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Explanation:
Stress tests on current exposure do not provide any information on wrong-way risk. Wrong-way risk refers to the risk that exposure to a counterparty is adversely correlated with the credit quality of that counterparty. In other words, the risk increases when the credit quality of the counterparty deteriorates.
Q.1999 Which of the following challenges is likely to be experienced when conducting stress tests on current exposure?
A
A lack of relevant financial data.
B
A lack of models tailored to simulate specific events.
C
The test would not provide information on wrong-way risk.
D
The costs involved could be unjustifiably high.
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