FRM-Mock Exam 2

Question #1 of 80 Question ID: 1359158
A bank uses VaR and stressed VaR (SVaR) in the calculation of its market risk capital
requirement. The risk team has compiled VaR and SVaR data shown as follows:
Latest
Latest Average 10- Average 10-
Confidence Available
Available Day VaR of Day SVaR of
Level 10-Day
10-Day VaR Last 60 Days Last 60 Days
SVaR
95% 538 844 243 610
99% 756 1039 544 865
99.9% 962 1527 726 1229
Assuming 10 exceptions during the VaR backtesting process, what is the overall
capital charge for market risk?
A) 4,185.
B) 4,227.
C) 5,636.
D) 5,821.
A risk manager is comparing machine learning approaches. During his analysis, he

notices that machine learning can be applied to three broad classes of statistical
problems. Which of the following statements would most likely apply to the statistical
problem related to regression? Regression problems:
A) make predictions on discrete, dependent variables.
B) make predictions on quantitative, continuous variables.
C) involve applying several layers of algorithms into the learning process.
D) involve observing input variables without including a dependent variable.

A trading manager for a large institution is interested in measuring market liquidity in

anticipation of placing a large trade and determining whether or not the market can
absorb the sale. In measuring market liquidity, which factor is most relevant for the
trader?
A) Depth.
B) Resiliency.
C) Tightness.
D) Width.
A risk manager is backtesting a company's one-day VaR 98% VaR model over a one-
year time horizon at a 95% confidence level. Assuming 250 days in a year, what is the
maximum number of daily losses exceeding the one-day 98% VaR that is acceptable
to conclude the model is calibrated correctly?
A) 9 exceptions.
B) 10 exceptions.
C) 11 exceptions.
D) 12 exceptions.
The chief risk officer (CRO) of a large financial institution mentioned that because the
institution's business units have a large number of small losses, a $0 threshold for
loss data collection should be selected to detect small losses early on. When asked
about Basel II rules, the CRO notes that Basel II rules do not allow recoveries of losses
to be included in the calculation of total losses because gross losses provides a more
realistic view of potential large infrequent losses. Which of these is correct?
A) The CRO is correct with respect to Basel II rules only.

B) The CRO is correct with respect to the loss threshold only.
C) The CRO is correct with respect to both the loss threshold and Basel II rules.
D) The CRO is incorrect with respect to both the loss threshold and Basel II rules.
Which of the following is not a type of risk that requires a specific capital charge under
Solvency II?
A) Underwriting risk.
B) Investment risk.
C) Operational risk.
D) Morality risk.
Using the growth-at-risk (GAR) framework in March 2020, a severely adverse annual
growth rate was defined as the worldwide one-year forecasted growth rate falling
below an amount that is closest to:
A) +2%.
B) 0%.
C) -3%.
D) -7%.
A pension fund has plan assets and liabilities currently valued USD 150 million and
USD 120 million, respectively. The assets are fully invested in equities, while the
liabilities resemble fixed-income obligations and have an average duration of 14. Over
the next year, the plan assets fall 30% and yields fall by 2%. Which of the following is
the change in surplus?
A) –$48.6 million.
B) –$78.6 million.
C) $11.4 million.
D) $18.6 million.
Which of the following statements is false of callable and putable bonds?
I. Callable bonds behave like option-free bonds at high yields.

II. Putable bonds behave like option-free bonds at low yields.
III. Callable bonds have increased reinvestment risk at low yields.
A) I and II.
B) III only.
C) I, II, and III.
D) None of these.
A hedge fund implements relative value fixed-income arbitrage trade involving selling
$150 million face value of U.S. Treasury bonds and buys U.S. Treasury Inflation
Protected Securities (TIPS). Data on the two bonds is shown as follows:
Bond Yield DV01
TIPS 1.475% 0.092

T-bond 3.325% 0.063
Given a yield beta of 1.012, what is the face value of the offsetting regression hedge?
A) 103.95.
B) 125.37.
C) 186.95.
D) 221.67.
Within the context of financial institutions sharing information during the pandemic,
using existing domestic communication channels is least likely to be used to share
information regarding:
A) how to properly use company equipment.
B) how to improve remote work security procedures.
C) how to quantify potential COVID-19-related cyber losses.
D) how cyberattacks are carried out and how to mitigate them.
A bank purchases a municipal bond with a 5% gross nominal rate of return. The
bank's pretax borrowing cost is 3.7%, and it is subject to an income tax rate of 40%.
The bond is a bank-qualified bond, but 25% of the interest is not tax deductible. The
net after-tax return on the municipal bond is closest to:
A) 1.67%.
B) 2.41%.
C) 2.96%.
D) 3.34%.
With regard to cyber events that are classified as impacting the availability and
integrity of data or computer systems, which policy tool(s) is/are most crucial in
ensuring proper recovery?
A) Bank holiday only.
B) Liquidity injections only.
C) Capital requirements only.

D) Liquidity injections and capital requirements only.
Capital Bank is a retail bank and is one of the top three mortgage lenders in its
country. It is considering securitizing some of its mortgage assets. If the bank goes
ahead with the securitization, which of the following is most accurate in relation to the
bank's asset and liability maturity (ALM) mismatch?
A) The ALM mismatch is likely to increase.
B) The ALM mismatch is likely to decrease.
C) The ALM mismatch could increase or decrease.
D) The ALM mismatch will not be impacted.
An institutional investor would like to invest $50 million in cash for six months. It
would like to maximize its return to avoid the negative effects of cash drag while at
the same time ensuring the highest level of safety for its funds. Which investment
vehicle is most suitable for the investor?
A) Banker’s acceptance.
B) Commercial paper.
C) International eurocurrency deposit.
D) Revenue anticipation note (RAN).

A portfolio manager currently holds 30,000 shares of SkyTrain, Inc., in a particular
portfolio. The daily volume of SkyTrain shares traded on the stock exchange is 70,000.
On any given day, the portfolio manager wishes to trade no more than 18% of the
trading volume of SkyTrain. Which of the following is closest to the liquidity duration
of SkyTrain in this portfolio?
A) 0.420.
B) 2.380.
C) 12.96.
D) 13.22.
Investor A has sold protection on the most junior tranche of a collateralized debt
obligation (CDO). Investor B has sold default protection on the most senior tranche of
the same CDO. If default correlations decrease, which of the following is incorrect?
I. Investor A's position will lose value.

II. Investor B's position will gain value.
A) I only.
B) II only.
C) Both I and II.
D) Neither I nor II.
Which of the following is not a benefit of enterprise risk management (ERM)?
A) Market value improvement.
B) Representing economic reality of transactions.
C) Regulatory capital relief.
D) Reduction in insurance premiums.

A portfolio has a mean return of 11% and a volatility of 25%. The market portfolio has
a mean of 9.95% and a volatility of 21%. The risk-free rate is 5%. Which of the
following is most accurate of the M2 measure?
A) M2 = 9.92% Underperformed the market
B) M2 = 9.92% Outperformed the market
C) M2 = 10.04% Underperformed the market
D) M2 = 10.04% Outperformed the market
A portfolio analyst for a university endowment is reviewing the endowment's holdings

of illiquid assets. He is concerned about underestimating risk for illiquid assets. Which
of the following shortcomings best illustrates the analyst's concern?
A) Infrequent trading.
B) Selection bias.
C) Smoothed data.
D) Survivorship bias.
Overview for Questions #21-22 of

Question ID: 1359181
80
Use the following information to answer the next two questions.
An investor buys a share of ABC Corporation for $125 at the beginning of the year. At
the beginning of the next year, she buys another share in ABC for $140. She holds
both shares for a further year, and then sells both shares for $160 each. ABC pays
dividends of $2 per share at the end of the first year and $3 at the end of the second
year.
Assuming dividends are not reinvested, what is the dollar-weighted rate of return on
this investment over the holding period?
A) 14.46%.
B) 15.09%.
C) 15.46%.
D) 16.09%.
Assuming dividends are not reinvested, what is the time-weighted rate of return
(TWRR) on this investment over the holding period?
A) 15.00%.
B) 15.20%.
C) 15.40%.
D) 15.60%.
Which of the following is correct regarding operational risk methodologies allowed

under Basel II?
I. Standardized approach.
II. Internal ratings advanced approach.
III. Internal models approach.
IV. Basic indicator approach.
V. Internal ratings foundation approach.
VI. Supervisory formula approach.
VII. Advanced measurement approach.
A) I and II.
B) I, II, and V.
C) VI and VII.
D) I, IV, and VII.
MRS Brokers has a three-year derivative exposure position with a counterparty. The
one-year credit default swap (CDS) spread on the counterparty is currently trading at
a spread 150 basis points. The following table shows MRS Brokers' forecast data on
the exposure, future spread, and recovery rates:
Year 1 Year 2 Year 3
Expected exposure (AUD millions) 18 18 18
CDS spread (bps) 150 225 375
Recovery rate (%) 90% 85% 75%
The risk team uses the following assumptions:
Counterparty default follows a constant hazard rate process.

MRS Brokers has signed an ISDA Credit Support Annex agreement, which
requires the posting of AUD 15 million over the life of the contract.
The current risk-free rate of interest is 3% and the term structure of interest
rates is flat over the three-year life of the contract.
Collateral and exposure values will remain stable over the life of the contract.
Given the information and assumptions just listed, what is the correct estimate for the
credit valuation adjustment for this position?
A) AUD 0.3776 million.
B) AUD 0.3992 million.
C) AUD 0.6332 million.
D) AUD 0.6554 million.

For ABC Bank, the duration of its assets is 6.3 and the duration of its liabilities is 9.2.
Total equity is $1.2 billion and total liabilities are $2.1 billion. The economic consensus
is that there will be a decrease in interest rates in the future. Which of these
statements regarding the bank's leverage-adjusted duration gap (LADG) and net
worth is correct?
A) ABC Bank has a negative LADG; its net worth will decrease.
B) ABC Bank has a negative LADG; its net worth will increase.
C) ABC Bank has a positive LADG; its net worth will decrease.
D) ABC Bank has a positive LADG; its net worth will increase.
A bank customer has a balance of $12,000 at the beginning of the month and $18,000
at the end of the month. The average balance during the month was $16,000. The
customer earned $35 of interest during the month (assume 30 days). Which of the
following amounts is closest to the annual percentage yield (APY) earned by the
customer?
A) 2.39%.
B) 2.62%.
C) 2.69%.
D) 3.61%.
A firm has a debt issue with a probability of default (PD) of 15% and a loss given
default of 35%. What is the value of the vulnerable option?
A) 90.25% of the value of a default-free option.
B) 92.75% of the value of a default-free option.
C) 93.25% of the value of a default-free option.
D) 94.75% of the value of a default-free option.

A firm is considering a new expansion project which would cause its one-year value at
risk (VaR) to increase from $500 million to $530 million. The firm's cost of additional
capital is 4%. Which of these statements is accurate?
To o set the project’s risk, the rm will need to raise an additional $30 million in
A)
capital.
The new project would need to generate an additional $20 million to maintain the
B)
rm’s economic capital.
Regardless of the additional amount generated by the new project, the rm’s
C)
nancial distress will increase.
D) To o set the project’s risk, the rm will need to raise an additional 4% in capital.
Which of the following differences between the 2007–2009 great financial crisis (GFC)
and the March to April 2020 COVID-19 crisis is least accurate?
A) The COVID-19 crisis resulted in a larger spread increase in investment-grade bonds.
Events of the COVID-19 crisis unfolded much faster than the more prolonged
B)
changes of the GFC.
Both events resulted in signi cant asset price declines across high-yield and
C)
investment-grade securities.
During the GFC, the decline in investment-grade bond prices was much larger than
D)
the decline in high-yield bond prices.

A bank liquidity manager is adopting the best practices in the United Kingdom in
terms of reporting the bank's liquidity position. What frequency of reporting would
apply to the bank's liquidity buffer (analysis of marketable asset holdings) and foreign
exchange (analysis of balance sheet exposures)?
Liquidity Buffer Foreign Exchange
A) Monthly Monthly
B) Monthly Quarterly
C) Quarterly Monthly
D) Quarterly Quarterly
A risk manager is analyzing the firm's liquidity health measures. Which of the
following measures is she least likely to consider as part of her analysis?
A) Total debt to equity.
B) Funding sources concentration.
C) Overnight borrowings to total assets.
D) Noncore funding to long-term assets.

You are a risk manager for International Bank and are calculating the market risk
capital charge for the bank's trading portfolio using the internal models approach
(IMA). You have compiled the following data:
VaR (95% confidence level, one-day holding period) of previous trading day:
$40,000
Average VaR (95% confidence level, one-day holding period) of last 60 trading
days: $22,000
Penalty factor zone: red
Assuming the return on the bank's trading portfolio is normally distributed with a 10-
day holding period, what is the market risk charge of the trading portfolio?
A) $178,621.
B) $204,328.
C) $294,724.
D) $392,966.
A diversified portfolio exhibits a normally distributed geometric return with a mean

and standard deviation of 12.2% and 23%, respectively. What is the 5% lognormal VaR,
assuming the beginning period portfolio value is $5.2 million?
A) $1,180,920.
B) $1,339,000.
C) $3,920,041.
D) $3,980,000.

Xfinity Resorts, Inc., operates a defined benefit pension scheme with assets of $300
million and liabilities of $275 million. Xfinity's advisors, Fortune Capital Management,
have estimated a 7% growth in assets and a 4% growth in liabilities over the next year.
The volatility of the growth in assets and liabilities is estimated to be 13% and 5%,
respectively. The correlation between asset and liability growth is estimated to be
0.40. What is the projected amended surplus at a 95% confidence level?
A) –$24.05 million.
B) –$49.05 million.
C) $24.05 million.
D) $49.05 million.

Given the following data, what is the credit exposure rank of each counterparty, from
the highest counterparty exposure to the lowest?
MtM Trades (In Opposing

Millions) Counterparties
Counterparty A B C D
Trades with +
10 6 5
MtM
Trades with -
–5 0 –5
MtM
Counterparty B A C D
Trades with +
12 5 7
MtM
Trades with -
–13 0 –8
MtM
Counterparty C A B D
Trades with +
5 12 2
MtM
Trades with -
–5 –3 –10
MtM
Counterparty D A B C
Trades with +
2 4 3
MtM
Trades with -
–8 –2 –7
MtM
A) C, D, A, B.
B) B, A, D, C.
C) D, B, C, A.
D) A, C, B, D.

QuantTech has an outstanding zero-coupon bond with one year remaining to
maturity. The bond has a zero recovery rate and a face value of USD 1,000. The bond
is currently trading at 93% of face value. Assuming the excess spread only captures
credit risk and the risk-free rate is 4% per annum, what is the risk-neutral probability
of default (PD) of QuantTech?
A) 3.28%.
B) 3.88%.
C) 4.28%.
D) 4.88%.
Which of these statements about the role of the chief risk officer (CRO) is accurate?
CROs are usually responsible for both developing and implementing the rm’s
A)
enterprise risk management (ERM) system.
B) An ability to protect the rm’s assets is not one of the ve critical skills of a CRO.
C) The CRO typically reports to the CEO; it is unusual for the CRO to report to the CFO.
CROs are typically responsible for market, credit, and liquidity risks, but not for
D)
operational risks.
A manager has a portfolio with only one position: a $50 million investment in Asset P.
The manager is considering adding a $50 million position in Position R or S to the
existing portfolio. The current volatility of P is 7%. The manager wants to limit
portfolio VaR to $13.5 million at the 95% confidence level. R has a return volatility of
11% and a correlation with P equal to 0.6. S has a return volatility of 14% and a
correlation with P equal to 0.2. Which of two proposed additions, R or S, will keep the
manager within her risk budget?
A) Adding R only.
B) Adding S only.
C) Adding either R or S.
D) Adding neither R nor S.
Which of the following is most accurate about early warning signals of retail and
commercial exposures?
Neither retail nor commercial exposures provide early warning signals of default
A)
that allow banks time to take action to minimize PD and LGD.
Both retail and commercial exposures provide early warning signals of default that
B)
allow banks time to take action to minimize PD and LGD.
Commercial exposures but not retail exposures provide early warning signals of
C)
default that allow banks time to take action to minimize PD and LGD.
Retail exposures but not commercial exposures provide early warning signals of
D)
default that allow banks time to take action to minimize PD and LGD.
A risk manager is reviewing short-term interest rate assumptions by applying the

Vasicek model. The first task is to estimate the long-run value of the short-term
interest rate. The current interest rate is 5% and you estimate the true long-term
interest rate is 5.5%, annual drift of 0.32%, annual volatility of 1.8%, dt = 1/12, and a
mean reversion adjustment of 0.04. What is the long-run value of the short-term rate,
assuming risk neutrality?
A) 16.5%.
B) 15.5%.
C) 14.5%.
D) 13.5%.

Q
DuPont Partners is a firm based in Paris that does payments and settlement activities.
After discussions with its local regulator providing significant evidence of its risk
management framework, strong leadership from the board, and robust risk policy
and procedures, the regulator approves the firm's change from the basic to the
standardized approach for operational risk capital. Which of the following is most
likely to be the change in operational risk capital under the new approach?
A) Will decrease.
B) Will increase.
C) Will stay the same.
D) Will decrease initially for a year then increase again.
What of the following items is least likely to be a reason for the slow transition from
the London Interbank Offered Rate (LIBOR) to the secured overnight financing rate
(SOFR)?
A) High cost.
B) Complexity
C) Lack of training.
D) Resistance to change

Bank Q is exploring the impact of changing economic conditions on its loan portfolio.
The local regulator has recently required all banks to calculate the stress loss for all
loan portfolios. The CFO compiles the following data:
Loan portfolio: $250 million

Recovery rate: 60%
PD normal conditions: 2.5%
PD stressed conditions: 7.0%
Correlation: 0.25
What is the stress loss for Bank Q?
A) $2.5 million.
B) $4.5 million.
C) $7.0 million.
D) $9.5 million.

80
Nate Colby is the chief financial officer of Marina Del Rey (MDR), a medium-sized
regional bank based out of southern California. The bank is under pressure to raise
sufficient stable deposits as a cheap source of funding in light of an increased level of
capital being required by the state financial regulator. Colby reviews the MDR retail
loan portfolio of USD 190 million and estimates a through-the-cycle probability of
default of 7%, a recovery rate of 30%, and exposure equal to the loan portfolio value.
Colby compiles the following data, including the companywide hurdle rate and
effective tax rate:
MDR: Key Data
Retail Lending Division
Return on the loan portfolio 14.00% p.a.
Transfers USD 0m
Operating direct costs USD 1.685m
Economic capital USD 114m

Return on risk capital 2.80% p.a.
Cost of the debt capital 6.00% p.a.
MDR: Consolidated Data
Effective tax rate 30.00%
Risk-free rate 2.80%
Equity beta 1.15
Equity market return 5.20%
Hurdle rate 4.50%
The board asks Colby to assess the risk-adjusted return on capital (RAROC) and the
adjusted RAROC (ARAROC) for the bank in advance of an important shareholder
meeting.
What are the RAROC and ARAROC?
RAROC ARAROC
A) 4.54% 1.78%
B) 4.54% 2.62%
C) 5.38% 1.78%
D) 5.38% 2.62%
What should be concluded from the following measures?
A) Keep the retail division because the RAROC is greater than the hurdle rate.
B) Close down the retail division because the RAROC is less than the hurdle rate.
C) Keep the retail division because the ARAROC is greater than the risk-free.
D) Close down the retail division because the ARAROC is less than the risk-free.
A bank has the following deposit and nondeposit liabilities broken down into three
categories:
Hot money (desired reserve of 80%): $50 million
Vulnerable funds (desired reserve of 30%): $55 million
Core funds (desired reserve of 20%): $100 million
Legal reserves are 3%. Actual loans are $165 million with the potential to reach $225
million. The bank wishes to be able to meet all good loans.
Based on the information listed, the bank's liability liquidity reserve is closest to:
A) $70 million.
B) $74 million.
C) $130 million.
D) $134 million.
Joanne Paulson is a general partner of Quicksilver Capital Partners, an up-and-coming

hedge fund based out of Geneva. She identifies Diamond Technologies, Inc., as a
strong candidate for a takeover by a larger player Aztex Mining Corporation. Which of
the following is incorrect in relation to implementing a merger arbitrage strategy?
I. Buy Aztex and sell Diamond Technologies.

II. The payoff is large profits if the merger goes ahead, and small losses if it
doesn't.
III. The strategy is likened to selling insurance.
A) I and II.
B) I and III.
C) II and III.
D) I, II, and III.
Based on a study involving a sample of 34 advanced and 34 emerging market and

developing economies, for the years since 2000, the number of climactic disasters has
generally been:
A) falling somewhat.
B) stable
C) rising somewhat.
D) rising signi cantly.
A bank supplies a line of credit to a customer with a $35 million limit that is currently
drawn by $10 million. The rate charged on the line of credit is 3% (300 bp) for all
drawn funds. Based on the customer's transaction history, projected needs, and
credit score, the bank determines that there is a 60% probability that the customer
will draw the entire limit. The bank's cost of funding for the liquidity cushion is 20 bps.
If the bank charges contingent commitments based on the probability of a drawdown,
which of the following amounts is closest to the liquidity charge for the line of credit?
A) 3 bps.
B) 9 bps.
C) 51 bps.
D) 129 bps.

You are valuing a call option on a three-year, 7% annual coupon, $100 par value bond
with a strike of 100. You create the following interest rate tree and calibrate a 50%
probability of movement upward or downward within the tree:
T0 T1 T2
8%
5%
2% 6%
4%
4%
What is the value of the option at the T1 upper node?
A) $0.45.
B) $0.55.
C) $0.65.
D) $0.75.

80
The current value of Firm Y is $80 million. There is a single three-year zero-coupon
bond with a face value of $55 million. The annual interest rate is 5%, the volatility of
the firm is 15%, and the value of the equity is $37.05 million.
Using the Merton model and put-call parity, what is the value of the short put option?
A) $3.789 million.
B) $3.989 million.
C) $4.189 million.
D) $4.389 million.
Using the Merton model, what is the value of the risky debt?
A) $42.95 million.
B) $43.95 million.
C) $44.95 million.
D) $45.95 million.
In September 2013, the average monthly correlation for all the Dow stocks was 30%
and the long-run correlation mean of Dow stocks was 35%. You run a regression that
estimates the following:
Y = 0.215 – 0.78X
What is the expected correlation for October 2013, given the mean reversion rate
estimated in the regression analysis?
A) 3.9%.
B) 5.0%.
C) 31.0%.
D) 33.9%.

You are calculating a bilateral credit value adjustment (BCVA) for a trade with
Counterparty X and estimate the following data:
Expected positive
= 7%
exposure
Expected negative
= 5%
exposure
Counterparty X credit
= 330 basis points
spread
Your firm's credit spread = 250 basis points
Which of the following is correct?
A) The credit value adjustment (CVA) will be negative for your rm.
B) The BCVA will be negative for your rm.
C) The BCVA will be positive for your rm.
D) The debt value adjustment (DVA) will be negative for your rm.
Using the fundamental law of active management (FLOAM), an investor requires an

information ratio of 0.5 and is considering a stock selection strategy based upon
momentum plays. Assuming the manager places 200 bets per year, what is the
required information coefficient?
A) 0.035.
B) 0.350.
C) 0.050.
D) 0.500.

80
Use the following information to answer the next three questions.

Assume a 50% probability that one-year spot rates are 20% and a 50% probability that
one-year rates are 12%. You also assume a two-year zero-coupon bond has a face
value of $1.
What is the value of the left-hand side of Jensen's inequality at T0?
A) $0.734047618.
B) $0.744047618.
C) $0.754047618.
D) $0.764047618.
What is the implied yield of the value of the left-hand side of Jensen's inequality at T0?
A) 15.131%.
B) 15.431%.
C) 15.631%.
D) 15.931%.
What is the implied convexity demonstrated by Jensen's inequality?
A) 0.87%.
B) 0.57%.
C) 0.37%.
D) 0.07%.
Consider a two-asset portfolio. The portfolio weight of Asset X is 0.35 and Asset Y is
0.65. The total value of the portfolio is $3.4 million and the standard deviation of
returns is 9.8%. The betas of X and Y are 0.65 and 1.35, respectively. What is the
marginal VaR of X and the component VaR of Y at a 99% confidence level?
Marginal VaR Asset X Marginal VaR Asset Y
A) $0.22834 $504,631
B) $0.14842 $504,631
C) $0.22834 $681,252
D) $0.14842 $681,252
Banks have three lines of defense for mitigating money laundering (ML) and the
financing of terrorism (FT) risks. Which of these is not one of these lines of defense?
A) Business units.
B) Regulatory authorities.
C) The chief ML/FT o cer.
D) Internal and external audits.
You are analyzing a corporate bond. The risk-free rate is 3.5%. You estimate the
recovery rate to be 35% and the implied default probability to be 5.38%. Which of the
following is closest to the bond's yield?
A) 6.25%.
B) 6.50%.
C) 7.25%.
D) 7.50%.
There is a short position in one-year bonds with a $150 million face value and a 6%
annual interest rate with interest paid semiannually. The annualized interest rate on
zero-coupon bonds is 3% for a 6-month maturity and 4.1% for a 12-month maturity.
After decomposing the bond into the cash flows of the two standard instruments,
what is the total present value of all the cash flows of the standard instruments?
A) –$154,788,591.
B) –$153,888,591.
C) –$153,788,591.
D) –$152,788,591.
The new CEO of a bank implements the following two changes:
I. Executive compensation will be directly linked to bank profitability, rather than

having flat salaries.
II. Compensation for sales staff will be primarily based on customer satisfaction.
Which of these changes is most consistent with best practices in managing the bank's
corporate culture?
A) II only.
B) I only.
C) Both I and II.
D) Neither I nor II.

Which of the following is true of currency option volatility smiles?
Currency options generate implied volatilities that are higher for deep-in-the-money
A)
options and lower for deep-out-of-the-money options.
Currency options generate implied volatilities that are higher for deep-out-of-the-
B)
money options and lower for deep-in-the-money options.
Currency options generate implied volatilities that are higher for at-the-money
C)
options and lower for deep-out-of-the-money and deep-in-the-money options.
Currency options generate implied volatilities that are higher for deep-in-the-money
D)
options and deep-out-of-the-money options and lower for at-the-money options.
An institutional trader is involved as a counterparty to numerous over-the-counter

(OTC) derivatives transactions with a dealer bank. In recent months, the trader has
lost confidence regarding the solvency of the dealer bank. As a result, which of the
following transactions is the trader least likely to perform?
A) Borrow funds from the dealer.
B) Request a novation of the contract.
C) Enter into new o setting derivatives contracts with the dealer.
D) Request to have at-the-money options revised to in-the-money strike prices.
Fund managers A and B both claim superior performance due to active management.
Manager A has an excess return of 0.12% and a standard error of the alpha of 0.087.
Manager B has an excess return of 0.085% and a standard error of the alpha of
0.039%. Assuming a large sample size of monthly returns, which of the managers can
statistically claim superior performance at the 5% significance level?
A) Manager A only.
B) Manager B only.
C) Both Manager A and Manager B.

D) Neither Manager A nor Manager B.
You are estimating exposures during a re-margining period and forecast the following
data:
A 10-day re-margining period

Annual volatility of collateral of the collateral of 10%
A 99% PFE confidence level
What is the percentage change in expected exposure (EE) during the re-margining
period?
A) –0.7%.
B) –0.8%.
C) –0.9%.
D) –1.0%.
Regarding sharing of cybersecurity information practices, which of these sharing types

is the least common?
A) Sharing among banks.
B) Sharing among regulators.
C) Sharing from banks to regulators.
D) Sharing from banks and regulators to security agencies.
A bond with a face value of 360 matures in 10 years and is calculated to be worth
$175 using the Merton model. The risk-free rate is 4.5%. What is the bond's spread?
A) 7.21%.
B) 4.98%.
C) 3.62%.
D) 2.71%.

Bank BCCA has the following balance sheet:
Assets Liabilities
Cash 15 Retail deposits (less stable) 130
Central bank reserves 12 Wholesale deposits 65
Treasury bonds > 1 year 15 Tier 2 capital 5
Mortgages 30 Tier 1 capital 20
Retail loans < 1 year 32
Small-business loans < 1 year 94
Fixed assets 22
Total assets 220 Total liabilities and equities 220
Available stable funding (ASF) factors and categories:
100% Tier 1 and Tier 2 capital, preferred stock, debt > 1 year
90% "Stable" demand and term deposits from individuals/businesses < 1 year
80% "Less stable" demand and term deposits from individuals/businesses < 1
year
50% Wholesale funding (demand and term deposits) < 1 year
0% All other liability and equity categories
Required stable funding (RSF) factors and categories:
0% Cash and short-term instruments

5% Marketable securities (> 1 year, sovereign 0% risk weight)
20% Corporate bonds rating of AA– or higher
50% Gold, equities, bonds rated A+ to A–
65% Residential mortgages
85% Loans to small businesses or retail customers < 1 year
100% All other assets
What is Bank BCCA's net stable funding ratio (NSFR)?
A) 92.5%.
B) 94.5%.
C) 106.0%.
D) 108.0%.
Assuming an option in the equity options portfolio has an at-the-money strike of 50,
which of the following options is most likely to have the lowest level of implied
volatility in real life?
A) At-the-money put.
B) In-the-money call.
C) Out-of-the-money put.
D) In-the-money put.
Consider the following data:
Value of the credit portfolio: $600 million

Number of credits: 40
PD: 3%
LGD: 100%
What is the credit VaR at a 95% confidence level assuming a correlation of 0, and 4
defaults representing the 95th percentile?
A) $42 million.
B) $72 million.
C) $528 million.
D) $546 million.

You are given the following data for a firm:
Current market value (MV): 3,750

Expected MV in one year: 4,500
Short-term (ST) debt: 950
Long-term (LT) debt: 1,250
Annualized volatility of firm's assets: 20%
According to the KMV model, what is the distance to default (DD) one year from now?
A) 2.35 standard deviations.
B) 2.41 standard deviations.
C) 2.55 standard deviations.
D) 3.25 standard deviations.
Regarding the application of artificial intelligence (AI) and machine learning (ML),
which of the following statements is most likely incorrect? AI and ML can be used to:
A) better estimate insurance risks through credit quality estimation.
B) improve risk management by backtesting risk management activities.
C) minimize execution trading costs, which also includes market impact costs.
optimize capital allocation by allocating capital to areas where the risk-reward ratios
D)
are higher.
Key characteristics that an organization should strive for to increase its cyber
resilience include all of these except:
senior management that demonstrates a consistent and sincere concern for

A)
employee performance issues.
having a culture that encourages employees to report cyber problems to

B)
management.
having a culture that values learning lessons from past positive cyber outcomes and
C)
ignores negative outcomes.
clear awareness of the level of cyber defense and any employee performance
D)
problems that could impair the level of defense.
The Harper Valley Bank, Inc. (HVB), uses the historical average cost approach to
estimate its cost of funds. HVB estimates noninterest expenses, including salaries and
overhead, to be $20 million annually. HVB has total assets of $2.1 billion, earning
assets of $1.5 billion, and equity capital of $300 million. Total borrowed funds raised
and total interest paid are $1.8 billion and $52 million, respectively. The shareholders'
after-tax required rate of return is 9%, and HVB is subject to an income tax rate of
35%. HVB's weighted average overall of capital is closest to:
A) 6.24%
B) 6.60%.
C) 6.77%.
D) 7.57%.

80
Use the following information to answer the next three questions.
Bank Q has a portfolio of two prime loans, A and B, each loan being $1 million and
each having an individual probability of default (PD) of 5%. Bank Q also has a portfolio
of 20 subprime loans with an estimated pairwise correlation of 0.85.

What is the joint PD on Bank Q's prime loan portfolio, assuming a joint default
correlation of 0.5?
A) 2.17%.
B) 2.63%.
C) 3.17%.
D) 3.63%.
What is the joint probability of default (PD) on Bank Q's prime loan portfolio,
assuming a joint default correlation of 0?
A) 0.02%.
B) 0.25%.
C) 2.50%.
D) 5.00%.
Which of the following is closest to the concentration ratio of Bank Q's combined
portfolio of all loans (prime and subprime)?
A) 0.045.
B) 0.050.
C) 0.059.
D) 0.062.

Consider a portfolio containing six equal positions of $2.5 million each in each asset.
The standard deviation of returns is 25% for each asset and the correlations between
all pairs of returns is 0.25. What is the 99% VaR of this portfolio?
A) $5.35 million.
B) $5.75 million.
C) $6.35 million.
D) $6.75 million.

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Question #1 of 80 Question ID: 1359158

95% 538 844 243 610

99% 756 1039 544 865

99.9% 962 1527 726 1229

Question #2 of 80 Question ID: 1359187

A risk manager is comparing machine learning approaches. During his analysis, he

A) make predictions on discrete, dependent variables.

B) make predictions on quantitative, continuous variables.

C) involve applying several layers of algorithms into the learning process.

D) involve observing input variables without including a dependent variable.

A trading manager for a large institution is interested in measuring market liquidity in

Question #4 of 80 Question ID: 1292034

Question #5 of 80 Question ID: 1359149

A) The CRO is correct with respect to Basel II rules only.

Question #6 of 80 Question ID: 1359156

Question #7 of 80 Question ID: 1359191

Question #8 of 80 Question ID: 1359178

Question #9 of 80 Question ID: 1292043

Which of the following statements is false of callable and putable bonds?

I. Callable bonds behave like option-free bonds at high yields.

C) I, II, and III.

Question #10 of 80 Question ID: 1292041

Bond Yield DV01

TIPS 1.475% 0.092

A) how to properly use company equipment.

B) how to improve remote work security procedures.

C) how to quantify potential COVID-19-related cyber losses.

D) how cyberattacks are carried out and how to mitigate them.

Question #12 of 80 Question ID: 1359164

Question #13 of 80 Question ID: 1359194

A) Bank holiday only.

B) Liquidity injections only.

C) Capital requirements only.

Question #14 of 80 Question ID: 1359144

A) The ALM mismatch is likely to increase.

B) The ALM mismatch is likely to decrease.

C) The ALM mismatch could increase or decrease.

D) The ALM mismatch will not be impacted.

Question #15 of 80 Question ID: 1359163

C) International eurocurrency deposit.

D) Revenue anticipation note (RAN).

Question #16 of 80 Question ID: 1359180

Question #17 of 80 Question ID: 1292060

I. Investor A's position will lose value.

C) Both I and II.

D) Neither I nor II.

Question #18 of 80 Question ID: 1359146

Which of the following is not a benefit of enterprise risk management (ERM)?

A) Market value improvement.

B) Representing economic reality of transactions.

C) Regulatory capital relief.

D) Reduction in insurance premiums.

following is most accurate of the M2 measure?

A) M2 = 9.92% Underperformed the market

B) M2 = 9.92% Outperformed the market

C) M2 = 10.04% Underperformed the market

D) M2 = 10.04% Outperformed the market

Question #20 of 80 Question ID: 1359173

A portfolio analyst for a university endowment is reviewing the endowment's holdings

Overview for Questions #21-22 of