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LAM argues that EIC is a better metric for decisions regarding the allocation of capital than RAROC.
True or False
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You have decided to analyze cash flows across a wide variance of sales including very extreme outcomes. You are interested in knowing the state of the liquidity of your company in each volume of sales. This is an example of scenario analysis.
True or False
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A company that sells milk to Starbucks and allows Starbucks to pay for delivered milk in 60 days has no credit risk exposure since Starbucks is a profitable company.
True or False
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Return optimization means managers must seek to maximize the return/risk ratio.
True or False
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Creditors view the economic capital of a borrower as a cushion that protects their own balance sheets from unexpected losses suffered by the borrower.
True or False
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Operational risk is not typically a serious issue because financial disasters are only caused by credit events.
True or False
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The concentration of credit risk should be managed with exposure limits. If credit risk is too concentrated a single error in judgment in granting credit can wipe out a firm’s economic capital.
True or False
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Lam suggests that sometimes covering up a serious problem can be effective risk management because it gives management time to find a solution without panicking investors and lenders. Lam suggests that once a solution to the problem is found management should then inform stakeholders.
True or False
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When regulators examine the performance of a bank’s capital levels across a number of interest rate levels, they are using scenarios analysis to test the bank’s capital adequacy.
True or False
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Economic capital and loss reserves are equivalent.
True or False
