Test Online 2016-FRR Dumps Questions to Be Certified

1. When creating a model to estimate risk, it is important to recognize which one of the following?

2. A governance, risk, and compliance strategy can help a bank to avoid:

I. Incomplete analysis of risks

II. Misperception of risk exposures

III. Duplication of effort

IV. Contradictory reporting

3. Which of the following statements explain how securitization makes the retail assets highly liquid and the balance sheet easier to manage?

I. By securitizing assets any lack of capital can be accommodated by selling the securitized bonds.

II. Any need to diversify credit risk can be achieved by selling bank's own securitized bonds and buying other bonds that increase diversification.

III. Securitization could be used to promote hedging by using limited market instruments.

4. Over a long period of time DeltaBank has amassed a large equity option position.

Which of the following risks should be considered in this transaction?

I. Counterparty risk on long OTC option positions

II. Counterparty risk on short OTC option positions

III. Counterparty risk on long exchange-traded option positions

IV. Counterparty risk on short exchange-traded option positions

5. Which of the following risk measures are based on the underlying assumption that interest rates across all maturities change by exactly the same amount?

I. Present value of a basis point.

II. Yield volatility.

III. Macaulay's duration.

IV. Modified duration.

6. Banks duration match their assets and liabilities to manage their interest risk in their banking book.

Currently, the bank's assets and liabilities both have a duration of 10.

To hedge against the risk of decreasing interest rates, the bank should

I. Increase the duration of the liabilities

II. Increase the duration of the assets

III. Decrease the duration of the liabilities

IV. Decrease the duration of the assets

7. What is the role of market risk management function within a bank?

I. Control and minimize the risks the bank should take.

II. Establish a comprehensive market risk policy framework.

III. Define, approve and monitor risk limits.

IV. Perform stress tests and other qualitative risk assessments.

8. What does correlation between two variables measure?

9. DeltaFin wants to develop a control scoring method for its RCSA program.

Which of the following statements regarding scoring methods are correct?

I. DeltaFin can develop a control scoring method that assesses both the design and the performance of the control.

II. DeltaFin can combine the design and performance scores for each control to produce an overall control effectiveness score.

III. DeltaFin can use the control performance scores to compute an overall risk severity score.

IV. DeltaFin can determine its own appropriate control scoring method.

10. SigmaBank has many branches that offer the same products and services.

Which one of the four following statement presents an advantage of using RCSA questionnaire approach in the SigmaBank's operational risk framework?

11. When a credit risk manager analyzes default patterns in a specific neighborhood, she finds that defaults are increasing as the stigma of default evaporates, and more borrowers default. This phenomenon constitutes

12. Of all the risk factors in loan pricing, which one of the following four choices is likely to be the least significant?

13. Bank customers traditionally trade commodity futures with banks in order to achieve which of the following goals?

I. To express their own price views

II. To reverse undesired short-term exposure created from fixed commodity sales

III. To reach short-term budgetary targets

14. Which of the following statements depicts a difference between funding liquidity risks and trading liquidity risks?

15. Which of the following statements about the option gamma is correct? Gamma is the

I. Second derivative of the option value with respect to the volatility.

II. Percentage change in option value per percentage change in the price of the underlying instrument.

III. Second derivative of the value function with respect to the price of the underlying instrument.

IV. Rate of change of the option delta with respect to changes in the underlying price.

16. Company A needs to provide a risk probability/frequency score for its RCSA program.

If the event is likely to happen once in 2 years, then the frequency score will be equal to:

17. Which of the following are conclusions that could be drawn from the shape of the statistical distribution of losses that a bank might incur over a future time period?

I. In most years a bank would look more profitable than it will be on average.

II. Most of the time a sufficiently well capitalized bank will appear over-capitalized.

III. Bad years do not come along very often, but when they do they lead to enormous losses.

18. A risk manager has a long forward position of USD 1 million but the option portfolio decreases JPY 0.50 for every JPY 1 increase in his forward position.

At first approximation, what is the overall result of the options positions?

19. To manage its credit portfolio, Beta Bank can directly sell the following portfolio elements:

I. Bonds

II. Marketable loans

III. Credit card loans

20. ThetaBank has extended substantial financing to two mortgage companies, which these mortgage lenders use to finance their own lending. Individually, each of the mortgage companies have an exposure at default (EAD) of $20 million, with a loss given default (LGD) of 100%, and a probability of default of 10%. Theta Bank’s risk department predicts the joint probability of default at 5%.

If the default risk of these mortgage companies were modeled as independent risks, the actual probability would be underestimated by:

21. Except for the credit quality of the Credit Default Swap protection seller, the following relationship correctly approximates the yield on a risk-free instrument:

22. Alpha Bank estimates that the annualized standard deviation of its portfolio returns equal 30%;

The daily volatility of the portfolio is closest to which of the following?

23. An asset and liability manager for a large financial institution has to recognize that retail products ___ include embedded options, which are often not rationally exercised, while wholesale products ___ carry penalties for repayment or include rights to terminate wholesale contracts on very different terms than are common in retail products.

24. Which of the following risk types are historically associated with credit derivatives?

I. Documentation risk

II. Definition of credit events

III. Occurrence of credit events

IV. Enterprise risk

25. 10 basis points are equal to:

26. A bank has a Var estimate of $100 million. It is considering a new transaction which has a correlation of 0.35 with the current portfolio and a standalone VaR estimate of $5 million.

What would be the new VaR for the bank if it carried out the transaction?

27. A hedge fund trader buys options to establish an exposure in the currency market, thereby effectively removing the risk of being able to participate in a gapping market.

In this case the options premium represents the price paid for eliminating the execution risk of

28. A large energy company has a recurring foreign currency demands, and seeks to use options with a pay-off based on the average price of the underlying asset on either a few specific chosen dates or all dates within a specific pricing window.

Which one of the following four option types would most likely meet these specific foreign currency demands?

29. According to the principles of the Basel II Accord, the implementation and relative weights of the elements of the operational risk framework depend on:

I. The culture of the financial institution

II. Regulatory drivers

III. Business drivers

IV. The bank's reporting currency

30. Arnold Wu owns a floating rate bond. He is concerned that the rates may fall in the future decreasing his payment amount.

Which of the following instruments should he buy to hedge against the fall in interest rates?

31. A risk manager is analyzing a call option on the GBP with a vega of 0.02.

When the perceived future volatility increases by 1%, the call option

32. What does a bank normally use to cover expected credit losses?

33. Suppose Delta Bank enters into a number of long-term commercial and retail loans at fixed rate prevailing at the time the loans are originated. If the interest rates rise:

34. Altman's Z-score incorporates all the following variables that are predictive of bankruptcy EXCEPT:

35. A financial analyst is trying to distinguish credit risk from market risk. A $100 loan collateralized with $200 in stock has limited ___, but an uncollateralized obligation issued by a large bank to pay an amount linked to the long-term performance of the Nikkei 225 Index that measures the performance of the leading Japanese stocks on the Tokyo Stock Exchange likely has more ___ than ___.

36. A risk associate is trying to determine the required risk-adjusted rate of return on a stock using the Capital Asset Pricing Model.

Which of the following equations should she use to calculate the required return?

37. Which one of the following four statements correctly defines an option's delta?

38. Which of the activities represent examples of market manipulation?

39. Which one of the four following statements describes a specific characteristic of risk and control self-assessments (RCSA) which distinguishes it from both control assessments and risk and control assessments?

40. Which one of the following four statements describes the advantage of using delta-gamma method of mapping options positions over delta-normal method?

Delta-gamma method

41. All of the four following exotic options are path-independent options, EXCEPT:

42. Which one of the following four physical commodities markets has the right combination of characteristics that generally allows short selling in the market, without making the short-selling transaction prohibitively expensive?

43. To reduce the variability of net interest income, Gamma Bank can swap positions that make its duration gap equal to

44. To ensure good risk management which of the following should be true about the CRO role and function?

45. To estimate the required risk-adjusted rate of return on a highly volatile energy stock, a risk associate compiled the following statistics:

Risk-free rate = 5%

Beta = 2.5

Market Risk = 8%

Using the Capital Asset Pricing Model, she estimates the rate of return to be equal:

46. Interest rate swaps are:

47. As Japan ___ its budget deficits and ___ its dependence on debt, the Japanese currency, JPY, would ___ in value against other currencies.

48. According to Basel II what constitutes Tier 2 capital?

49. Which one of the following inherent biases occurs in scenario analysis for operational risk?

50. Gamma Bank provides a $100,000 loan to Big Bath retail stores at 5% interest rate (paid annually). The loan is collateralized with $55,000. The loan also has an annual expected default rate of 2%, and loss given default at 50%.

In this case, what will the bank's exposure at default (EAD) be?

51. In hedging transactions, derivatives typically have the following advantages over cash instruments:

I. Lower credit risk

II. Lower funding requirements

III. Lower dealing costs

IV. Lower capital charges

52. The skewness of ABC company's stock returns equal -1.5.

What is the correct interpretation of this?

53. To estimate a partial change in option price, a risk manager will use the following formula:

54. BetaFin has decided to use the hybrid RCSA approach because it believes that it fits its operational framework.

Which of the following could be reasons to use the hybrid RCSA method?

I. BetaFin has previously created series of RCSA workshops, and the results of these workshops can be used to design the questionnaires.

II. BetaFin believes that using the questionnaire approach should be more useful.

III. BetaFin had used the questionnaire approach successfully for certain businesses and the workshop approach for others.

IV. BetaFin had already implemented a sophisticated RCSA IT-system.

55. Which one of the following does the Basel I Accord fail to take into consideration?

56. A bank considers issuing new capital to increase its Tier 1 capital levels.

Which of the following financial instruments would most likely to be considered?

57. Which one of the following four statements about the "market-maker" trading strategy is INCORRECT?

58. If the LTV (loan-to-value ratio) is 75%, what is the haircut?

59. Short-selling is typically associated with which of the following risks?

I. Potential for extreme losses

II. Risk associated with the availability of shares to borrow

III. Market behavior risk

IV. Liquidity risk

60. The Basel II Accord's operational risk definition excludes all of the following items EXCEPT:

61. Bank Muri has $4 million in cash and $5 million in loans coming due tomorrow with an expected default rate of 1%. The proceeds will be deposited overnight. The bank owes $ 9 million on a securities purchase that settles in two days and pays off $8 million in commercial paper in three days that is not expected to renew. On day 2, $1 million in loans is coming in with an expected default rate of 1% and on day 3, $2 million in loans is coming in with expected default rate of 2%.

How much should the bank plan to raise in order to avoid liquidity problems?

62. Which one of the following four statements correctly defines a typical carry trade?

63. A bank has a large number of auto loans and would prefer to sell them to raise cash for more funding. However, selling individual auto loans is difficult.

What could the bank do?

64. For what reason does risk appetite usually mature as the operational risk program develops?

65. A risk associate responsible for the operational risk function wants to evaluate the upward reporting governance structure and to assess its critical features.

Which one of the four attributes does not represent a critical feature of the upward reporting governance structure?

66. A portfolio consists of two floating rate bonds and one fixed rate bond.





Based on the information below, modified duration of this portfolio is

67. Which one of the following market risk measures evaluates the bank's earnings sensitivity?

68. Which one of the following four statements regarding scenario analysis is correct?

69. Under the Basel II Accord, when using the Basic Indicator Approach to calculate its operational risk capital, a bank multiplies how many years of gross income by what percentage?

70. When the cost of gold is $1,100 per bullion and the 3-month forward contract trades at $900, a commodity trader seeks out arbitrage opportunities in this relationship.

To capitalize on any arbitrage opportunities, the trader could implement which one of the following four strategies?

71. Which of the following would a bank resort to as a "lender of last resort" in the event of an extreme liquidity crisis?

72. A risk analyst is considering how to reduce the bank's exposure to rising interest rates.

Which of the following strategies will help her achieve this objective?

I. Reducing the average repricing time of its loans

II. Increasing the average repricing time of its deposits

III. Entering into interest rate swaps

IV. Improving earnings capacity and increasing intermediated funds

73. Which one of the following is a definition of spread risk?

74. Which one of the following four statements regarding commodity exchanges is INCORRECT?

75. A bank owns a portfolio of bonds whose composition is shown below.





What is the modified duration of the portfolio?

76. A retail credit score of above 680 is generally considered to be "prime." The term "prime" means the borrower is what?

77. Counterparty credit risk assessment differs from traditional credit risk assessment in all of the following features EXCEPT:

78. Using a forward transaction, Omega Bank buys 100 metric tones of aluminum for delivery in six-months' time. However, after two months, the bank becomes concerned with the potential fluctuations in aluminum prices and wants to hedge its potential exposure against a possible decline in aluminum prices.

Which one of the following four strategies could the bank use to offset the risk from its current exposure to aluminum as it sets the price for selling the commodity in four-months' time?

79. Which of the following statements regarding collateralized debt obligations (CDOs) is correct?

I. CDOs typically have loans or bonds as underlying collateral.

II. CDOs generally less risky than CMOs.

III. There is a correlation among defaults in the CDO collateral which should be considered in valuation of these complex instruments.

80. Mega Bank holds a $250 million mortgage loan portfolio, which reprices every 5 years at LIBOR + 10%. The bank also has $150 million in deposits that reprices every month at LIBOR + 3%.

What is the amount of Mega Bank's rate sensitive liabilities?

81. Which one of the four following statements about Basis point values is correct?

Basis point value:

82. In its VaR calculations, JPMorgan Chase uses an expected tail-loss methodology which approximates losses at the 99% confidence level. This methodology consists of two subsequent steps to estimate the VaR.

Which of the following explains this two-step methodology?

83. Since most consumers of natural gas do not have the ability to store it, they contract with gas suppliers to receive a flow of natural gas equal to a specific number of MMBT's per day (MMBT is millions of British Termal Units, the unit in which gas futures are quoted on the U.S. markets).

To protect against price increases with a bank, the natural gas consumer, concerned with the average price over the course of the month, will use the following contracts:

84. AlphaBank's management is evaluating how changes in its business environment could materially impact risk categories. As a result, bank's management decides to implement the structure, which facilitates the discussion in an integrative context, spanning market, credit, and operational risk factors, and encourages transparency and communication between risk disciplines.

Which one of the following four approaches should the management choose to achieve this strategic goal?

85. US based Alpha Bank holds European corporate bonds and US inflationCindexed Treasury notes in its investment portfolio.

This investment portfolio is not exposed to changes in which of the following?

86. Which one of the following four statements regarding counterparty credit risk is INCORRECT?

87. Which one of the following financial instruments is subject to implied volatility price risk?

88. Which of the following statements is a key difference between customer loans and interbank loans?

89. Which one of the following four statements best describes challenges of delta-normal method of mapping options positions?

Delta-normal method understates

90. Alpha Bank estimates its 1-month, 95% VaR is 30 million EUR.

This means that in the next month, there is a

91. Which one of the following four statements correctly identifies disadvantages of using the economic capital?

92. The technique of using interest rate swap positions to reduce the effect of the variability of interest rates on net interest income is known as:

93. Suppose that a regulator deems all corporate debt to have the same risk level.

Which of the following behavior of banks would be an example of regulatory arbitrage?

94. Which one of the following statements correctly identifies risks in foreign exchange forwards?

95. A credit rating analyst wants to determine the expected duration of the default time for a new three-year loan, which has a 2% likelihood of defaulting in the first year, a 3% likelihood of defaulting in the second year, and a 5% likelihood of defaulting the third year.

What is the expected duration for this three-year loan?

96. It is commonplace for the sellers of a single-name Credit Default Swap to post collateral to the buyer.

What determines the amount of collateral posted?

97. Which one of the four following statements about a minimal loss threshold in operational loss data collection is incorrect?

98. The pricing of credit default swaps is a function of all of the following EXCEPT:

99. Under the Standardized Approach in the Basel II Accord, what is the risk weight of a non-performing corporate loan?

100. Gamma Bank has a significant number of retail customers and finds its balance sheet shape and structure difficult to manage.

Which one of the following characteristics of a bank with wide retail operations is INCORRECT?

101. A risk associate evaluating his current portfolio of assets and liabilities wants to determine how sensitive this portfolio is to changes in interest rates.

Which one of the following four metrics is typically used for this purpose?

102. Which one of the following four statements about planning for the operational risk framework is INCORRECT?

103. From the bank's point of view, repricing the retail debt portfolio will introduce risks of fluctuations in:

I. Duration

II. Loss given default

III. Interest rates

IV. Bank spreads

104. Which of the following statements describes a bank's reasons to set risk limits?

I. To control and minimize a bank's current risk exposure.

II. To predict future risks.

III. To allocate risks to business units.

IV. To keep risk within tolerance levels.

105. James Johnson bought a 3-year plain vanilla bond that has yield of 4.7% and 4% coupon paid annually, for $87,139. Macauley's duration of the bond is 2.94 years. Rate volatility is 20% of the yield.

The bond's annualized volatility is therefore:

106. What are the add-on losses faced by a bank that is going bankrupt?

I. The discount accepted by the bank for selling its assets in a fire sale.

II. The increased cost of funding liabilities in a financially distressed situation.

III. The reduction in the present value of future growth opportunities.

IV. Loss of goodwill and intangible assets.

107. James Johnson has a $1 million long position in ThetaGroup with a VaR of 0.3 million, and $1 million long position in VolgaCorp with a VaR of 0.4 million. The returns of the two companies have zero correlation.

What is the portfolio VaR?

108. What is the objective of a bank’s risk management department?

109. Which one of the following four statements correctly defines a non-exotic call option?

110. Gamma Bank estimates its monthly portfolio volatility at 5%.

The portfolio's annual volatility is closest to which of the following?

111. A corporate bond gives a yield of 6%. A same maturity government bond yields 2%. The probability of the corporate bond defaulting is 2.5%. In case of default, investors expect to lose 60% of their investment.

The risk premium in the credit spread is:

112. By lowering the spread on lower credit quality borrowers, the bank will typically achieve all of the following outcomes EXCEPT:

113. Bank Sigma has an opportunity to do a securitization deal for a credit card company, but has to retain a portion of the residual risk of the deal with an estimated VaR of $8 MM. Its fees for the deal are $2 MM, and the short-term financing costs are $600,000.

What would be the RAROC for this transaction?

114. In the United States, foreign exchange derivative transactions typically occur between

115. Which one of the following is an advantage of using a daily decay factor when forecasting tomorrow’s P&L?

116. According to Basel II what constitutes Tier 1 capital?