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Mock Exam D
FRM 2012 Practice Questions

By David Harper, CFA FRM CIPM
www.bionicturtle.com

.......................................................................................... 6 Question 12: Basis risk ........................................................ 3 Question 2: Capital asset pricing model (CAPM) ............ 3 Question 4: Collateralization in over-the-counter (OTC) market ........................................................................................................................................and off-balance-sheet foreign exchange (FX) risk hedges ....................................... 11 www.................................... 7 Question 16: Tax argument for risk management ......................... 11 Question 25: Dollar value of an '01 (DV01......... 10 Question 23: Expected loss (M.............. 7 Question 15: Currency swap valuation ......................................................................... 3 Question 3: EWMA covariance ............ 5 Question 8: Arbitrage pricing model (APT) ...................... 9 Question 19: Dynamic delta hedging ......................................... 8 Question 17: Black-Scholes with dividends ....................................................... 10 Question 22: Commodity lease rates ... 4 Question 7: Chase Manhattan Bank/Drysdale Securities ......................................................................................... 10 Question 24: Bond maturity and retirement ............. 5 Question 10: Limitations of Value-at-Risk (VaR)................ 6 Question 13: Spectral risk measures ...................................................... 6 Question 14: Hypothesis testing (Stock & Watson) ....... DVBP......................................................... 9 Question 21: Difference between two means ......................................bionicturtle................ Coherent Risk Measures........ 9 Question 20: Bond price using spot rates .......................................................Table of Contents Question 1: On.............. .... PV01) ...................... 5 Question 11: Chi-square distribution ....................................................................com FRM 2012 n PART 1: MOCK EXAM D n 1 ................ 8 Question 18: American option lower bounds .... Ong) ....................... 5 Question 9: Eurodollar futures and duration-based hedges ................................................................................................................................................................. 4 Question 6: Geometric Brownian motion (GBM) Monte Carlo simulation .. aka........ 4 Question 5: Role of rating agencies in financial markets .

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 www.bionicturtle.com Answer A Answer B Answer C Answer D FRM 2012 n PART 1: MOCK EXAM D n 2 .Candidate Answer Sheet: Mark an X under your answer of choice.

i.(EUR) denominated assets.0% and return A(n-1) = 1. that pay an interest rate of 4. what is today's updated estimate of the correlation between the assets? a) b) c) d) 0.0% and the net yield on the EUR-denominated assets is 8. the exchange rate has moved to EUR/USD $1.90 to update covariance.0% 8.and off-balance-sheet foreign exchange (FX) risk hedges 1..S.bionicturtle. EUR is the base currency and USD is the quote currency.0%. At the end of the year.4.0%. bank raises $200 million in liabilities.0%.0% per annum with (discrete) annual compounding.e. 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). the bank is un-hedged with respect to currency risk.0% as the difference between the blended ROA of 7.38 0.26.Question 1: On. For example. sigma B(n-1) = 2. A U. In this way the expected return on the investment (ROI) is 3.0%.0% and 8. sigma A(n-1) = 1.40 per one unit of EUR..0% (average of 6.0%) and the cost of funds (COF) of 4. in order to fund two investments: $100 million invested into U.30% because the EUR appreciated against the USD ROI of +1. However. Our portfolio (P) has volatility of 30% and a correlation with the market of 0.0%.40. The nominal returns for the year were exactly as expected. A and B. so this quote format refers to USD $1. At the beginning of the year.0% is equivalent to 8. Asset B closed trading yesterday with daily volatility of 2.2% 12.90% because the EUR appreciated against the USD ROI of -4.S.40.com FRM 2012 n PART 1: MOCK EXAM D n 3 .0%.0% and a daily return of +2.0% Question 3: EWMA covariance 3. i. the exchange rate is EUR/USD $1. Assume two assets. The expected net (of default risk) yield on the USD assets is 6. Yesterday's correlation (coefficient) between the two assets was 0.90% because the EUR depreciated against the USD ROI of -2.40.8% 11. According to CAPM. a) b) c) d) ROI of +5.46 www.0%.e.44 0. If we use the EWMA model with a lambda parameter of 0. dollar denominated assets and the remaining $100 million invested into Euro.0% and daily return of +1. Assume the riskfree rate is 4% and the expected (overall) market return is 12% with 20% volatility.0% and return B(n-1) = 2. Note #2: In the initial exchange rate of EUR/USD $1. Asset A closed trading yesterday with daily volatility of 1. what is the portfolio's expected return? a) b) c) d) 6. an effective annual rate of 8.40 0.40% because the EUR depreciated against the USD Question 2: Capital asset pricing model (CAPM) 2.