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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:.

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Riskiq

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

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.

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FRM 2000 Credit Risk Q. 9


An investment in a callable bond can be analytically decomposed into a1

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

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).

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FRM 2000 Credit Risk Q. 18


According to put call parity buying a call option on a stock is equivalent to1

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 not true

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.

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FRM 2000 Credit Risk Q. 21


Which one of the following statements about sfas 133 is not true1

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


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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

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FRM 2000 Credit Risk Q. 32


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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


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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.

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FRM 2000 Credit Risk Q. 34


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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

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.

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FRM 2000 Credit Risk Q. 63


Which one of the following statements about operations risk is not correct1

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


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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

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FRM 2000 Credit Risk Q. 75


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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


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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.

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FRM 2000 Credit Risk Q. 77


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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


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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.

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FRM 2000 Credit Risk Q. 125


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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

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.

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FRM 2000 Credit Risk Q. 133


Fas133 requires that firms listed in the us1

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


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