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RiskIQ. Sample Questions Source: FRM Exam 2000. Montgomery Investment Technology, Inc. Financial Modeling Software and Consulting. www.fintools.com. Question 1:. An investment in a callable bond can be analytically decomposed into a:.

RiskIQ

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RiskIQ

Sample Questions

Source: FRM Exam 2000

Montgomery Investment Technology, Inc.

Financial Modeling Software and Consulting

www.fintools.com

An investment in a callable bond can be analytically decomposed into a:

- A. Long position in a non-callable bond and a short position in a put option.
- B. Short position in a non-callable bond and a long position in a call option.
- C. Long position in a non-callable bond and a long position in a call option.
- D. Long position in a non-callable and a short position in a call option.

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FRM 2000 Credit Risk Q. 9

Question 1: Correct Answer is D

An investment in a callable bond can be analytically decomposed into a:- A. Long position in a non-callable bond and a short position in a put option.
- B. Short position in a non-callable bond and a long position in a call option.
- C. Long position in a non-callable bond and a long position in a call option.
- D. Long position in a non-callable and a short position in a call option.

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FRM 2000 Credit Risk Q. 9

According to Put-Call parity, buying a call option on a stock is equivalent to:

- A. Writing a put, buying the stock, and selling short bonds (borrowing).
- B. Writing a put, selling the stock, and buying bonds (lending).
- C. Buying a put, selling the stock, and buying bonds (lending).
- D. Buying a put, buying the stock, and selling short bonds (borrowing).

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FRM 2000 Credit Risk Q. 18

Question 2: Correct Answer is D

According to Put-Call parity, buying a call option on a stock is equivalent to:- A. Writing a put, buying the stock, and selling short bonds (borrowing).
- B. Writing a put, selling the stock, and buying bonds (lending).
- C. Buying a put, selling the stock, and buying bonds (lending).
- D. Buying a put, buying the stock, and selling short bonds (borrowing).

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FRM 2000 Credit Risk Q. 18

Which one of the following statements about SFAS 133 is NOTTRUE?

- A. Fair value is the relevant measure for derivatives.
- B. Even though derivatives are assets and liabilities, they should be recorded off the balance sheet.
- C. Derivatives are assets and liabilities and should be reported on the balance sheet.
- D. Special hedge accounting is limited to offsetting changes in fair value or cash flows for the risk being hedged.

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FRM 2000 Credit Risk Q. 21

Question 3: Correct Answer is B

Which one of the following statements about SFAS 133 is NOTTRUE?- A. Fair value is the relevant measure for derivatives.
- B. Even though derivatives are assets and liabilities, they should be recorded off the balance sheet.
- C. Derivatives are assets and liabilities and should be reported on the balance sheet.
- D. Special hedge accounting is limited to offsetting changes in fair value or cash flows for the risk being hedged.

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FRM 2000 Credit Risk Q. 21

Assume the one-year T-bill yield is 6.25 percent and the risk neutral default probability of one-year Commercial Paper is 0.85 percent. What should the yield of one-year Commercial Paper be assuming a 50 percent recovery rate?

- A. 6.7 percent
- B. 6.9 percent
- C. 7.2 percent
- D. 7.5 percent

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FRM 2000 Credit Risk Q. 32

Question 4: Correct Answer is A

Assume the one-year T-bill yield is 6.25 percent and the risk neutral default probability of one-year Commercial Paper is 0.85 percent. What should the yield of one-year Commercial Paper be assuming a 50 percent recovery rate?

- A. 6.7 percent
- B. 6.9 percent
- C. 7.2 percent
- D. 7.5 percent

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FRM 2000 Credit Risk Q. 32

What is the difference between the marginal default probability and the cumulative default probability?

- A. Marginal default probability is the probability that a borrower will default in any given year, while the cumulative default probability is over a specified multi-year period.
- B. Marginal default probability is the probability that a borrower will default due to a particular credit event, while the cumulative default probability is for all possible credit events.
- C. Marginal default probability is the minimum probability that a borrower will default, while the cumulative default probability is the maximum probability.
- D. Both a and c.

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FRM 2000 Credit Risk Q. 34

Question 5: Correct Answer is A

What is the difference between the marginal default probability and the cumulative default probability?- A. Marginal default probability is the probability that a borrower will default in any given year, while the cumulative default probability is over a specified multi-year period.
- B. Marginal default probability is the probability that a borrower will default due to a particular credit event, while the cumulative default probability is for all possible credit events.
- C. Marginal default probability is the minimum probability that a borrower will default, while the cumulative default probability is the maximum probability.
- D. Both a and c.

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FRM 2000 Credit Risk Q. 34

Which one of the following statements about operations risk is NOT correct?

- A. The operations unit for derivatives activities, consistent with other trading and investment activities should report to an independent unit and should be managed independently of the business unit.
- B. It is essential that operational units be able to capture all relevant details of transactions, identify errors and process payments or move assets quickly and accurately.
- C. Because the business unit is responsible for the profitability of a derivatives function, it should be responsible for ensuring proper reconciliation of front and back office databases on a regular basis.
- D. Institutions should establish a process through which documentation exceptions are monitored, resolved and appropriately reviewed by senior management and legal counsel.

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FRM 2000 Credit Risk Q. 63

Question 6: Correct Answer is C

Which one of the following statements about operations risk is NOT correct?- A. The operations unit for derivatives activities, consistent with other trading and investment activities should report to an independent unit and should be managed independently of the business unit.
- B. It is essential that operational units be able to capture all relevant details of transactions, identify errors and process payments or move assets quickly and accurately.
- C. Because the business unit is responsible for the profitability of a derivatives function, it should be responsible for ensuring proper reconciliation of front and back office databases on a regular basis.
- D. Institutions should establish a process through which documentation exceptions are monitored, resolved and appropriately reviewed by senior management and legal counsel.

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FRM 2000 Credit Risk Q. 63

If portfolio A has a VaR of 100 and portfolio B has a VaR of 200, then the VaR of the portfolio C=A+B:

- A. Will certainly be smaller than or equal to 300
- B. Will be exactly equal to 300
- C. Can be greater or smaller than 300
- D. Will be greater than 300

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FRM 2000 Credit Risk Q. 75

Question 7: Correct Answer is A

If portfolio A has a VaR of 100 and portfolio B has a VaR of 200, then the VaR of the portfolio C=A+B:- A. Will certainly be smaller than or equal to 300
- B. Will be exactly equal to 300
- C. Can be greater or smaller than 300
- D. Will be greater than 300

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FRM 2000 Credit Risk Q. 75

A trader has put on a long position in a 2-year call on a stock whose strike will be determined by the value of the stock in 1 year's time. You can expect this position:

- A. To have no delta, no gamma, and no vega.
- B. To have no delta, no gamma, and appreciable vega.
- C. To have small delta, no gamma, and appreciable vega.
- D. To have small delta, no gamma, no vega.

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FRM 2000 Credit Risk Q. 77

Question 8: Correct Answer is C

A trader has put on a long position in a 2-year call on a stock whose strike will be determined by the value of the stock in 1 year's time. You can expect this position:

- A. To have no delta, no gamma, and no vega.
- B. To have no delta, no gamma, and appreciable vega.
- C. To have small delta, no gamma, and appreciable vega.
- D. To have small delta, no gamma, no vega.

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FRM 2000 Credit Risk Q. 77

If the F-test shows that the set of X variables explain a significant amount of variation in the Y variable, then:

- A. Another linear regression model should be tried.
- B. A t-test should be used to test which of the individual X variables, if any, should be discarded.
- C. A transformation of the Y variable should be made.
- D. Another test should could be done using an indicator variable to test the significance level of the model.

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FRM 2000 Credit Risk Q. 125

Question 9: Correct Answer is B

If the F-test shows that the set of X variables explain a significant amount of variation in the Y variable, then:- A. Another linear regression model should be tried.
- B. A t-test should be used to test which of the individual X variables, if any, should be discarded.
- C. A transformation of the Y variable should be made.
- D. Another test should could be done using an indicator variable to test the significance level of the model.

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FRM 2000 Credit Risk Q. 125

FAS133 requires that firms listed in the US:

- A. Use VaR for their internal models.
- B. Mark all the derivatives in the banking book to market.
- C. Prove “hedge effectiveness” in order to apply accrual accounting to derivatives.
- D. None of the above.

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FRM 2000 Credit Risk Q. 133

Question 10: Correct Answer is C

FAS133 requires that firms listed in the US:- A. Use VaR for their internal models.
- B. Mark all the derivatives in the banking book to market.
- C. Prove “hedge effectiveness” in order to apply accrual accounting to derivatives.
- D. None of the above.

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FRM 2000 Credit Risk Q. 133