金融风险管理师FRM-考试+Answer-(1)

1 EXAMPLE 12 1 FRM EXAM 2000 QUESTION 78 What feature of cash and futures prices tends to make hedging possible a They always move together in the same direction and by the same amount b They move in opposite directions by the same amount c They tend to move together generally in the same direction and by the same amount d They move in the same direction by different amounts ANSWER Example 12 1 FRM Exam 2000 Question 78 c Hedging is made possible by the fact that cash and futures prices usually move in the same direction and by the same amount 2 EXAMPLE 12 2 FRM EXAM 2000 QUESTION 79 Under which scenario is basis risk likely to exist a A hedge which was initially matched to the maturity of the underlying is lifted before expiration b The correlation of the underlying and the hedge vehicle is less than one and their volatilities are unequal c The underlying instrument and the hedge vehicle are dissimilar d All of the above are correct ANSWER Example 12 2 FRM Exam 2000 Question 79 d Basis risk occurs if movements in the value of the cash and hedged positions do not offset each other perfectly This can happen if the instruments are dissimilar or if the correlation is not unity Even with similar instruments if the hedge is lifted before the maturity of the underlying there is some basis risk 3 EXAMPLE 14 1 FRM EXAM 1999 QUESTION 64 Under what circumstances is it appropriate to scale up a VAR estimate from a shorter holding period to a longer holding period using the square root of time a It is never appropriate b It is always appropriate c When either mean reversion or trend are present in the historical data series d When neither mean reversion nor trend are present in the historical data series ANSWER Example 14 1 FRM Exam 1999 Question 64 d The presence of either mean reversion or trend or time variation in risk implies a different distribution of returns for different holding periods 4 EXAMPLE 14 2 FRM EXAM 1998 QUESTION 5 Consider a portfolio with a one day VAR of 1 million Assume that the market is trending with an autocorrelation of 0 1 Under this scenario what would you expect the two day VAR to be a 2 million b 1 414 million c 1 483 million d 1 449 million ANSWER Example 14 2 FRM Exam 1998 Question 5 c Knowing that the variance is V 2 day V 1 day 2 2 we find VAR 2 day VAR 1 day 2 2 1 2 0 2 1 483 assuming the same distribution for the different horizons 5 EXAMPLE 16 1 ABSOLUTE AND RELATIVE RISK An investment manager is given the task of beating a benchmark Hence the risk should be measured a In terms of loss relative to the initial investment b In terms of loss relative to the expected portfolio value c In terms of loss relative to the benchmark d In terms of loss attributed to the benchmark ANSWER Example 16 1 Absolute and Relative Risk c This is an example of risk measured in terms of deviations of the active portfolio relative to the benchmark Answers a and b are incorrect because they refer to absolute risk Answer d is also incorrect because it refers to the absolute risk of the benchmark 6 EXAMPLE 16 2 PENSION LIABILITIES The AT if the underlying credit defaults the counterparty will default as well since it is the same 34 EXAMPLE 22 4 FRM EXAM 2000 QUESTION 39 A portfolio consists of one long 100 million asset and a default protection contract on this asset The probability of default over the next year is 10 for the asset and 20 for the counterparty that wrote the default protection The joint probability of default for the asset and the contract counterparty is 3 Estimate the expected loss on this portfolio due to credit defaults over the next year with a 40 recovery rate on the asset and 0 recovery rate for the counterparty a 3 0 million b 2 2 million c 1 8 million d None of the above ANSWER Example 22 4 FRM Exam 2000 Question 39 c The only state of the world with a loss is a default on the asset jointly with a default of the guarantor This has probability of 3 The expected loss is 100 000 000 0 03 1 40 1 8 million 35 EXAMPLE 22 5 FRM EXAM 2004 QUESTION 65 When an institution has sold exposure to another institution i e purchased protection in a CDS it has exchanged the risk of default on the underlying asset for which of the following a Default risk of the counterparty b Default risk of a credit exposure identifi ed by the counterparty c Joint risk of default by the counterparty and of the credit exposure identifi ed by the counterparty d Joint risk of default by the counterparty and the underlying asset ANSWER Example 22 5 FRM Exam 2004 Question 65 d The protection buyer is exposed to the joint risk of default by the counterparty and underlying credit If only one defaults there is no credit risk 36 EXAMPLE 23 2 FRM EXAM 1998 QUESTION 39 Calculate the one year expected loss of a 100 million portfolio comprising 10 B rated issuers Assume that the one year probability of default for each issuer is 6 and the average recovery value for each issuer is 40 a 2 4 million b 3 6 million c 24 million d 36 million ANSWER Example 23 2 FRM Exam 1998 Question 39 b The expected loss is 100 000 000 0 06 1 0 4 3 6 million Note that correlation across obligors does not matter for expected credit loss 37 EXAMPLE 23 3 FRM EXAM 2003 QUESTION 26 Which of the following loans has the lowest credit risk 1 Year Probability Loss Given Remaining Term Loan of Default Default Months a 1 99 60 3 b 0 90 70 9 c 1 00 75 6 d 0 75 50 12 ANSWER Example 23 3 FRM Exam 2003 Question 26 38 EXAMPLE 24 1 FRM EXAM 2001 QUESTION 48 Which of the following best refl ects an operational risk faced by a bank a A counterparty invokes force majeure on a swap contract b The Federal Reserve unexpectedly cuts interest rates by 100 bps c A power outage shuts down the trading fl oor indefi nitely with no backup facility d The rating agencies downgrade the sovereign debt of the bank s sovereign counterparty ANSWER Example 24 1 FRM Exam 2001 Question 48 c A power outage is an example of system failure which is part of the operational risk defi nition Answer d is a case of credit risk Answer b is a case of market risk Answer a is a mix of credit and legal risk 39 EXAMPLE 24 2 FRM EXAM 2002 QUESTION 133 Which one of the following cases or events can be considered as resulting from operational risk a A bank reports losses on a diversifi ed portfolio of stocks during the stock market decline b The bank becomes embroiled in a high profi le lawsuit with a customer that accuses it of improper selling practices c The bank reports the loss of 1 5 billion due to rises in interest rates d A U S investor makes a loss as the Japanese yen depreciates relative to the dollar ANSWER Example 24 2 FRM Exam 2002 Question 133 b Answers a c and d correspond to the market risk of stocks fi xed income securities and currencies respectively Lawsuits by contrast are part of operational risk 40 EXAMPLE 24 3 FRM EXAM 2002 QUESTION 104 Which of the following risks is not a process risk a Model error b Booking error c Rogue trader risk d Documentation risk ANSWER Example 24 3 FRM Exam 2002 Question 104 c Rogue trader risk is related not to trade processing but to people risk 41 EXAMPLE 24 4 FRM EXAM 2004 QUESTION 39 Which of the following is not a type of operational risk as defi ned by Basel II a Human error and internal fraud b Destruction by fi re or other external catastrophes c Damaged reputation due to a failed merger d Failure or breakdown in internal control processes ANSWER Example 24 4 FRM Exam 2004 Question 39 c Damaged reputation due to a failed merger is a business risk Also reputational risk is not a type of operational loss 42 EXAMPLE 24 5 FRM EXAM 2003 QUESTION 65 Which of these outcomes is not associated with an operational risk process a The sale of call options is being booked as a purchase b A monthly volatility is inputted in a model that requires a daily volatility c A loss is incurred on an option portfolio because ex post volatility exceeded expected volatility d A volatility estimate is based on a time series that includes a price that exceeds the other prices by a factor of 100 ANSWER Example 24 5 FRM Exam 2003 Question 65 c Choices a b and d are operational losses Answer c is the result of a bet on volatility which is market risk 43 EXAMPLE 24 6 FRM EXAM 1998 QUESTION 6 Which of the following steps should be done fi rst during a risk management process a Risk measurement b Risk control c Risk identifi cation d Limit setting ANSWER Example 24 6 FRM Exam 1998 Question 6 c We need to identify risks before measuring controlling and managing them 44 EXAMPLE 26 1 FRM EXAM 2004 QUESTION 47 The failure of Barings Bank is a typical example of a lack in control pertaining to which one of the following risks a Liquidity risk b Credit risk c Operational risk d Foreign exchange risk ANSWER Example 26 1 FRM Exam 2004 Question 47 c The Barings failure falls in the category of operational risk because of a breakdown in procedures The trader Nick Leeson had control of the back offi ce 45 EXAMPLE 26 2 FRM EXAM 2001 QUESTION 130 Liquidity risk is the risk that I The markets become less active making it diffi cult to exit II The offi ces get fl ooded III It becomes diffi cult to borrow money IV The process for settlement becomes less smooth a I and II b II and III c I and III d I and IV ANSWER Example 26 2 FRM Exam 2001 Question 130 c Liquidity risk arises as asset liquidity risk when transactions cannot be conducted at prevailing market prices exiting positions is difficult i e costly to liquidate and as funding liquidity risk when losses cannot be funded easily by borrowing 46 EXAMPLE 26 3 FRM EXAM 1999 QUESTION 160 The risk that one of the parties will fail to meet its obligation to make payments in a swap agreement is called a Counterparty risk b Operational risk c Market risk d Notional risk ANSWER Example 26 3 FRM Exam 1999 Question 160 a This also belongs to the credit risk category 47 EXAMPLE 26 4 FRM EXAM 2002 QUESTION 103 Consider a bank that wants to have an amount of capital so that it can absorb unexpected losses corresponding to a fi rm wide VAR at the 1 level It measures fi rm wide VAR by adding up the VARs for market risk operational risk and credit risk There is a risk that the bank has too little capital because a It does not take into account the correlations among risks b It ignores risks that are not market operational or credit risks c It mistakenly uses VAR to measure operational risk because operational risks that matter are rare events d It is meaningless to add VARs ANSWER Example 26 4 FRM Exam 2002 Question 103 b VAR can be added across different types of risk but this will provide a conservative estimate of capital as diversification effects are ignored So answer a would be for too much capital Answer c is not correct because rare events can be factored into operational VAR Most likely the bank may have too little capital for other types of risk than those measured by these three categories 48 EXAMPLE 26 5 FRM EXAM 2004 QUESTION 58 A sound risk management process would include which of the following primary components I A comprehensive risk measurement approach II A detailed structure of limits III Guidelines and other parameters used to govern risk taking IV Strong risk management unit with a dual reporting relationship to the fi rm s head trader and chief risk offi cer a I II and IV only b II III and IV only c IV only d I II and III only ANSWER Example 26 5 FRM Exam 2004 Question 58 d Answer I II and III are correct Answer IV is incorrect because the CRO cannot report to the head trader because this would prevent him from functioning independently of trading 49 EXAMPLE 26 6 FRM EXAM 1999 QUESTION 164 When would it be prudent for a trader to direct accounting entries a Never b When senior management of the fi rm and the board of directors are aware and have approved the practice on an exception basis c When audit controls are such that the entries are reviewed on a regular basis to ensure detection of irregularities d Solely during such times as staffi ng turnover requires the trader to backfi ll until additional personnel can be hired and trained ANSWER Example 26 6 FRM Exam 1999 Question 164 a As one risk manager has said this is one of the few instances where never means absolutely never Allowing traders to tabulate their profits and losses is a recipe for disaster 50 EXAMPLE 26 7 FRM EXAM 1998 QUESTION 7 Independent credit risk management should be responsible for I Approving credit exposure measurement standards II Setting credit limits and monitoring adherence to such limits III Reviewing counterparty creditworthiness and concentration of credit risk a I only b II only c I and II only d I II and III ANSWER Example 26 7 FRM Exam 1998 Question 7 d Credit risk managers go through all the steps in the risk management process They participate in approving standards and set and monitor risk limits 51 EXAMPLE 26 8 FRM EXAM 1998 QUESTION 9 The members of the board of directors should have which of the following responsibilities related to risk management I The board must approve the fi rm s risk management policies and procedures II The board must be able to evaluate the performance of risk management activities III The board must maintain oversight of risk management activities a I and II only b II and III only c I and III only d I II and III ANSWER Example 26 8 FRM Exam 1998 Question 9 d The board must approve policies and be able to evaluate and maintain oversight of risk management 52 EXAMPLE 26 9 FRM EXAM 2000 QUESTION 63 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 ANSWER Example 26 9 FRM Exam 2000 Question 63 c Answers a b and d are all reasonable Answer c violates the principle of separation of trading and back office functions 53 EXAMPLE 26 10 FRM EXAM 2002 QUESTION 132 The following is not a problem of having one employee perform trading functions and back offi ce functions a The employee gets paid more because she performs two functions b The employee can hide trading mistakes when processing the trades c The employee can hide the size of her book d The employee s fi rm may not know its true exposure ANSWER Example 26 10 FRM Exam 2002 Question 132 a Answers b c and d all can lead to a situation where the trader loses money and hides the losses Answer a is not a problem per se 54 EXAMPLE 26 11 FRM EXAM 1999 QUESTION 165 All of the following would strengthen the internal controls for sales personnel except a Tape recording of incoming and outgoing calls b Prompt confi rmation of trades and acquisition of completed legal agreements c Compensation schemes directly linked to calendar year revenues d Independent credit department personnel reviewing and approving as deemed appropriate all over line requests ANSWER Example 26 11 FRM Exam 1999 Question 165 c Linking compensation to revenues provides incentives for better performance but unfortunately for avoiding controls as well 55 EXAMPLE 26 12 FRM EXAM 1999 QUESTION 162 The best example of an effective risk control function is a unit that a Uncovers numerous control exceptions violations of law and procedural errors while maintaining a noncontroversial relationship with risk taking personnel b Is staffed by competent personnel who report to the head of the trading department while maintaining independence from front offi ce personnel c Conveys issues regarding control mechanisms risk levels and the quality of managerial governance achieves timely and constructive action by responsible personnel and thereby has few repeat criticisms d Effi ciently skews review coverage toward areas experiencing high losses or mediocre performance thereby reducing resource requirements ANSWER Example 26 12 FRM Exam 1999 Question 162 c Having too many exceptions indicates that the control function is not working properly so a is wrong Risk managers cannot report to the head of trading so b is wrong Reducing personnel requirements is not an end in itself so d is wrong The goal is to create an environment that is conducive to controlled risk taking 56 EXAMPLE 26 13 FRM EXAM 2004 QUESTION 37 Which of the following statements is are true I To ensure higher effectiveness in managing operational risk the operational risk manager s compensation should be linked to trader performance II Stop loss limits are less effective as an operational risk measure than exposure limits because exposure limits consider future market risk movements while stop loss limits are backward looking III As annual audits of listed entities are regulatory and mandatory by nature they should not be seen as a material part of operational risk management IV The long option like feature of most traders compensation packages substantially increases operational risk a I III and IV b II and IV c II only d IV only ANSWER Example 26 13 FRM Exam 2004 Question 37 d The risk manager s compensation cannot be linked to trading profi ts because this would be a confl ict of interest Stop loss limits are effective to control market and operational risk In addition exposure limits do not take into account future market movements Annual audits are an integral part of operational risk management Therefore I II and III are incorrect 57 EXAMPLE 26 14