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:

 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 www.fintools.com title

 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 www.fintools.com title

 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 www.fintools.com title

 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 www.fintools.com title

 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 www.fintools.com title

 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 www.fintools.com title

 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 www.fintools.com title

 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 www.fintools.com title

 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 www.fintools.com title

 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 www.fintools.com title

 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 www.fintools.com title

 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 www.fintools.com title

 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 www.fintools.com title

 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 www.fintools.com title

 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 www.fintools.com title

 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 www.fintools.com title

 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 www.fintools.com title

 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 www.fintools.com title

 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 www.fintools.com title

 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 www.fintools.com title

 END SLIDESHOW

To go back to Finance IQ page:

FinanceIQ

www.fintools.com title