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25 Questions FRM

This document contains a 25 question mock exam for the Financial Risk Manager (FRM) exam. The questions cover topics such as foreign exchange risk hedging, the Capital Asset Pricing Model, EWMA covariance estimation, bond pricing, options valuation, and risk measurement. Each question is multiple choice with 4 possible answers. The document provides an answer sheet for candidates to mark their responses.

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471 views4 pages

25 Questions FRM

This document contains a 25 question mock exam for the Financial Risk Manager (FRM) exam. The questions cover topics such as foreign exchange risk hedging, the Capital Asset Pricing Model, EWMA covariance estimation, bond pricing, options valuation, and risk measurement. Each question is multiple choice with 4 possible answers. The document provides an answer sheet for candidates to mark their responses.

Uploaded by

theboy_ldv
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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P1.

Mock Exam D
FRM 2012 Practice Questions

By David Harper, CFA FRM CIPM


www.bionicturtle.com

Table of Contents
Question 1: On- and off-balance-sheet foreign exchange (FX) risk hedges ..................... 3
Question 2: Capital asset pricing model (CAPM) .................................................... 3
Question 3: EWMA covariance ......................................................................... 3
Question 4: Collateralization in over-the-counter (OTC) market ................................. 4
Question 5: Role of rating agencies in financial markets .......................................... 4
Question 6: Geometric Brownian motion (GBM) Monte Carlo simulation ........................ 4
Question 7: Chase Manhattan Bank/Drysdale Securities ........................................... 5
Question 8: Arbitrage pricing model (APT) .......................................................... 5
Question 9: Eurodollar futures and duration-based hedges ....................................... 5
Question 10: Limitations of Value-at-Risk (VaR). Coherent Risk Measures. ..................... 5
Question 11: Chi-square distribution ................................................................. 6
Question 12: Basis risk .................................................................................. 6
Question 13: Spectral risk measures .................................................................. 6
Question 14: Hypothesis testing (Stock & Watson) ................................................. 7
Question 15: Currency swap valuation ............................................................... 7
Question 16: Tax argument for risk management .................................................. 8
Question 17: Black-Scholes with dividends .......................................................... 8
Question 18: American option lower bounds ........................................................ 9
Question 19: Dynamic delta hedging ................................................................. 9
Question 20: Bond price using spot rates ............................................................ 9
Question 21: Difference between two means ..................................................... 10
Question 22: Commodity lease rates ............................................................... 10
Question 23: Expected loss (M. Ong) ............................................................... 10
Question 24: Bond maturity and retirement ....................................................... 11
Question 25: Dollar value of an '01 (DV01; aka, DVBP, PV01) ................................... 11

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FRM 2012 n PART 1: MOCK EXAM D n 1

Candidate Answer Sheet: Mark an X under your answer of choice.

Question #
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25

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Answer A

Answer B

Answer C

Answer D

FRM 2012 n PART 1: MOCK EXAM D n 2

Question 1: On- and off-balance-sheet foreign exchange (FX) risk hedges


1. A U.S. bank raises $200 million in liabilities, that pay an interest rate of 4.0%, in order to fund
two investments: $100 million invested into U.S. dollar denominated assets and the remaining
$100 million invested into Euro- (EUR) denominated assets. The expected net (of default risk)
yield on the USD assets is 6.0% and the net yield on the EUR-denominated assets is 8.0%. In this
way the expected return on the investment (ROI) is 3.0% as the difference between the blended
ROA of 7.0% (average of 6.0% and 8.0%) and the cost of funds (COF) of 4.0%. However, the bank
is un-hedged with respect to currency risk. At the beginning of the year, the exchange rate is
EUR/USD $1.40. At the end of the year, the exchange rate has moved to EUR/USD $1.26. The
nominal returns for the year were exactly as expected.
What is the one-year realized ROI if we account for the currency shift?
Note #1: please assume all interest rates are effective annual rates (EARs). For example, an
effective annual rate of 8.0% is equivalent to 8.0% per annum with (discrete) annual
compounding.
Note #2: In the initial exchange rate of EUR/USD $1.40, EUR is the base currency and USD is the
quote currency, so this quote format refers to USD $1.40 per one unit of EUR.
a)
b)
c)
d)

ROI of +5.90% because the EUR appreciated against the USD


ROI of -4.30% because the EUR appreciated against the USD
ROI of +1.90% because the EUR depreciated against the USD
ROI of -2.40% because the EUR depreciated against the USD

Question 2: Capital asset pricing model (CAPM)


2. Assume the riskfree rate is 4% and the expected (overall) market return is 12% with 20%
volatility. Our portfolio (P) has volatility of 30% and a correlation with the market of 0.4.
According to CAPM, what is the portfolio's expected return?
a)
b)
c)
d)

6.0%
8.8%
11.2%
12.0%

Question 3: EWMA covariance


3. Assume two assets, A and B. Asset A closed trading yesterday with daily volatility of 1.0% and
daily return of +1.0%; i.e., sigma A(n-1) = 1.0% and return A(n-1) = 1.0%. Asset B closed trading
yesterday with daily volatility of 2.0% and a daily return of +2.0%; i.e., sigma B(n-1) = 2.0% and
return B(n-1) = 2.0%. Yesterday's correlation (coefficient) between the two assets was 0.40. If
we use the EWMA model with a lambda parameter of 0.90 to update covariance, what is today's
updated estimate of the correlation between the assets?
a)
b)
c)
d)

0.38
0.40
0.44
0.46

www.bionicturtle.com

FRM 2012 n PART 1: MOCK EXAM D n 3

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