JAIIB Paper 1 Module D Quiz 10

A haircut means the collateral’s recognised value is set below its market value. The buffer helps protect the lender against price volatility, liquidation costs and potential delays in selling collateral.

Variation margin transfers or secures the current mark-to-market exposure under the arrangement. It helps control current credit exposure but depends on collateral terms, timing and counterparty performance.

VaR estimates a loss quantile for a portfolio over a stated horizon and confidence level. It does not measure the severity of losses beyond that threshold and can fail under unusual market conditions.

Stress testing explores how portfolios or institutions might perform under adverse scenarios that may not be captured adequately by routine models. It informs risk limits, capital and contingency planning.

A stop-loss instruction aims to trigger a trade after a specified price condition. A derivative hedge creates an offsetting exposure intended to reduce risk, but can involve basis, liquidity and counterparty risks.

Repricing gaps compare the timing and sensitivity of assets and liabilities. If liabilities reprice upward faster than assets, funding costs may rise more quickly than asset income, potentially compressing net interest income.

Duration gap analysis compares the interest-rate sensitivity of assets and liabilities. It can help estimate the effect of rate changes on economic value, although assumptions and behavioural characteristics also matter.

Operational risk can arise from failed processes, people, systems or external events. Incorrect trade capture is operational, whereas yield-driven price changes are market risk and borrower default is credit risk.

A settlement fail occurs when the required securities or cash are not delivered according to settlement obligations. It can create costs, liquidity strain and counterparty exposure.

A liquidity buffer consists of assets or resources available to meet unexpected outflows and stressed funding needs. It supports resilience but does not eliminate every liquidity risk.

Acceptance generally signifies the drawee’s undertaking to pay the bill at maturity according to its terms. It does not by itself mean that payment has already been made or that the bill is government-guaranteed.

A usance bill provides a credit period and becomes payable at a specified future date or after a defined tenor. It differs from a sight bill, which is payable on presentation subject to its terms.

A sight bill is payable on presentation according to the instrument’s terms and applicable law. It is distinct from a usance bill that provides a future payment period.

Trade credit allows a buyer to receive goods or services and pay later under agreed terms. It supports working capital but exposes the supplier to delayed payment or buyer default.

An assignment transfers specified receivable rights, subject to the governing law, contract terms and any notice or consent requirements. It does not automatically transfer ownership of the seller’s entire business.

Invoice validity warranties and verification help reduce fraud, duplication and dispute risks. They do not guarantee buyer solvency or remove all legal and operational risk.

Export credit insurance can cover specified commercial and political non-payment risks. Coverage limits, exclusions, waiting periods and claim conditions apply, and currency risk may require a separate hedge.

In documentary collection, banks handle documents and present them for payment or acceptance according to instructions. Unlike a letter of credit, collection does not ordinarily provide the same independent payment undertaking by a bank.

A documentary credit provides a bank undertaking to honour a presentation that complies with the credit terms and applicable rules. Banks deal with documents, not the physical goods themselves.

A forfaiter purchases eligible export receivables at a discounted price, often on a without-recourse basis subject to agreed terms. The exporter receives earlier cash while the forfaiter assumes specified payment risks.