RiskIQ

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RiskIQ
Sample Questions Source FRM Exam 2000

• Montgomery Investment Technology, Inc.
• Financial Modeling Software and Consulting

www.fintools.com
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An investment in a callable bond can be
analytically decomposed into a
Question 1

• 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
3
An investment in a callable bond can be
analytically decomposed into a
Question 1 Correct Answer is D

• 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
4
According to Put-Call parity, buying a call
option on a stock is equivalent to
Question 2

• 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
5
According to Put-Call parity, buying a call
option on a stock is equivalent to
Question 2 Correct Answer is D

• 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
6
Which one of the following statements about SFAS
133 is NOT TRUE?
Question 3

• 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
7
Which one of the following statements about SFAS
133 is NOT TRUE?
Question 3 Correct Answer is B

• 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
8
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?
Question 4

• 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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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?
Question 4 Correct Answer is A

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

FRM 2000 Credit Risk Q. 32
10
What is the difference between the marginal
default probability and the cumulative default
probability?
Question 5

• 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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What is the difference between the marginal
default probability and the cumulative default
probability?
Question 5 Correct Answer is A

• 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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Which one of the following statements about
operations risk is NOT correct?
Question 6

• 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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Which one of the following statements about
operations risk is NOT correct?
Question 6 Correct Answer is C

• 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
14
If portfolio A has a VaR of 100 and portfolio B
has a VaR of 200, then the VaR of the portfolio
CAB
Question 7

• 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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If portfolio A has a VaR of 100 and portfolio B
has a VaR of 200, then the VaR of the portfolio
CAB
Question 7 Correct Answer is A

• 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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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
Question 8

• 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
17
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
Question 8 Correct Answer is C

• 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
18
If the F-test shows that the set of X variables
explain a significant amount of variation in the
Y variable, then
Question 9

• 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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If the F-test shows that the set of X variables
explain a significant amount of variation in the
Y variable, then
Question 9 Correct Answer is B

• 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
20
FAS133 requires that firms listed in the US
Question 10

• 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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FAS133 requires that firms listed in the US
Question 10 Correct Answer is C

• 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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