Financial Risk Manager Examination (FRM") Practice Eyam. TABLE OF CONTENTS. Introduction. FRM Part I Practice Exam Candidate Answer. Financial risk manager handbook plus test bank: FRM Part I/Part II, 6th Edition / Philippe . is now structured to correspond to the two levels of the FRM exams. TOPIC OUTLINE, READINGS,. TEST WEIGHTINGS. The Study Guide sets forth primary topics and subtopics covered in the FRM. Exam Part I and Part II.

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Get an understanding of fundamental risk management concepts that are integral to the FRM exam in this free eBook download from Kaplan Schweser. Take advantage of these free study materials for the FRM exam from Kaplan Schweser. Get a competitive edge in your studies with our free resources. Financial Risk Manager (FRM) frm practice questions frm test questions frm certification frm questions.

Futures on Commodity A with 6 months to expiration B. Futures on Commodity A with 9 months to expiration C. Futures on Commodity B with 6 months to expiration D. Futures on Commodity B with 9 months to expiration 6. What is the name of this strategy, and what is the maximum profit and loss the investor could incur at expiration? The p-value for the F-statistic for the regression is 0.

Which of the following statements is correct? A fixed income portfolio manager currently holds a portfolio of bonds of various companies. Assuming all these bonds have the same annualized probability of default and that the defaults are independent, the number of defaults in this portfolio over the next year follows which type of distribution?

Bernoulli C. Binomial D. An analyst has been asked to check for arbitrage opportunities in the Treasury bond market by comparing the cash flows of selected bonds with the cash flows of combinations of other bonds. USD If the current market price of a stock is USD 60, which of the following options on the stock has the highest gamma?

Call option expiring in 5 days with strike price of USD 30 B. Call option expiring in 5 days with strike price of USD 60 C. Call option expiring in 30 days with strike price of USD 60 D. Put option expiring in 30 days with strike price of USD 30 An investment advisor is advising a wealthy client of the company.

The advisor has gathered the following information: Which bond should the investment advisor download for the client? Y bond C. Two wooden pencils will be provided at the start of the Exam and more will be provided if necessary.

Food and drink containers may not be opened in the testing room. All food and drinks must be consumed outside the testing room. Additionally, baggage of any kind, writing instruments, and pencil cases may not be brought into the testing room. A designated area for these items will be provided. You will not have access to them during the Exam. A full list of permitted and prohibited items, as well as what to expect on exam day, can be found on the GARP website.

Part I is offered in the morning session and Part II in the afternoon session of each exam administration.

For more information, visit our website. Scoring the Exam There are no penalties for incorrect answers. There is no numerical score available for review. How much time do I need to prepare for the Exam?

Your preparation time will vary based on your experience and background, but on average, candidates spend about hours studying. In a recent survey, individual reports varied from less than to more than hours. How much work experience do I need to sit for the Exam? No work experience is required to sit for the Exam; however, you must have at least two years of professional work experience to complete your certification and use the FRM designation.

How quantitative is the Exam?

The FRM Exam does have a quantitative component, but the concepts are presented in real-world situations that risk managers face. The level of mathematical difficulty is on par with an advanced undergraduate or introductory graduate level finance course at most universities.

The two designations attest to different skills and aspects of your capabilities, and complement each other well. The FRM is focused on risk, and tests your knowledge of topics such as market risk, operational risk, integrated risk management, valuation and risk models, and investment risk management.

Many professionals choose to demonstrate their mutual competencies by earning both designations, especially given the prominent role of risk management in the global financial industry. Do you offer any exemptions for either part of the FRM Exam?

No, we do not offer exemptions and cannot accept other designations in partial fulfillment of our requirements. In order to obtain a true, objective representation of your risk management competency, we cannot rely on assessments performed by other designation-granting organizations.

What are my career prospects after becoming a Certified FRM? There are currently more than 45, FRMs employed globally at nearly every major bank, asset management firm, hedge fund, consulting firm, and regulator. B is incorrect. Short position in a put combined with short position in a stock could limit only the upside risk.

FRM-Exam-Samples.pdf - FRM Part II Samples...

C is correct. Straddle strategy b. As a result. American Options. So it is never optimal to exercise an American call option on a non- dividend-paying stock before the expiration date.. There are no advantages to exercising early if the investor plans to keep the stock for the remaining life of the call option.

At any given time during its life. So it can be optimal to exercise an American put option on a non-dividend-paying stock early. Value-at-Risk definition and methods Reference: The lack of exceedances in demonstrates that UBS failed to take into account the existence of fat tails in esti- mating the distribution of its market risk. B is wrong since exceedances alone tell us nothing about the existence of fat tails.

Using days in a year. A and D are correct. Chapter 7. Risk Management and Investment Management Subtopic: Setting Risk Limits Reference: The major reason for using the ASRF is: Asset correlations decrease with increasing PDs. In recent years. The model corresponds to the one-year Value at Risk at a The approach uses a single risk factor portfolio model instead of a multiple risk factor model.

You are the risk manager of a pension fund.


The model should not be portfolio invariant and the capital required for any given loan should not depend on the risk of other loans. The portfolio of the financial institution is assumed to be infinitely granular. The model should be portfolio invariant so that the capital required for any given loan depends only on the risk of that loan and does not depend on the portfolio it is added to. The model should not depend on the granularity of the portfolio. Which of the following statements are correct?

You are asked to evaluate how the correlation among hedge funds and between hedge funds and other asset classes. Which of the following measures help reduce model risk? Identify and evaluate key model assumptions. Leo realizes that model risk can never be eliminated.

Sale and disposition of passive financial assets and passive derivatives in the QSPE must be defined in the deal documents and may never be discretionary. The SPE must be demonstrably different from the originator and any affiliates of the originator. There is a pronounced smile for these options.

Validate the model using simple problems for which answers are independently known. Have regularly scheduled model reviews that involve careful back-testing and stress-testing. All else equal. As a risk practitioner. Use the historical volatility because doing so corrects for the pricing mistakes in the option market. The SPE cannot use derivatives. Sale and disposition of assets in the QSPE must be defined in the deal documents and may never be discretionary.

FASB For each option. Which approach should you use to mark the book? Use the implied volatility of at-the-money options because the estimation of the volatility is more reliable. The trader is short deep out-of-money options and long at-the-money options. You are asked to mark to market a book of plain vanilla stock options.

A short American call option on the underlying pool of mortgages. Randy Bartell has collected operational loss data to calibrate frequency and severity distributions. An increase in the TED spread could indicate greater concerns about bank solvency. The mortgages have prepayment risk because the borrower has the option to repay the loan early at any time usually due to favorable interest rate changes.

Which of the following state- ments best describes the change in your situation? Assume that the mortgages are insured. An increase in the TED spread could indicate more willingness of banks to lend since they get paid more for lending. A short European put option on the underlying pool of mortgages. You are told that the TED spread increased sharply. A long American put option on the underlying pool of mortgages. You are a risk manager for a hedge fund. Scale bias c. Truncation bias d.

Omitted-variable bias 8. A long American call option on the underlying pool of mortgages. Data capture bias b.

Which of the following biases is not typically associated with external loss data? Mortgage-backed securities MBS are a class of securities where the underlying is a pool of mortgages. Credit risk charges only c. With increasing EDF. Unexpected loss UL represents the standard deviation of losses. EL increases linearly with increasing EDF. Suppose that you want to estimate the implied default probability for a BB-rated discount corporate bond.

The lower the LGD. Market risk charges only b. EL is often higher than UL. Market risk and credit risk charges d.

Which of the following statements are true? All types of risk charges UL increases at a much faster rate than EL. According to the Basel II Accord. Frictions between the asset manager and investor: Frictions between the servicer and asset manager: Supervisory Formula SF iii. Which of the following approaches can be used to compute regulatory capital under the internal ratings-based IRB approach for securitization exposures under the Basel II framework?

Frictions between the originator and the arranger: Frictions between the mortgagor and the originator: Paul sells a put option on HRTB stock with a time to expiration of 6 months. Of the following frictions in the securitiza- tion process. A credit manager overseeing the structured credit book of a bank works on identifying the frictions in the securitization process that caused the recent subprime mortgage crisis in the United States. Backtesting is generally a more useful form of validation for market risk models than for operational risk models.

Market risk VaR estimates a specific quantile of the loss distribution. The following statements concern differences between market and operational risk VaR models. Which of the following statements is false?

Market risk models are primarily driven by historical data. The time horizon over which VaR is evaluated differs between market and operational risk models.

Joan Berkeley is an investment analyst for a U. To assess these funds better. Which of the following statements is least likely to be correct?

Draco has the highest Information Ratio. The pension fund should invest in the Borealis fund because it has the highest Sharpe ratio. The quantitative results are shown in Exhibits 1 and 2. Andromeda is a passively managed fund. Joan conducts detailed quantitative analysis on four mutual funds that claim to be large-capitalization funds. Exhibit 1: Joan made several comments. In examining some of the features of a two-asset credit portfolio.

ELB is the expected loss of a portfolio consisting of credits A and B. ULB is the unexpected loss of a portfolio consisting of credits A and B. RCB is the risk contribution of credit A and credit B. The SPV gains credit exposure by downloading credit default swaps. Basic Indicator Approach. Redhat is a small bank whose only business line is retail banking. The SPV gains credit exposure by downloading securities. The SPV gains credit exposure by selling credit default swaps.

The SPV gains credit exposure by selling risk-free bonds. In a synthetic CDO. Standardized Approach. Failure to fully account for time-variation of volatility. Which of the options below properly classifies each model risk error into a model risk category?

Failure to consider a sufficient number of trials in a Monte Carlo simulation. Use of the mid-quote price rather than the bid price to value long positions in financial instruments. Consider the following two asset portfolios: Level II — single business line level c. Woo finds that the options book of Ms. Aggregates risk across different business lines. What is a possible explanation? The book has a long position in binary options. The book has a long position in up-and-in call options.

Aggregates risk across different risk factors within a single business line. Level I — single risk factor level b. Aggregates the standalone risks within a single risk factor. He asks you to explain how that is possible. The book has a long position in up-and-out call options. Yu has only long positions and yet has a negative delta.. Level III — different business lines level d. Looking at a risk report. The book has a long position in down-and-out call options.

There are different commercially available credit risk models. Assume that firm value is log-normally distributed with constant volatility.

These models exhibit significant differences as well as simi- larities.. The capital structure of HighGear Corporation consists of two parts: Which of the following models builds on transition probabilities determined by macro factors? CreditMetrics b. John Smith is a bank supervisor responsible for the oversight of Everbright Group. Everbright Group now determines its credit risk profile according to the foundation IRB approach and assesses opera- tional risk according to the standardized approach as described in the Basel II Capital Accord.

Correlation between risk types is a key input for calculating firm-wide VaR. Make sure that the bank estimates for LGD and EAD for its corporate loans are in compliance with supervisory estimates.

FRM Practice Exams.pdf

Silo Bank begins its risk measurement process by calculating VaR for market. When market and credit risks involve securities issued by firms such as bonds. With non-normal distributions. If correlations between highly adverse market. None of the statements are valid. Which of the following statements about correlation are valid? Taking into account that no additional external credit enhancements are available here.

As far as the bank knows. There is no counterparty exposure as the bank guarantee to be provided by Global Bank PLC is only a contingent exposure. Assume that KidCo will default if Pattern Inc.

Global Bank PLC is exposed to the credit quality of these banks. There is only counterparty exposure with the regional banks that originated the mortgages that are securitized in the SPV because in providing the bank guarantee to the AAA tranche on this RMBS. As a risk manager. If Pattern Inc. The following table lists the default probabilities for an A-rated issue by a company facing the risk of imminent downgrade.. Year Default Probability 1 0.

Based on the information in the table above.

It is estimated that the contribution to this spread by all noncredit factors e. The spread on a one-year BBB-rated bond relative to the risk-free treasury of similar maturity is 1. Existing investment mandates often distinguished between structured and corporate ratings. Hedge fund manager compensation is often symmetric i. Which of the following statements does not identify a potential factor that played a role in the subprime crisis?

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Leverage obtained through lines of credit increases the risk of a hedge fund more than leverage obtained by issuing debt. A hedge fund investor should pay performance-based compensation to the manager for producing alpha. Even though the rating agencies publicly disclosed their rating criteria for subprime. Without due diligence by the asset manager.

The lack of hedge fund transparency is particularly problematic for investors with fiduciary responsibilities such as pension fund managers. Credit ratings were assigned to subprime MBS with significant error. You have a long position in a digital call option — an option that is also called cash-or-nothing — on shares in Global Enterprises. A EUR 10 million interest rate swap with one remaining payment due December 1.

Which of the following sensitivities would be associated with this option? A cross-currency swap with final payments due December 1. Vega is negative. The digital call has a strike price of USD 20 with one year remaining to expiration. Delta is positive. Vega is positive. Which of the following instruments has or have the most potential counterparty credit risk when the final exchange draws near maturity?

Gamma is positive. Which statements are true? The Merton Model relies on a simplistic capital structure consisting of only one debt issue. The Merton Model assumes that debt does not pay a coupon while most publicly-trade debt is coupon debt. There is an equal probability that. The Merton Model assumes a constant riskless interest rate. The Merton Model asset value volatility cannot be estimated because firm value does not trade. It builds on several very strong assumptions and its applicability is hampered by practical difficulties.

Which of the following statements does not correctly identify limiting assumptions or practical difficulties of using the model? The current yield-to-maturity on a 1-year zero coupon bond with a face value of 1.

Using this information. The Merton model is used to predict default. Present and Future". This is a drawback of the Basel II prescribed IRB model as there can be many systematic risk factor affecting the exposure instead of one single risk factor Topic: Operational and Integrated Risk Management Subtopic: This is a drawback of the Basel II prescribed IRB model as the portfolio of the financial institutions need not be completely granular d.

The default risk depends less on the overall state of the economy and more on individual risk drivers c. Is incorrect since granularity though an issue.

July This statement is not correct since the model is based on a VaR minus Expected Loss approach to computing capital to cover Unexpected Losses UL under credit risk exposures. This statement is incorrect but put here to confuse unprepared candidates. Type of question: Operational and Integrated Risk Management.

Exotic Options Reference: Statement B is incorrect. The SPE may hold only passive financial assets and passive derivatives for hedging. The prices obtained with C are the right ones because they correspond to prices at which you could sell or download the options.

Market Risk Measurement and Management Subtopic: Volatility smiles. Credit Risk Measurement and Management Subtopic: Securitization Reference: Christopher L. Sale and disposition of assets in the QSPE must be defined in the deal documents and may never be discretionary.. Structured Finance and Insurance: First and foremost. But he should never ignore the small problems because small discrep- ancies are often good warning signals of larger problems.

Practitioners should evaluate model adequacy using stress tests and backtests. It is always a good idea to check a model on simple problems to which one already knows the answer. Measuring Market Risk 2nd. Users should explicitly set out the key assumptions on which a model is based. West Sussex: Operation and Integrated Risk Management Subtopic: Model Risk Reference: Kevin Dowd. It is true that unnecessary complexity is never a virtue in model selection.

Deutsche Bank White Paper. Data capture bias — Data is usually captured with a systematic bias. It is generally not possible to guarantee that these thresholds are uniform. This problem is particularly pronounced with publicly available data. Evaluating the performance of risk management systems Reference: Falko Aue and Michael Kalkbrener. A bigger bank is exposed to more opportunity for operational failures and therefore to a higher level of operational risk. Survivorship bias is not a problem that is typically associated only with external data collection.

Scale bias — Scalability refers to the fact that operational risk is dependent on the size of the bank. Truncation bias — Banks collect data above certain thresholds. Omitted-variable bias Answer: Fixed Income Securities..

Prepayment risk is equivalent to an American call option because the borrower can repay at any time and the position is short because the option lies with the borrower. Counterparty Risk Reference: Mortgages and Mortgage Backed Securities Reference: Basel II accord Reference: June Other choices are incorrect except choice A.

All types of risk charges Answer: Tier 3 capital can only be used to satisfy capital requirements resulting from market risk charges and cannot be applied to credit risk charges. Internal Credit Risk Models: Capital Allocation and Performance Measurement. EL increases linearly with increasing EDF ii.

Over the same fixed horizon. Michael Ong. Futures and Other Derivatives. Probability of Default Reference: Risk Mitigation Reference: Adam Ashcroft and Til Schuermann. Frictions between the servicer and asset manager or credit ratings agency: Answer C is the value of a call option with 1 year to expiration.

The value of the put option is USD Selling a put option exposes you to zero credit risk as the premium is paid up front. All the information necessary to price the option is provided but it is not necessary. Counterparty Credit Risk.

The correct answer is there- fore a. Correct since the RBA.

Basel II: Is incorrect since IAA is missing. SF and IAA are the correct approaches. The high soundness standard typically used in operational risk models together with the limited time series of data available make backtesting of limited value. Operational risk models often incorporate more qualitative information. Operational risk models often rely heavily on scenarios and other forms of judgment in addition to historical loss data. Operational risk models do define VaR as a specific quantile of the loss distribution.

Enterprise Risk Management: Theory and Practice. Operational risk VaRs are typically calculated at a 1 year time horizon.

FRM Exam Part I Syllabus

Nocco and Stulz. Correlations across market. The trade will decrease the VaR by 0. Choice b: The Sharpe ratio is not the right metric in this context because a fund is added to an existing portfolio and the fund has to be a large cap fund.

Draco has the highest IR. Choice a: The high R2 indicate low residuals. Euromoney Institutional Investor. Risks of Specific Strategies References: Lars Jaeger ed. Choice d: So style drifting occurs. Choice c: Although Crux claims to be large-capitalization fund. Two different risky assets with average losses due to a credit event at some time during the analysis horizon have an aggregate average loss equal to the sum of the two average losses.

The unexpected loss of the portfolio is not equal to the sum of the individual unexpected losses of the risky assets that make up the aggregate portfolio due to default correlation. The sum of all the risk contributions from all the assets in the portfolio is the portfolio unexpected loss. The portfolio unexpected loss is very much smaller than the sum of the individual unexpected losses due to the diversification effect. Risk Management New York: Dan Galai. Firm wide risk measurement and management Reference: Michael Crouhy.

So as a rational company. Economic Capital Reference: For all business lines. SPV sells credit protection and uses the funds to download risk-free bonds Topic: Collateralized Debt Obligations Reference: This is the case in a cash CDO. Chapters Value at Risk. Portfolio Construction Reference: Philippe Jorion. The wrong answers A. Implementation and Model Risk Reference: It usually pertains to valuation errors. Measuring Market Risk. An example is unexpected rise in volatili- ty. An example is consideration of an insufficient number of trials in a Monte Carlo simulation.

Implementation risk refers to model risk pertinent to implementation. Incorrect model calibration risk refers to model risk pertinent to non-calibration or inac- curate calibration of usually correctly specified models under changing circumstances. B and D capture cases when candidates do not fully understand correct classification and application of model risks. Incorrect model application risk refers to model risk perti- nent to improper application of a risk model.

Operational Risk Measurement and Management Subtopic: Economic Capital and Risk Aggregation. This is negative delta. Andrew Kuritzkes. Til Schuermann and Scott M. The degree of diversification benefits are the same for each level Answer: Exotic Derivatives Reference: Hence their price decreases. Yu has only long positions and yet has a negative delta. Futures and Derivatives.

Credit Derivatives Reference: Rene M. According to the Merton model. Is correct b.Wherever necessary and possible, questions, note the questions answered after the 90 minute mark. A designated area for these items will be provided.

The model corresponds to the one-year Value at Risk at a Looking at a risk report. Which of the following statements about the risk of his position are not correct?