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GARP 2016-FRR Financial Risk and Regulation (FRR) Series Exam Practice Test

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Total 342 questions

Financial Risk and Regulation (FRR) Series Questions and Answers

Question 1

The value of which one of the following four option types is typically dependent on both the final price of its underlying asset and its own price history?

Options:

A.

Stout options

B.

Power options

C.

Chooser options

D.

Basket options

Question 2

In analyzing market option pricing dynamics, a risk manager evaluates option value changes throughout the entire trading day. Which of the following factors would most likely affect foreign exchange option values?

I. Change in the value of the underlying

II. Change in the perception of future volatility

III. Change in interest rates

IV. Passage of time

Options:

A.

I, II

B.

I, II, III

C.

II, III

D.

I, II, III, IV

Question 3

What is the explanation offered by the liquidity preference theory for the upward sloping yield curve shape?

Options:

A.

The long term rates must rise enough to get some borrowers to borrow short-term and some lenders to lend long-term.

B.

The long term rates must rise enough to get some borrowers to borrow long-term and some lenders to lend short-term.

C.

The short term rates must rise enough to get some borrowers to borrow short-term and some lenders to lend long-term.

D.

The short term rates must fall enough to get some borrowers to borrow long-term and some lenders to lend short-term.

Question 4

To estimate the interest charges on the loan, an analyst should use one of the following four formulas:

Options:

A.

Loan interest = Risk-free rate - Probability of default x Loss given default + Spread

B.

Loan interest = Risk-free rate + Probability of default x Loss given default + Spread

C.

Loan interest = Risk-free rate - Probability of default x Loss given default - Spread

D.

Loan interest = Risk-free rate + Probability of default x Loss given default - Spread

Question 5

According to the largest global poll of foreign exchange market participants, which one of the following four global financial institutions was the most active participant in the global foreign exchange market?

Options:

A.

Citibank

B.

UBS AG

C.

Deutsche Bank

D.

Barclays Capital

Question 6

A credit analyst wants to determine if her bank is taking too much credit risk. Which one of the following four strategies will typically provide the most convenient approach to quantify the credit risk exposure for the bank?

Options:

A.

Assessing aggregate exposure at default at various time points and at various confidence levels

B.

Simplifying individual credit exposures so that they can be combined into a simplified expression of portfolio risk for the bank

C.

Using stress testing techniques to forecast underlying macroeconomic factors and bank's idiosyncratic risks

D.

Analyzing distribution of bank's credit losses and mapping credit risks at various statistical levels

Question 7

Which of the following statements about the interest rates and option prices is correct?

Options:

A.

If rho is positive, rising interest rates increase option prices.

B.

If rho is positive, rising interest rates decrease option prices.

C.

As interest rates rise, all options will rise in value.

D.

As interest rates fall, all options will rise in value.

Question 8

In the United States, Which one of the following four options represents the largest component of securitized debt?

Options:

A.

Education loans

B.

Credit card loans

C.

Real estate loans

D.

Lines of credit

Question 9

Which one of the following four global markets for financial assets or instruments is widely believed to be the most liquid?

Options:

A.

Equity market.

B.

Foreign exchange market.

C.

Fixed income market

D.

Commodities market

Question 10

Which one of the following changes would typically increase the price of a fixed income instrument, such as a bond?

Options:

A.

Decrease in inflation rates in a country.

B.

Increase in time to maturity.

C.

Increase in risk premium.

D.

Increase in demand for goods and services.

Question 11

An options trader is assessing the aggregate risk of her currency options exposures. As an options buyer, she can potentially ___ lose more than the premium originally paid. As an option seller, however, she has a ___ risk on the contract and always receives a premium.

Options:

A.

Never, unlimited

B.

Sometimes, unlimited

C.

Never, limited

D.

Sometimes, limited

Question 12

Which of the following attributes are typical for early models of statistical credit analysis?

Options:

A.

These models assumed the default of any obligor was independent of the default of any other.

B.

The underlying default assumptions were analytically inconvenient.

C.

The underlying default assumptions failed to develop relatively simple formulas for the determination of portfolio credit risk.

D.

These models effectively incorporated herd behavior.

Question 13

Counterparty credit risk assessment differs from traditional credit risk assessment in all of the following features EXCEPT:

Options:

A.

Exposures can often be netted

B.

Exposure at default may be negatively correlated to the probability of default

C.

Counterparty risk creates a two-way credit exposure

D.

Collateral arrangements are typically static in nature

Question 14

Which one of the following four variables of the Black-Scholes model is typically NOT known at a point in time?

Options:

A.

The underlying relevant exchange rates

B.

The underlying interest rates

C.

The future volatility of the exchange rates

D.

The time to maturity

Question 15

Which one of the following four statements on factors affecting the value of options is correct?

Options:

A.

As volatility rises, options increase in value.

B.

As time passes, options will increase in value.

C.

As interest rates rise and option's rho is positive, option prices will decrease.

D.

As the value of underlying security increases, the value of the put option increases.

Question 16

All of the four following exotic options are path-independent options, EXCEPT:

Options:

A.

Chooser options

B.

Power options

C.

Asian options

D.

Basket options

Question 17

To estimate a partial change in option price, a risk manager will use the following formula:

Options:

A.

Partial change in option price = Delta x Change in underlying price

B.

Partial change in option price = Delta x (1+ Change in underlying price)

C.

Partial change in option price = Delta x Gamma x Change in underlying price

D.

Partial change in option price = Delta x Gamma x (1+ Change in underlying price)

Question 18

Which one of the following four mathematical option pricing models is used most widely for pricing European options?

Options:

A.

The Black model

B.

The Black-Scholes model

C.

The Garman-Kohlhagen model

D.

The Heston model

Question 19

Except for the credit quality of the Credit Default Swap protection seller, the following relationship correctly approximates the yield on a risk-free instrument:

Options:

A.

Bond + CDS

B.

Bond + CDS + Market Spread

C.

Bond - CDS

D.

Bond - CDS - Market spread

Question 20

After entering the securitization business, Delta Bank increases its cash efficiency by selling off the lower risk portions of the portfolio credit risk. This process ___ return on equity for the bank, because the cash generated by the risk-transfer and the overall ___ of the bank's exposure to the risk.

Options:

A.

Increases; increase;

B.

Increases; reduction;

C.

Decreases; increase;

D.

Decreases; reduction;

Question 21

A risk manager has a long forward position of USD 1 million but the option portfolio decreases JPY 0.50 for every JPY 1 increase in his forward position. At first approximation, what is the overall result of the options positions?

Options:

A.

The options positions hedge the forward position by 25%.

B.

The option positions hedge the forward position by 50%.

C.

The option positions hedge the forward position by 75%.

D.

The option positions hedge the forward position by 100%.

Question 22

A risk manager is considering how to best quantify option price dynamics using mathematical option pricing models. Which of the following variables would most likely serve as an input in these models?

I. Implicit parameter estimate based on observed market prices

II. Estimates of sensitivity of option prices to parameter changes

III. Theoretical option determination based on assumptions

Options:

A.

I, III

B.

II

C.

II, III

D.

I, II, III

Question 23

A credit rating analyst wants to determine the expected duration of the default time for a new three-year loan, which has a 2% likelihood of defaulting in the first year, a 3% likelihood of defaulting in the second year, and a 5% likelihood of defaulting the third year. What is the expected duration for this three-year loan?

Options:

A.

1.5 years

B.

2.1 years

C.

2.3 years

D.

3.7 years

Question 24

As DeltaBank explores the securitization business, it is most likely to embrace securitization to:

I. Bring transparency to the bank's balance sheet

II. Create a new profit center for the bank

III. Strategically release risk capital and regulatory capital for redeployment

IV. Generate cash for additional debt origination

Options:

A.

I, III

B.

II, IV

C.

I, II, III

D.

II, III, IV

Question 25

Alpha Bank determined that Delta Industrial Machinery Corporation has 2% change of default on a one-year no-payment of USD $1 million, including interest and principal repayment. The bank charges 3% interest rate spread to firms in the machinery industry, and the risk-free interest rate is 6%. Alpha Bank receives both interest and principal payments once at the end the year. Delta can only default at the end of the year. If Delta defaults, the bank expects to lose 50% of its promised payment. What interest rate should Alpha Bank charge on the no-payment loan to Delta Industrial Machinery Corporation?

Options:

A.

8%

B.

9%

C.

10%

D.

12%

Question 26

Which one of the following statements correctly identifies risks in foreign exchange forwards?

Options:

A.

Short-term forward price fluctuations are driven by changes in the spot exchange rate, since most inter-country interest rates differentials are significant, and the effect of compounding is large for short periods of time.

B.

Short-term forward price fluctuations are driven by changes in the spot exchange rate, since most inter-country interest rates differentials are small, and the effect of compounding is small for short periods of time.

C.

Long-term forward price fluctuations are driven by changes in the spot exchange rate, since most inter-country interest rates differentials are small, and the effect of compounding is large for short periods of time.

D.

Long-term forward price fluctuations are driven by changes in the spot exchange rate, since most inter-country interest rates differentials are significant, and the effect of compounding is small for short periods of time.

Question 27

Which one of the following four option types has two strike prices?

Options:

A.

Asian options

B.

American options

C.

Range options

D.

Shout options

Question 28

Which one of the four following statements regarding foreign exchange (FX) swap transactions is INCORRECT?

Options:

A.

FX swap is a common short-term transaction.

B.

FX swap is normally used for hedging various currency positions.

C.

FX swap generates more exchange rate risk than simple forward transactions.

D.

FX swap is generally used to for funding foreign currency balances and currency speculation.

Question 29

A risk manager analyzes a long position with a USD 10 million value. To hedge the portfolio, it seeks to use options that decrease JPY 0.50 in value for every JPY 1 increase in the long position. At first approximation, what is the overall exposure to USD depreciation?

Options:

A.

His overall portfolio has the same exposure to USD as a portfolio that is long USD 5 million.

B.

His overall portfolio has the same exposure to USD as a portfolio that is long USD 10 million.

C.

His overall portfolio has the same exposure to USD as a portfolio that is short USD 5 million.

D.

His overall portfolio has the same exposure to USD as a portfolio that is short USD 10 million.

Question 30

A credit risk analyst is evaluating factors that quantify credit risk exposures. The risk that the borrower would fail to make full and timely repayments of its financial obligations over a given time horizon typically refers to:

Options:

A.

Duration of default.

B.

Exposure at default.

C.

Loss given default.

D.

Probability of default.

Question 31

An asset manager for a large mutual fund is considering forward exchange positions traded in a clearinghouse system and needs to mitigate the risks created as a result of this operation. Which of the following risks will be created as a result of the forward exchange transaction?

Options:

A.

Exchange rate risk

B.

Exchange rate and interest rate risk

C.

Credit risk

D.

Exchange rate and credit risk

Question 32

In the United States, during the second quarter of 2009, transactions in foreign exchange derivative contracts comprised approximately what proportion of all types of derivative transactions between financial institutions?

Options:

A.

2%

B.

7%

C.

25%

D.

43%

Question 33

As Japan ___ its budget deficits and ___ its dependence on debt, the Japanese currency, JPY, would ___ in value against other currencies.

Options:

A.

Reduces, reduces, appreciate

B.

Reduces, reduces, depreciate

C.

Increases, reduces, appreciate

D.

Reduces, increases, depreciate

Question 34

Which of the following factors can cause obligors to default at the same time?

I. Obligors may be harmed by exposures to similar risk factors simultaneously.

II. Obligors may exhibit herd behavior.

III. Obligors may be subject to the sampling bias.

IV. Obligors may exhibit speculative bias.

Options:

A.

I

B.

II, III

C.

I, II

D.

III, IV

Question 35

Foreign exchange rates are determined by various factors. Considering the drivers of exchange rates, which one of the following changes would most likely strengthen the value of the USD against other foreign currencies?

Options:

A.

The expected US inflation rate increases

B.

The global demand for US products decreases

C.

The economic performance in the US weakens

D.

The US current account surplus increases

Question 36

Which one of the following four statements correctly defines a non-exotic call option?

Options:

A.

A call option gives the call option buyer the obligation, but not the right, to buy the underlying instrument at a known price in the future.

B.

A call option gives the call option buyer the obligation, but not the right, to sell the underlying instrument at a known price in the future

C.

A call option gives the call option buyer the right, but not the obligation, to buy the underlying instrument at a known price in the future

D.

A call option gives the call option buyer the right, but not the obligation, to sell the underlying instrument at a known price in the future

Question 37

A financial analyst is trying to distinguish credit risk from market risk. A $100 loan collateralized with $200 in stock has limited ___, but an uncollateralized obligation issued by a large bank to pay an amount linked to the long-term performance of the Nikkei 225 Index that measures the performance of the leading Japanese stocks on the Tokyo Stock Exchange likely has more ___ than ___.

Options:

A.

Legal risk; market risk; credit risk

B.

Market risk; market risk; credit risk

C.

Market risk; credit risk; market risk

D.

Credit risk, legal risk; market risk

Question 38

A credit analyst wants to determine a good pricing strategy to compensate for credit decisions that might have been made incorrectly. When analyzing her credit portfolio, the analyst focuses on the spreads in each loan to determine if they are sufficient to compensate the bank for all of the following costs and risks EXCEPT.

Options:

A.

The marginal cost of funds provided.

B.

The overhead cost of maintaining the loan and the account.

C.

The inherent risk of lending to this borrower while providing a return on the risk capital used to the support the loan.

D.

The opportunity cost of risk-adjusted marginal cost of capital.

Question 39

Most loans and deposits in the interbank market have a maturity of:

Options:

A.

More than 10 years

B.

More than 5 years but less than 10 years

C.

More than 3 years but less than 5 years

D.

Less than one year

Question 40

Which one of the following four statements correctly describes an American call option?

Options:

A.

An American call option gives the buyer of that call option the right to buy the underlying instrument on any date up to and including the expiry date.

B.

An American call option gives the buyer of that call option the right to sell the underlying instrument on any date up to and including the expiry date.

C.

An American call option gives the buyer of that call option the right to buy the underlying instrument on the expiry date.

D.

An American call option gives the buyer of that call option the right to sell the underlying instrument on the expiry date.

Question 41

Which one of the following four statements correctly defines chooser options?

Options:

A.

The owner of these options decides if the option is a call or put option only when a predetermined date is reached.

B.

These options represent a variation of the plain vanilla option where the underlying asset is a basket of currencies.

C.

These options pay an amount equal to the power of the value of the underlying asset above the strike price.

D.

These options give the holder the right to exchange one asset for another.

Question 42

Which one of the following four statements about the relationship between exchange rates and option values is correct?

Options:

A.

As the dollar appreciates relative to the pound, the right to buy dollars at a fixed pound exchange rate decreases.

B.

As the dollar appreciates relative to the pound, the right to buy dollars at a fixed pound exchange rate increases.

C.

As the dollar depreciates relative to the pound, the right to buy dollars at a fixed pound exchange rate increases.

D.

As the dollar appreciates relative to the pound, the right to sell dollars at a fixed pound exchange rate increases.

Question 43

ThetaBank has extended substantial financing to two mortgage companies, which these mortgage lenders use to finance their own lending. Individually, each of the mortgage companies have an exposure at default (EAD) of $20 million, with a loss given default (LGD) of 100%, and a probability of default of 10%. ThetaBank's risk department predicts the joint probability of default at 5%. If the default risk of these mortgage companies were modeled as independent risks, the actual probability would be underestimated by:

Options:

A.

1%

B.

2%

C.

3%

D.

4%

Question 44

To hedge a foreign exchange exposure on behalf of a client, a small regional bank seeks to enter into an offsetting foreign exchange transaction. It cannot access the large and liquid interbank market open primarily to larger banks. At which one of the following exchanges can the smaller bank trade the currency futures contracts?

I. The Tokyo Futures Exchange

II. The Euronext-Liffe Exchange

III. The Chicago Mercantile Exchange

Options:

A.

I

B.

III

C.

II, III

D.

I, II, III

Question 45

Gamma Bank provides a $100,000 loan to Big Bath retail stores at 5% interest rate (paid annually). The loan is collateralized with $55,000. The loan also has an annual expected default rate of 2%, and loss given default at 50%. In this case, what will the bank's expected loss be?

Options:

A.

$500

B.

$750

C.

$1,000

D.

$1,300

Question 46

Which one of the following four statements regarding counterparty credit risk is INCORRECT?

Options:

A.

Counterparty credit risk refers to the inability to realize gains in a contract with a counterparty due to its default.

B.

The exposure at default is variable due to fluctuations in swap valuations.

C.

The exposure at default can be negatively correlated to probability of default.

D.

Dynamic collateral provisions often increase counterparty risk considerably.

Question 47

By lowering the spread on lower credit quality borrowers, the bank will typically achieve all of the following outcomes EXCEPT:

Options:

A.

Aggressively courting of new business

B.

Lower probability of default

C.

Rapid growth

D.

Higher losses in case of default

Question 48

For which one of the following four reasons do corporate customers use foreign exchange derivatives?

I. To lock in the current value of foreign-denominated receivables

II. To lock in the current value of foreign-denominated payables

III. To lock in the value of expected future foreign-denominated receivables

IV. To lock in the value of expected future foreign-denominated payables

Options:

A.

II

B.

I and IV

C.

II and III

D.

I, II, III, IV

Question 49

Which one of the following four models is typically used to grade the obligations of small- and medium-size enterprises?

Options:

A.

Causal models

B.

Historical frequency models

C.

Credit scoring models

D.

Credit rating models

Question 50

A risk manager is analyzing a call option on the GBP with a vega of 0.02. When the perceived future volatility increases by 1%, the call option

Options:

A.

Increases in value by 0.02.

B.

Increases in value by 2.

C.

Decreases in value by 0.02.

D.

Decreases in value by 2.

Question 51

A credit portfolio manager analyzes a large retail credit portfolio. Which of the following factors will represent typical disadvantages of market-linked credit risk drivers?

I. Need to supply a large number of input parameters to the model

II. Slow computation speed due to higher simulation complexity

III. Non-linear nature of the model applicable to a specific type of credit portfolios

IV. Need to estimate a large number of unknown variable and use approximations

Options:

A.

I

B.

I, II

C.

II, III

D.

III, IV

Question 52

Which of the following risk measures are based on the underlying assumption that interest rates across all maturities change by exactly the same amount?

I. Present value of a basis point.

II. Yield volatility.

III. Macaulay's duration.

IV. Modified duration.

Options:

A.

I and II

B.

I, II, and III

C.

I, III, and IV

D.

I, II, III, and IV

Question 53

Mega Bank has $100 million in deposits on which it pays 3% interest, and $20 million in equity on which it pays no interest. The loan portfolio of $120 million earns an average rate of 10%. If the rates remain the same and Mega Bank is able to earn the same net interest income in perpetuity at a 5% discount rate, what will the present value of this holding be?

Options:

A.

$100 million

B.

$150 million

C.

$180 million

D.

$200 million

Question 54

Which one of the following four statements best describes challenges of delta-normal method of mapping options positions?

Delta-normal method understates

Options:

A.

Risks of long and short positions for both calls and puts.

B.

Risks of long option positions for puts and overstates risks of short option positions for calls.

C.

Risks of long option positions for calls and overstates risks of short option positions for puts.

D.

Risks of short option positions and overstates risks of long option positions for both calls and puts.

Question 55

What are the add-on losses faced by a bank that is going bankrupt?

I. The discount accepted by the bank for selling its assets in a fire sale.

II. The increased cost of funding liabilities in a financially distressed situation.

III. The reduction in the present value of future growth opportunities.

IV. Loss of goodwill and intangible assets.

Options:

A.

I, II

B.

II, III, IV

C.

III, IV

D.

I, II, III, IV.

Question 56

In additional to the commodity-specific risks, which of the following risks represent the main commodity derivative risks?

I. Basis

II. Term

III. Correlation

IV. Seasonality

Options:

A.

I, II

B.

II, III

C.

I, IV

D.

I, II, III, IV

Question 57

Which of the following statements depicts a difference between funding liquidity risks and trading liquidity risks?

Options:

A.

Funding liquidity risks are associated with how fast prices move in the market while trading liquidity risks originate out of bank trades.

B.

Funding liquidity risks are concerned with the ability of the bank to fund deposits withdrawals while trading liquidity risks are concerned with the change in bid-offer spreads of asset values.

C.

Funding liquidity risks are short term risks while trading liquidity risks are longer term risks.

D.

Funding liquidity risks are associated only with the bank assets while trading liquidity risks are associated with both assets and liabilities of the bank.

Question 58

The retail banking business of BankGamma has an expected P & L of $50 million and a VaR of $100 million. The bank seeks to diversify its revenue, and is considering the opportunity to acquire a credit card business with an expected P & L of $50 million and a VaR of $150 million. What will be the overall RAROC if the bank acquires the new business?

Options:

A.

33.3%.

B.

50%.

C.

58%.

D.

72%.

Question 59

Which of the following statements about the option gamma is correct? Gamma is the

I. Second derivative of the option value with respect to the volatility.

II. Percentage change in option value per percentage change in the price of the underlying instrument.

III. Second derivative of the value function with respect to the price of the underlying instrument.

IV. Rate of change of the option delta with respect to changes in the underlying price.

Options:

A.

I only

B.

II and III

C.

III and IV

D.

II, III, and IV

Question 60

John owns a bond portfolio worth $2 million with duration of 10. What positions must he take to hedge this portfolio against a small parallel shifts in the term structure.

Options:

A.

Long position worth $2 million with duration of 10.

B.

Long position worth $20 million with duration of 1.

C.

Short position worth $2 million with duration of 10.

D.

Short position worth $20 million with duration of 1.

Question 61

Which of the following reports have been suggested by the FDIC that banks should produce in addition to the usual probabilistic analysis and stress tests in order to gauge liquidity issues?

I. Cash flow gaps

II. Funding availability

III. Critical assumptions used in credit projections

Options:

A.

I, II

B.

I, II, III

C.

I

D.

I, III

Question 62

Jack Richardson wants to compute the 1-month VaR of a portfolio with a market value of USD 10 million, with an average monthly return of 1% and average monthly standard deviation of 1.5%. What is the portfolio VaR at 99% confidence level?

Probability Cumulative Normal distribution

0.90 1.282

0.91 1.341

0.92 1.405

0.93 1.476

0.94 1.555

0.95 1.645

0.96 1.751

0.97 1.881

0.98 2.054

0.99 2.326

Options:

A.

164,500

B.

232,600

C.

246,750

D.

348,900

Question 63

To ensure good risk management which of the following should be true about the CRO role and function?

Options:

A.

The CRO should receive compensation that is directly determined by the profit of the trading desk.

B.

The CRO should report to the CEO or the Board of Directors.

C.

The CRO should not be involved with the setting of risk limits.

D.

To ensure efficient flow of information the CRO should not be independent of business units.

Question 64

Which of the following statements represents a methodological difference between variance-covariance and full revaluation methods?

Options:

A.

Variance-covariance approach provides computational advantages over the full revaluation approach.

B.

Variance-covariance approach computes the VAR for each position separately, while the full revaluation method computes the VAR on a portfolio basis.

C.

Variance-covariance approach prices positions more accurately than the full revaluation approach.

D.

Variance-covariance approach uses only historic data to compute the covariance matrix.

Question 65

For two variables, which of the following is equal to the average product of the deviations from their respective means?

Options:

A.

Standard deviation

B.

Kurtosis

C.

Correlation

D.

Covariance

Question 66

An asset and liability manager for a large financial institution has to recognize that retail products ___ include embedded options, which are often not rationally exercised, while wholesale products ___ carry penalties for repayment or include rights to terminate wholesale contracts on very different terms than are common in retail products.

Options:

A.

Frequently; typically

B.

Hardly ever; typically

C.

Frequently; rarely

D.

Hardly ever; rarely

Question 67

What does correlation between two variables measure?

Options:

A.

Symmetry of a joint distribution of the two variables.

B.

Association between the two variables and the strength of a possible statistical relationship.

C.

The proportion of variability in one of the variables that is explained by the other.

D.

Extreme returns of both variables.

Question 68

Which of the following statements about implementation of a successful RCSA program is correct?

Options:

A.

An RCSA is only complete after all possible mitigating actions have been identified and analyzed as a result of the assessment process.

B.

Internal loss data help to identify the risks and control weaknesses that need to be addressed in the RCSA; external events are not helpful in informing the discussions around potential risks.

C.

The RCSA scoring methodology should include only financial impacts and not include reputational, legal, regulatory, client and life safety impacts.

D.

To ensure that the RCSA is well designed, it is important to interview participants, stakeholders and support functions prior to the launching the RCSA.

Question 69

Which one of the following four exercise features is typical for the most exchange-traded equity options?

Options:

A.

Asian exercise feature

B.

American exercise feature

C.

European exercise feature

D.

A shout option exercise feature

Question 70

James Johnson has a $1 million long position in ThetaGroup with a VaR of 0.3 million, and $1 million long position in VolgaCorp with a VaR of 0.4 million. The returns of the two companies have zero correlation. What is the portfolio VaR?

Options:

A.

$1 million

B.

$0.7 million

C.

$0.5 million

D.

$0.4 million

Question 71

Which type of risk does a bank incur on loans that are in the "pipeline", i.e loans that are in the process of origination but not yet originated?

Options:

A.

Interest rate risk and credit risk

B.

Interest rate risk only

C.

Credit Risk only

D.

The bank does not incur any risk since the loan is not yet originated

Question 72

Why is economic capital across market, credit and operational risks simply added up to arrive at an estimate of aggregate economic capital in practice?

Options:

A.

Market, credit and operational risks are perfectly correlated which justifies adding up their associated economic capital.

B.

In practice, it is very difficult to estimate the correlations between the risk categories and as a result a conservative estimate is obtained by adding up the risks.

C.

Regulators require banks to add up economic capital across market, credit and operational risks.

D.

Since market, credit and operational risks are significantly different measures of risk, there is no diversification benefit to computing economic capital to banks across types of risks.

Question 73

Present value of a basis point (PVBP) is one of the ways to quantify the risk of a bond, and it measures:

Options:

A.

The change in value of a bond when yields increase by 0.01%.

B.

The percentage change in bond price when yields change by 1 basis point.

C.

The present value of the future cash flows of a bond calculated at a yield equal to 1%.

D.

The percentage change in bond price when the yields change by 1%.

Question 74

To estimate the required risk-adjusted rate of return on a highly volatile energy stock, a risk associate compiled the following statistics:

Risk-free rate = 5%

Beta = 2.5

Market Risk = 8%

Using the Capital Asset Pricing Model, she estimates the rate of return to be equal:

Options:

A.

10%

B.

15%

C.

25%

D.

40%

Question 75

If a bank is long £500 million pounds, short £300 million in delta-equivalent pound options, and long £100 million in pound-denominated stocks, what is the amount of pound exposure that would be shown in the aggregated risk reports?

Options:

A.

£300 million pounds

B.

£500 million pounds

C.

£800 million pounds

D.

£900 million pounds

Question 76

How could a bank's hedging activities with futures contracts expose it to liquidity risk?

Options:

A.

The futures hedge may not work due to the widening of basis which could result in a loss for the bank.

B.

Prices may move such that a loss results on the hedge.

C.

Since futures require margins which are settled every day, the bank could find itself scrambling for funds.

D.

The bank could get exposed to liquidity risk since futures trade on an exchange.

Question 77

The Sarbanes-Oxley Act includes one of the following four requirements for financial institutions in the United States:

Options:

A.

Risk and control requirements

B.

Market discipline requirements

C.

Capital allocation requirements

D.

Regulatory response to systemic risk requirements

Question 78

10 basis points are equal to:

Options:

A.

10%

B.

1%

C.

0.1%

D.

0.01%

Question 79

To improve the culture and awareness of the operational risk, Gamma Bank's CRO decides to promote three activities within her organization. Which one of the following four activities is NOT typically used to develop an operational risk framework?

Options:

A.

Marketing

B.

Planning

C.

Training

D.

Auditing

Question 80

In its VaR calculations, JPMorgan Chase uses an expected tail-loss methodology which approximates losses at the 99% confidence level. This methodology consists of two subsequent steps to estimate the VaR. Which of the following explains this two-step methodology?

Options:

A.

After VaR is computed at the 97% confidence level, the expected tail loss in excess of that confidence level is determined, which is then compared with the VaR estimate at the 99% confidence level.

B.

After VaR is computed at the 99% confidence level, the expected tail loss in excess of that confidence level is determined, which is then compared with the VaR estimate at the 98% confidence level.

C.

After VaR is computed at the 99% confidence level, the expected tail loss in excess of that confidence level is determined, which is then compared with the VaR estimate at the 99% confidence level.

D.

After VaR is computed at the 1% confidence level, the expected tail loss in excess of that confidence level is determined, which and is then compared with the VaR estimate at the 98% confidence level.

Question 81

Which one of the following four factors typically drives the pricing of wholesale products?

Options:

A.

Marketing considerations

B.

Prevailing market price

C.

Long-term competitiveness

D.

Overall risk exposure

Question 82

All of the following factors generally explain the equity bid-offer spread in a market EXCEPT:

Options:

A.

Market volatility

B.

Interest rates

C.

Competition among market makers

D.

Market depth

Question 83

A portfolio manager is interested in computing risk measures for his bond investment portfolio. Which of the following measures the sensitivity of duration to interest rates?

Options:

A.

Modified duration.

B.

Yield curve

C.

Convexity.

D.

Credit spread.

Question 84

The skewness of ABC company's stock returns equal -1.5. What is the correct interpretation of this?

Options:

A.

It indicates higher relative probability of negative returns compared to estimates derived from a normal distribution.

B.

It indicates that the returns are indeed normally distributed.

C.

It indicates lower probability of extreme negative events compared to the normal distribution.

D.

It indicates higher relative probability of extreme events than non-extreme events compared to estimates from a normal distribution.

Question 85

Which of the following statements about a bank's behavior regarding Risk Adjusted Return on Capital (RAROC) is correct?

I. A bank should always seek to maximize their overall RAROC.

II. A bank should consider investing in a business even with negative RAROC if it increases the RAROC of the bank as a whole.

III. A bank should minimize its overall RAROC by controlling the absolute and relative amount of risk of its businesses.

IV. A bank should maximize its RAROC by always investing in a new business that maximizes the RAROC for that business unit.

Options:

A.

I and II

B.

II and IV

C.

I, II and III

D.

II, III, and IV

Question 86

Which one of the following four statements about the "market-maker" trading strategy is INCORRECT?

Options:

A.

A market maker that attracts buy and sell orders can make a profit from the spread quoted between the buy and sell price.

B.

A market maker can benefit from the market information she gets from the trades she is asked to execute.

C.

This strategy is independent of market liquidity and number of other market makers.

D.

This risk in this strategy is that traders have to take positions that may quickly incur a loss.

Question 87

In analyzing the historical performance of a financial product, you are concerned about "fat tails", the probability of extreme returns compared to realized returns. Which of the following measures should you use to determine if the product return distribution of the product has "fat tails"?

Options:

A.

Mean

B.

Standard deviation

C.

Skewness

D.

Kurtosis

Question 88

Securitization is the process by which banks

I. Issue bonds where the payment of interest and repayment of principal on the bonds depends on the cash flow generated by a pool of bank assets.

II. Issue bonds where the bank has transferred its legal right to payment of interest and repayment of principal to bondholders.

III. Sell illiquid assets.

Options:

A.

I, II

B.

I

C.

I, III

D.

I, II, III

Question 89

Which one of the following market risk measures evaluates the bank's earnings sensitivity?

Options:

A.

Cash flow stress testing

B.

Large exposure risk identification

C.

Earnings-at-risk stress testing

D.

Value-at-risk back testing

Question 90

Operational risk team for a large international bank is implementing business continuity planning (BCP). Which of the following BCP activities fall within the definition of operational risk and represent Basel II Accord's operational risk categories:

I. Damage to Physical Assets

II. Business Disruption and System Failures

III. Social Distancing Requirements

IV. Potential for Extreme Losses

Options:

A.

I and II

B.

III

C.

I and IV

D.

III and IV

Question 91

Asset and liability management is typically concerned with all of the following activities:

I. Maintaining the desired liquidity structure of the bank.

II. Managing the factors affecting the structure and composition of a bank's balance sheet.

III. Effectively transferring the interest rate risk in the banking book to the investment bank at a fair transfer price.

IV. Focusing on the circumstances impacting the stability of income the bank generates over time.

Options:

A.

I

B.

II, III

C.

III, IV

D.

I, II, IV

Question 92

Unico Bank, concerned with managing the risk of its trading strategies, wants to implement the trading strategy that exposes the bank to the lowest market risk. Which one of the following four strategies should Unico take to limit its risk exposure?

Options:

A.

A matched book strategy that allows the trading desk to match all customer positions immediately with an equal and opposite position by trading internally or with another bank.

B.

A covering strategy that manages positions in the product by executing covering deals or hedging deal at the discretion of the trading des.

C.

A passive hedging strategy that allows the traders to price transactions with customers and other banks, at the relevant bid price on the market.

D.

A market-maker strategy that allows the traders to quote a buy and sell price to customers and other banks and to trade at the relevant price on the sell side of the market.

Question 93

Floating rate bonds typically have ________ duration which means they have ________ sensitivity to interest rate changes.

Options:

A.

long, small

B.

long, high

C.

short, high

D.

short, small

Question 94

Rising TED spread is typically a sign of increase in what type of risk among large banks?

I. Credit risk

II. Market risk

III. Liquidity risk

IV. Operational risk

Options:

A.

I only

B.

II only

C.

I and IV

D.

I, II, and III

Question 95

A bank has a large number of auto loans and would prefer to sell them to raise cash for more funding. However, selling individual auto loans is difficult. What could the bank do?

Options:

A.

Package the loans into a securitized vehicle and sell the low risk portion of the portfolio.

B.

Obtain a stronger credit rating so that the bank could borrow at a cheaper rate.

C.

Set up a marketing team to sell individual loans to investors.

D.

Merge with another bank.

Question 96

Which of the following are conclusions that could be drawn from the shape of the statistical distribution of losses that a bank might incur over a future time period?

I. In most years a bank would look more profitable than it will be on average.

II. Most of the time a sufficiently well capitalized bank will appear over-capitalized.

III. Bad years do not come along very often, but when they do they lead to enormous losses.

Options:

A.

I, II

B.

I, III

C.

II, III

D.

I, II, III

Question 97

An endowment asset manager with a focus on long/short equity strategies is evaluating the risks of an equity portfolio. Which of the following risk types does the asset manager need to consider when evaluating her diversified equity portfolio?

I. Company-specific projected earnings and earnings risk

II. Aggregate earnings expectations

III. Market liquidity

IV. Individual asset volatility

Options:

A.

I

B.

I, IV

C.

II, III

D.

I, II, IV

Question 98

Bank customers traditionally trade commodity futures with banks in order to achieve which of the following goals?

I. To express their own price views

II. To reverse undesired short-term exposure created from fixed commodity sales

III. To reach short-term budgetary targets

Options:

A.

I

B.

II

C.

I, III

D.

I, II, III

Question 99

To estimate the responsiveness of a particular equity portfolio to the overall market, a trader should use the portfolio's

Options:

A.

Alpha

B.

Beta

C.

CVaR

D.

VaR

Question 100

Which of the following statements defines Value-at-risk (VaR)?

Options:

A.

VaR is the worst possible loss on a financial instrument or a portfolio of financial instruments over a given time period.

B.

VaR is the minimum likely loss on a financial instrument or a portfolio of financial instruments with a given degree of probabilistic confidence.

C.

VaR is the maximum of past losses over a given period of time.

D.

VaR is the maximum likely loss on a financial instrument or a portfolio of financial instruments over a given time period with a given degree of probabilistic confidence.

Question 101

Financial regulators in a European country are considering banning trading in highly complex derivative instruments that are not settled through a centralized clearinghouse. This ban can result in:

I. The value of the country's currency dropping

II. Counterparties involved in trading of these derivative instruments failing to fulfill their obligations

III. The business model relying on these instruments failing

IV. Certain activities becoming illegal

Options:

A.

I, II

B.

II, III

C.

I, IV

D.

II, III, IV

Question 102

Bank Sigma has an opportunity to do a securitization deal for a credit card company, but has to retain a portion of the residual risk of the deal with an estimated VaR of $8 MM. Its fees for the deal are $2 MM, and the short-term financing costs are $600,000. What would be the RAROC for this transaction?

Options:

A.

25%

B.

17.5%

C.

33%

D.

12%

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Total 342 questions