2016-FRR Online Practice Questions and Answers

When looking at the distribution of portfolio credit losses, the shape of the loss distribution is ___ , as the likelihood of total losses, the sum of expected and unexpected credit losses, is ___ than the likelihood of no credit losses.

A. Symmetric; less

B. Symmetric; greater

C. Asymmetric; less

D. Asymmetric; greater

Which one of the following four statements correctly defines chooser options?

A. The owner of these options decides if the option is a call or put option only when a predetermined date is reached.

B. These options represent a variation of the plain vanilla option where the underlying asset is a basket of currencies.

C. These options pay an amount equal to the power of the value of the underlying asset above the strike price.

D. These options give the holder the right to exchange one asset for another.

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

A. Probability of default

B. Duration

C. Loss given default

D. Market spreads

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?

A. The options positions hedge the forward position by 25%.

B. The option positions hedge the forward position by 50%.

C. The option positions hedge the forward position by 75%.

D. The option positions hedge the forward position by 100%.

The potential failure of a manufacturer to honor a warranty might be called ____, whereas the potential failure of a borrower to fulfill its payment requirements, which include both the repayment of the amount borrowed, the principal and the contractual interest payments, would be called ___.

A. Credit risk; market risk

B. Market risk; credit risk

C. Credit risk; performance risk

D. Performance risk; credit risk

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 expected loss be?

A. $500

B. $750

C. $1,000

D. $1,300

If the yield on the 3-month risk free bonds issued by the U.S government is 0.5%, and the 3-month LIBOR rate is 2.5%, what is the TED spread?

A. 0.5%

B. -2.0%

C. 2.0%

D. 3.0%

Which one of the following four statements represents the advantages of the historical sim-ulation method when calculating VaR?

A. Solve the problem caused by incorrectly assuming that asset returns are normally distributed.

B. Rely on current market data to describe the distribution of returns and determine volatilities.

C. Are believed to be superior in accuracy predicting future levels of realized volatility.

D. Are only using loss probabilities that can be found in tables of the standard normal distribution.

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

A.

I only.

B.

I and II.

C.

II and III.

D.

I and IV

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:

A. 10%

B. 15%

C. 25%

D. 40%