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Free Questions › CTP › Financial, Regulatory and Operational Risk
Free CTP Financial, Regulatory and Operational Risk Practice Questions & Answers
150 exam-style Financial, Regulatory and Operational Risk questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 91
A credit default swap (CDS) spread widening on a counterparty is generally interpreted as:
Select an option first.
Correct answer: A — Deteriorating creditworthiness / higher perceived default risk
Explanation: A wider CDS spread means the market demands more premium to insure against that counterparty's default, signaling deteriorating credit quality. Treasury teams monitor CDS spreads as a real-time, forward-looking complement to slower-moving agency ratings.
Question 92
Value at Risk (VaR) is best described as:
Select an option first.
Correct answer: B — An estimate of the maximum expected loss over a given horizon at a specified confidence level under normal conditions
Explanation: VaR estimates the loss that is not expected to be exceeded over a specified horizon at a given confidence level (for example, 95% or 99%) under normal market conditions. It is a probabilistic measure and does not represent an absolute worst case, which is why stress testing supplements it.
Question 93
Sensitivity analysis in risk measurement involves:
Select an option first.
Correct answer: C — Measuring how a portfolio or exposure's value changes when a single risk factor moves by a specified amount
Explanation: Sensitivity analysis isolates one risk factor, such as an interest rate or exchange rate, and measures the resulting change in value while holding others constant. Common examples include DV01 for rates and delta for options, providing intuitive, single-factor risk insight.
Question 94
In an insurance policy, the deductible is:
Select an option first.
Correct answer: A — The amount of loss the insured must bear before the insurer begins paying
Explanation: The deductible is the portion of a covered loss the insured retains before coverage responds. Higher deductibles typically lower premiums because the insured absorbs more of the frequent, smaller losses.
Question 95
Self-insurance (risk retention) means that a company:
Select an option first.
Correct answer: B — Sets aside its own funds to pay for anticipated losses instead of purchasing external coverage
Explanation: Self-insurance is a form of risk retention in which the company funds expected losses internally, often through reserves or a captive, rather than transferring them to an insurer. It can lower costs for predictable, high-frequency, low-severity losses but exposes the firm to volatility.
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Question 96
A captive insurance company is:
Select an option first.
Correct answer: D — An insurer owned by the parent company to insure the parent's own risks
Explanation: A captive is a wholly owned subsidiary formed to insure the risks of its parent (and affiliates), formalizing self-insurance while potentially providing access to reinsurance markets and tax and cost efficiencies. It gives the parent greater control over coverage and claims than the commercial market.
Question 97
Cyber insurance is increasingly relevant to treasury because it can help cover losses from:
Select an option first.
Correct answer: A — Data breaches, ransomware, and certain funds-transfer fraud events (subject to policy terms)
Explanation: Cyber insurance policies can respond to breach response costs, ransomware, business interruption, and, under some policies and endorsements, social-engineering or funds-transfer fraud losses, subject to conditions. It has become an important complement to the controls treasury uses against payment fraud and cyber events.
Question 98
A firm has a $5,000,000 exposure to a customer with a probability of default of 2% and a loss given default of 40%. What is the expected loss?
Select an option first.
Correct answer: C — $40,000
Explanation: Expected loss = PD x LGD x EAD = 0.02 x 0.40 x $5,000,000 = $40,000. This standard formula combines the likelihood of default with the fraction not recovered and the size of the exposure.
Question 99
A bank counterparty has an exposure at default of $10,000,000, a probability of default of 0.5%, and an expected recovery rate of 60%. What is the expected loss?
Select an option first.
Correct answer: A — $20,000
Explanation: LGD = 1 - recovery rate = 1 - 0.60 = 0.40. Expected loss = PD x LGD x EAD = 0.005 x 0.40 x $10,000,000 = $20,000. The recovery assumption directly reduces the loss given default component.
Question 100
A firm's policy caps exposure to any single supplier at 15% of annual cost of goods sold (COGS). If COGS is $80,000,000 and current purchases from Supplier X total $10,500,000, how much additional business can be placed with Supplier X within the limit?
Select an option first.
Correct answer: B — $1,500,000
Explanation: The concentration limit is 15% x $80,000,000 = $12,000,000. Current purchases are $10,500,000, so the remaining capacity is $12,000,000 - $10,500,000 = $1,500,000 of additional business before the cap is reached.
Question 101
A portfolio has a 1-day VaR of $100,000. Assuming returns are independent and identically distributed, what is the approximate 10-day VaR using the square-root-of-time rule?
Select an option first.
Correct answer: C — $316,228
Explanation: Under the square-root-of-time rule, VaR scales with the square root of the horizon: 10-day VaR = $100,000 x sqrt(10) = $100,000 x 3.1623 = $316,228. This assumes independent, identically distributed returns with no autocorrelation.
Question 102
A $10,000,000 portfolio has a daily return standard deviation of 1.5%. Using the parametric method and a 95% confidence level (z = 1.645), what is the approximate 1-day VaR?
Select an option first.
Correct answer: A — $246,750
Explanation: Parametric VaR = portfolio value x z-score x daily volatility = $10,000,000 x 1.645 x 0.015 = $246,750. The z-score of 1.645 corresponds to the 95% one-tailed confidence level under a normal distribution.
Question 103
A hedge's value changed by -$95,000 while the hedged item's value changed by +$100,000 over the period. Using the dollar-offset method, what is the hedge effectiveness ratio, and does it fall within the traditional 80%-125% band?
Select an option first.
Correct answer: C — 95%, within the band
Explanation: Dollar-offset ratio = |change in hedge| / |change in hedged item| = $95,000 / $100,000 = 0.95 = 95%, which lies inside the traditional 80%-125% effectiveness range. This indicates the hedge is highly effective at offsetting the hedged item's movement.
Question 104
A bond position has a DV01 (dollar value of a basis point) of $2,500. If interest rates rise by 15 basis points, what is the approximate change in the position's value?
Select an option first.
Correct answer: D — A loss of $37,500
Explanation: DV01 measures value change per one basis point; for a 15 bp rise, change = 15 x $2,500 = $37,500. Because bond prices fall when rates rise, the position loses approximately $37,500.
Question 105
A company self-insures the first $250,000 of any liability loss and carries commercial coverage above that up to $5,000,000. If a covered loss totals $900,000, how much does the commercial insurer pay?
Select an option first.
Correct answer: A — $650,000
Explanation: The company retains the first $250,000, so the insurer pays the excess: $900,000 - $250,000 = $650,000, which is within the $5,000,000 limit. This layered structure blends self-insured retention with excess commercial coverage.
Question 106
An insurer collects $2,000,000 in premiums for a line of business and pays $1,500,000 in claims. What is the loss ratio?
Select an option first.
Correct answer: C — 75%
Explanation: Loss ratio = claims paid / premiums earned = $1,500,000 / $2,000,000 = 0.75 = 75%. A loss ratio below 100% means premiums exceeded claims for that line, before accounting for expenses.
Question 107
A company pays an annual premium of $120,000 for coverage with a $50,000 deductible per claim. During the year it experiences two covered claims of $200,000 and $30,000. Counting premium plus what the firm pays on each claim, what is the company's total out-of-pocket cost for the year?
Select an option first.
Correct answer: C — $200,000
Explanation: Premium is $120,000. On the $200,000 claim the firm pays the $50,000 deductible; the $30,000 claim is fully below the $50,000 deductible, so the firm pays all $30,000. Total out-of-pocket = $120,000 + $50,000 + $30,000 = $200,000.
Question 108
A U.S. firm holds a receivable of 5,000,000 euros, currently valued at an exchange rate of 1.10 USD per euro. If the euro depreciates by 2% against the dollar, what is the approximate USD loss on the receivable?
Select an option first.
Correct answer: C — $110,000
Explanation: Current USD value = 5,000,000 x 1.10 = $5,500,000. A 2% adverse move reduces value by 0.02 x $5,500,000 = $110,000. The dollar value of the foreign-currency receivable falls as the euro weakens against the dollar.
Question 109
A treasury policy states that no counterparty bank may hold more than 20% of the firm's total invested cash and that all instruments must carry a minimum rating of A-1/P-1. During a period of rapid cash inflows, the only A-1 counterparties available would each require holding 30% of the portfolio. What is the most policy-consistent action?
Select an option first.
Correct answer: C — Seek a documented policy exception with appropriate approval, or hold excess in a permitted government money market fund
Explanation: When two policy constraints conflict, the treasurer should not silently breach either limit; the correct path is a documented, approved exception or use of another compliant vehicle such as a government money market fund that diversifies without violating rating rules. Breaching concentration or rating limits without authorization undermines the control framework and governance.
Question 110
Why do strong treasury policies require periodic review and re-approval by the board or a designated committee rather than remaining static?
Select an option first.
Correct answer: A — Because market conditions, regulations, the firm's risk appetite, and counterparty landscape change over time
Explanation: Risk appetite, permissible instruments, regulatory requirements, and the creditworthiness of counterparties all evolve, so a policy that is not periodically reassessed can become misaligned with actual risk. Board or committee re-approval ensures governance oversight and keeps the framework current; none of the other options reflect real requirements.
Question 111
A newly hired treasury analyst notices that the same person initiates ACH batches, releases them, and reconciles the bank account. Which policy principle is most directly violated?
Select an option first.
Correct answer: D — Segregation of duties
Explanation: Allowing one individual to initiate, release, and reconcile payments concentrates incompatible functions and enables fraud to go undetected. Segregation of duties requires that these responsibilities be split among different people so that no single person controls a transaction end to end.
Question 112
A firm's investment policy allows commercial paper but is silent on asset-backed commercial paper (ABCP). The treasurer wants to buy ABCP. What is the most prudent interpretation?
Select an option first.
Correct answer: C — Treat instruments not explicitly authorized as prohibited until the policy is formally amended to address them
Explanation: Best practice treats an investment policy as a permissive list: instruments not explicitly authorized should be considered prohibited until governance formally evaluates and adds them. ABCP carries different structural and credit risks than plain commercial paper, so it warrants explicit policy consideration before use.
Question 113
During a market stress event, several of a firm's bank counterparties are downgraded from A to BBB. The investment policy requires a minimum of A- for deposits. What is the most appropriate immediate treasury response?
Select an option first.
Correct answer: A — Assess and reduce exposures to now-noncompliant counterparties in an orderly manner and document any temporary exceptions
Explanation: When counterparties fall below the policy minimum, treasury should evaluate the breach, reduce exposure in an orderly fashion to avoid fire-sale losses, and document any interim exceptions with proper approval. Concentrating in a downgraded bank or ignoring the change would increase, not manage, credit risk.
Question 114
Why might a treasurer supplement agency credit ratings with market-based indicators such as CDS spreads and equity prices when monitoring counterparties?
Select an option first.
Correct answer: B — Because market indicators can react faster than agency ratings, which may lag deteriorating conditions
Explanation: Agency ratings tend to change slowly and can lag rapidly deteriorating conditions, whereas CDS spreads and equity prices move continuously and can provide earlier warning. Combining both gives a more timely and complete picture, though no indicator eliminates risk.
Question 115
Wrong-way risk in counterparty credit exposure refers to the situation where:
Select an option first.
Correct answer: A — Exposure to a counterparty increases at the same time the counterparty's credit quality deteriorates
Explanation: Wrong-way risk arises when the size of the exposure and the counterparty's likelihood of default are positively correlated, so exposure grows precisely as the counterparty becomes more likely to fail. This adverse correlation makes losses worse than independence assumptions would suggest.
Question 116
A firm concentrates 45% of its receivables in one large customer. Which statement best captures the treasury risk implication?
Select an option first.
Correct answer: B — Default or delayed payment by that customer could materially impair liquidity, warranting monitoring, limits, or credit insurance
Explanation: Heavy receivables concentration means a single customer's default or slow payment can significantly disrupt the firm's cash flow and liquidity. Treasury may mitigate this through closer credit monitoring, exposure limits, factoring, or trade credit insurance.
Question 117
A key limitation of standard (parametric) VaR that stress testing is designed to address is that VaR:
Select an option first.
Correct answer: B — Says little about the size of losses in the tail beyond the confidence level and can understate risk during extreme events
Explanation: VaR indicates a threshold loss at a confidence level but does not describe how large losses can be in the tail beyond it, and parametric VaR can understate risk when returns are fat-tailed or correlations break down in crises. Stress testing and expected shortfall (conditional VaR) are used to capture these tail scenarios.
Question 118
Expected shortfall (conditional VaR) improves on VaR primarily because it:
Select an option first.
Correct answer: A — Measures the average loss given that the loss exceeds the VaR threshold
Explanation: Expected shortfall averages the losses that occur beyond the VaR cutoff, thereby capturing the severity of tail events that VaR alone omits. This makes it more informative about extreme downside risk and, unlike VaR, it is a coherent risk measure that respects diversification.
Question 119
Under hedge accounting, if a hedge is deemed highly effective, the primary financial-statement benefit is that:
Select an option first.
Correct answer: C — Gains and losses on the hedging instrument can be matched with the hedged item, reducing earnings volatility
Explanation: Qualifying hedge accounting allows the timing of gains and losses on the hedging instrument to be aligned with the offsetting effect on the hedged item, smoothing reported earnings. Achieving this requires formal designation, documentation, and demonstrated effectiveness.
Question 120
A treasurer reports a 99% 1-day VaR of $500,000. Which interpretation is correct?
Select an option first.
Correct answer: A — On about 1 out of 100 trading days, losses are expected to exceed $500,000
Explanation: A 99% 1-day VaR of $500,000 means that on roughly 1% of days (about 1 in 100), the one-day loss is expected to exceed $500,000, with no statement about how much larger those losses could be. It is neither a guaranteed loss nor an absolute cap.
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