Page 1 of 2

INSTITUTE OF BUSINESS MANAGEMENT

Final Exam Semester:Spring
Course Title:Financial Regulations in Risk Mangt. Course Code:FRM506
Faculty:Muhammad Ali Khoja Day / Date:Saturday, 03
rd
May 2014
Time:09:30-12:30PMTotal Marks: 100
NOTE: Attempt all questions. Students Name:

1.Explain why the following statements are True or False:

(i) Foundation Internal Ratings Based (IRB) approach uses a single risk factor portfolio model
instead of a multiple risk factor model.

(ii)Value-at-Risk (VaR) is the average loss exceeding a specified threshold.

(iii) Economic Capital is the type of capital used to buffer a bank from unexpected losses.

(iv) Stress testing is considered an intuitive risk management tool because scenarios are drawn
from factors that would likely impact portfolio values.

(v) Treasury STRIP bonds are zero-coupon bonds.

(vi) Operational Risk includes Fraud, System malfunction, risk of falling below the reserve limit and
inadequate systems.

(vii) The standard formula of Solvency II incorporates the values on the basis of Mark-to-Market
only.

(viii) If ALL the insurers in the market held just their Solvency required capital, then 1 in 200
insurers would fail per year.

(ix)A Regulatory reserve is always greater than the Capital Reserve.
(x) 'Solvency 2' will introduce economic risk-based solvency requirements across all EU Member
States with "one-model-fits-all" way of estimating capital requirements.[20 marks]
2.Define the following terms:
a. Economic Capital
b. Value-at-Risk
c. Regulatory Capital
d. Mark-to-Market
e. Insurance Risk
f. Market Risk
g. Credit Risk
h. Liquidity Risk
i. Operational Risk
j. Probability of Default [20 marks]

Page 2 of 2

3. An insurance company is considering launching a new product. Given an example of each of the
following risks associated with an insurance product:
a) Operational Risk
b) Credit Risk
c) Market Risk
d) Insurance Risk
e) Foreign Exchange Risk [5 marks]

Solvency II is the name of the proposed regulations for insurers which was initiated by the
European Commission in 2000 aimed to increase the protection to policyholders by imposing new
capital adequacy measures.

4. Why does the European Union (EU) need harmonised solvency rules?[5 marks]
5. How Solvency II acts as an alarm of the financial instability of the insurance firm? Explain the
working of the first pillar of Solvency II. [10 marks]
6. What are the challenges/opportunities for the insurance companies implementing Solvency II?
[10 marks]
The Basel II Framework sets out the details for adopting more risk-sensitive minimum capital
requirements for banking organizations. The new framework reinforces these risk-sensitive
requirements by laying out principles for banks to assess the adequacy of their capital and for
supervisors to review such assessments to ensure banks have adequate capital to support their
risks. It also seeks to strengthen market discipline by enhancing transparency in banks financial
reporting.
7. What are the 3 pillars of BASEL II?[15 marks]
8. What's the difference between the standardised approach and the IRB approaches?[4 marks]
9. Why do financial institutions need to hold capital? [2 marks]
10. What happens if an institution breaches the Basel II requirements? [2 marks]
11. What is a bank loan rating? Why has it become relevant?[2 marks]
12. As per your understanding how BASEL II supports the bank in Risk Management? [5 marks]