RSK1501
EXAM PACK
+27 81 278 3372
, RSK1501/201
1 INTRODUCTION
Dear Student,
I hope you are finding the module interesting and that you were able to complete both
assignments successfully. The purpose of this tutorial letter is to provide solutions to
Assignment 01 and Assignment 02 for semester 2, as well as some information on the
examination paper. Please work through the assignments to ensure that you understand
where you made mistakes.
2 SUGGESTED SOLUTIONS TO ASSIGNMENT 01
1. The main objective of risk managers in banks is to maximise the shareholders'
wealth. Which one of the following statements is correct if the bank maximises
return on equity (ROE)?
1. Cost of capital will be maximised.
2. Shareholders wealth will be minimised.
3. Shareholders wealth will be maximised.
4. Shareholders wealth will not be affected.
Refer to section 2.1 (page 10) of the study guide.
ROE is a common measure of bank profitability that is equal to net income/total equity. The
objective of any business is to maximise profits and to increase the wealth of shareholders.
2. What is the difference between systematic and unsystematic risk?
a. Systematic risk affects all banks and can be diversified.
b. Systematic risk affects all banks and cannot be diversified.
c. Unsystematic risk is bank-specific and cannot be diversified.
d. Unsystematic risk is bank-specific and can be diversified.
Choose the correct option
1. a and c
2. a and d
3. b and c
4. b and d
Refer to section 2.5 (page 9) of learning lesson 2.
, RSK1501/201
Systematic market risk or undiversifiable risk is the uncertainty inherent to the entire market
or market segment due to macroeconomic factors (e.g., interest rates or inflation), while
unsystematic market risk, also known as specific or diversifiable risk, is the type of
uncertainty inherent to a specific company or industry invested in.
3. The traditional lending function involves four different components. Which one of the
following options is NOT a component?
1. Servicing
2. Originating
3. Credit checking
4. An application process
Refer to section 3.1 (page 2) of learning lesson 3.
The traditional lending function involves: originating, funding, services and monitoring.
Credit checking involves checking the applicant’s entry on credit registers. This process
provides a borrower’s credit reference and takes place before the loan can be granted to
the borrower while monitoring is an on the going process after the loan has been made.
4. Credit checking is the process of …
1. obtaining information on a potential borrower.
2. asking applicants a number of probing questions.
3. requesting the credit history of a borrower from a credit bureau.
4. awarding scores to factors predicting the ability of applicants to repay a credit.
Refer to section 3.1 (page 2) of learning lesson 3.
Lenders will check the applicant’s entry on credit registers. Credit reference agencies or
credit bureaus hold factual information on retail clients and this allows a lender to check
individuals’ names and addresses and past credit histories, including any court judgments
or defaults recorded against them. To obtain information on a potential borrower, banks
will initially adopt a qualitative approach, which involves asking the applicant a number of
questions.
5. A severe mismatch of assets and liabilities by banks will lead to …
1. credit risk.
2. liquidity risk.
3. interest rate risk.
4. foreign exchange risk.
Refer to section 5.2 (page 26) of the study guide.
The level of interest rate risk faced by banks will differ between fixed-rate assets and
liabilities, and rate-sensitive assets and liabilities.
6. Identify the correct statement.
1. Liquidity is the ability of a bank to ultimately meet all its obligations.
2. The profitability of a bank would increase if it increases its liquidity.
3. Capital risk is the same as the risk of insolvency or the risk of failure.
4. The primary function of derivatives is to speculate on underlying securities.
, RSK1501/201
Refer to section 1.2 (page 5) of the study guide.
Capital risk is the same as the risk of insolvency or the risk of failure. It is not treated as a
separate risk because all other banking risks can potentially affect the bank’s capital.
Capital risk therefore refers to the decrease in the market value of assets below the market
value of liabilities. Capital risks are closely tied to financial leverage (debt/equity) and banks
are typically highly leveraged firms.
7. Changes in economic, social and political conditions, as well as specific
events in foreign countries, may adversely affect a global bank’s commercial and
financial interests. What is this type of risk called?
1. Foreign risk
2. Country risk
3. Political risk
4. Sovereign risk
Refer to section 2.5 (page 11) of learning lesson 2.
Country risk relates to the risk that economic, social and political conditions, as well as
specific events in a foreign country, will adversely affect a bank’s commercial and financial
interests.
8. The banking book relates to …
1. assets held for short-term resale before maturity date.
2. assets held for long-term resale including loans, bonds and equities.
3. assets on a bank's balance sheet that are expected to be held to maturity.
4. assets held to trade and included on the balance sheet at marked-to-market values.
Refer to section 2.5 (page 6) of learning lesson 2 or page 11 of the study guide.
The bank’s assets are divided into two “books” that contain assets of similar characteristics;
the trading book and the banking book. The banking book incorporates assets which are
held to maturity – for example, corporate and retail loans, while the trading book of the
bank incorporates assets, which are held for trading as opposed to being held until maturity
– for example, equities.
9. What is the risk of insolvency?
1. The risk of asset value falling below liability value.
2. The risk of not being able to find a buyer for an asset.
3. The risk of human resource costs in a tight labour market.
4. The risk of borrowers not paying off lenders in a timely fashion.
Refer to section 2.4 (page 5) of learning lesson 2.
10. Which one of the following events can be described as a regulatory risk?
1. Negative publicity to a bank either true or not.
2. A borrower having the right to pay off a loan early.
3. Changing rules relating to products and dealing with customers.
4. Non-bank and retailers that are now offering money transfer services.
EXAM PACK
+27 81 278 3372
, RSK1501/201
1 INTRODUCTION
Dear Student,
I hope you are finding the module interesting and that you were able to complete both
assignments successfully. The purpose of this tutorial letter is to provide solutions to
Assignment 01 and Assignment 02 for semester 2, as well as some information on the
examination paper. Please work through the assignments to ensure that you understand
where you made mistakes.
2 SUGGESTED SOLUTIONS TO ASSIGNMENT 01
1. The main objective of risk managers in banks is to maximise the shareholders'
wealth. Which one of the following statements is correct if the bank maximises
return on equity (ROE)?
1. Cost of capital will be maximised.
2. Shareholders wealth will be minimised.
3. Shareholders wealth will be maximised.
4. Shareholders wealth will not be affected.
Refer to section 2.1 (page 10) of the study guide.
ROE is a common measure of bank profitability that is equal to net income/total equity. The
objective of any business is to maximise profits and to increase the wealth of shareholders.
2. What is the difference between systematic and unsystematic risk?
a. Systematic risk affects all banks and can be diversified.
b. Systematic risk affects all banks and cannot be diversified.
c. Unsystematic risk is bank-specific and cannot be diversified.
d. Unsystematic risk is bank-specific and can be diversified.
Choose the correct option
1. a and c
2. a and d
3. b and c
4. b and d
Refer to section 2.5 (page 9) of learning lesson 2.
, RSK1501/201
Systematic market risk or undiversifiable risk is the uncertainty inherent to the entire market
or market segment due to macroeconomic factors (e.g., interest rates or inflation), while
unsystematic market risk, also known as specific or diversifiable risk, is the type of
uncertainty inherent to a specific company or industry invested in.
3. The traditional lending function involves four different components. Which one of the
following options is NOT a component?
1. Servicing
2. Originating
3. Credit checking
4. An application process
Refer to section 3.1 (page 2) of learning lesson 3.
The traditional lending function involves: originating, funding, services and monitoring.
Credit checking involves checking the applicant’s entry on credit registers. This process
provides a borrower’s credit reference and takes place before the loan can be granted to
the borrower while monitoring is an on the going process after the loan has been made.
4. Credit checking is the process of …
1. obtaining information on a potential borrower.
2. asking applicants a number of probing questions.
3. requesting the credit history of a borrower from a credit bureau.
4. awarding scores to factors predicting the ability of applicants to repay a credit.
Refer to section 3.1 (page 2) of learning lesson 3.
Lenders will check the applicant’s entry on credit registers. Credit reference agencies or
credit bureaus hold factual information on retail clients and this allows a lender to check
individuals’ names and addresses and past credit histories, including any court judgments
or defaults recorded against them. To obtain information on a potential borrower, banks
will initially adopt a qualitative approach, which involves asking the applicant a number of
questions.
5. A severe mismatch of assets and liabilities by banks will lead to …
1. credit risk.
2. liquidity risk.
3. interest rate risk.
4. foreign exchange risk.
Refer to section 5.2 (page 26) of the study guide.
The level of interest rate risk faced by banks will differ between fixed-rate assets and
liabilities, and rate-sensitive assets and liabilities.
6. Identify the correct statement.
1. Liquidity is the ability of a bank to ultimately meet all its obligations.
2. The profitability of a bank would increase if it increases its liquidity.
3. Capital risk is the same as the risk of insolvency or the risk of failure.
4. The primary function of derivatives is to speculate on underlying securities.
, RSK1501/201
Refer to section 1.2 (page 5) of the study guide.
Capital risk is the same as the risk of insolvency or the risk of failure. It is not treated as a
separate risk because all other banking risks can potentially affect the bank’s capital.
Capital risk therefore refers to the decrease in the market value of assets below the market
value of liabilities. Capital risks are closely tied to financial leverage (debt/equity) and banks
are typically highly leveraged firms.
7. Changes in economic, social and political conditions, as well as specific
events in foreign countries, may adversely affect a global bank’s commercial and
financial interests. What is this type of risk called?
1. Foreign risk
2. Country risk
3. Political risk
4. Sovereign risk
Refer to section 2.5 (page 11) of learning lesson 2.
Country risk relates to the risk that economic, social and political conditions, as well as
specific events in a foreign country, will adversely affect a bank’s commercial and financial
interests.
8. The banking book relates to …
1. assets held for short-term resale before maturity date.
2. assets held for long-term resale including loans, bonds and equities.
3. assets on a bank's balance sheet that are expected to be held to maturity.
4. assets held to trade and included on the balance sheet at marked-to-market values.
Refer to section 2.5 (page 6) of learning lesson 2 or page 11 of the study guide.
The bank’s assets are divided into two “books” that contain assets of similar characteristics;
the trading book and the banking book. The banking book incorporates assets which are
held to maturity – for example, corporate and retail loans, while the trading book of the
bank incorporates assets, which are held for trading as opposed to being held until maturity
– for example, equities.
9. What is the risk of insolvency?
1. The risk of asset value falling below liability value.
2. The risk of not being able to find a buyer for an asset.
3. The risk of human resource costs in a tight labour market.
4. The risk of borrowers not paying off lenders in a timely fashion.
Refer to section 2.4 (page 5) of learning lesson 2.
10. Which one of the following events can be described as a regulatory risk?
1. Negative publicity to a bank either true or not.
2. A borrower having the right to pay off a loan early.
3. Changing rules relating to products and dealing with customers.
4. Non-bank and retailers that are now offering money transfer services.
