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    © All Rights Reserved
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    2 views73 pages

    2013 FRM Practice Exam

    Uploaded by

    Felipe Maestro
    Practice Exam

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    © All Rights Reserved
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    Eyl ¢xamination renee Exam PART | and PART II Oke ee 2018 Financia’ Fesk Manager Exarination RM Practice Exam ‘TABLE OF CONTENTS, iredUstion. sesssccsnsnenacraenserastaasiunrasenanencosavezest 2013 FRM Part | Practice Exam Candidate Answer Sheet .......... 2013 FRM Part | Practice Exam Questions. 2013 FRM Part | Practice Exam Answer Sheet/ANswers ....-..e0sseeseceeeeeee esl 2013 FRM Part | Practice Exam Explanations .........:csesssesesseeeeesesseeelT 2013 FRM Part il Practice Exam Candidate Answer Sheet .....2-2sc0csseeseees2-89 2013 FAM Part ll Practice Exam Questions 2... c.cssccsseeceecseessaseeeeeseedl 2013 FRM Part Il Practice Exam Answer Sheet/Answers ......-c0c¢ccseseseseee49) 2013 FRM Port il Practice Examn Explanations «e+ seeee st «© 2018 Global sociation of sk Professionals. ll iahtsresorvad* s Hlegal to weereduse cis rater Inany formal wityeut Dror atten approval of GAR®. Gleb Association of Rk Pretessonals, ne 2013 Financial Rsk Manager Exartination (FRM) Practice Exar INTRODUCTION ‘Tho FRM Exam is a practice-crianted examination, ts ‘questions are derived from a cambination of theory, as set forth ia the core readings, ard "teal-workl” wotk experience ‘Candidates are expected to understand risk management ‘concepts and approaches and how they would apply to @ risk managers day-to-day activities The FRM Examination Is also a comprehensive examina tion, tasting a risk professional on a numbor of risk manage ment concepts and approaches, It is very rare that 3 sk manager will be faced with an issue that can immediately be slotted into ona catagory. In the roal world a risk mar: ager must be able to identity any number of risk- related Issues andl be abie to deal with them effectively. ‘The 2015 FRM Practice Exams | and Ii have been devel ‘oped to aid candidates in their preparation for the FRM, Examination in May and November 2018. These Practice [Exams are based on a sample of questions from the 2010 throush 2012 FRM Examinations and are sugsestive of the ‘questions that willbe In the 2013 FRM Examination The 2015 FRM Practice Exam for Part | contains 25 multiple-choice questions and the 2018 FRM Practice Exam for Part |I contains 20 multinle-cheice questions. Note that the 2018 FRM Examination Part | will contain 100 multiple ‘choice questions and the 2073 FRM Examination Part I wil contain 80 multiple-chcies questions, The Practice Exams \woro designed te be shorter to allow candidatas to calibrate their preparedness without being overwhelming The 2015 FRM Practice Exams do not necessarily cover all topics ta be tested in the 2018 FRM Examination as the Iatetial covered inthe 2078 Study Gulcle may be different ‘rom that that covered by the 2610 through 2012 Study Guides. The questions sclacted for inclusion in the Practice Exams were chosen to be broadly reactive of the material assioned for 2013 as well as to represent the sivie of question that the FRM Committee considers appropriate basac! on assigned material For a complete list of current toples, core readings, end key learning objectives candidates ehould refer to the 2013 FRM Examination Study Guide and AIM Statements Core readings wore selected by the FRM Committee £0 ‘assist candidates in thsir review of tha subjects covered by the Exam. Quastions for the FRM Examination ate derives) from the "core" readings. Is strongly suggested that candidates review these readings in depth prior ta sitting for the Exam. Suggested Use of Practice Exams ‘Te masimize the effectiveness of the Practicn Exams, cand dates aro encouraged te follow these recommenciations! 1. Plan a date and time to take each Practice Exam Sot dates appropriately to give sufficiont study/ review time for the Practice Exam prior to the actual Exam. 2. Simul ‘the test environment as closely as possible ‘+ Take each Practice Exam in a quiet place. Have only the practice exam, candidate answer sheet, calculator, and writing instruments (pencils, erasers) avalable + Minimize possible distractions from other people, cell phones and study matedal | Allocate 60 minutes for the Practica Exam and set an alatm to alert you when 60 minutes have passed. Complete the exam but note the questions answered after the 60 minute mark Follow the FRM calculator policy, You may only uso 2 Texas Instruments BA Il Plus (inclucing the BA i Plus Professional), Hewlett Packard 12¢ (including the HP 12¢ Platinum and the Anniversary Edition), Hwlett Packard 108 I, Hewlett Packard 108 Il+ or Howlett Packard 208 calculator. 3. After completing the Practice Exam, Calculate your score by comparing your answer sheet with the Practies Exam answer kay. Only Include questions ccmpletad in the frst 60 minutes. + Use the Practice Exam Answers and Explantions te better understand correct and incorrect answers and to identity topics that require act tional review, Consult roferanced cora raadinas to prepare for Exam, on of sk Professionals ll nghts reserved lagal to fepractce this mater 1 in any format without prior wikten approval of GARP, Global Acsocation of Rik Srolessanals he Financial Risk Manager (FRM ) Examination 2013 Practice Exam PART | Answer Sheet 2018 Financia’ Fesk Manager Exarination RM Practice Exam a b. ¢ 4, a b. & 4, 1 oO Oo Oo Oo 16. Oo oO oO oO 2 Oo QO Oo Oo "7 Oo oS oO oO 3 Oo oO Oo oO 18 oO oO oO oO 4 oO Oo oO oO 19. oO oO @} Oo & oO Oo Oo oO 20. Oo Oo Oo oO 6. oO O oO oO a oO Oo oO oO 2 oO oO oO oO 2 O ° o Oo 8 Oo OQ Oo Oo 23. Oo Oo Oo © 9. oO Oo Oo oO 24, oO Oo o oO 10. Oo Oo Oo Oo 23 OO ° oO o w Oo Oo Oo Oo 2 Oo oO Oo Oo Correct way to complete B. Oo o Oo oO 1 e e e e “4, oO oO Oo Oo Wrong way te complete 6. Oo oO Oo Oo L oH S G ® < 21 Global Aiton of sk Peso ll noes eave. lt wore nat 3 Inany formal witreut Dior aiken approval of GAR® Gleb Association of Rk Prctessonal, Financial Risk Manager (FRM ) Examination 2013 Practice Exam PART | Questions 2018 Financia Fesk Manager Examination FRM") Practice Exam 1. | You are deciding between buying a futures contract on an exchange and buying a forward centract directly from a counterparty on the same underlying asset. Both contracts would have the same maturity and delivery specifications You find that the futures price is less thon the forward price Assuming no srbitrage epspertunty exists, what single factor acting alone would be a realstic explanation for this price difference? ‘a. Tho futures contract is more liquid and eatior to trade, 1B, The forward contract counterparty is more likely to default The astet Is strongly negatively correlated with interest rates. . The trancaction costs on the futures contract are less than on the forwarel contract 2 | Eric Meyers is a trader in the arbitrage unit of a multinational bank. He finds that an asset is trading at USD 1,009, the price of a I-year futures contract on that asset is USD 1,010, and the price of a 2-year futures con- tract is USD 1025 Assume that there are no cash flows from the asset for 2 years. f the term structure of interest rates is flat at 1% per year, which of the following is an appropriate arbitrage strategy? Short 2-year futures and long ‘-vear futures Short -ysar futures andl long 2-year futures ‘Short 2-year futures and long the underlying asset fundec by borrowing for 2 years Short 1-year futures anc! long the underlying asset funded by borrowina for | year oop 3. Tho price of a siemonth European call option on a stock is USD 3 The stock prico is USD 24. A dividend! of USD Tis expected in three months. The continuously compouncled risk-free rate for ll maturities is 5% per year. Which of the following is closest to the value of a put option on the same underiying stock with a strike pice of USD 25 and a time to maturity of six months? Usp 360 uso 240 usp 437 Usd 163. aere 2018 Giobal Asiocation of isk Profassonals. ll ohtsresorved. ts legal to reproduce this material 5 In ay format without Brior witten approval of GARP, Globa: Association of Rsk Professionals, ne 2013 Financial Risk Manager Examination (FRM Practice Exam “4. | Which of the following statements regarding the trustee named in 3 corporate bond indenture is correct? ‘The trustee has the authority to dectare & default if the Issuer misses @ payment ‘The trustee may take action beyond the Indenture to protect bondholders. The trustee must act at the request of a sufficient number of bondholders. ‘The trustee Is paid by the bondholders or their representatives. apse 5. oar, Inc. is a manufacturer that is heavily dependent on plastic parts shipped from Malaysia. Pear wants to hedge its exposure to plastic price shocks over the next 7 % months. Futures contracts, hewever, are not read lly available for plastic. After some research, Pear identifies futures contracts on other commodities whose prices are closely correlated to plastic prices. Futures on Commodity & have a correlation of 0.85 with the price of plastic, and futures on Commodity B have a correlation of 0.92 with the price of plastic. Futures on both Commodity A and Commodity 8 are available with 6-month and 9-month expirations. Ignoring liquidity Considerations, which contract would be the best to minimize basis risk? Futures on Commodity A with 6 months to expiration Futures on Commodity A with 9 months to expiration Futures on Commodity B with 6 months to expiration Futures on Commodity 8 with 9 months to expiration peep 6. You are examining the exchange rate between the US. dollar and the euro and are given the following information regarding the USD/EUR exchange rate and the respective domestic risk-free rates: ‘Current USD/EUR exchange rate is 125 ‘Current USD-denominated! I-year risk-free interest rate is 4% per year ‘Current EUR-denominated I-year risk-free interest rate Is 7% per year According to the interest rate parity theorem, what is the I-year forward USD/EUR exchange rate? 078 oa tai 129 aoge ‘ © 2015 Global Assonation af Rsk Professionals. ll hts reserved. I legal to repreduce ths material ina format midtout pror writen approval Of GARP, Global Askoaton of Risk Professionals, ne 2018 Financial Risk Manager Examination (FRM) Practice Exam 7% An investor solls a January 2014 call on the stock of XYZ Limited with a strike price of USD 50 for USD 10, and buys 2 January 2014 call on the same underlying stock with a strike price of USD 60 for USD 2. What is ‘the name of this strategy, ancl what is the maximum profit anc loss the investor could incur at expiration? Strategy ‘Maximum Profit, Maximum Loss a Bear spread USD 8 usp 2 b. Bullspread USD 8 Unlimited € Bearspread Unlimited usp 2 d. Bull spread USD 8 usp 2 ‘Samantha Xiao is trying to get some insight into the relationship between the return on stock LMD (Rysa,) and the return on the S&P 500 index (Ran). Using historical data she estimates the following: ‘Annual mean return for LMD: 10% ‘Annual mean return for S&P 500 Index: 1% ‘Annual volatility for $8P 500 index: 18% Covariance between the returns of LMD and S&P 500 index 6% ‘Assuming she uses the same data to estimate the regression model given by: Rinar® 1+ BR ean * & Using the ordinary least squares technique, which of the following models will she obtain? Risay = “0.02 + OSARay 8, B. Riser #002 +185Ran + & Risa = 0.04 + O54Ruuy + 6 Rugs = 0.04 4 LEER + 6 \© 2015 Global Assocation of Risk Professionals All rghts reserved. sega to reproduce ths material 7 In any format without prior witen approval of GARP. Slabal Asrociation of Rsk Professional. Ine 2013 Financial Risk Manager Examination (FRM Practice Exam 10, For a sample of 400 firms, the relationship between corporate revenue (Y,) and the average years of experience per employee (X) is modeled as follows: Bit BX 6 11,2400 ‘You wish to test the joint null hypothesis that f,= 0 and f= 0 at the 95% confidence level. The p-value for the t-statistic for 8, is 0.07, and the p-value for the t-statistic for, is 0.06. The p-value for the F-statistic for the regression is 0.045. Which of the following statements is correct? & You can reject the null hypothesis because each Bis different from 0 at the 95% confidence level. 1b. You cannot reject the null hypothesis because neither Bis different from 0 at the 95% confidence level You can reject the null hypothesis because the F-statistic is significant at the 95% confidence level. 4. You cannot reject the null hypothesis because the F-statistic is not significant at the 95% confidence level. A fixed income portfolio manager currently holds 2 portfolio of bonds of various companies. Assuming all these: bonds have the same annualized probability of default anc! that the defaults are independent, the number of defaults in this portfolio over the next year follows which type of distribution? a Bernoulli Normal ©. Binomial Exponential ‘A portfolio manager has asked each of four analysts to use Monte Carlo simulation to price a path-dependent derivative contract on a stock. The derivative expires in nine months and the risk-free rate Is 4% per year com- pounded continuously. The analysts generate a tetal af 20,000 paths using a geometric Brownian motion ‘model, record the payoff for each path, and present the results in the table shown below. Analyst Number of Paths Average Derivative Payoff per Path (USD) 1 2000 4% 2 4,000 44 3 10.000 46 4 4,000 45 ‘What is the estimated price of the derivative? UsD 43.33 usp 43.77 usp 44.21 USD 45.10 pose © 2015 Global Assonation af Rsk Professionals. ll hts reserved. I legal to repreduce ths material ina format midtout pror writen approval Of GARP, Global Askoaton of Risk Professionals, ne 2018 Financial Risk Manager Examination (FRM) Practice Exam 12.] Suppose that the correlation of the return of a portfolio with the return of its benchmark Is 0.8, the volatility the b e a. of the return of the portfolio is 5% and the volatility of the return of the benchmark is 4%, What is the beta of portfolio? 1.00 00 6a 100 18. | Firms commonly incentivize their management to increase the firm's value by granting managers securities tied to the firm's stock. Some securities, however, can reduce managerial incentives to manage risk within the firm, Which is likely the best example of this type of security? ose 14. You Deep in-the-money call option on the firm's stock ‘At:the-money eall option on the firm's stock Deep out-of-the-money call option on the firm's stock Lona position in the firm's stock have been asked to check for arbitrage opportunities in the Treasury bend market by comparing the cash flows of selected bonds with the cash flows of combinations of other bonds. Ifa I-year zero-coupon bond is priced at USD 96.12 and 3 1-year bond paying 3 10% coupon semi-annually is priced at USD 106 20, what should be the price of a I-year Treasury bond that pays a coupon of 8% semi-annually? usb 9810 usp 10123 Usb 103.35 UsD 10418 \© 2015 Global Assocation of Risk Professionals All rghts reserved. sega to reproduce ths material ° In any form ithowt prior witten approval of GARP.Slobal Assocation of Rek Profesor In 3 Financial Risk Manager Exarination (FRM) Practice Exam 15. | i the current market price of a stock Is USD 59, which of the following options on the stock has the highest gemma? & Call option expiring in 30 days with strike price of USD 50 bb. Call option expiring in § clays with strike price of USD 20 ‘© Call option expiring in § days with strike price of USD SO dL Put option expiring In 30 days with strike price ef USD 30 16, John Starwood Is an investment advisor at Metuchen Investment Advisors (MIA). Starwood Is advising Michael Cooke, a wealthy client of MIA Cocke would like to invest USD 500,000 in # bond! rated at least AA. Starwood is considering bonds issued by IBM, GE, and Microsoft, and wants to choose 2 bend that satisfies Cooke's rating, requirement, but also has the highest yield to maturity. He has access to the following information: —$—___ __Benenr, SAP Bondi Rating AAY AR AAA Semiannual Coupon 178% 1.70% — 169% ‘Term to Maturity in years § s 5 Price (USD) e773 989 Par value

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