operating bank managing substantial of long-term resources required to
overseas business operations. To ensure robust liquidity
management, the bank adheres to broad norms in line with cover long-term assets?
regulatory standards: A. 50%
1.Voluntary Risk Exposures: XYZ Bank avoids voluntary risk B. 70%
exposures beyond a period of 10 years. C. 80%
2.Long-Term Resources: The bank has developed a diversified base D. 90%
of long-term funding consistent with its long-term commitments Answer: B. 70%
and assets.
3.Maturity Mismatches:
1. Long-term resources account for at least 70% of long-term assets.
2. Long and medium-term resources together cover at least 80% of long and
medium-term assets.
3. These controls are managed currency-wise and applied where any single
currency constitutes 10% or more of the consolidated overseas balance
sheet.
4.Monitoring System: The bank's International Division (ID) monitors
asset-liability mismatches currency-wise on a consolidated basis,
submitting quarterly reviews to top management.
• The definitions of maturities used are:
• Short-Term: Maturing within 6 months
• Medium-Term: Maturing within 6 months to 3 years
• Long-Term: Maturing beyond 3 years
• Case Study on Liquidity Management
Q.2 Which division is responsible for
• XYZ Bank is a globally operating bank managing substantial monitoring liquidity mismatches in
overseas business operations. To ensure robust liquidity
management, the bank adheres to broad norms in line with XYZ Bank?
regulatory standards: A. Risk Management Division
1.Voluntary Risk Exposures: XYZ Bank avoids voluntary risk B. Asset Management Division
exposures beyond a period of 10 years. C. International Division
2.Long-Term Resources: The bank has developed a diversified base D. Compliance Division
of long-term funding consistent with its long-term commitments Answer: C. International Division
and assets.
3.Maturity Mismatches:
1. Long-term resources account for at least 70% of long-term assets.
2. Long and medium-term resources together cover at least 80% of long and
medium-term assets.
3. These controls are managed currency-wise and applied where any single
currency constitutes 10% or more of the consolidated overseas balance
sheet.
4.Monitoring System: The bank's International Division (ID) monitors
asset-liability mismatches currency-wise on a consolidated basis,
submitting quarterly reviews to top management.
• The definitions of maturities used are:
• Short-Term: Maturing within 6 months
• Medium-Term: Maturing within 6 months to 3 years
• Long-Term: Maturing beyond 3 years
• Case Study on Liquidity Management
Q.3 What is considered a long-term
• XYZ Bank is a globally operating bank managing substantial maturity in liquidity management
overseas business operations. To ensure robust liquidity
management, the bank adheres to broad norms in line with norms?
regulatory standards: A. Over 6 months
1.Voluntary Risk Exposures: XYZ Bank avoids voluntary risk B. Over 1 year
exposures beyond a period of 10 years. C. Over 3 years
2.Long-Term Resources: The bank has developed a diversified base D. Over 5 years
of long-term funding consistent with its long-term commitments Answer: C. Over 3 years
and assets.
3.Maturity Mismatches:
1. Long-term resources account for at least 70% of long-term assets.
2. Long and medium-term resources together cover at least 80% of long and
medium-term assets.
3. These controls are managed currency-wise and applied where any single
currency constitutes 10% or more of the consolidated overseas balance
sheet.
4.Monitoring System: The bank's International Division (ID) monitors
asset-liability mismatches currency-wise on a consolidated basis,
submitting quarterly reviews to top management.
• The definitions of maturities used are:
• Short-Term: Maturing within 6 months
• Medium-Term: Maturing within 6 months to 3 years
• Long-Term: Maturing beyond 3 years
• Case Study on Liquidity Management
Q.4 When are currency-wise controls
• XYZ Bank is a globally operating bank managing substantial required for maturity mismatches?
overseas business operations. To ensure robust liquidity
management, the bank adheres to broad norms in line with A. If a currency contributes 5% of the
regulatory standards: balance sheet
1.Voluntary Risk Exposures: XYZ Bank avoids voluntary risk B. If a currency contributes 10% or more
exposures beyond a period of 10 years. of the balance sheet
2.Long-Term Resources: The bank has developed a diversified base C. If a currency is part of short-term
of long-term funding consistent with its long-term commitments assets
and assets. D. If a currency impacts medium-term
3.Maturity Mismatches: liabilities
1. Long-term resources account for at least 70% of long-term assets. Answer: B. If a currency contributes
2. Long and medium-term resources together cover at least 80% of long and 10% or more of the balance sheet
medium-term assets.
3. These controls are managed currency-wise and applied where any single
currency constitutes 10% or more of the consolidated overseas balance
sheet.
4.Monitoring System: The bank's International Division (ID) monitors
asset-liability mismatches currency-wise on a consolidated basis,
submitting quarterly reviews to top management.
• The definitions of maturities used are:
• Short-Term: Maturing within 6 months
• Medium-Term: Maturing within 6 months to 3 years
• Long-Term: Maturing beyond 3 years
• Case Study on Liquidity Management
Q.5 What is the maximum time frame
• XYZ Bank is a globally operating bank managing substantial for short-term maturities?
overseas business operations. To ensure robust liquidity
management, the bank adheres to broad norms in line with A. 3 months
regulatory standards: B. 6 months
1.Voluntary Risk Exposures: XYZ Bank avoids voluntary risk C. 1 year
exposures beyond a period of 10 years. D. 2 years
2.Long-Term Resources: The bank has developed a diversified base Answer: B. 6 months
of long-term funding consistent with its long-term commitments
and assets.
3.Maturity Mismatches:
1. Long-term resources account for at least 70% of long-term assets.
2. Long and medium-term resources together cover at least 80% of long and
medium-term assets.
3. These controls are managed currency-wise and applied where any single
currency constitutes 10% or more of the consolidated overseas balance
sheet.
4.Monitoring System: The bank's International Division (ID) monitors
asset-liability mismatches currency-wise on a consolidated basis,
submitting quarterly reviews to top management.
• The definitions of maturities used are:
• Short-Term: Maturing within 6 months
• Medium-Term: Maturing within 6 months to 3 years
• Long-Term: Maturing beyond 3 years
 Stock Approach
1. Core deposit/total assets: Higher ratio better
2. Net loans/Total Deposits: Lower Ratio better
3. Time deposits/total deposits: higher ratio better
4. Volatile liabilities/ total assets: Lower Ratio better
5. Short Term liabilities/ liquid assets: Lower Ratio better
6. Liquid assets / total assets: higher ratio better
7. Short term liabilities / Total assets: Lower Ratio better
8. Prime assets / total assets: higher ratio better
9. Market liabilities / total assets: Lower Ratio better
•Common Equity Tier 1 Capital
A- Elements of Common Equity Tier 1 Capital :
▪ Common shares (paid-up equity capital)
▪ Stock surplus (share premium) resulting from the issue of common shares
▪ Statutory reserves
▪ Capital reserves representing surplus arising out of sale proceeds of assets
▪ AFS reserve
▪ Revaluation reserves : CET1 capital at a discount of 55 % ( valuations are
obtained, from two independent valuers, at least once in every 3 years )
▪ Revaluation reserves which do not qualify as CET1 capital shall also not
qualify as Tier 2 capital
▪ Banks may, at their discretion, reckon foreign currency translation reserve
arising due to translation of financial statements of their foreign operations
in terms of AS-11 as CET1 capital at a discount of 25 %.
▪ Banks may include current financial year profits in CRAR calculations
quarterly, provided incremental provisions for NPAs in any quarter of the
previous year have not deviated by more than 25% from the four-quarter
average.
▪ When calculating capital adequacy at the consolidated level, common shares
issued by consolidated subsidiaries of the bank and held by third parties
(minority interest) that meet the criteria are included in Common Equity Tier
1 capital.
B- Elements of Additional Tier 1 Capital
▪ Perpetual Non-Cumulative Preference Shares
(PNCPS),
▪ Stock surplus (share premium)
▪ Debt capital instruments eligible for inclusion in
Additional Tier 1 capital
▪ In consolidated capital adequacy calculations,
include qualifying Additional Tier 1 instruments
issued by subsidiaries and held by third parties.
Tier 2 Capital - Indian Banks
▪ General Provisions and Loss Reserves : up to a maximum
of 1.25% of the total credit RWA under standardized
approach, up to a maximum of 0.6% of credit-RWA
calculated under the IRB approach.
▪ Debt Capital Instruments issued by the banks
▪ Preference Share Capital Instruments [Perpetual
Cumulative Preference Shares (PCPS) / Redeemable Non-
Cumulative Preference Shares (RNCPS) / Redeemable
Cumulative Preference Shares (RCPS)
▪ Stock surplus (share premium)
▪ In consolidated capital adequacy calculations, include
qualifying Tier 2 capital instruments issued by
subsidiaries and held by third parties.