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1. RiskIQ Sample Questions Source: FRM Exam 2000 Montgomery Investment Technology, Inc. Financial Modeling Software and Consulting www.fintools.com

2. Question 1: 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. www.fintools.com FRM 2000 Credit Risk Q. 9

3. 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. www.fintools.com FRM 2000 Credit Risk Q. 9

4. Question 2: 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). www.fintools.com FRM 2000 Credit Risk Q. 18

5. 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). www.fintools.com FRM 2000 Credit Risk Q. 18

6. Question 3: 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. www.fintools.com FRM 2000 Credit Risk Q. 21

7. 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. www.fintools.com FRM 2000 Credit Risk Q. 21

8. Question 4: 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 www.fintools.com FRM 2000 Credit Risk Q. 32

9. 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 www.fintools.com FRM 2000 Credit Risk Q. 32

10. Question 5: 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. www.fintools.com FRM 2000 Credit Risk Q. 34

11. 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. www.fintools.com FRM 2000 Credit Risk Q. 34

12. Question 6: 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. www.fintools.com FRM 2000 Credit Risk Q. 63

13. 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. www.fintools.com FRM 2000 Credit Risk Q. 63

14. Question 7: 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 www.fintools.com FRM 2000 Credit Risk Q. 75

15. 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 www.fintools.com FRM 2000 Credit Risk Q. 75

16. Question 8: 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. www.fintools.com FRM 2000 Credit Risk Q. 77

17. 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. www.fintools.com FRM 2000 Credit Risk Q. 77

18. Question 9: 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. www.fintools.com FRM 2000 Credit Risk Q. 125

19. 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. www.fintools.com FRM 2000 Credit Risk Q. 125

20. Question 10: 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. www.fintools.com FRM 2000 Credit Risk Q. 133

21. 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. www.fintools.com FRM 2000 Credit Risk Q. 133

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