Q.1    Please write the alphabate of selected choice in the answer column:                         (05)
                                                                                                                                                 (Answer)

i	What is meant by the course title “Advance Risk Management”? A) Managing the risk involved in advancing funds to borrowers. B) Managing the risk involved in monitoring advances. C) Making advance preparations by re-organizing risk management     functions to coup with all the risks that are expected to arise in the future. D) None of the above
ii	What is meant by the expression “Operational Risk”? A) Risk arising out of possible negligence of the Operations Department      of a branch. B) Risk arising out of weak supervision by Operations Department      at the Head Office. C) Risk arising out of operational errors committed by any unit in a bank. D) None of the above.
iii	In maintaining accounts record, which is the most important area of operational control? A) Vital areas to be covered in the operational manuals. B) System familiarity at the various operational levels of the bank. C) Access to the accounting records. D) None of the above.
iv	What is meant by the expression “Market Risk”? A) Risk arising out of unexpected closure or expansion of a market. B) Risk of possible losses due to adverse movements in commodity      prices, interest and exchange rates or market distress caused      by any reason, to be suffered by a bank directly or on the      exposures the bank Takes on behalf of its customers. C) Risk arising out of foreign investors’ entry into a market, which       increases local investors’ stake. D) None of the above
v	Which of the following is the initial impact of a steady drop in a country’s foreign exchange reserves? A) Default on external loan repayment commitments. B) Official devaluation of the country’s currency. C) Gradual weakening of the country’s currency in the foreign       exchange markets. D) None of the above

Q.2     Of the following indicator trends, a combination of which four trends is an indication of the
            weakening of a country’s currency for a prolonged period? Tick in left hand column. (02)

	Static level of exports.
	Steadily rising trade deficit.
	Developing political instability.
	Excessive de-regulation that obliges the government to dilute or withdraw import restrictions.
	Steadily rising payments on both official and private sector external debt.
	A natural calamity that affects a non-productive territory of the country.
	Rapid increase in consumption of imported consumer goods.

Q.3     In a forecasting exercise, what should be the logical sequence of analytical stages?
           Write numbers from 1 to 6 in the box before each stage listed below, to indicate the place
           of that stage in that sequence. (03)

	Preparing simulated models for predicting the variety of possible outcomes
	Trend analyses of the variables involved
	Identification of the sources providing historical trends of each involved variable
	Identification of all the variables involved in the specific forecasting exercise
	Verification of credibility of information sources on each variable
	Stipulating the appropriate strategy for benefiting maximally from each possible outcome

Q.4     State True or False in the answer column. Give brief reason for your selection at the
           space provided below the question:                                                                             (05)

                                                                                                                                               (Answer)

i	Savers in Pakistan are not concerned about profit rates on deposits and bank deposits will not be diverted to Mutual Funds.
ii	Auto leasing will remain a profitable business for banks in the medium-term in spite of the currently Visible economic trends.
iii	Even in the next two years, Currency option contracts will not become a popular exchange risk hedging mechanism in Pakistan among the exporter/importer community.
iv	Interest rates in Pakistan are likely to come down in the next 12 months.
v	The present arrangements in Pakistan for credit referencing are adequate for commercial banks to maintain the expansion of consumer finance portfolio on a secure basis.

Q.5    Fill in the blanks:                                                                                                          (15)

i	Banks are in the business of taking a variety of risks but, aside from the risk associated with their finance portfolio, their risk increases in direct proportion to the _____________ in their networks.
ii	Centralization of trade transaction processing ____________ the bank’s operating cost.
iii	Contract employment has _____________________________ staff mobility and reduced the ability of banks to sustain their manpower even in key positions, which is increasing bank risk.
iv	Banks need to monitor reports on expected climatic conditions because besides the agricultural sector the ______________________-based industrial sector is also indirectly impacted by these changes.
v	Changes in the country risk perception of Pakistan’s major trading partners should guide your bank’s _____________________ finance activities and exposures arising there from.
vi	___________ propels growth in almost two thirds of the industrial sector of every economy, and that is why in the US it is considered the most important indicator of economic growth.
vii	Besides offering a Credit Report or Reference, for longer-term risk assessment of an entity, Credit Rating agencies now provide a Credit ___________________, which gives a more reliable view of an entity’s health in the short-term.
viii	For managing liquidity risk effectively, banks need to install a system whereby banks can generate asset and liability ________________ ladders in real-time.
ix	Implementation of RTGS will require banks to settle inter-bank receipts / payments in _____.
x	In the context of risk measurement, Basle – II Accord envisages the Standardized Approach and ____________________ other approaches that are based on risk rating.
xi	Because risk will continue to escalate due to increasing market volatility and changes in customer conduct, ____________________is now mandatory to supplement internal, external and central bank audit.
xii	In respect of facilities extended to borrowers who are not rated by a credit rating agency, Basle – II Accord stipulates applying ___________% risk weight.
xiii	Because the overwhelming majority of the borrowers in Pakistan are not risk-rated by a credit rating agency, against bulk of their financing portfolio banks will have to maintain a minimum of _________ % capital adequacy.
xiv	For sovereign exposures, risk assessment will rely on the ratings developed by OECD __________ credit agencies, besides internationally recognized credit rating agencies.
xv	Under Basle – II accord, Regional governments and local authorities would qualify for the same risk rating as applicable to claims on their sovereign if these entities have specific _________________ generating powers and institutional arrangements the effect of which is to reduce their risks of default.

 

Q.6	Opening branches purely for competing may lead to setting up loss-making branches and, later on, incurring closure costs. In the context of developing branches in up-coming industrial estates, list the areas of inquiry that relating to branch location and its future business prospects to justify setting up a new branch. (10)
Q.7	Not up-dating and increasing the range of banking products and services on a timely basis can gradually reduce a bank’s market access and market share, giving rise to disadvantages that flow from not having a critical mass of the customer base. A bank’s failure to offer competitive packages of products and services force its customers to move to banks that offer the range of products and services they begin to seek over time. List the points you will consider while devising various packages for a new financing product to put your bank at a comparative advantage versus other banks. (10)
Q.8	Your bank plans to build an asset portfolio in facilities to importers of power generation plants. According to conditions applicable to these imports, payment will be allowed only after the equipment it is approved by the concerned Federal Ministry and its inspectors confirm that it meets the ministry’s laid down specifications. These inspectors can inspect the plant either in the country of its manufacture (and at importer’s expense) or upon its arrival in Pakistan. Given these conditions, what risk acceptance and management policy will you devise to prepare Branch Managers for building this portfolio on a secure basis? (10)
Q.9	In the coming years, Letters of Credit will gradually go out of fashion because of the high charges recovered by banks to establish them. International trade will largely be conducted through exports on collection basis and risk of default will shift from banks in foreign countries to importers in those countries. In this developing scenario, how will you gear up your bank for mitigating the risk associated with realization of export proceeds? List the internal and external risk mitigation checks and arrangements you will implement to prepare for managing this developing risk? (10)
Q.10	Countries that are deregulated too rapidly suffer from serious inadequacies of trained and experienced manpower. This shortage gives rise to unhealthy trends in employee mobility which is made worse if, at all levels, employees are hired on contracts providing for short notice periods for contract termination by either party. To mitigate the risk of trained and experienced employees leaving the bank, what policy guideline would you recommend to sustain the loyalty of employees? (10)
Q.11	Banks everywhere need to change their accounting software to produce accounting reports that meet the new supervision, control and reporting requirements imposed by the Basle-II Accord. However, changing bank’s accounting computer software carries high risks. Identify and list these risks that not only disrupt banking operations, but also result in misreporting and inappropriate management of the overall risk of the bank. (10)
Q.12	In October 2005 State Bank of Pakistan issued guideline for Stress Testing. The Test required to be carried out assuring three different hypothetical scenario of minor, moderate and major shocks. Comment on the Stress Testing methodology and usefulness or otherwise. (10)