Financial Risk and Regulation (FRR) Series (2016-FRR) Free Practice Test

Question 1

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

A. I, III

B. II, III, IV

C. I, II

D. I, II, III, IV

Correct Answer: D

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Question 2

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

A. I, II, III

B. II, III, IV

C. I, II

D. I, IV

Correct Answer: A

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Question 3

A risk management team of a European bank collects internal operational loss event data as part of the operational risk event program and uses this data as an input into an operational risk capital model. To comply with the Basel II Accord requirements and to form the basis of a capital model, the risk management team will need:

A. A minimum of three years of loss data in a capital model, and the use of five years of data once it is available

B. A minimum of four years of loss data in a capital model, and the use of six years of data once it is available

C. A minimum of two years of loss data in a capital model, and the use of four years of data once it is available

D. A minimum of five years of loss data in a capital model, and the use of ten years of data once it is available

Correct Answer: A

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Question 4

What are some of the drawbacks of correlation estimates? Which of the following statements identifies major problems with correlation calculations?
I. Correlation estimates are not able to capture increases in factor co-movements in extreme market scenarios.
II. Correlation estimates tend to be unstable.
III. Historical correlations may not forecast future correlations correctly.
IV. Correlation estimates assume normally distributed returns.

A. I, II and III

B. I and IV

C. II, III, and IV

D. I and II

Correct Answer: A

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Question 5

A trader for EtaBank wants to take a leveraged position in Collateralized Debt Obligations.
These CDOs can be used in a repurchase transaction at a 20% haircut. Starting with $100 worth of CDOs, which one of the following four positions would completely utilize the available leverage?

A. The trader can buy $100 in CDO's, and repo the CDO's to get back $20, plus interest.

B. The trader can buy $100 in CDO's, and repo the CDO's to get back $100, less interest.

C. The trader can buy $100 in CDO's, and repo the CDO's to get back $80, less interest.

D. The trader can buy $100 in CDO's, and repo the CDO's to get back $60, plus interest.

Correct Answer: C

Question 6

To hedge a foreign exchange exposure on behalf of a client, a small regional bank seeks to enter into an offsetting foreign exchange transaction. It cannot access the large and liquid interbank market open primarily to larger banks. At which one of the following exchanges can the smaller bank trade the currency futures contracts?
I). The Tokyo Futures Exchange
II). The Euronext-Liffe Exchange
III). The Chicago Mercantile Exchange

A. III

B. I, II, III

C. II, III

D. I

Correct Answer: B

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Question 7

Which one of the following statements regarding collateralized mortgage obligations (CMO) is incorrect?

A. CMOs are generally less risky investment than CDOs.

B. CMOs are pools of mortgages that are divided according to the timing of cash flows.

C. CMOs have senior tranches which are considered short-term, low-risk instruments by banks

D. CMOs are asset-backed securities that have pools of collateralized debt obligations (CDOs) as underlying collateral.

Correct Answer: D

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Question 8

Alpha Bank estimates its 1-month, 95% VaR is 30 million EUR. This means that in the next month, there is a

A. 95% chance that AlphaBank can lose more than 30 million EUR.

B. 95% chance that AlphaBank will at least lose 30 million EUR.

C. 95% chance that AlphaBank will lose exactly 30 million EUR.

D. 95% chance that AlphaBank can lose at most 30 million EUR.

Correct Answer: D

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Question 9

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

A. Chooser options

B. Basket options

C. Power options

D. Asian options

Correct Answer: D

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Question 10

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

A. I, II, III

B. II, III

C. I, IV

D. II, IV

Correct Answer: A

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Question 11

All of the following performance statistics typically benefit country's creditworthiness EXCEPT:

A. High degrees of investment

B. Low unemployment

C. Low inflation

D. Low degrees of savings

Correct Answer: D

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Question 12

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?

A. Gold

B. Natural Gas

C. Grain

D. Oil

Correct Answer: A

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GARP Financial Risk and Regulation (FRR) Series (2016-FRR) Free Practice Test