Transcript Document

RiskIQ
Sample Questions
Source: FRM Exam 2000
Montgomery Investment Technology, Inc.
Financial Modeling Software and Consulting
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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.
FRM 2000 Credit Risk Q. 9
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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.
FRM 2000 Credit Risk Q. 9
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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).
FRM 2000 Credit Risk Q. 18
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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).
FRM 2000 Credit Risk Q. 18
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Question 3:
Which one of the following statements about SFAS 133
is NOT TRUE?

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.
FRM 2000 Credit Risk Q. 21
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Question 3: Correct Answer is B
Which one of the following statements about SFAS 133
is NOT TRUE?

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.
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
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
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.
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.
FRM 2000 Credit Risk Q. 34
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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.
FRM 2000 Credit Risk Q. 63
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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.
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
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
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.
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.
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.
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.
FRM 2000 Credit Risk Q. 125
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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.
FRM 2000 Credit Risk Q. 133
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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.
FRM 2000 Credit Risk Q. 133
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