BFM B - Unit 31 - set 2 - Motivational Banker

1. How is profit typically calculated in a bank's profit planning process?

By subtracting non-interest income from operating expenses

By subtracting interest income from non-interest income

By subtracting operating expenses from total income

By subtracting total expenses from total income

Question 1 of 25

2. What contributes to the interest income side in a bank's profit planning?

Trading in securities

Salary and office expenses

Income from loans and investments

Operating expenses

Question 2 of 25

3. What are considered interest expenses in a bank's profit planning process?

Salary expenses

Expenses related to trading in foreign exchange

Expenses on savings accounts and fixed deposits

Operating expenses

Question 3 of 25

4. What is a key strategy mentioned in the text to increase profits in banking profit planning?

Minimize interest income

Minimize non-operating expenses

Maximize interest expenses

Maximize non-interest income

Question 4 of 25

5. What action is part of the strategy to reduce operating expenses in profit planning?

Maximize treasury income

Minimize interest expenses

Minimize non-interest income

Maximize interest income

Question 5 of 25

6. What contributes to treasury income in a bank's profit planning?

Trading in foreign exchange

Salary expenses

Interest income from loans

Operating expenses

Question 6 of 25

7. What does RAROC stand for in financial evaluation?

Risk-Adjusted Ratio of Operational Capital

Return-Adjusted Ratio of Credit Risk

Risk-Adjusted Return on Capital

Return-Adjusted Ratio of Market Risk

Question 7 of 25

8. What are the two key components considered in RAROC analysis?

Return and revenue

Return and risk

Risk and revenue

Return and profit

Question 8 of 25

9. What does 'return' signify in the context of RAROC calculation?

Potential financial loss from an investment

Profit or earnings generated by a specific investment or business unit

Risk of price fluctuations in financial markets

Risk of errors or failures in operational processes

Question 9 of 25

10. How is 'risk' defined concerning RAROC calculations?

Potential financial gain from an investment

The possibility of operational success in an investment

Potential for financial loss or negative outcomes associated with an investment or business activity

The potential for increasing revenue in a business unit

Question 10 of 25

11. What is the primary purpose of using RAROC in financial institutions?

To ignore the impact of risk on returns

To evaluate risk-adjusted performance and allocate capital efficiently

To solely focus on maximizing returns without considering risks

To overlook the profitability of business units

Question 11 of 25

12. What are some examples of risks typically taken into account in RAROC calculations?

Revenue risk and employee turnover risk

Credit risk and market risk

Market risk and profit risk

Revenue risk and operational risk

Question 12 of 25

13. How are expected losses typically addressed in financial institutions?

Covered by additional investments

Covered by provisions at the year-end

Covered by borrowing from external sources

Covered by increasing revenue streams

Question 13 of 25

14. How are unexpected losses usually managed in financial institutions?

Covered by reducing operating expenses

Covered by capital allocation

Covered by increasing interest rates

Covered by revenue diversification

Question 14 of 25

15. Why is adjustment for risk essential in the RAROC calculation?

To ignore the impact of risk on returns

To ensure all returns are equally attractive

To compensate for the additional risk associated with higher-risk investments

To maximize profits regardless of risks involved

Question 15 of 25

16. What does the 'Cost of Capital' represent in the RAROC formula?

The earnings or profit generated by the investment

The cost of borrowing or the return expected by investors for providing capital

The level of risk associated with the investment

The amount of equity invested in the business unit

Question 16 of 25

17. How is the 'Risk' component assessed in RAROC calculation?

Through provisions set at year-end

Through increasing operating expenses

Through various risk metrics such as Value at Risk (VaR), credit risk assessments, or risk models

Through reducing the return generated by the investment

Question 17 of 25

18. What does the 'Return' component represent in the RAROC formula?

The cost incurred by the institution to obtain capital

The earnings or profit generated by the investment or business unit

The level of risk associated with the investment

The amount of equity invested in the business unit

Question 18 of 25

19. What role does the expected loss play in a bank's risk management?

A measure of economic capital required to support financial risk

A buffer against unexpected losses

A measure to generate higher returns

A measure to guard against future losses

Question 19 of 25

20. How is 'unexpected loss' defined concerning a bank's risk evaluation?

It's the amount of economic capital required to support financial risk

It's the reserves necessary to guard against future losses

It's the measure of losses covered by provisions at year-end

It's a measure of the amount of economic capital required to support the bank's financial risk

Question 20 of 25

21. How does the amount of risk capital affect expected returns in business activities?

Higher risk capital requires lower returns

Higher risk capital requires no impact on returns

Higher risk capital requires higher returns

Higher risk capital requires only minimal returns

Question 21 of 25

22. What is the primary objective of using Risk-Adjusted Return on Capital (RAROC) measures?

To ignore the economic return of business activities

To establish benchmarks to evaluate the financial return of business activities

To maximize the amount of economic capital required

To minimize the economic capital required for business lines

Question 22 of 25

23. What does RAROC aim to evaluate within a bank's operations?

Only individual transactions

Only customer trades

Entire business lines and the entire business

Only specific products

Question 23 of 25

24. What is another term used interchangeably with economic capital in risk management?

Expected return

Risk buffer

Unexpected profit

Risk capital

Question 24 of 25

25. What is the primary objective of employing Risk-Adjusted Performance Measures (RAPM) like RAROC?

To measure overall profit in a given period

To compare the performance of different trading activities

To solely determine compensation for traders

To focus on expanding all lines of activity uniformly

Question 25 of 25

BFM B – Unit 31 – set 2

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