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    FRM Exam Sample

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    Priyanka Agarwal
    This document contains 15 sample questions from the 2003 FRM exam. The questions cover topics such as VaR calculation methods, options pricing, interest rate calculations, credit risk assessment, and fixed income modeling. For each question, an answer is provided along with a brief explanation of the reasoning behind the answer. The questions and answers provide an overview of the types of concepts and calculations that may be included in the FRM exam.

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    FRM Exam Sample

    Uploaded by

    Priyanka Agarwal
    538 views3 pages
    This document contains 15 sample questions from the 2003 FRM exam. The questions cover topics such as VaR calculation methods, options pricing, interest rate calculations, credit risk assessment, and fixed income modeling. For each question, an answer is provided along with a brief explanation of the reasoning behind the answer. The questions and answers provide an overview of the types of concepts and calculations that may be included in the FRM exam.

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    This document contains 15 sample questions from the 2003 FRM exam. The questions cover topics such as VaR calculation methods, options pricing, interest rate calculations, credit risk assessment, and fixed income modeling. For each question, an answer is provided along with a brief explanation of the reasoning behind the answer. The questions and answers provide an overview of the types of concepts and calculations that may be included in the FRM exam.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    538 views3 pages

    FRM Exam Sample

    Uploaded by

    Priyanka Agarwal
    This document contains 15 sample questions from the 2003 FRM exam. The questions cover topics such as VaR calculation methods, options pricing, interest rate calculations, credit risk assessment, and fixed income modeling. For each question, an answer is provided along with a brief explanation of the reasoning behind the answer. The questions and answers provide an overview of the types of concepts and calculations that may be included in the FRM exam.

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    FRM Exam

    Sample Examination （15 representative questions from 2003 exam）

    Q1. If you use Delta-VaR for a portfolio of options, which of the following
    statements is always correct?
    A: It can sometimes overstate the VaR.
    Using delta-VaR for a portfolio that pursues a portfolio insurance strategy
    with options will necessarily overstate the VaR over longer periods of time.
    Hence, delta-VaR can overstate, but we can also find examples where it
    understates.

    Q2. Assume we calculate a one-week VaR for a natural gas position by


    rescaling the daily VaR using the square-root rule. Let us now assume
    that we determine the true gas price process to be mean reverting and
    recalculate the VaR. Which of the following statements are true?
    A: The recalculated VaR will be less than the original VaR.
    If the process is mean reverting then we can no longer scale volatility (and
    associated VaR) up by the square root of time. Mean-reversion makes
    extreme outcomes less likely since following large losses changes the
    conditional mean of the distribution will be higher.

    Q3. Of the following options, which one does not benefit from an increase
    in the stock price when the current stock price is ＄100 and the
    barrier has not yet been crossed:
    A: A down and in call with in barrier at ＄90 and strike at ＄110.

    Q4. The 1-year US dollar interest rate is 3% and 1-year Canadian dollar
    interest rate is 4.5%. The current USD/CAD spot exchange rate is
    1.5000. Calculate the 1-year forward rate.
    A: 1.5218
    1.5218=1.500*(1.045/1.03)

    Q5. Suppose you have a position of ＄100 million in the instruments below.
    Each one has a maturity of 10 years. Which instrument is most likely to
    have a DV01 that exceeds the DV01 of a Treasury strip with 10-year
    maturity?
    A: Inverse floating rate securities.
    Q6. Which of the following properties of ineffective hedges is not correct:
    A: SEC disclosure requirements are such that firms have to disclose hedges that
    turn out to be ineffective when the hedges mature.
    SEC disclosure requirements say nothing about this.

    Q7. An unexpected change in taxation making it optimal for firms to


    reduce divided payments and to replace them by share repurchases for
    an amount equal to the reduction in dividend payments would:
    A: Increase the value of a portfolio of calls on common stock.
    This has no effect on leverage. It increases the share price, but decreases the
    supply of shares over time. This makes calls more valuable.

    Q8.The latest proposal of the Basel Committee on Banking Supervision


    (BCBS, Basel 2) for the new Basel Accord introduces the advanced
    internal rating approach for credit risk. Banks will input their own:
    A: EDF and LGD.

    Q9.Assuming the time horizon for all transactions is the same, which of the
    following transactions would have the least credit risk?
    A: A forward sale of oil to a C rated company where the total purchase price is
    guaranteed by a letter of credit from an AAA rated bank.
    The trade with the least credit risk would be d as it is fully collateralized by a
    AAA rated bank. Each of the other answers has a higher potential credit loss.

    Q10. A Credit Default Swap is an instrument that can be characterized


    best as:
    A: An option to sell defaulted securities at par value to a third party in
    exchange for a serious of fixed cash flows.
    A credit default swap is a standard type of credit derivative. It is an option to
    sell defaulted securities to a third party at par value.

    Q11. Quite a few models were developed in the last few years to measure
    credit risk exposure. Which of the models below is based on an actuarial
    approach?
    A: CreditRisk﹢
    Q12. A bank computes the distribution of its loan portfolio
    marked-to-market value one year from now using the CreditMetrics
    approach of computing values for rating transition outcomes using (a) a
    rating agency transition matrix, (b)current forward curves, and (c)
    correlations among rating transition outcomes derived from stock
    returns of the obligors. In computing firm-wide risk using this
    distribution of its loan portfolio, the bank is most likely to understate its
    risk because it ignores:
    A: Spread risk.
    Rating drift is in the transition matrix; the term structure of interest rates is
    not a risk; the negative correlation reduces risk.

    Q13. When your firm started trading fixed income securities, it used the
    Black-Scholes model to price European options on fixed income
    securities. You have a long position in a five-year European option on a
    coupon bond that has eight years to maturity. If you were to conclude
    that you are using the wrong model and should use the HJM one-factor
    model, which of the following statements would be correct:
    A: The value of your position would fall because Black-Scholes fails to capture
    pull-to-par effect.

    Q14. Each of the following companies experienced massive losses


    associated with derivatives positions that made headlines. Which
    company suffered losses for reasons that have nothing to do with
    operational risk?
    A: Metallgesellschaft.

    Q15. Consider a stock with an initial price of ＄100. Its price one year
    from now is given by S＝100*exp(r), where the rate of return r is
    normally distributed with a mean of 0.1 and a standard deviation of 0.2.
    With 95% confidence, after rounding, S will be between:
    A: ＄74.68 and ＄163.56
    In(S/100) = r-N(0.1, 0.22) thus 0.1-1.96*0.2<In(S/100)<0.1+1.96*0.2.
    0.1-1.96*0.2 is -0.292, so that 100Exp[-0.292] is ﹩74.68. 0.1+1.96*0.2 is
    0.492, yielding ﹩163.56.

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