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# 1. Consider a convertible bond that is trading at a conversion premium of 20 percent.

If the value of the underlying stock rises by 25 percent, the value of the bond will: A. rise by less than 25%. B. rise by 25%. C. rise by more than 25%. D. remain unchanged. Correct answer: A The convertible bond implicitly gives bondholders a call option on the underlying stock. The delta of this option will vary between 0 (when the option is extremely out of the money) and 1 (when the option is extremely in the money). In this case, the bond is trading at a conversion premium of 20% so the delta must be somewhere between zero and one, and hence the price of the convertible bond will rise by less than the price of the underlying stock. 2. If a cash flow of $10,000 in two years' time has a PV of $8,455, the annual percentage rate, assuming continuous compounding is CLOSEST to: A. 8.13%. B. 8.39%. C. 8.75%. D. 8.95%. Correct answer: B Continuously compounded rate = ln(FV/PV)/N = ln(10000 / 8455) / 2 = 8.39%. 3. The current values of a firm's assets and liabilities are 200 million and 160 million respectively. If the asset values are expected to grow by 40 million and liability values by 30 million within a year and if the annual standard deviation of these values is 50 million, the distance from default in the KMV model would be closest to: A. 0.8 standard deviations. B. 1.0 standard deviations. C. 1.2 standard deviations. D. Cannot not be determined. Correct answer: B Distance from default = (Expected value of assets - Expected value of liabilities) / Standard deviation = (240 - 190)/50 = 1.0. 4. What is the semiannual-pay bond equivalent yield on an annual-pay bond with a yield to maturity of 12.51 percent? A. 12.00%. B. 11.49%. C. 12.51%. D. 12.14%.

Correct answer: D: The semiannual-pay bond equivalent yield of an annual-pay bond = 2 * [(1 + yield to maturity on the annual-pay bond)0.5 -1] = 12.14%.

5. You want to test at the 0.05 level of significance that the mean price of luxury cars is greater than $80,000. A random sample of 50 cars has a mean price of $88,000. The population standard deviation is $15,000. What is the alternative hypothesis? A. The population mean is greater than or equal to $80,000. B. The population mean is less than $80,000. C. The population mean is not equal to $80,000. D. The population mean is greater than is $80,000. Correct answer: D The alternate hypothesis is the statement which will be accepted if the null hypothesis is proven wrong. Therefore, we make whatever we are trying to test as the alternate hypothesis - in this case that the mean price of luxury cars is greater than $80,000, and the null hypothesis as the opposite (the mean price of luxury cars is less than or equal to $80,000). This problem is a common example of how statisticians establish hypotheses by proving that the opposite (i.e. the null hypothesis) is false. 6. Suppose that Gene owns a perpetuity, issued by an insurance company that pays $1,250 at the end of each year. The insurance company now wishes to replace it with a decreasing perpetuity of $1,500 decreasing at 1% p.a. without any change in the payment dates. At what rate of interest (assuming a flat yield curve) would Gene be indifferent between the choices? A. 4%. B. 5%. C. 6%. D. 9%. Correct answer: B 1,250 / r = 1,500 / (r + 1%) or, 1,250 x (r + 1%) = 1,500 x r or, r = 12.5 / (1,500 - 1,250) = 5%. 7. Which of the following is considered to be the responsibility of the legal risk manager? I. Inadequate documentation o f OTC derivatives transactions. II. The enforceability of netting agreements in bankruptcy. III. Default on interest and principal payments. A. I only B. II only C. I and II only D. I, II, and III

Answer : D Legal risk management is concerned with adequate documentation, public filings, compliance with regulatory entities, and some borrower impositions. The legal manager is also involved in deciding if default has occurred and, if so, assisting with the enforcement of netting agreements. 8. An analyst has constructed the following t-test for a portfolio of financial securities whose returns are normally distributed: Number of securities = 40. H0: Mean return >= 18 percent. Significance level = 0.1 What is the rejection point for this test? A. 1.304. B. 1.684. C. 2.021. D. 2.023. Correct answer: A This is a one-tailed test with 39 degrees of freedom and significance level of 0.1. Looking up the Student's t-distribution for df = 39 and p = 0.1, we get the critical value of 1.304. 9. Consider an A-rated institution that funds itself in the wholesale market at LIBOR + 90bps. Which of the following is the most attractive instrument for this firm to take exposure to an AAA-corporate issuer? A. Credit swap. B. Floating rate note. C. Credit-linked note. D. Fixed coupon bond. Correct answer: A This firm has a fairly high funding cost. Funding itself at 90 bps over LIBOR and lending to AAA names at around LIBOR is a loss making strategy, which rules out the notes and the bond. The only way this firm can make money is by selling credit protection via a credit swap that does not require it to make a physical investment. 10. Which of the following statements about the Treynor ratio is correct? A. The Treynor ratio considers both systematic and unsystematic risk of a portfolio. B. The Treynor ratio is equal to the excess return of a portfolio over the risk-free rate divided by the total risk of the portfolio. C. The Treynor ratio can be used to appraise the performance of well-diversified portfolios. D. The Treynor ratio is derived from portfolio theory since it assesses a portfolio's

excess return relative to its risk. Answer: C A is incorrect - Treynor ratio considers only systematic risk of a well-diversified portfolio B is incorrect - Treynor ratio denominator is beta of the portfolio C is correct - this statement is correct D is correct - Treynor ratio is derived from CAPM and not portfolio theory 11. Which of the following is TRUE in relation to affirmative covenants? A. They prohibit the borrower from issuing new debt. B. They prohibit the borrower from paying dividends above a limit to shareholders. C. They require the borrower to take actions to service the debt and maintain collateral. D.They prohibit the borrower from paying dividends under certain circumstances to shareholders Correct answer: C Affirmative covenants are terms that require the borrower to take actions to service the debt and maintain collateral. 12. Suppose that you need to borrow $1 million for 24 months. Two large US-based international banks with equal credit ratings offer deposit rates of 2%. To choose between the two banks, you would need all of the following except: A. day count basis. B. compounding basis. C. currency of deposit. D. balance sheets of the banks. Correct answer: D $1 million is a relatively small amount and the liquidity risk is not high in most markets. All other factors are crucial for the decision. 13. An analyst wants to test whether the variance of return from telecom stocks is higher than 0.04. For this purpose, he obtains the following data from a sample of 51 telecom stocks. Mean return from telecom stocks = 15% Standard deviation of return from telecom stocks = 24% Mean return from market = 12% Standard deviation of return from market = 13% Based on this information and a 0.05 significance level: A. we can say that the variance of telecom firms is lower than 0.04. B. we can say that the variance of telecom firms is higher than 0.04. C. we cannot say that the variance of telecom firms is lower than 0.04. D. none of the above. Correct answer: B Tests of the variance of a population require the chi-squared test. For this data, chi-squared = (n - 1) x Sample variance / Hypothesized variance = 50 x 0.24^2 / 0.04 =

72. Since the analyst wants to show that the variance is more than 0.04, this will be chosen as the alternative hypothesis and the null hypothesis will be that the variance is lower than or equal to 0.04. The critical value of the chi-squared statistic (for df=50 and p=0.05) is 67.505. Since the test statistic is higher than the critical statistic, we can reject the null hypothesis (variance <= 0.04), and accept the alternative hypothesis (variance > 0.04). 14. Which of the following internal controls does NOT effectively reduce operational risk? A. Separation of trading from accounting and data entry B. Automated reminders of payments required and contract expirations C. A multitude of users can modify trade tickets so that errors may be quickly corrected D. Reconciling results from different systems to ensure data integrity Answer: C Proper practice limits the amount of people who can change trade tickets and what information can be changed once a ticket is written. Double checking work, separating duties, and automatic reminders all help lower operational risk. 15. It would be prudent for a trader to direct accounting entries in the following situation: A. Never. B. when senior management of the firm and the Board of Directors are aware and have approved such on an exception basis. C. when audit controls are such that the entries are reviewed on a regular basis to ensure detection of irregularities. D. solely during such times as staffing turnover requires the trader to back-fill until additional personnel can be hired and trained. Answer: A In accordance with the separation of duties principle, it would never be appropriate for a trader to direct the accounting entries. 16. Which of the following statements concerning coupon rate structures is FALSE? A. Zero-coupon bonds have only one cash inflow at maturity. B. Accrual bonds, like zero-coupon bonds, always sell at a discount to face value. C. Accrual bonds have only one cash inflow at maturity. D. Step-up notes have coupon rates that increase over time at a pre-specified rate. correct answer：B. Accrual bonds, unlike zero-coupon bonds, do not always sell at a discount to face value. The interest accrues forward and thus the bonds are likely to sell for more than face value. 17. Consider the following 3-year currency swap, which involves exchanging annual interest of 2.75% on 10 million US dollars for 3.75% on 15 million Canadian dollars. The CAD/USD spot rate is 1.52. The term structure is flat in both countries. Calculate

04×3 = USD9. $145.818 Answer: C Vswap (USD) = BUSD − ( So × BGBP ) （ So = spot rate in USD per GBP） B fixed = ( PMT f .70. A.50 percent.182 275000 = 10000000 * 2.04×2 + 10.70. $152. PMT = 0.000e −0.25. Round to the nearest dollar.1%. B. 21. 19. A 3-year. 23. Correct answer:C I/Y = 8.7%. FV = 100. $119.2 year × e − ( r×t ) ) + [(notional +PMT f .calculate value of swap Vswap (USD) = BUSD − ( So × BCAD ) （ So = spot rate in USD per CAD） =9631182-14438805/1. D. D.75% Step 2.52=USD131967 18.000 B.05*2+15565200e-0. C.000e −0. Given that the dollar yen volatility is 12 percent and dollar peso volatility is 15 percent. the best estimate of the yen peso volatility is: A. B.693 C. $99.1 year × e − ( r×t ) ) + ( PMT f .75% Step 3.05*1+565200e-0. 8 percent semiannual coupon bond with $100 par value currently yields 8. and the correlation between dollar yen and dollar peso is 0. Assume continuous compounding.49.the value of the swap in USD if interest rates in Canada are 5% and in the United States are 4%. What would be the price of the bond? A.967 D. $98.04×1 + 275.50.275.05*3=CAD14438805 565200=15000000*3.calculate value of USD-denominated bond: BUSD = 275.08/2 x 100 = 4.2%. PV = -98.50/2 = 4. N = 3x2 = 6.3 year ) × e − ( r×t ) ] Step 1.calculate value of CAD-denominated bond BCAD=565200e-0. C. 19.24. $95.631.4%.25. . $127. $131.000e −0. 16.

00 So.4.15^2 . 20. 21. D.12^2 + 0.12 x 0.5 = 16. 10 bps D.00 . Tracking error is the standard deviation of the difference between the return of the managed portfolio and the benchmark portfolio. This solution incorrectly sets the tracking error equal to the variance of the difference between the return of the managed portfolio and the benchmark portfolio. Incorrect.25 x 0. TE = (14.RB] = (4 + (-2) + 6 + 0) / 4 = 2.2 x 0. 3. tracking error = σ ep and E [RP .00)1/2 = 3. Incorrect. This solution incorrectly sets the tracking error equal to the difference between the standard deviation of the return of the managed portfolio and the standard deviation of the return of the benchmark portfolio. C. B. Suppose the daily returns of a portfolio and a benchmark portfolio it is replicating are as follows: Portfolio Return (bps) benchmark Portfolio Return(bps) Day 1 34 30 Day 2 -89 -87 Day 3 108 102 Day 4 70 70 What is the tracking error over the four day period? A.RB)]2 = (16 + 4 + 36 + 0) / 4 = 14. A lower bound on its price is the price of a 3-year European put option. Correct. Incorrect. Tracking error is the standard deviation of the difference between the return of the managed portfolio and the benchmark portfolio.16 bps B.2 x Correlation x (Vol_A) x (Vol_B). A lower bound on its price is the price of a 3-year American put option.00 E [(RP .Correct answer: A Here we use the expression that: (Vol_A/B)^2 = (Vol_A)^2 + (Vol_B)^2 .16 bps. Therefore. Which of the following statements are true with regard to a 3-year Bermuda put option? I. This solution incorrectly sets the tracking error equal to the average difference between the return of the managed portfolio and the benchmark portfolio.15)^0. Tracking error is the standard deviation of the difference between the return of the managed portfolio and the benchmark portfolio.7%.39 bps Answer: A A. Tracking error is the standard deviation of the difference between the return of the managed portfolio and the benchmark portfolio. 2. 2 bps C. yen/peso volatility = (0. . II.

III. C. measures the rate of change in duration. I and III only. Which of the following statements describe a property of bond convexity? Convexity: I. Probability (no default in Portfolio II) = (1-0. It is likely to outperform both European and American put options as the price of the underlying rises. we need to know the recovery rates. and Portfolio II consists of 20 bonds. In this question. III and IV only. the loss in the event of a single default will be much lower in case of portfolio I than portfolio II. III only Answer: A The Bermuda put option allows multiple opportunities to exercise.1%)^100 =90.III. The probability of observing no default in Portfolio I is roughly the same as Portfolio II. 2 Even though both portfolios have the same probability of not defaulting. The 1-year default probabilities of AAA and A bonds are 0. all weighted equally. The probability of observing no default in Portfolio I is higher than in Portfolio II. each rated A. D.48%.5% respectively in this country. Which one of the following statements is TRUE? A. B. Assume that the event of default on any bond is independent of default on others. Correct answer ：A . II and III D. A. B. Correct answer: C Probability (no default in Portfolio I) = (1-0. each rated AAA. Consider two portfolios: Portfolio I consists of 100 bonds.5%)^20 =90. all weighted equally. its price must be higher than that of a European put option (which allows exercise only at maturity) but less than that of American put option (which allows exercise at any point before maturity). II and IV only. 23. A. II only C. increases if the coupon on a bond is decreased.46%. IV.1% and 0. I only B. increases as yields increase. C. so you do not need to know the recovery rates. The probability of observing no default in Portfolio I is lower than in Portfolio II. D. II and III only. Therefore. Hence the answer is counter-intuitive. II. Notes: 1 The question does not ask you to compute expected loss. you are not concerned with it. increases with the square of maturity. 22. Insufficient information.

D. a medium-size bank. An analyst wants to test whether the mean spending by tourists coming to a holiday resort is equal to or less than $2. 24. 2. D. The bank reviewed its records.200 and the standard deviation of the population is $400. It encourages trader to select positions with low estimated risks. Why should your bank be careful in tying compensation to the VaR of each trader? A. uses only operational loss data from internal records to model its loss distribution from operational risk events. and. 26.01 significance level the critical Z value is 2. The critical value of the Z statistic for this study is: A. your bank links trader compensation with their compliance with imposed VaR limits on their trading book.96. C. Correct answer: D D 首先，由于此项政策的推出，必定导致交易员选择风险较小的资产进行投资 其次，为了不受到惩罚或者希望的到根据新政策规定的提供的更多的报酬的目 的，交易员必定控制自己的风险低于 VaR limit，导致 VaR limit 被高估了。 25. which leads to an underestimation of the VaR limits. It encourages trader to select positions with high estimated risks. The estimated loss distribution likely overtakes bank Z’s real risk because many incidences in the past were likely “one off. Convexity increases with the square of maturity. which means that convexity measures the rate of change in duration.33.” . which of the following statements is correct? A. It encourages trader to select positions with high estimated risks.33.58. which leads to an overestimation of the VaR limits. after confirming that they were complete records of its historical losses and that its losses could be approximated by a uniform distribution. Bank Z.65. It encourages trader to select positions with low estimated risks. B.000 with a 1 percent level of significance. 2. Convexity is the second derivative of price with respect to yield. 1. The estimated loss distribution likely accurately represents Bank Z’s real risk because the records are accurate and complete. To control risk-taking by traders. B. which leads to an overestimation of the VaR limits.Convexity is inversely related to yield and is directly related to the coupon rate on a bond. He finds that the average spending by 16 tourists is $2. C. which leads to an underestimation of the VaR limits. Correct answer: C Since this is a one-tailed test with a 0. -1. B. Based on that decision. it decided against using external loss data to estimate its loss distribution.

but specifies that the bank is unwilling to provide a contractual guarantee. D. The estimated loss distribution likely understates Bank Z’s real risk because the bank has not experienced a huge loss.75 and has an effective duration of 9. 8 percent semiannual coupon bond with $100 par value currently trades at $78. The estimated loss distribution likely is the best estimate of Bank Z’s real risk because there is no better loss data for the bank than its own. The bank is contemplating a large securitization of low-quality loans that are currently on its balance sheet. What is the price of the bond if the yield falls by 150 basis points? . Your bank has chosen to use the advanced Internal Rating Based Approach under Basel II. The bank forgoes the securitization and buys a credit default swap on the loans from an AAA-rated provider.0. The SPV sells protection to the bank through a credit default swap on the loans in the bank’s portfolio. the bank will try to help the investors. Correct answer: C C A 中 Bank set up a SPV 形成了实际参股，要合并报表，对于减少监管资本没有 帮助 B 中 Bank 持有了 8%的 Equity Tranches，是 SPV 中最有风险的部分，最减少监 管资本的帮助不大 C 中 Bank 将手中的 Loan 完全卖出，形成了 True Sale，完全不持有头寸，直接 从资本中扣除，可以实际减少监管资本。故正确 D 中 Bank 放弃了证券化，单买了一个 CDS，Loan 仍然还在资产负债表中。随 然通过 CDS 可以减少监管资本的要求，但是仍然没有 C 中的完全出售 Loan 来 的多。 28. The bank sells the loans to an SPV that issues securities. B. Correct answer: D D 由于该公司的 Loss Distribution 近似于一个 Uniform distribution，可以推测该公 司损失的次数比较小，且大小相近或相似，其原因大致可归类于数据选取的偏 差，原因可能是由于公司刚成立不久，数据量不够大，还没有经历过比较极端 巨大的损失所造成的。 27. The bank sells the loans to an SPV and keeps an equity piece representing 8% of the value of the loans. A 12-year. These securities issued are then sold to third-party investors.C. C. Which one of the following approaches would be the most efficient in reducing the bank’s regulatory capital? A. D. All proceeds from selling these securities are invested in a portfolio of equities. You are concerned about whether the securitization will provide you with regulatory capital relief. The bank indicates to some investors that if credit quality of the loans declines significantly. The bank sets up an Special Purpose Vehicle (SPV) that issues securities.8 years and a convexity of 130.

48 29. A $100 million position in distressed securities D. IV. Moments II.015)]+[(0.2% 6. A $10 million position in distressed securities B. A $10 million position in Treasury bonds C. D. B. D.16 299 $. $95. Probability-weighted moments Econometric I and III I. and so have more intrinsic liquidity.015)2] = 16. .47. $67.5)(130)(-0. 31.8% current market yield 4. A. Distressed securities trade much less than Treasury bonds. Correct answer ：C Percentage price change = [(-) (effective duration)( Δy)]+[(1/2)(convexity)( Δy)2] = [(-)(9. II and III IV III and IV III.48. A $100 million position is more illiquid than a $10 million position in the same instrument.17. C. A $100 million position in Treasury bonds Answer: C Asset liquidity risk is a function of the size of the position and the intrinsic liquidity of the instrument.A. A.80)(-0.75(1+0. probability-weighted moments. You are given the following specification of the currency swap: notional principal $10m euro 10. or with maximum likelihood techniques 30. Asset liquidity risk is most pronounced for A. B.5m swap coupon 7. Maximum likelihood Answer: B The parameters of loss distributions can be estimated by moments.43. $86. $91.6% There are two payments left in the swap (the first one in a year) and the current exchange rate is $0.2% 3. Calculate the dollar value of the swap for the euro payer.16 Estimated price = 78.95/euro. C. .1616) = $91. Which of the below are methods to estimate parameters of operational loss distributions? I.

((714.00% 23. Answer: C Mortgage pass-through securities. You are given the following information about a portfolio and are asked to make a recommendation about how to reallocate the portfolio to improve the risk/return tradeoff. Covariance Curren Margin Marginal Risk Expecte Standard of Marginal t al Return/ Contributio Asset d Portfolio and Return Weigh Risk Marginal risk n return Deviation Asset I t Returns Asset 1 7.00% 14.90% Risk free 4. D. 33. .036 + 11.17 344 $.B. It is similar to a plain vanilla corporate bond C. .036^2) x 0.60 % 35.S. It is similar to a U.S.042 + 10. resulting in an increase in the effective duration of the loans.000 / 1.29% 2.41% 0.17% 16. Treasury. Correct answer: A The swap is equivalent to long position in dollar denominated bond and short position in euro denominated bond.00 % .000 / 1.99% 4. but when interest rates increase. 32.10% Asset 2 8.70% Asset 4 6. This is reflected in the price/yield relationship as negative convexity.50% 21. C. When rates fail.86% 22.92% 5.95) = .214. its price increase would exceed that of a comparable duration U.000 / 1.00% 3.19 344 $.20% 44. .70 % 1.55% 20.43% 2. D.000 / 1.60% 6. How would you describe the typical price behavior of a low premium mortgage pass-through security? A.00% 38.10% 13.S. When interest rates fall. its price increase would lag that of a comparable duration U. have an embedded option allowing borrowers to repay the loan at any time. unlike Treasuries or plain vanilla corporate bonds.71% 11.00% 17.48% 1. borrowers will hold on to mortgages longer than they otherwise would.16.70% 23.40% 0.39% 1. Treasury.80% 5.00% Asset 3 6.720.39% 2.299. the effective duration of these securities decreases because borrowers will refinance mortgages at lower rates (putting the loans back to the investors). When interest rates fall. Treasury bond B.02% 40.44% 2. (720.93% 2.90% 13.21 283 $.41% 1.042^2) .

Asset 4 should be increased since it has the highest marginal return-to-marginal risk ratio. Thus the probability of default = cumulative probability of standard normal distribution below -1. 34. $5 million B.e. 27.Which of the following the recommendations will improve the risk/return tradeoff of the portfolio? A. Incorrect. 35. 11. Incorrect. $0 since markets are efficient D. Asset 3 should be decreased since it has the lowest marginal return-to-marginal risk ratio. Incorrect. -$20 million if not. $0. Suppose the payoff from a merger arbitrage operation is $5 million if successful. C. Therefore. D. B. Asset 4 should be increased since it has the highest marginal return-to-marginal risk ratio.5%.2.165 = 30. 34. The probability of success is 83%. Increase the allocations to assets 1 and 2 and decrease the allocations to assets 3 and 4. Using the standard deviations in the return on assets this distance = 30 / 25 = 1. Increase the allocations to assets 1 and 4 and decrease the allocations to assets 2 and 3. Correct answer: A The distance between the current value of the assets and the book value of the liabilities = 195. Answer: D A. A portfolio optimizing the risk-reward tradeoff has the property that the ratio of the marginal return to marginal risk of each asset is equal. The expected payoff on the operation is A.2 standard deviations. i. B. Increase the allocations to assets 2 and 3 and decrease the allocations to assets 1 and 4. 11.75 million C. this option is the only recommendation that will move the ratios in the right direction. B. Symmetrically distributed Answer: B . Correct. D.9%.5%.5%. C. 57.4%. Calculate the estimated default frequency (EDF) for a KMV credit risk model using the data given below (all figures in millions). D. Increase the allocations to assets 1 and 3 and decrease the allocations to assets 2 and 4. C. Assets Liabilities Market value 195 185 Book value 180 165 Standard deviation 25 15 of returns A.

the 99% confidence level VaR = 15. Correct answer: C Liquidity risk is the most prominent form of risk when emerging markets securities are involved. determine the fair price of insurance to protect the institution against a loss of over HKD 80 million for this particular operational risk. 10. Since VaR is directly proportional to this multiple.333 B. Your trader plans to buy default swaps on Argentina. A particular operational risk event is estimated to occur once in 200 years for an institution. US yields would fly up too soon. with a small probability of a large loss.33 / 1. HKD 120.40 = $0. If the confidence level is raised to 99% (assuming a one-tailed normal distribution) the new value of VaR will be closest to: A. B. Then he wants to increase the size of position to $1.5.667 Answer: C The range of losses is HKD 25 million to HKD 100 million. If the loss is over HKD 80.The expected payoff is the sum of probabilities times the payoff in each state of the world.5 38. apart from basis risk.$3.65 = 21.2 x 2.8. leaving you uncovered. HKD 133. Based on this information. As a risk manager. CDS writer may go bankrupt. C.15 .33. 21.000 C. 37. liquidity in US Treasuries will dry up.500 million. your main concern will be that: A. 36.75. HKD 90.1.65 while 99% confidence level requires a multiple of 2.2.25) or 20/75.2. with equal probability. Note that the distribution is highly asymmetric. D. 15. D. 18. C. The probability of a loss being greater than HKD 80 million is (100 . HKD 106. liquidity in Argentina bonds will dry up. Your firm does market direction neutral arbitrage in the spread between US Treasuries and Argentina bonds. or 83% × $5 + 17% × (-$20) = $4. Correct answer: D 95% confidence level requires a volatility multiple (alpha) of 1.80)/(100 . the expected loss (being equally probable) would be HKD 90 .000 D. A. The VaR of a portfolio at a 95% confidence level is 15. The loss for this type of event is expected to be between HKD 25 million and HKD 100 million with equal probability of loss in that range (and zero probability outside that range). B.

667 Concentration Limit for Constr. iii. Incorrect. According to historical VaR models. the maximum permitted loan amount to the energy and construction sectors will be: Energy Construction A. USD 66. D. In light of the dramatic losses to the funds. = USD 500 million x (0.70) = USD 32.5 million Answer: A A.5% of its capital. The LGD rates for the energy and construction sectors are. USD 37. iii. Assume Satya Bank.5 million USD 15. Incorrect. iv.142.06 / 0.5 million USD77. Concentration Limit = Capital x (loss limit on capital / loss rate of the sector) Concentration Limit for Energy = USD 500 million x (0. implementing stress tests to quantify possible losses if it had to liquidate large positions.7 million USD 32. C. USD 13. respectively. It uses incorrect variables and/or formula to calculate concentration limits. . Incorrect.45) = USD 66. ii. ii. and iv only B i.million: ⎛ 100 million+80 million ⎞ ⎛ 20 ⎞ ⎛ 1 ⎞ Expected value of loss = ⎜ ⎟⎜ ⎟⎜ ⎟ = HKD120. such spread positions would have had limited risk. Adding counterparty risk to its risk measurement. and position limits unchanged. iii.8 million C. It uses incorrect variables and/or formula to calculate concentration limits.8 million D.666. If Satya Bank wants to strictly adhere to its concentration limit policy. 45% and 70%.000 2 ⎝ ⎠ ⎝ 75 ⎠ ⎝ 200 ⎠ 39. having a capital of USD 500 million. Using Riskmetrics-type VaR instead of a historical VaR to estimate its risk exposures. which led to Amaranth’s collapse in September 2006. USD 30. Keeping the fund’s policies. trading. and iv C i and iii only D None of the changes would have helped Answer: C C Amaranth 事件常识 40. wants to limit its losses in the energy sector to 6% and in the construction sector to 4.0 million USD 22.857 B. A ii. the hedge fund Amaranth had large calendar spread positions in natural gas. It uses incorrect variables and/or formula to calculate concentration limits. Including operational VaR to its risk measurement.1 million B. its risk management policies came under scrutiny. In august 2006. Correct.045 / 0. which of the following risk management policies could have better captured the extent of the risks that sank Amaranth? i.

43. Error-correction model tree design. Prepayment models are complex and rely upon a number of different methods to circumvent the problem of prepayment path dependency. B.2217. using the continuous time futures pricing model. time to maturity of debt. C.41. long-futures position.04)(0. risk-free interest rate. C.2156. B. D. If the current exchange rate between the euro and dollar is 1=US$1.02-0. C. $1. what is the price of a three-month futures contract? A.25) = $1. D. Assume that the short-term interest rate in London is 4 percent and that the short-term interest rate in the US is 2 percent. Cox-Ingersoll-Ross tree design. Monte Carlo simulation. it is a: A. 44. B. B. short-futures position. credit risk is a decreasing function of risk-free interest rate 42.2156. When an investor is obligated to buy the underlying asset in a futures position. hedged-futures position. C. $1. D. Credit risk is NOT an increasing function of: A. Correct answer:D When an investor is obligated to buy the underlying asset in a futures position. Bernard and Schwartz simulation. Correct answer: B In the context of the analytical model. Correct answer:B Monte Carlo simulation techniques have been used to deal with problems associated with prepayment path dependency. level of debt.2235.2144. $1. The formula is: 1. . it is a long futures position. D.2207. Correct answer: B. Which of the following is often used to avoid the problems associated with prepayment path dependency? A. standard deviation of asset returns. $1.2217e(0. basis trade.

29. 47. what is the daily portfolio VAR (2. calculate the daily percentage VAR for stocks and corporate bonds: Stocks: VAR(2. The portfolio has higher SR than the benchmark B.1 percent.53% Bonds: VAR(2. So. Correct answer:D. so answer B) is incorrect.57%. The portfolio has negative IR C.00472 = 6.43. The benchmark returns 8% with risk of 14%. D. so it is incorrect.5% ? σ = 1.0353 = 3. The IR is 0.011) = 0.87% .87% = 0. commodity exchanges require traders to settle their accounts on a daily basis.16% . Answer C) is the SR of the portfolio. not the IR.96(0. and (8% 3%)/14% = 0. respectively.5 percent) on a percentage basis? A.29 Answer: D The Sharpe ratios of the portfolio and benchmark are (10% .98 × 20% × 14% . variation margin. The IR is 0. In commodity trading. This is positive.5%)Percentage Basis = z2. and estimates a correlation coefficient of returns of 0.36. and any gains are added to the account.27%.5%)Percentage Basis = z2. A portfolio manager is constructing a portfolio of stocks and corporate bonds. marking to market. 2. The TEV is the square root of 20% 2 + 14% 2 + 2 × 0. Which of the following statements is correct? A. 46. If the portfolio manager plans to allocate 35 percent of the portfolio to corporate bonds and the rest to stocks.3%)/20% = 0. Portfolio manager returns 10% with a volatility of 20%.0216 = 2. Marking to market is when any loss for the day is deducted from the trader’s account. 2. the SR of the portfolio is lower than that of the benchmark. maintenance margin.5% ? σ = 1. respectively.96(0. The portfolio manager has estimated that stocks and corporate bond returns have daily standard deviations of 1.05%. D.98.71%. C.35. which is 0. 2.8%)/6. Answer a) is incorrect. This process is known as: A. initial margin.8 percent and 1. B. So the IR of the portfolio is (10% . 3.018) = 0. Correct answer : A First. C. the exchange removes any daily losses from a trader’ account and s adds any gains to the trader’s account.45. The risk-free rate is 3%. The correlation between the two is 0. B. To safeguard the clearinghouse.35 D.

D.0353)(0.71% 48.498 A.43)]0. ＊The floating component of the swap is LIBOR + 200bps.554 N(d2) = 0. 50.free rate = 8% Time to expiration = 0. D. rollover.35)(0.5 years N(d1) = 0. What is the value of the European call option given below using the Black-Scholes model? Spot rate = 120 Strike price = 125 Risk. C. D. correlation. which is the current market rate.83.352(0.23.000. $35. Short futures. 6. 1.Strike .000. correlation. $8. the value of the swap will change for both parties. 49.5 = 0. The source of basis risk for this farmer arises from the fact that his contract and harvest dates do not perfectly match. Correct answer: C Using the Black-Scholes model. C. the value of a call option = Spot price x N(d1) . B.03532) + 0.000.0271 = 2. $0. Two banks enter into a 1-year plain vanilla interest-rate swap with the following terms: ＊Notional principal is $500.02162) + 2(0. he will be exposed to basis risk due to a necessary rollover in his position. rollover.69.000.000. If the current risk-free rate is 4 percent. B. Which of the following is the appropriate direction of his position and the source of basis risk that may impact the farmer? A. the value for this swap at inception is closest to: A.67.652(0. To protect himself from price declines. Short futures. 11.000.65)(0. Long futures. Correct answer : C The farmer needs to be short the futures contracts.000. As a result.0216)(0. the farmer has decided to hedge.750. ＊The fixed component of the swap is 7%. B. 4. Correct answer:A The initial value of a swap is always zero. A corn grower is concerned that the price he can get from the field in mid-September will be less than he has forecasted. $500. C.Next calculate the portfolio VAR using weights of 35% for bonds and 65% for stocks: [0. The best available futures contract he can find is for August delivery. Long futures. As interest rates move and payments take place.

Correct answer: A A portfolio of the three instruments will have the identical profit and loss pattern as the fourth instrument and therefore the same value by no arbitrage. Correct answer: C Balance sheet liquidity refers to the ability to meet cash needs with the available cash. B. i. Which of the following best explains put-call parity? A. 53. No arbitrage requires that only the underlying stock can be synthetically replicated using at the money call and put options and a zero coupon bond with a face value equal to the strike price of the options.671. So the fourth security can be synthetically replicated using the remaining three. meet financial obligations as they arise. B.price x exp(-Risk-free rate x Time to expiration) x N(d2) = 120 x 0.7 million. Which statement about option valuation is least accurate? A. A stock can be replicated using any at the money call and put options and a bond. marketable securities and exiting credit lines. put. The remaining statements are true. No arbitrage requires that using any three of the four instruments (stock. out-of-the-money options have no value. 54. the ability to avoid running out of cash. The buyer of a call option contract can never lose more than the initial premium. put option and bond. D. the lowest value that the portfolio will fall to over the next five days and within 95% probability is: A. . merge with or acquire other firms at short notice. 52. Balance sheet liquidity refers to the ability to: A. raise debt without moving the market. bond) the fourth can be synthetically replicated. a put option is worth the difference between the stock price and the strike price. call. -$31. D. If the stock price is lower than the strike price at expiration.2 million. $1.e. Correct answer: B While out-of-the-money options have no intrinsic value. A portfolio has a mean value of $100 million and a daily standard deviation of $19 million. C. Assuming that the portfolio values are normally distributed. Prior to maturity. A stock can be replicated using any call option. B. they still have time value prior to maturity. The value of an option is its time value plus its intrinsic value. D.498 = 6.554 .08 x 0. C.125 x exp(0. 51. meet debt covenants.5) x 0. C. B.

$3. of the bonds listed below would meet your investment guidelines? A. B. As the periods in the binomial option-pricing model are lengthened. it converges to the Black-Scholes-Merton option-pricing model. The risk-free rate is 3 percent. we know that 95% of the outcomes will be above 1.03. above $30. B.03 × 0. What is the value of the put according to put-call parity? A. D. it converges to the Black-Scholes-Merton option-pricing model.1 million. 55. 56. D. Correct answer: C Given that the daily standard deviation is $19 million. None of the above. Which. You are considering an investment in one of three different bonds.18 57. C.1 million.45. Correct answer: c Explain: The lowest investment-grade ratings are BBB and Baa. Bond C carries an S&P rating of BBB and a Moody’s rating of Baa.25 – 40 = $4. Bond A carries an S&P rating of BB and a Moody’s rating of Baa.645 standard deviations below the mean. D. if any.89. $6. A 3-month call with a strike of $42 has a premium of $2. D.C.49.18. Which of the following statements regarding the Black-Scholes-Merton option-pricing model is TRUE? A. Correct answer:B p = c + X – S = 2. i. $57.5 million.49 million. As the number of periods in the binomial options-pricing model is increased toward infinity.49 + 42 e –0. A security sells for $40. The Black-Scholes-Merton model is superior to the binomial option-pricing model in its ability to price options on assets with periodic cash flows. Given that the returns are normally distributed.e. Your investment guidelines require that any bond you invest in carry an investment grade rating from at least two recognized bond rating agencies. The Black-Scholes-Merton option-pricing model is the discrete time equivalent of the binomial option-pricing model. C. C. B.5 = $42. $4. $1. Bond B carries an S&P rating of BBB and a Moody’s rating of Ba. $30. the standard deviation over 5 days = $19 million x (5/1)^0. Correct answer: A .

historical volatility. Correct answer:A The question describes the process for finding the expected volatility implied by the market price of the option. Correct answer:C: The risk-neutral probability.0% B. C.1 .0. 4.5566.As the option period is divided into more/shorter periods in the binomial option-pricing model. 0. calculate the two-period cumulative probability of default for a B credit.5% Correct answer: d . 0. d = 0. 2.0. 58. 0.0225. option volatility.0% D.25 percent. In this case. p.5566 60. The continuously compounded risk-free rate is 2.9. 59. u = 1. implied volatility. Given the following ratings transition matrix. r = 0. B. 4. can be calculated as . we have found the: A. 0.9] / [1. D.9] = . B. 2. A stock that is currently trading at $50 and can either move to $55 or $45 over the next 6-month period. What is the risk-neutral probability of an up movement? A. C. which makes p equal to [e[0.5% C. D. we approach the limiting case of continuous time and the binomial model results converge to those of the continuous-time Black-Scholes-Merton option pricing model.0225*(6/12)] .6655.1. A. If we use four of the inputs into the Black-Scholes-Merton option-pricing model and solve for the asset price volatility that will make the model price equal to the market price of the option. market volatility.5656.6565.

Correct answer: A Assuming a constant marginal default probability. 0. So. The country’s willingness and its ability to pay must be analyzed. A CBO (collateralized bond obligation) consists of several tranches of notes from a repackaging of corporate bonds. .50%.0. the default probability for the immediate quarter is likely to be lower than the average of 0. Which of the following is generally true of these structures? A. C. B.45%. and absorbs the last loss on the structure.03 × 0. Default probability over a quarter = 1 . the senior tranche is typically rated AAA. The total is 0.045. The super senior tranche is typically rated below AAA and sold to bond investors.90 × 0. 1.00 = 0. Otherwise. however. 0.(1 Default probability over a year)^(1/4) = 1 . BBB-rated firms have default probability of 0. 0. The equity tranche does not absorb the first losses of the structure. Scenario two: B could go to A then D.50%.05 × 0. However. Based on this information the default probability over the next quarter will be CLOSEST to: A. Correct Answer: a Explain: In the absence of transaction costs or fees.007. the yield on the underlying portfolio should be equal to the weighted average of the yields on the different tranches.(1 . D.2% over a period of one year. with probability of 0. The super senior tranche has expected loss rate higher than the junior tranche. 62. It is more costly to do due diligence on a country rather than on a company. 61.018. C. ranging from equity to super senior.02. Financial data on a country is often available only with long lags. D. with probability of 0.02 = 0.05%.25 = 0. 63.2%)^0. What is the most significant difference to consider when assessing the creditworthiness of a country rather than a company? A. with probability of 0. has the lowest loss rate of all tranches. B.14 = 0.05%. Scenario three: B could go to B then D. with probability of 0. The total yield of all the CBO tranches is slightly less than the underlying repackaged bonds to allow the issuer to recover fees/costs/ profits. Scenario four: B could go to C then D. B. C. the CBO yield will be slightly less.0005. With costs.Explain: Scenario one: B can go into default the first year. the marginal rate of default for high credits tends to rise with the time horizon.

So.02 per 10. The concentration limit for this particular borrower is closest to: A. 66.02 / 1. 21. 64.02%.01^5) / 10.00%. Assume the recovery rate follows a beta distribution. after a period of five years from the scheduled maturity date of the bond? The yield curve for risk-free debt is flat at 1. Correct answer: a Explain: Countries cannot be forced into bankruptcy. Correct answer: A We need to find the present value recovery at the time of Scheduled Maturity.09%. D.00%. What is the LGD ratio for this debt? A.00% Answer: C 5%/50%=10% 65. There is no enforcement mechanism for payment to creditors such as for private companies. Assume a bank wants to limit its losses in a particular sector to 5% of its capital and that the loss rate for this sector is 50%. 25. C. 10. Recent history has shown that a country can simply decide to renege on its debt. Your analysis shows that if a risky bond defaults. Which of the following is not a commonly used method for generating a recovery rate function? A. C. A country is often unwilling to disclose sensitive financial information. 2. Hence. Nonparametric kernel estimation. None of the above.33% B. Answer: B Explanation: Cubic SPLINE estimation would make little sense here.102. B. Cubic SPLINE estimation.50% C. 8.00% .000 = 20. Estimate conditional densities with generalized method of moments. B.00% D. 20.000 of face value.D. LGD = (2. we can expect to recover 2. D. willingness to pay is a major factor in assessing the creditworthiness of a country. 22.102.

I and II. Answer: D The CAPM assumes that investors all have the same horizon (as well as expectations). The time horizons of investors are normally distributed.9%. Monte Carlo simulation. An at-the money strap. 70. A. An at-the-money strip.1%. A credit manager discovers that the defaults by sub-investment grade clients of his bank follow a Poisson distribution. 69. Correct answer: D Probability of three defaults = [7^6 x exp(-7)] / fact(6) = [117649 x 0. bond spreads. 12. D. A covered call. B. 13. B. All of the following are assumptions of the Capital Asset Pricing Model EXCEPT: A. hence.8%. Which of the following strategies will be the best for this investor? A. A protective put. Investors can borrow and lend at the same risk-free rate. What is the probability that there will be 6 defaults over the next year? A. D. balance sheet items IV.67. asset volatilities. I and IV. which would have a positive variance and. B. 68. Each investor seeks to maximize the expected utility of wealth at the end of that investor’s horizon. Investors have the same expectations concerning returns. The estimated default frequency in KMV model are calculated using: I. 14. C. An investor owns a stock and believes that the stock’s price will remain relatively unchanged for the short term but is bullish in the long term. dispersion.9%. C. with an average number of defaults in the year equal to 7. . 12.5%.000912] / 720 = 14. D. Correct answer:C A covered call strategy is used to generate cash on a stock position that is not expected to increase in value over the life of the option. III. B. II. This means that the distribution of the horizons is not normal because normality implies a bell-shaped curve distribution. C.

Which of the following methods can be used to measure corporate "Cash-Flow at Risk"? I.64. II and III. D. The payoff is ($120-$90)-2($60-$50)=$30-$20=$10.5 = 0. Correct answer: C The estimated default frequency in KMV model is calculated using balance sheet items and the standard deviation of the assets. I and III. the prices move to $120 and $60. standard error of the mean is CLOSEST to: A.56. I. $0 since the acquisition is successful Answer: C This position is long one share of company B offset by a short position in two shares of company A. I and II. D.5. III. $10 D. 73. the gain is A. Correct answer: D All these methods can be alternatively used to measure corporate Cash-Flow at Risk 74. The bid from Company A is an exchange offer with a ratio of 2. C.12.C. If the mean P/E of 30 stocks in a certain industrial sector is 18 and the sample standard deviation is 3.5 / 30^0. Delta Normal. B. the prices of A and B are $50 and $90. After the acquisition goes through. 71. A.34. 0. respectively. 0. Correct answer: C Standard error of the mean = s / n^0.64. For each share of B. $20 C. A major acquisition has just been announced. B. 72. C. A hedge fund takes a long position in company B hedged with A's stock. D. Historical Simulation. II and III. targeting company B. Monte Carlo Simulation. II.5 = 3. Which of the following statements regarding the beta distribution used in the modeling of recovery functions is FALSE? . $30 B. Just after the announcement. III and IV. 0. II and III. 1.

The beta distribution does not fit bimodal recovery functions well. 77. long gamma and long vega D. short gamma and short vega C. Because they are exposed to changes in the hedge ratio. The beta distribution can be skewed. cumulative probability of default on AAA bonds is 1%. 1. D.5199 Answer: B . short gamma and long vega Answer: C Convertible arbitrage managers hedge their equity exposure by shorting stocks using the delta hedge ratio. 1.5000. Hedge fund managers following a convertible arbitrage strategy are said to be: A. long gamma and short vega B.98%.5%. If the recovery rate in the case of default is zero. 75.03%. symmetric. 3. 1. Correct answer: D AAA 1-year zero rate = (1 + default-free rate) / (1 .5207 D. what is the continuous compounded yield on AAA 1-year zero? A. The current USD/CAD spot exchange rate is 1. A. C.A.1 = 3. 2.probability of default) = (1 + 2%) / (1 1%) .03%. B. The beta distribution only requires two inputs for calibration. B.5218 C. or convex. The beta distribution does not fit bimodal recovery functions well. 1. The 1-year US dollar interest rate is 3% and the 1-year Canadian dollar interest rate is 4.01%.5225 B. D. 76. They are also exposed to changes in the price volatility of the stock underlying the option embedded in the convertible security. 3. The beta distribution is a nonparametric distribution. or convex. Answer: C The beta distribution is a parametric distribution. they are said to be long gamma.00%. Suppose that the yield on 1-year Treasury zero is 2% and the constant. 3. it can be skewed. In addition. symmetric. and only requires two inputs for calibration. C. Calculate the 1-year forward rate. so they are said to be long vega.

and their shareholders would benefit if they used all of their excess capital to repurchase shares or increase dividends. and iii only B iii and iv only C i and iv only D i. The gross leverage and net leverage are. C. A i. A hedge fund with $100 million in equity is long $200 million in some stocks and short $150 million in other stocks. is lower than that of the securities issued. ii.03 which is actually closer to choice “a”: F = 1. Firms whose capital exceeds their required regulatory capital are firms that employ their capital inefficiently. even though the question doesn’t specifically state that: F = 1. This excess collateral (or the equity tranche) absorbs a significant amount of the credit risk of the pool of bond obligations and leaves the securities offered to investors with lesser risk and hence a higher rating. is same as that of the securities issued.500 × e 0.045−0.In order to get the answer reported in GARP’s answer key. iv. Economics capital can be used to validate a firm’s regulatory capital requirement against its own assessment of the risks it is running. Which of the following statements regarding economic capital are true? i. and iv only Correct answer: C iii 不对，资本超过 regulatory capital 不是无效的表现 79. Since regulatory capital models and economic capital models have different objectives. B. is higher than that of the securities issued. 80. The weighted average rating of the collateral pool used to structure collateralized bond obligations: A. iii. may be higher or lower than that of the securities issued depending on the number of tranches. ii. economic capital models cannot help regulators in setting regulatory capital requirements. If you use continuous compounding.500 × answer 1. you’ll get an 1.5218 . you have to assume annual compounding. iii. D.03 = 1. Economic capital is designed to provide a cushion against unexpected losses at a specified confidence level over a set time horizon. 78. Correct answer: B An issuer (SPV) needs to provide for a significantly higher collateral than the securities issued. . respectively.045 = 1. Our advice is to be prepared for this type of ambiguity on the FRM exam.5227 .

D. The corporate bond could be upgraded so that it would have a higher rating than Malaysian sovereign debt. A note that pays an enhanced yield in the case of a bond downgrade IV. D. Which of the following statements concerning the risk of his position is incorrect? A.5 and 1. and III are correct. treasury and buying protection on the corporate bond using a CDS would be a better hedge than just buying protection on the corporate bond.A. Wallace.5. parallel. Answer: A Sovereign debt is typically rated higher than corporate debt in the same country.5. Which of the following is a type of credit derivative? I. A put option on a corporate bond II.5 2.0 and 0. 82. is holding a 5-year USD Malaysian corporate bond in his book. normally distributed with a constant . C. A put option on an off-the-run Treasury bond A. 81. The net leverage is (200 . but it is highly unlikely. Consider a swap contract that has just been initiated with a term to maturity of 10 years.0 and 1. II and III only C. C. An option on a T-bond has no credit component. 83. A short position in Ringgits sovereign bond from Malaysia would always help hedge the corporate bond against currency risk if the corporation is an exporter. and III B. II. II. I. If the DV01 of the swap is proportional to its term to maturity and the movement of the term structure of interest rates is stochastic.5 3.S.5 3. All of the above Correct Answer: a Explain: Part I. Buying protection with a CDS would hedge the corporate bond position against some risks but it would do a poor job of hedging the position if there is a drop in liquidity for emerging market sovereign bonds. B. II only D.150)/100 = 0. A total return swap on a loan portfolio III. B. an emerging market bond trader.5 and 0. 2.5 Answer: C The gross leverage is (200 + 150)/100 = 3. He is concerned about the risk of his position. A short position in a 5-year U.

B. The decision to include or exclude high volatility samples can then be made on a real-time basis. the potential exposure peaks after one third of the initial life of the contract. Correct answer: B If the DV01 is proportional to its term to maturity. Correct answer: C An unduly low margin would bankrupt the clearing house. 84. C. the potential exposure of the swap will peak after: A. However. B. 6. the interest rate volatility of the past crises needs to be ignored as the regime has clearly shifted.S. A five-year U. While determining initial margin at 99% 1-day VAR. We need to have an additional factor measuring (and possibly predicting) pressure on currency.5 years. it will give him a return very close to the return of the following position: A. While determining initial margin at 99% 1-day VAR. None of the above. 2. the interest rate volatility of the past crises needs to be accounted if these events have occurred in the recent past and could recur.7 years. A five-year IBM credit default swap on which he receives fixed and makes a payment in the event of default C.6 years. especially during international currency crises. 3.S. Treasury bond plus a five-year IBM credit default swap on which he receives fixed and makes a payment in the event of default Correct Answer: d Explain: A long corporate bond position is equivalent to a long Treasury bond position plus a short CDS. 5. D.3 years. C. while an unduly high margin . 85. A five-year U. Which of the following positions would you agree the most? A. this volatility is currently low. The National Stock Exchange of India introduced bond futures trading in 2003. In the past. interest rate volatility in India had been very high. A five-year IBM credit default swap on which he pays fixed and receives a payment in the event of default B. D.volatility. Treasury bond plus a five-year IBM credit default swap on which he pays fixed and receives a payment in the event of default D. If an investor holds a five-year IBM bond.

The best compromise would be statement C. possible serial correlations in credit events and the need to accommodate clients. B. Which of the following in NOT an issue in the active risk management of a credit book? A. Answer: B A. The asset-backed security (ABS)will have a senior tranche that is rated investment grade and whose face value is lower than the value of the receivables that were on the firm’s balance sheet. When choosing a hedging approach. B. D. an OTC product. because the need for rebalancing increases the chance of mishaps in implementing the strategy. C. 86.would kill trading interest. Because ABS bonds are rated with respect to the risk of the underlying assets (in this credit card receivables) not the risk of the originator of the assets. Its balance sheet reflects a large number of receivables from shoppers who use the chain’s private label credit card. dynamic replication using an exchange-traded product. The securitization will result in a bond with two tranches: one that is senior and receives a Ba3/BB-rating and another that is junior and receives a B2/B. The bond issued in the securitization will be B1/B+ rated because the department store chain is rated B1/B+. a product traded on an organized exchange. where the clearing house can change the measurement of VAR. The problem lies in the illiquidity of the papers. Incorrect. Serial correlations. Illiquidity of the underlying. D. D. The asset-backed security (ABS)will be over collateralized with the receivables that had been on the firm’s balance sheet and are now a liability of the special purpose entity (SPE). The firm has decided to raise much needed funds for renovation by securitizing these receivables. Which of the following scenarios is the most likely outcome? A. C. Need to maintain client relationship. Correct answer: B The credit market has enough issuers. C. A department store chain has a B1 rating from Moody’s and a B+ rating from S&P. static replication using an exchange-traded product. B. you expect operational risks to be higher for: A. Limited number of issuers. 87. . 88. Answer: B Operational risks tend to be higher for dynamic replication using an exchange-traded product.

C. D. Because it is usually the case that at least one of the tranches is investment-grade. To ensure that the default risk is lower. while the sub tranche only gets paid back if the senior tranche is paid in full. where an important objective in the model risk management process is to identify the model currently used to arrive at observed market prices that may differ from true fundamental value. more likely to include the reverse engineering of prices if the risk manager does not believe in the efficient market hypothesis. C. For a financial institution. all financial assets were complex. Which of the following statements about the role of the model risk manager is most correct? The role of the model risk manager is: A. C. 90. the senior tranche is smaller than the pool of receivables backing the bond. A large fraction of ABSs are structured with senior and sub tranches. accurate prices for financial instruments were observable at all times.B. B. 89. The difference between a Monte Carlo simulation and a historical simulation is that a . If accurate prices were always observable. never likely to include the reverse engineering of prices regardless of the risk manager’s beliefs regarding the efficient market hypothesis. there would be no need to estimate market prices and no need to manage model risk. Because if over collateralization is used the collateral is an asset of the SPE not a liability D. The senior is usually AAA because it has the full backing of all the assets in the pool that the SPE owns. Incorrect. Infrequent trading exacerbates model risk. Incorrect. 91. Answer: A Model risk is a result of incorrect estimates of market prices. Model risk exists for both simple and complex instruments when assets are infrequently traded. assets were traded infrequently. model risk would not exist if: A. Answer: C The reverse engineering of prices is the process of finding the set of pricing methodologies that best accounts for observed market prices. D. B. Correct. because it makes asset values difficult to determine based on recent transactions. This differs from an efficient market setting where the objective is to identify the model that produces the true fundamental value. This process is important in a non-efficient market setting. less likely to include the reverse engineering of prices if the risk manager does not believe in the efficient market hypothesis. all financial assets were simple in design. more likely to include the reverse engineering of prices if the risk manager does believe in the efficient market hypothesis.

31. B. The mean age of the 80 employees in a company is 35 and the standard deviation is 15. Correct answer:B The variance/covariance method relies on the assumption of normality.3 94. A VaR model that has been prepared by an external contractor. uses randomly selected variables from future distributions. C. uses variables based on roulette odds. uses a computer to generate random variables. Which of the common methods of computing value at risk relies on the assumption of normality? A. 34. II. B. we can say that the employees within the firm fall between: A. B. 93.historical simulation uses randomly selected variables from past distributions. Assuming that the ages are normally distributed and using 95 percent confidence. 92. Historical. Correct answer: C. II and IV. A mark-to-market model that cannot be understood by risk managers. C. I and III. D. .0 years.7 and 38. while a Monte Carlo simulation: A.96 x 15 / 80^0. 33.5 = 35 ¡�1.7 and 38. A. A Monte Carlo simulation uses a computer to generate random variables from specified distributions.4 years. B. Monte Carlo simulation.0 and 50. projects variables based on a priori principles.96 x standard deviation / Number of employees^0. 20. D. A mark-to-market model that relies on volatility figures prepared by the trader being monitored. Variance/covariance. D.8 and 36. C. III.3 = between 31. Which of the following are examples of model risk? I. A VaR model that does not allow for the adjustment of market correlations.3 years. IV. Rounding estimation.2 years.5 = 35 ¡�3.6 and 35. Correct answer: B The range of the 95 percent confidence interval = mean ¡�1.

000 loans for an average cost of $362 per year. If the bank can service 5. II. B. 95. synergy of service D. D. when the correlation between the assets is a perfect 1. II and III. Correct answer: A The option on a portfolio can. the servicing is said to have: A. D.000 loans for an average cost of $298 per year. The credit exposure on derivatives contracts can be thought of as an option written with the strike price of zero. Rather the risk arises if the risk manager does not understand the model. the option on portfolio is never more valuable than a portfolio of individual options. or if some of the assumptions regarding market parameters are hard-coded into the model. economies of scale C. The option on a portfolio is never more valuable than a portfolio of individual options. at most. In the netting arrangement. per loan. I and II.00%. I. be equal in valuable to the portfolio of individual options.C. per loan. III. Short positions in forwards. 97. Short positions in currency swaps. II. III and IV. A. II. I. The option on a portfolio is always more valuable than portfolio of individual options. or the results of the model are derived using assumptions given by the trader being monitored. Correct answer: C The fact that VaR model that has been prepared by an external contractor does not by itself lead to model risk. Short positions in options. economies of scope B. III and IV. A bank can service 1. which of the following contracts would NOT be netted with other contracts? A. 96. II and III. . C. I and III. C. Which of the following statements are TRUE? I. B. Thus. diseconomies of scope Answer: B Economies of scale refers to the cost of producing a single project falling as more products are produced.

8)(1190 1160)] / 5 = 252.190. IV.150.57. 99.100 + 1. hence there is no netting 98. it poses a systemic risk as the Fed guarantees every wire that is sent through the system.8) (1100 . III. To value current positions.100. 45 B. Based on this data. Step 2. lending of fed funds Answer: A The Fed allows banks to fund negative intra-day balances. This is an example of: A. Compensation scheme for trader should be directly linked to calendar revenues. 315 Correct answer: C Step 1. the covariance of the stock with the market is CLOSEST to: A. it receives $50 million from the sale of securities. Calculate the mean stock price = (55 + 43 + 58 + 64 + 69) / 5 = 57. II. $69.160 + 1. a daylight overdraft B. On the corresponding days the S&P 500 closed at 1. a reserve overdraft C. Calculate the mean S&P level = (1.8)(1150 . In the afternoon.160.57. I and II B. 252 D.57. $64. $58.200 + 1. Short positions in interest rate swaps. the bank sends customer wires totaling $59 million. II and IV . The covariance between the stock and S&P = [(55 . Trade tickets need to be confirmed with the counterparty. During the morning. While providing liquidity to the transaction settlement process.150 + 1. 100.8. 1. Step 3.1160) + (43 57. An analyst observes that the closing price of a stock during a week as $55. 1. ). ab initio([拉](=from the beginning)从开始起 adv.200. 1. A. $43. Correct answer: A Short positions in options are obligations.160.D. price information should be obtained from external sources.8)(1200 . Individual responsible for committing to transaction should perform clearance and accounting functions. borrowed reserves D. A bank has an opening reserve account balance of $42 million. and the closing reserve account balance is $33 million.1160) + (58 .1160) + (64 .190) / 5 = 1. 1.1160) + (69 57. Which of the following strategies can contribute to minimizing operational risk? I. 108 C.8)(1160 .

400. Note that VAR value is always negative. In the approaches for weight data points in LDA model which one is incorrect？ A.125 -(1. I is incorrect because it violates the separation of duties principle.000-23.97%.400.100. and III Answer: B II and IV are both correct. Which of the following reasons does not help explain the problems of LTCM in August and September 1998: A. II.400. 14. 101.97%.65%.000 = 14. 103. III and IV D.75%. Answer:C Data capture bias is caused by a correlation between the probability of a loss been reported and the size of the loss. 17. What is the portfolio’s standard deviation? A.000(X) X = 17. Split loss is the loss affects more than one business line. An increase in interest rates on on-the-run Treasuries . A spike in correlations B. Data capture bias is caused by the fact that banks do not collect data below a given threshold.65)(X)]-br> -2.C. I. C. 102.000[0.50 percent. D. A drop in liquidity D. the analysis can increase the probabilities of smaller losses and decrease the possibility of larger losses. To deal with data capture bias. C. Historical VAR of the portfolio at 5 percent probability level is $2.50%. III is incorrect because it ignores the amount of risk assumed by the trader and may encourage taking risks that may not become evident during the calendar period. Scale bias is caused by the possibility that larger firms could have large loss. B. B. Correct answer:B VAR = Portfolio Value [E(R)-z σ ]-br> -2.000. each business line needs to be weighted.750.000 = 1.000. D. An increase in stock index volatilities C. Portfolio A has total assets of $14 million and an expected return of 12. 15. 12.

a 10 to 1 leverage ratio would significantly change the risk of the fund. assets. so that would not indicate style drift. I. 104. II and III only D. The fund made a major shift in allocation by moving 40 percent of its holdings from Eastern European equities to Asian equities. James makes note of the following findings about the fund: I. Dominic James is a fund of hedge funds manager that is analyzing the Peyton Formika Fund for signs of style drift. not an increase in the R-squared measure against the peer group.S.Answer: D Increased volatility and higher correlations led to substantial losses in LTCM’s highly-leveraged portfolio. II and IV only B. James Henry is preparing a presentation on the calculation of VAR for his supervisor. The Peyton Formika Fund is a global macro asset allocation hedge fund designed to provide low correlations with U. Due to outstanding returns. . Excessive cash inflows which may be more money than the manager can sustain is also a potential indicator of style drift. style drift would be a concern with a decrease. Even though the initial position is small. the fund manager gained confidence in his existing Indian equity holdings and levered his existing 5% weighting in India only by a 10 to 1 ratio. After a recent trip to India. An increase in the spread between U.S. notably through leverage. III. I and II only C. A significant drop in market liquidity forced LTCM to liquidate these highly-leveraged positions at substantial discounts. Also. Which of James’ findings are indicators that the Peyton Formika Fund is at risk for style drift? A.72 to 0. IV. III and IV only Answer： A Hedge fund style drift occurs when there are changes in the risk factor exposures of the fund or changes in the overall risk of the fund. 105. II. The R2 of the fund versus the global macro peer group has changed from 0. assets in the fund have increased from $70 million to $430 million over the past 12 months. Using leverage only for his Indian equity position would definitely be an indicator of style drift. The change in allocation from Eastern European equities to Asian equities is within the objectives of a global allocation fund. treasury rates and Russian government rates resulted in significant losses.78 over the past 12 months.

B. Correct answer: A The continuously compounded return is the most appropriate return calculation to use in estimating VAR. C. 58% and 42%. A money market account plus a pay fixed USD swap D. This duration matched portfolio would suffer the greatest drop ff value because the price of US low-grade corporate would decline and the price of US treasuries would increase. and hence their price would decline. Duration-matched portfolio. the price of US treasuries will increase. The demand of riskier assets. 107. Which of the following portfolios would have suffered the greatest drop in value as a result of the Russian debt crisis in 1998? A. We would see the prices of US corporates decline relative to US treasuries. a 1-day VAR can be extended to a multiple-day VAR using the square root rule without violating the assumptions underlying the 1-day VAR calculation. In this environment we would expect the demand for safer assets. A flight-to-quality is a flow of funds from riskier to safer investments in times of uncertainty. 106. The proportion of these two securities that would lead to the lowest risk are: A. Long 5-year on the run US treasury C. B. determining which return calculation will maintain the distribution assumptions of a 1-day VAR when converting to a multiple-day VAR. D. choice D contains two asset classes which differ on the basis of risk. 34% and 66%. short US treasuries Answer: D The Russian Crisis is an example of an environment in which there would be fight to quality. Continuously compounded return. Of the four choices. Which of the following types of return calculations should Henry select in order to estimate VAR? A. 42% and 58%. Absolute return.Henry is having trouble， however. Simple return. long US Low-grade corporate bonds. and hence their prices. Geometric mean return. Thus. A portfolio contains two perfectly negatively correlated investments with volatilities of 5 percent and 7 percent. Long-short market neutral US equity fund B. to increase. Correct answer: A . C. D. 66% and 34%. Using continuously compounded returns.

109. w1/w2 = v2/v1). B.31%. Correct answer: D Step 1.857% + 20% x 20% + 47% x -42.857%)^2 = 0. An analyst is studying a stock that is currently trading at $35. B. The returns for the three scenarios given are: 42. a 20 percent probability that the stock will trade at $42.35)/35]. LTCM was an example of strategies that were deliberately undertaken and approved but that didn’t pay off.42. Daiwa had a fixed income rogue doing unauthorized trades. III. Calculate volatility/standard deviation = 0.857% = -2%.857% [= (20 . 108. What is the implied volatility of this stock price? A. IV.857%)^2 + 20% x (-2% . excessive managerial focus on bondholders’ interests at shareholders’ expense. Step 3.Since the investments are perfectly negatively correlated the volatility of the portfolio = (w1 x v1 . II. Allied Irish Bank C.e. 39%. giving shareholders an incentive to take on negative NPV projects. 110. 20% [= (42 35) / 35].w2 x v2). I and III only . II. Daiwa Answer: A A. Sumitomo D. Long-Term Capital Management B. and a 47 percent chance that the stock will trade at $20.35) / 35] Step 2. I. The analyst estimates that there is 33 percent probability that the stock will trade at $50 after one year. a reduction in risk at bondholders’ expense. LTCM was subject to operational risks like model risk. C. Allied Irish Bank involved a rogue trader making fx trades. Calculate Variance = 33% x (-2% . excessive hedging by managers. Which of the following cases of losses was not the result of unauthorized or rogue trading? A. Risk management activities can reduce the probability that a firm will experience a debt overhang in the future. but the trades that led to the losses were not unauthorized. A. 13%.857% [= (50 . D. Calculate expected price = 33% x 42. This can be reduced to zero by adjusting the amounts invested in the inverse of the ratios of the volatilities (i. Sumitomo’s rogue trading in copper killed it. The costs that are usually associated with debt overhang include: I.154538^0.20%)^2 + 47% x (2% + 42. and IV B.5 = 39. D. and -42. C. 31%. 24%.154538 Step 4.

probability that a loss will exceed 5% of the portfolio value. The more firm hedges its financial exposures. i. maximum percentage loss that is expected to occur 5% of the time. B. The use of risk management to reduce financial exposures effectively increases a firm’s debt capacity. negative NPV projects. 111. leaving exposures unhedged or selectively hedged while maintaining more equity may be the value-maximizing strategy. I only D. D.C. The other major cost of debt overhang is that it may lead to underinvestment. hedging could help some firms to increase shareholder value. percentage loss in value that will only be exceeded or equaled on 5 out of 100 days. 112. while for other firms. maximum dollar loss that is expected to occur 95% of the time. consideration of capital structure plays a vital role in hedging decisions. Which of the following statements is not correct? A. VAR itself is not a probability. B. Severity assessment involves the determination of the probability of loss should a failure occur in a given operational risk category II. because debtholders bear the cost if the project fails while shareholders benefit from low probability outcomes associated with high cash flows. Which of the following statements best defines VAR(5%) on a percentage basis? VAR(5%) is the: A. External dependency risk is a widely recognized operational risk component . 113. Decisions to hedge financial exposures should be made jointly with the company’s capital structure decisions. because positive NPV projects that do not provide cash flow sufficient to repay the debt may be bypassed. III only Answer: D Debt overhang provides shareholders with an incentive to take on risky. C. a firm must hedge its financial exposure irrespective of its capital structure. Consider the following statements and identify which ones are true: I.e. Answer: B Hedging is not a mandatory. In order to maximize value. It is a statement of loss in either percentage or dollar terms for a given probability. D. Note that maximum dollar loss would have been correct if the question asked for the definition of VAR(5%) on a dollar basis. Correct answer:B VAR(5%) on a percentage basis is defined as the percentage loss in value that is expected to be equaled or exceeded only 5% of the time (5 days out of 100). Therefore. the less equity it requires to support its business. C.

II is a correct. the probability of Bank B not recovering the full principal of the loan is most will be closest to: A. not the probability.III. You are an analyst at Bank Alpha. but its options trading is insignificant in relation to its overall business activities. operational strategic risk and external dependency risk. B.2%. 114. . Forecasting changes in asset and liability duration is one way to manage strategic operational risk Corporate restructuring is one of the transitory conditions that are particularly risky for organizations I.002%. C 115. D. B. You were given the task to determine whether under Basel II your bank can use the simplified approach to report options exposure instead of the intermediate approach. B. Assuming that the performance of Company C is not affected by interest rates. Bank B lends $10 million to Company C for six months and receives $12 million worth of US Treasuries as collateral. 2%. III is incorrect. C. The bank purchases and writes options. The three components identified are operational failure risk. 0. II. The bank writes options. 0. C. Corporate restructuring is one of the transitory conditions that are particularly risky for organizations. Severity assessment involves the determination of the extent of the loss. and its options trading is insignificant in relation to its overall business activities. 0. but its option trading is insignificant. IV. The 6-month default probability of the Company C is 2 percent and the 6-month 99% VaR on the Treasuries is $2 million. Which of the following criteria would your bank have to satisfy in order for it to use the simplified approach? A. Duration management is not part of strategic operational risk. The bank solely purchases options. D. II and IV II and IV I. C. IV is correct. and III I. Probability is measured by the net likelihood assessment. D. III and IV Answer: B I is incorrect. A. The bank purchases and writes options and has significant option trading.02%.

117. Correct answer: C The probability that this portfolio will see its first default by the end of second year = P[first default in year 1] + P[first default in year 2] = P[first default in year 1] + P[no default in first year] x P[at least one default in second year] = (1 .0. Insufficient Information. but a financial derivative. D. Answer: A The three common traits associated with past major financial shocks are: a triggering event leads to a sharp decline in asset prices. C. B. C. A sharp decline in asset prices due to a triggering event. 22. the joint probability of both occurring together will be 2% x 1% = 0. this is a wager and so the contract is void.02%. which of the following is correct? A. the events of default by Company C and the extreme fall in the value of Treasures (more than $2 million) will be independent. Since the performance of Company C does not depend on interest rates. None of the above. .13%.0. C. Reliance on overly complex pricing models. D.95^5 x (1 . Consider a portfolio of five equally-weighted bonds. 17. Which of the following is NOT one of the three traits common to past major financial shocks? A. Two NY-based banks entered into a credit derivative contract to compensate the actual credit loss suffered by one party in consideration of annual fee paid by it to the second party. As per the State of NY Insurance Department. Therefore.62%. 118. B. 116. liquidity pressures.50%. Each bond has default probability of 5% per annum and the defaults are independent of each other. As per UK law. A lack of market liquidity.95^5) = 40. this is not an insurance contract. In this situation.13%. D. A. this is an insurance contract. 40. Leverage concerns.Correct answer: B Bank B will not recover the full principal of the loan only if the Company C defaults and the value of the collateral falls by $2 million (the probability of which is 1%). What is the probability that this portfolio will see its first default by the end of second year? Assume the same default probabilities for first and second years for the surviving bonds. leverage concerns.95^5) + 0. B. As per the State of NY Insurance Department.

Answer: C A. Is incorrect.at maturity. The second step measures the VAR for the portfolio of derivatives based on the simulated outcomes. C. and III. In an attempt to provide guidance on an additional steps to be taken by the private sector to promote the efficiency . B. Is incorrect. Which of the following statements describe an appropriate step in the structured Monte Carlo (SMC) approach for measuring risk? I.The counterparty risk management policy Group II (GRMPG II) published a report in July 2005 containing recommendations and guiding principles.effectiveness and stability of the global financial system . GRMPG II recommends that fiduciaries taking on risks associated with complex products should have the ability to aggregate risk across their entire pool of assets in order to understand portfolio-level implications. III. 119.financial intermediaries should consider whether disclosure appropriately conveys the fact that secondary market value . . on a voluntary basis. The first step simulates thousands of valuation outcomes for the underlying assets. A. This is the essence of Sarbanes-Oxley requirement. Because the statement is correct according to CRMPG II report. B. will be less than the issue price. which of the following statements relating to Emerging Issue is incorrect ? A. As a guiding principle in selling structured products to retail investors . 120. I only. disclosure should relate to the secondary market value at or near issuance (not at maturity). Because the statement is correct according to CRMPG II report. GRMPG II recommends that hedge funds. This recommendation is an effort to promote the efficiency. the payment is contingent ONLY on credit event happening. II. Is incorrect. adopt the relevant recommendations and guiding principles contained in their (GRMPG II) report. The first step assumes some properties of the underlying asset’s return distribution such as normality. as payment is contingent on BOTH the credit event happening AND the party suffering loss. B.Correct answer: B Since this contract seeks to compensate the actual loss. This basically comes from the New Prudent Man Rule as opposed to the traditional Fiduciary Rule. Is correct. As a guiding principle，senior management should conduct periodic reviews of the financial intermediary’s internal controls for the sale of complex products retail investors. II. Because the statement is correct according to CRMPG II report. this is an insurance contract. According to the GRMPG II report. effectiveness and stability of the global financial system. Per CRMPG II report. D. D. I. In credit derivative. C.

This translates in to a price level = Current price Dollar loss/Underlying quantity = $1.200.000 bushels) at a price of $1. D. Step 2: The VAR for the portfolio of derivatives is then calculated from the simulated outcomes. Correct answer: B The trader would have to post a margin of $4.800 at the outset and would receive a margin call if the value of this margin fell to $3. Correct answer: A The expected default loss = expected exposure x 0. III.57. I. 122.57. Over a horizon of one year.200.$3. 123. given the default. I and III. $2. A. you need to know: I. the expected recovery rate. In the peaks-over-threshold to estimate parametric tails in distributions which of the statements is incorrect.800 and the maintenance margin is $3. I and II. $1. the returns are normally distributed and the volatility in the market value of the swap is $40 million.200) of is value. D. Correct answer:B Steps in using the SMC approach include: Step 1: Simulate thousands of valuation outcomes for the underlying assets based on the assumption of normality.21. with analysis of the balance sheet to find out leverage ratio.000 = $1. A trader buys one wheat contract (underlying = 5. 121.600 (= $4. the expected default rate of the counterparty. II and III. $1.5 x default probability x (1 recovery rate).25. B. II only. Consider a 5-year interest rate swap with notional of $500 million. Thus the margin call would come when the contract lost $1.89 . $2. II. D.$1. At what price will the trader receive a maintenance margin call? A. II and III.89 per bushel. The initial margin on the contract is $4.53. A In this process we estimate a threshold then calculate the conditional probability of . the history of rating changes of the counterparty. To compute expected default loss.600 / 5. B. I and III.800 . C. C.C.

Subexpoential distribution includes Weibull. of which ξ is the shape parameter.. Negative binomial.. C The presence of moral hazard in insurance leads to numerous contracting terms that restrict and condition the insurance and that make the insurance less valuable for banks. Answer: C ξ X −ξ The POT model is f ( x) = 1 − (1 + ) . The sum of n independent distributed severities will tend to be large due to the severity a single large loss event. B Insurance companies do not have any comparative advantage in bearing or measuring operational risk and thus make poor risk management partners for banks. Answer: B B 选项不正确， 保险公司既然敢于给公司承担保险业务， ，其必定有这一套严密 且合理的操作风险计量方法来确定银行由于操作风险所带来的操作风险所发生 的损失。 126. and Parto distribution.. If the parameter indicating the fatness of the tail is below zero. D a loss above this level. Which of the following is not an accurate statement regarding the purchase of insurance by banks for covering operational risk-related losses? A Insurance for operational risk events can be very expensive. A. The equation lim P ( X 1 + . B. P(max( X 1. C. If it is β 1 larger than 0. X n ) > X ) Answer: A Subexpoential distribution does not include negative binomial distribution. D Policy limits often limit insurance coverage to levels well below the catastrophic levels for which banks actually need protection. 125. The model consist of two parameter this shape and scaling parameter. Which of the following risks is not included in the Basel II definition of operational risk? . + X n > X ) = 1 is satisfied. D.. In the is description about the subexponential distribution which one is incorrect. 124. it indicates a fat tail.B C tail. Parto distribution decays more slowly than exponential distribution prior to the tail. this indicating a fat To deals with varying parameters the maximum likelihood method can be used.

B. Correct answer: D A．由于 CRO 将市场、信用、操作风险简单加总，则这样的操作方法就是假设了 三者之间不存在相关性； B．对于 Basel，市场风险部分采用 10 天、99%置信区间； C．不对； D． 此答案包含了信用风险与市场风险之间的相关性， 利率风险是市场风险中的一 种，但是信用风险可能造成借款者无法偿还的信用风险，而题干中将 3 种风险 简单加总恰恰是忽略了市场风险与信用风险之间的相关性，此选项正确。 128. Process Failure Risk. In addition. credit risk. C It ignores strategic risks.A. D. The Chief Risk Officer (CRO) wants to estimate the bank’s total risk by adding up the regulatory capital for market risk. Every year Business Week reports the performance of a group of existing equity mutual funds. . Answer d) is also incomplete. and the Advanced Measurement Approach for operational risk. because dead funds are not considered. and operational risks have zero correlation. Answer: B Reputation risk 和 Strategy Risk 不属于 Operational risk 127. D It ignores the interest risk associated with the bank’s loans. and operational risk. Survivorship bias only B. Answers a) and b) are incomplete. The bank uses the model approach for market risk. B It uses a 10-day horizon for market risk. selected for their popularity. Taking the average performance of this group of funds will create A. Instant-history bias only Answer: C The publication lists existing funds. Which of the following statements about this approach is incorrect? A It assumes market. Both survivorship and selection bias D. which are large and likely to have done well. Systems Failure Risk. so it must be subject to survivorship bias. Your bank is implementing the advanced Internal Rating Based Approach of Basel II for credit risk. Selection bias only C. Legal Risk. Reputation Risk. credit. there is selection bias because the publication focuses on just the popular funds. C. The CRO asks you to identify the problems with using this approach to estimate the bank’s total risk.

it is more appropriate for asymmetric return distributions than any metric that uses standard deviation (such as the Sharpe ratio). III – The Sortino ratio allows one to evaluate portfolios obtained through an optimization algorithm that uses semi-variance. C. 130. The Sortino ratio allows one to evaluate portfolios obtained through an optimization algorithm that uses variance as a risk metric. as a risk metric. not variance. I – Since the Sortino ratio uses the notion of semi-variance.Y = $90 million. Which of the following statements about the Sortino ratio are valid? I. Solving these equations we get X = $70 million. III – The Sortino ratio allows one to evaluate portfolios obtained through an optimization algorithm that uses semi-variance. The net mark-to-market value of these contracts is $50 million and gross mark-to-market value (sum of absolute values) is $90 million. Incorrect. III and IV I and III I and IV A. $90 million. III – The Sortino ratio allows one to evaluate portfolios obtained through an optimization algorithm that uses semi-variance. Incorrect. IV – The Sortino ratio is similar to the Sharpe ratio. but the Sortino ratio replaces the risk free rate with the minimum acceptable return and the standard deviation of returns with the standard deviation of returns below the minimum acceptable return. except the risk free rate is replaced with the minimum acceptable return in the numerator and the standard deviation of the returns is replaced with the standard . not the Sortino ratio. not variance. IV. C. B. The current credit exposure of Firm A to Firm B will be: A. III. The Sortino ratio is defined on the same principles as the Sharpe ratio. Answer: D A. not variance. D. Firm A has 40 derivatives contract outstanding with Firm B. $120 million. D. B. The Sortino ratio compares the portfolio return to the return of a benchmark portfolio. Correct. The Sortino ratio is more appropriate for asymmetrical return distributions. $70 million. II – The information ratio. Then X + Y = $50 million and X . II. as a risk metric. II and III I.129. C. compares the portfolio return to the return of a benchmark portfolio. B. as a risk metric. $140 million. Incorrect. Correct answer: A Say that the sum of the positive MTM values is X and the sum of the negative MTM values is Y. D.

Incorrect.700 / USD 5. Correct.000. is the only model given above that allows for the interest rate r to mean revert to a level b.292 USD 292. Because of the use of incorrect variable and/or incorrect formula.90 × (1. as a risk metric. 133.000) = USD 58. A financial institution does not have the cash to meet its capital withdrawals. USD 0. not variance. Incorrect. dr = a × (r − b) × dt + s × dz Correct answer: C dr = a × (b − r ) × dt + s × dz .90 • Portfolio beta of Peso = 1.700 Based on the given information.700 × 0. USD 0. Which of the following is an example of liquidity risk? A. not the Sortino ratio. Incorrect.90 = USD 0.446 B. Suppose a portfolio consists of a USD 1 million investment in Euros and a USD 4 million investment in Mexican Pesos. dr = a × (b − r ) × dt + s × dz D. Because of the use of incorrect variable and/or incorrect formula.106 USD 422.230 C. dr = a × dt − b × dt + s × dz C.084 USD 337.30 • Diversified Portfolio VaR = USD 324. Which of the following models for interest rates would allow for mean reversion? A. Because of the use of incorrect variable and/or incorrect formula. USD 0. Marginal VaR of Euro = (USD 324.110 Answer: A A. the marginal VaR and the component VaR of the Euro position are closest to: Marginal VaR Component VaR A. 132.058 USD 58. The bid-ask spread for an actively traded asset is close to zero. D. II – The information ratio.000)×0.446 B. . dr = a × dt + s × dz B.000 / 5.000. C. III – The Sortino ratio allows one to evaluate portfolios obtained through an optimization algorithm that uses semi-variance.deviation of the returns below the minimum acceptable return in the denominator. B.688 D. 131. Additional information is given below: • Portfolio beta of Euro = 0. USD 0. compares the portfolio return to the return of a benchmark portfolio.000.058 Component VaR of Euro = USD 324.

134. the overriding guiding principle for its recommendations concerning complex financial products is: A. C.C. 2. the bank will probably have to pay the net value of the swap (after expenses) with the client's creditor.6%. B. . standardization of procedures D. B. the overriding guiding principle is that management must rely on sound judgment based on familiarity and knowledge of the fundamentals of risk management. the position’s marginal VAR divided by the value invested in the position.1%. A bank enters into a 5-year swap with a client to pay a fixed annual coupon of 7% in return or semi-annual LIBOR. sound judgment and experience C. accountability B. at which point the 3-year swap rate is 6%. but will not bear any loss. the bank is paying a rate of 7% when the prevailing market rate is 6%. 135. Correct answer:A Liquidity risk (funding related) refers to the risk that a financial institution will be unable to raise the cash necessary to roll over its debt. The loss incurred by the bank as a percentage of the notional amount due to this default will be CLOSEST to: A. high trading volume would tend to indicate lower liquidity risk (trading-related). while a bid-ask spread close to zero indicates little liquidity risk. Note that a wide bid-ask spread would indicate high liquidity risk (trading-related). According to the Report of the Counterparty Risk Management Policy Group (CRMPG) II. the bank owes the client rather than the other way around. 0. Due to the ISDA agreement. 4. D. the position’s marginal VAR multiplied by the beta of the position with the overall portfolio. 136. the use of sophisticated financial models Answer: B According to the CRMPG II. D. For a portfolio with a large number of relatively small positions. Also. Therefore. Correct answer: A At the point of default. Two years later the client defaults. or meet capital withdrawals. A firm issues new bonds upon the maturity of an older bond issue.0%. 3. The daily trading volume for a stock is significantly higher than the daily trading volume for the average stock. fulfill cash requirements of counterparties.0%. the component VAR of a given position would probably be closest to: A.

Their strategy to hedge this exposure: A.970% D. a shift in the market from backwardation to contango. where r is the return for time t-1. is the weight in the portfolio. suffered from poor diversification.where is the value of the portfolio. 1. was based on fraudulent reporting. Correct answer:D In a large portfolio with many positions.02) 1 2 2 ] = 1. Given that you just observed a return of 2%.97 )(0. Yesterday's forecast of standard deviation was 1%. ht −1 and 2 ht are forecast variances at time t-1 and t respectively. the approximation is simply the marginal VAR multiplied by the dollar weight in position . B. 1. what will be the new forecast of standard deviation? A. creating a liquidity . Answer: A Metallgesellschaft implemented a stack-and-roll hedge strategy. You need to update a daily volatility forecast using the RiskMetricsTM exponential method with a decay factor of 0.97. and λ is an exponential deny factor.030% B. the position’s marginal VAR multiplied by the value invested in the position. the position’s marginal VAR divided by the beta of the position with the overall portfolio.044% C. Metallgesellschaft Refining and Marketing offered customers long-term contracts with fixed prices for petroleum contracts.C. 1.977% Answer: B The formula for the weighted average forecast for the time t variance using the RiskMetricsTM approach is: ht = λht −1 + (1 − λ )( rt −1 ) . the updated forecast for standard deviation is: (h t ) 2 = 1 [(0. which uses short-term futures contracts to hedge long-term risk exposure. 138. Using the information provided.97)(0. D.01) 2 + (1 − 0. failed because of improper internal controls. and other factors. 1. No offsetting interim cash inflows were available on their long-term customer contracts. C. The stack-and-roll hedge strategy proved ineffective due to interim funding cash outflows created by margin calls. D. did not account for funding risk created by a mismatch between the timing of the hedge cash flows and the contract cash flows. 137.044%.

reducing both legal and credit risk.47 C.crisis that was exacerbated by their size of their futures positions in relation to the liquidity of the market. Master netting agreements have been used effectively to reduce the occurrence of contract disputes. PMT =0. Enforceability of contract Answer: D Most lawsuits involving derivatives are the result of the enforceability of the provisions of the derivatives contract. 95. D. or operational controls.75 Answer: C Step 1.and 3-year bonds.5/2），CPT PV =-89. I/Y =2. Breach of fiduciary duty.year bonds=5%+0.75 respectively.0%. B. N =4. compute semiannual zero rates for the 1. I/Y =3*2=6% 140. Given a one-year and a three-year zero coupon bond price of 95. 1-year bond: FV = I00. PV =-83. N = 2.5008*2=5. Broker size C.%)/2=0.18， CPT 3-year bond: FV = I00. 139. use linear interpolation on zero rates for 2. PMT =0. compute 2-year bond price FV = I00.75， CPT Step 2.18 and 83. .18 B.72 D.72 I/Y =2. fraud. what should be the price of a two year zero coupon bond using linear interpolation on zero rates (semiannual compounding)? A. PMT =0.5%=5. 89. standardized language that minimizes the chances of mistakes or misunderstandings.75（5. Central themes were not diversification. 83. These contracts contain carefully-formulated. N = 6.5%，zero rates for 2.5% Step3. 89.year bond (6%-5. The type of derivative. PV =-95. Lawsuits about derivatives to major corporations are most likely to involve which of the following issues? A.