FRM Exam Questions

1. Risk is the probability of the occurrence of an unfavorable event that will have a
negative effect on the performance.
- Occurrence PROBABILITY of loss. Exposure to an unfavorable event:
- May occur with probability. (p)
- May not occur with probability (1-p)
 - Event EFFECT
2. 2 different sources of liquidity risk

 The primary sources of liquidity, which are either cash or other resources that can be converted into
cash very easily; and Liabilities
 The secondary sources of liquidity, which usually can’t be converted into cash as easily and fast as
the primary sources and may imply asset sales or other actions that would affect a company’s
operations. Assets

3. Credit risk and two different sources

A credit risk is risk of default on a debt that may arise from a borrower failing to make required
payments. The two main sources are lending and transactions: (pre) settlement

4. Define market risk

Market risk is the possibility that an individual or other entity will experience losses due to factors that
affect the overall performance of investments in the financial markets. Market risk may arise due to
changes to interest rates, exchange rates, geopolitical events, or recessions.

5. Prices market risk

- Interest rates
- Foreign exchange rates
- Equity prices
- Commodity prices
6. If inflation increases ECB- European Central BANK will intervene

The Governing Council decided to raise the three key ECB interest rates by 75 basis points. The
Governing Council took its decision, and expects to raise interest rates further, to ensure the
timely return of inflation to the ECB’s 2% medium-term inflation target.

7. Effect Financial leverage on return on equity

Effect of losses: negative impact on ROE
Consequently, Negative impact on solvency

8. SOL
9. SOL
10. Positive if: ROA> INTEREST debt funding (= interest/ average liabilities)
Negative if: ROA< interest debt funding (= Interest/average liabilities)
11. SOL
12. Future contract- exchange traded (regulated) public market
- Contract can be traded
- Central Clearing CCP- Margin requirements – No counterparty risk
- Standardized contract/ Higher costs
13. Unsystematic risk is a risk specific to a company or industry, while systematic risk is the
risk tied to the broader market.
14. A black swan is an unpredictable event that is beyond what is normally expected of a
situation and has potentially severe consequences.
15. There are four primary sources of risk that affect the overall market: interest rate risk,
equity price risk, foreign exchange risk and commodity risk. /////
- Bought assets = long position- loss if price decrease
- Sold assets= short position- loss if price increase
16. SOL
17. A forward contract is a private and customizable agreement that settles at the
end of the agreement and is traded over the counter. A futures contract has
standardized terms and is traded on an exchange, where prices are settled on a
daily basis until the end of the contract.
18. Margin requirement is determined by volatility
- Volatility= price fluctuations in the past
- Higher volatility leads to higher margin requirement
19.

20. Equity-Based Financial Instruments, Types of Asset Classes of Financial Instruments

Financial instruments may also be divided according to an asset class, which depends on
whether they are debt-based or equity-based. Cash and derivative instruments.

21. Interest Rate risk in the Banking Book

Trading book: Market risk includes: interest rate risk, equity position risk, settlement
and counterparty risk and foreign exchange risk.

22. – Futures and forwards

- Interest rate and currency swaps
- Credit default swaps
 - Options
23.

24.Market risk; inflation

25.Look at FRM Week 2
26.
Notably, a rise in holding period will increase the VaR number. One may also get same outcome
by reducing probability level (i.e. increasing confidence level) adequately (instead of changing
holding period).