CMA Final · Risk Management in Banking and Insurance · Operational Risk and Off-Balance Sheet Risk
A bank has a notional interest rate swap of Rs 200 crore with a corporate. Under the current exposure method, add-on is 1% of notional and the mark-to-market replacement cost is Rs 3 crore positive. The corporate risk weight is 100%. What is the risk-weighted amount for this swap?
The risk-weighted amount is Rs 5 crore. Under the current exposure method, the credit equivalent is positive replacement cost of Rs 3 crore plus the add-on of 1% of Rs 200 crore, which is Rs 2 crore, and the 100% risk weight leaves it at Rs 5 crore.
- ARs 2 crore
- BRs 3 crore
- CRs 6 crore
- DRs 5 croreCorrect
Explanation
Credit equivalent = replacement cost + potential future exposure = 3 + (1% x 200 = 2) = Rs 5 crore. At 100% risk weight, RWA = Rs 5 crore. Rs 2 crore uses only the add-on, Rs 3 crore uses only mark-to-market, and Rs 6 crore wrongly applies the add-on on a doubled figure.
Did you get it right without looking?
One question tells you little. A timed set on Operational Risk and Off-Balance Sheet Risk shows your real accuracy, how long you take and where you lose marks.
More Operational Risk and Off-Balance Sheet Risk questions
- Case: A bank has a forward contract with a customer to buy USD 1,00,000 at Rs 84 per USD. The current replacement cost (mark-to-market) is R…
- Under the Basel framework, which of the following is a correct example of an operational risk event category?
- Which statement best describes why a bank's letter of credit and guarantee commitments are called off-balance sheet risk?
- Which statement best describes the Loss Distribution Approach to measuring operational risk capital?
- Which of the following is an off-balance sheet exposure of a bank?
- A bank issues a performance guarantee with a notional amount of Rs 200 crore. Under the RBI capital adequacy framework the credit conversion…