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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

B.275.50. C. N = 3x2 = 6.52=USD131967 18. A. PV = -98. C.calculate value of swap Vswap (USD) = BUSD − ( So × BCAD ) （ So = spot rate in USD per CAD） =9631182-14438805/1.calculate value of CAD-denominated bond BCAD=565200e-0. 8 percent semiannual coupon bond with $100 par value currently yields 8. Round to the nearest dollar. A 3-year. $131.7%.25.2%.08/2 x 100 = 4. PMT = 0.calculate value of USD-denominated bond: BUSD = 275.05*3=CAD14438805 565200=15000000*3.4%. FV = 100. and the correlation between dollar yen and dollar peso is 0.04×3 = USD9.75% Step 2. 16.000e −0.000e −0. $99.05*2+15565200e-0.the value of the swap in USD if interest rates in Canada are 5% and in the United States are 4%.000e −0.05*1+565200e-0. $145. $98.70. 19. $95. .1 year × e − ( r×t ) ) + ( PMT f . Assume continuous compounding. What would be the price of the bond? A. $119.75% Step 3. D.818 Answer: C Vswap (USD) = BUSD − ( So × BGBP ) （ So = spot rate in USD per GBP） B fixed = ( PMT f . Correct answer:C I/Y = 8. B.50/2 = 4.70. 21. $152.000 B. 19.1%. 23.967 D. the best estimate of the yen peso volatility is: A.3 year ) × e − ( r×t ) ] Step 1.50 percent.182 275000 = 10000000 * 2. D.04×2 + 10.04×1 + 275.24. $127.49.693 C.631.25.2 year × e − ( r×t ) ) + [(notional +PMT f . Given that the dollar yen volatility is 12 percent and dollar peso volatility is 15 percent.

Therefore.00)1/2 = 3. 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.Correct answer: A Here we use the expression that: (Vol_A/B)^2 = (Vol_A)^2 + (Vol_B)^2 .16 bps B.5 = 16. Incorrect. C.2 x Correlation x (Vol_A) x (Vol_B). Tracking error is the standard deviation of the difference between the return of the managed portfolio and the benchmark portfolio.15^2 . 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. Incorrect. This solution incorrectly sets the tracking error equal to the average difference between the return of the managed portfolio and the benchmark portfolio. 21. yen/peso volatility = (0.00 So. 2. A lower bound on its price is the price of a 3-year European put option.7%. Incorrect. 2 bps C. Tracking error is the standard deviation of the difference between the return of the managed portfolio and the benchmark portfolio. A lower bound on its price is the price of a 3-year American put option. 3. Tracking error is the standard deviation of the difference between the return of the managed portfolio and the benchmark portfolio.00 E [(RP . B.25 x 0. D. Correct. .15)^0. tracking error = σ ep and E [RP .4. 20. II.2 x 0. Tracking error is the standard deviation of the difference between the return of the managed portfolio and the benchmark portfolio.16 bps. 10 bps D. 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.12 x 0.00 . Which of the following statements are true with regard to a 3-year Bermuda put option? I.RB] = (4 + (-2) + 6 + 0) / 4 = 2. TE = (14.12^2 + 0.39 bps Answer: A A.

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

It encourages trader to select positions with high estimated risks. 2. B. 26. -1. C.96. The estimated loss distribution likely overtakes bank Z’s real risk because many incidences in the past were likely “one off.01 significance level the critical Z value is 2.65. 2. after confirming that they were complete records of its historical losses and that its losses could be approximated by a uniform distribution. The estimated loss distribution likely accurately represents Bank Z’s real risk because the records are accurate and complete. 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。 25.58. which leads to an overestimation of the VaR limits. which of the following statements is correct? A. Based on that decision.33. B. Convexity increases with the square of maturity. which leads to an underestimation of the VaR limits.Convexity is inversely related to yield and is directly related to the coupon rate on a bond. it decided against using external loss data to estimate its loss distribution. Convexity is the second derivative of price with respect to yield. Why should your bank be careful in tying compensation to the VaR of each trader? A. D.200 and the standard deviation of the population is $400. which leads to an overestimation of the VaR limits. 24. He finds that the average spending by 16 tourists is $2. C. a medium-size bank.000 with a 1 percent level of significance. Correct answer: C Since this is a one-tailed test with a 0. An analyst wants to test whether the mean spending by tourists coming to a holiday resort is equal to or less than $2. uses only operational loss data from internal records to model its loss distribution from operational risk events. To control risk-taking by traders. The critical value of the Z statistic for this study is: A. Bank Z. which leads to an underestimation of the VaR limits. B. It encourages trader to select positions with low estimated risks.33.” . which means that convexity measures the rate of change in duration. The bank reviewed its records. 1. your bank links trader compensation with their compliance with imposed VaR limits on their trading book. It encourages trader to select positions with low estimated risks. It encourages trader to select positions with high estimated risks. and. D.

8 years and a convexity of 130. Your bank has chosen to use the advanced Internal Rating Based Approach under Basel II.0. 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。 27.75 and has an effective duration of 9. The bank indicates to some investors that if credit quality of the loans declines significantly. The bank sells the loans to an SPV that issues securities. B. The bank sells the loans to an SPV and keeps an equity piece representing 8% of the value of the loans. You are concerned about whether the securitization will provide you with regulatory capital relief. The SPV sells protection to the bank through a credit default swap on the loans in the bank’s portfolio.C. These securities issued are then sold to third-party investors. The bank forgoes the securitization and buys a credit default swap on the loans from an AAA-rated provider. All proceeds from selling these securities are invested in a portfolio of equities. The bank sets up an Special Purpose Vehicle (SPV) that issues securities. but specifies that the bank is unwilling to provide a contractual guarantee. D. What is the price of the bond if the yield falls by 150 basis points? . A 12-year. The bank is contemplating a large securitization of low-quality loans that are currently on its balance sheet. D. 8 percent semiannual coupon bond with $100 par value currently trades at $78. C. 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 will try to help the investors. The estimated loss distribution likely understates Bank Z’s real risk because the bank has not experienced a huge loss. Which one of the following approaches would be the most efficient in reducing the bank’s regulatory capital? A. 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.

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. Moments II. A $10 million position in distressed securities B.95/euro.48 29.5)(130)(-0. 31. Which of the below are methods to estimate parameters of operational loss distributions? I. $95.6% There are two payments left in the swap (the first one in a year) and the current exchange rate is $0.5m swap coupon 7.1616) = $91. $91. A $100 million position is more illiquid than a $10 million position in the same instrument.015)]+[(0. A. C. Correct answer ：C Percentage price change = [(-) (effective duration)( Δy)]+[(1/2)(convexity)( Δy)2] = [(-)(9.17. $86.2% 6.43.16 Estimated price = 78.015)2] = 16.A. D. Calculate the dollar value of the swap for the euro payer. B.16 299 $. probability-weighted moments. B. Maximum likelihood Answer: B The parameters of loss distributions can be estimated by moments. D. and so have more intrinsic liquidity. II and III IV III and IV III. $67. Distressed securities trade much less than Treasury bonds. IV. .75(1+0. C. . You are given the following specification of the currency swap: notional principal $10m euro 10.2% 3. A. A $100 million position in distressed securities D. or with maximum likelihood techniques 30.48. Probability-weighted moments Econometric I and III I. Asset liquidity risk is most pronounced for A.80)(-0.8% current market yield 4. A $10 million position in Treasury bonds C.47.

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.S.70 % 1.19 344 $.70% 23.39% 2.21 283 $.71% 11. C.00% 3.000 / 1. Treasury bond B.214. . Treasury.17 344 $.29% 2.S. Correct answer: A The swap is equivalent to long position in dollar denominated bond and short position in euro denominated bond.02% 40. .95) = .60 % 35.80% 5.299. When interest rates fall. the effective duration of these securities decreases because borrowers will refinance mortgages at lower rates (putting the loans back to the investors).((714.90% Risk free 4.00% 17. 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. Treasury.042^2) . have an embedded option allowing borrowers to repay the loan at any time.17% 16.10% Asset 2 8. unlike Treasuries or plain vanilla corporate bonds. When interest rates fall.10% 13.000 / 1.16.48% 1.43% 2. 33.50% 21.00 % . It is similar to a U.00% 14. . resulting in an increase in the effective duration of the loans.000 / 1.70% Asset 4 6. borrowers will hold on to mortgages longer than they otherwise would. D.93% 2.99% 4.00% 38.41% 1.036^2) x 0.S. How would you describe the typical price behavior of a low premium mortgage pass-through security? A.000 / 1. It is similar to a plain vanilla corporate bond C. Answer: C Mortgage pass-through securities.55% 20.B. 32.86% 22. its price increase would exceed that of a comparable duration U.036 + 11. but when interest rates increase.042 + 10. D.90% 13.92% 5.00% 23.39% 1. When rates fail.41% 0. This is reflected in the price/yield relationship as negative convexity.40% 0.720.20% 44. (720.00% Asset 3 6.44% 2.60% 6. its price increase would lag that of a comparable duration U.

e.5%. Increase the allocations to assets 2 and 3 and decrease the allocations to assets 1 and 4. 34.Which of the following the recommendations will improve the risk/return tradeoff of the portfolio? A. $0. Thus the probability of default = cumulative probability of standard normal distribution below -1.5%. Correct answer: A The distance between the current value of the assets and the book value of the liabilities = 195.5%. Increase the allocations to assets 1 and 4 and decrease the allocations to assets 2 and 3. The expected payoff on the operation is A. Assets Liabilities Market value 195 185 Book value 180 165 Standard deviation 25 15 of returns A. 11. 57. Incorrect. Asset 4 should be increased since it has the highest marginal return-to-marginal risk ratio. $0 since markets are efficient D.165 = 30. B. C. Symmetrically distributed Answer: B . 11. Increase the allocations to assets 1 and 2 and decrease the allocations to assets 3 and 4.4%. C. B. D. Incorrect. i. 34. 35. 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. Using the standard deviations in the return on assets this distance = 30 / 25 = 1. Therefore. C. this option is the only recommendation that will move the ratios in the right direction. Asset 4 should be increased since it has the highest marginal return-to-marginal risk ratio. $5 million B. Correct.2 standard deviations. Suppose the payoff from a merger arbitrage operation is $5 million if successful. B. Incorrect. D. Increase the allocations to assets 1 and 3 and decrease the allocations to assets 2 and 4. 27. Asset 3 should be decreased since it has the lowest marginal return-to-marginal risk ratio. Answer: D A.2. The probability of success is 83%.75 million C. D.9%. Calculate the estimated default frequency (EDF) for a KMV credit risk model using the data given below (all figures in millions). -$20 million if not.

80)/(100 . A particular operational risk event is estimated to occur once in 200 years for an institution. the 99% confidence level VaR = 15.000 C.333 B. Correct answer: C Liquidity risk is the most prominent form of risk when emerging markets securities are involved. D.8. with equal probability. 36.1.33.65 = 21. As a risk manager.000 D. or 83% × $5 + 17% × (-$20) = $4. 10. 18. your main concern will be that: A. C.500 million. A.65 while 99% confidence level requires a multiple of 2. 37. HKD 133. If the loss is over HKD 80.2.15 .The expected payoff is the sum of probabilities times the payoff in each state of the world. US yields would fly up too soon. CDS writer may go bankrupt. apart from basis risk.25) or 20/75. liquidity in US Treasuries will dry up. HKD 120. If the confidence level is raised to 99% (assuming a one-tailed normal distribution) the new value of VaR will be closest to: A. the expected loss (being equally probable) would be HKD 90 .40 = $0. The VaR of a portfolio at a 95% confidence level is 15. HKD 106.75.$3.2. leaving you uncovered. Your firm does market direction neutral arbitrage in the spread between US Treasuries and Argentina bonds.33 / 1. 21. Correct answer: D 95% confidence level requires a volatility multiple (alpha) of 1. Since VaR is directly proportional to this multiple.667 Answer: C The range of losses is HKD 25 million to HKD 100 million. determine the fair price of insurance to protect the institution against a loss of over HKD 80 million for this particular operational risk.5 38. B. The probability of a loss being greater than HKD 80 million is (100 . Then he wants to increase the size of position to $1. HKD 90. D.5. 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). 15. liquidity in Argentina bonds will dry up. B. Based on this information.2 x 2. Note that the distribution is highly asymmetric. C. Your trader plans to buy default swaps on Argentina. with a small probability of a large loss.

It uses incorrect variables and/or formula to calculate concentration limits. D. The LGD rates for the energy and construction sectors are. In light of the dramatic losses to the funds.5 million USD 15.5 million Answer: A A. Concentration Limit = Capital x (loss limit on capital / loss rate of the sector) Concentration Limit for Energy = USD 500 million x (0. the maximum permitted loan amount to the energy and construction sectors will be: Energy Construction A. iii. A ii.000 2 ⎝ ⎠ ⎝ 75 ⎠ ⎝ 200 ⎠ 39. In august 2006.5% of its capital. USD 13.million: ⎛ 100 million+80 million ⎞ ⎛ 20 ⎞ ⎛ 1 ⎞ Expected value of loss = ⎜ ⎟⎜ ⎟⎜ ⎟ = HKD120. ii. Correct. trading.667 Concentration Limit for Constr. the hedge fund Amaranth had large calendar spread positions in natural gas. wants to limit its losses in the energy sector to 6% and in the construction sector to 4. USD 30. = USD 500 million x (0.142.0 million USD 22. Using Riskmetrics-type VaR instead of a historical VaR to estimate its risk exposures.45) = USD 66. USD 37. Assume Satya Bank.045 / 0. C. which of the following risk management policies could have better captured the extent of the risks that sank Amaranth? i. and iv C i and iii only D None of the changes would have helped Answer: C C Amaranth 事件常识 40.06 / 0. 45% and 70%. Incorrect. its risk management policies came under scrutiny. and iv only B i.1 million B. Incorrect.666. respectively. having a capital of USD 500 million. . and position limits unchanged. ii. USD 66. Keeping the fund’s policies. Incorrect.8 million C.70) = USD 32.8 million D. implementing stress tests to quantify possible losses if it had to liquidate large positions. iv. iii.5 million USD77. Including operational VaR to its risk measurement. It uses incorrect variables and/or formula to calculate concentration limits. iii. It uses incorrect variables and/or formula to calculate concentration limits. Adding counterparty risk to its risk measurement.7 million USD 32. such spread positions would have had limited risk.857 B. If Satya Bank wants to strictly adhere to its concentration limit policy. which led to Amaranth’s collapse in September 2006. According to historical VaR models.

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. long-futures position.41.2207. credit risk is a decreasing function of risk-free interest rate 42.2156. 44. it is a: A. it is a long futures position. risk-free interest rate. B. The formula is: 1. Error-correction model tree design. C. basis trade. Bernard and Schwartz simulation. 43.04)(0. Correct answer:D When an investor is obligated to buy the underlying asset in a futures position. $1. standard deviation of asset returns. D. Correct answer: B In the context of the analytical model.2144.25) = $1. B. D. time to maturity of debt. using the continuous time futures pricing model. C.2217e(0. B. C. . hedged-futures position. Credit risk is NOT an increasing function of: A. Cox-Ingersoll-Ross tree design.2235. $1.2217. Correct answer:B Monte Carlo simulation techniques have been used to deal with problems associated with prepayment path dependency.02-0. $1. C. Monte Carlo simulation. $1. B. When an investor is obligated to buy the underlying asset in a futures position.2156. Which of the following is often used to avoid the problems associated with prepayment path dependency? A. Prepayment models are complex and rely upon a number of different methods to circumvent the problem of prepayment path dependency. what is the price of a three-month futures contract? A. level of debt. short-futures position. If the current exchange rate between the euro and dollar is 1=US$1. D. Correct answer: B.

Answer C) is the SR of the portfolio. In commodity trading.35. So the IR of the portfolio is (10% . and (8% 3%)/14% = 0. the exchange removes any daily losses from a trader’ account and s adds any gains to the trader’s account.98 × 20% × 14% . This is positive. The risk-free rate is 3%.011) = 0.57%. 3. marking to market.43. not the IR. what is the daily portfolio VAR (2. The IR is 0.53% Bonds: VAR(2. The correlation between the two is 0.0353 = 3. Which of the following statements is correct? A. the SR of the portfolio is lower than that of the benchmark. Marking to market is when any loss for the day is deducted from the trader’s account. B.16% .35 D.29.87% .05%.36. Answer a) is incorrect. Correct answer:D. 2. The portfolio has negative IR C. so answer B) is incorrect.45.1 percent. B. and any gains are added to the account.96(0. calculate the daily percentage VAR for stocks and corporate bonds: Stocks: VAR(2.5% ? σ = 1. which is 0. 47. If the portfolio manager plans to allocate 35 percent of the portfolio to corporate bonds and the rest to stocks. initial margin.3%)/20% = 0. C. 2.87% = 0.8%)/6. This process is known as: A. variation margin. 2.96(0.98. The TEV is the square root of 20% 2 + 14% 2 + 2 × 0.00472 = 6.5 percent) on a percentage basis? A. 46. The benchmark returns 8% with risk of 14%. A portfolio manager is constructing a portfolio of stocks and corporate bonds. The portfolio has higher SR than the benchmark B. and estimates a correlation coefficient of returns of 0.71%. Portfolio manager returns 10% with a volatility of 20%.8 percent and 1. respectively.5%)Percentage Basis = z2.018) = 0. To safeguard the clearinghouse. D.29 Answer: D The Sharpe ratios of the portfolio and benchmark are (10% . So. maintenance margin.5%)Percentage Basis = z2. C. D.5% ? σ = 1.27%. commodity exchanges require traders to settle their accounts on a daily basis.0216 = 2. The IR is 0. so it is incorrect. The portfolio manager has estimated that stocks and corporate bond returns have daily standard deviations of 1. Correct answer : A First. respectively.

71% 48.65)(0. Which of the following is the appropriate direction of his position and the source of basis risk that may impact the farmer? A.0271 = 2. $35.83.498 A. correlation. Long futures.000. A corn grower is concerned that the price he can get from the field in mid-September will be less than he has forecasted. the value for this swap at inception is closest to: A. the value of a call option = Spot price x N(d1) . rollover. What is the value of the European call option given below using the Black-Scholes model? Spot rate = 120 Strike price = 125 Risk.000.750. $8. which is the current market rate. Correct answer: C Using the Black-Scholes model. he will be exposed to basis risk due to a necessary rollover in his position.Next calculate the portfolio VAR using weights of 35% for bonds and 65% for stocks: [0. C. Long futures.5 = 0. correlation. The source of basis risk for this farmer arises from the fact that his contract and harvest dates do not perfectly match.000.000. B. $0.03532) + 0.554 N(d2) = 0. 49. As interest rates move and payments take place. 4. Correct answer:A The initial value of a swap is always zero.000. 6.0216)(0. ＊The fixed component of the swap is 7%.000. Short futures.652(0.23.35)(0. D. To protect himself from price declines.43)]0. The best available futures contract he can find is for August delivery.67. If the current risk-free rate is 4 percent. Correct answer : C The farmer needs to be short the futures contracts.352(0. C.0353)(0. As a result. ＊The floating component of the swap is LIBOR + 200bps. the value of the swap will change for both parties. the farmer has decided to hedge.69. B. 50.Strike . B.000.free rate = 8% Time to expiration = 0.02162) + 2(0. Short futures. 1. C. $500. D.5 years N(d1) = 0. 11. rollover. D. Two banks enter into a 1-year plain vanilla interest-rate swap with the following terms: ＊Notional principal is $500.

D. C. D. A stock can be replicated using any at the money call and put options and a bond. So the fourth security can be synthetically replicated using the remaining three. 51. 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. they still have time value prior to maturity. D. put.2 million. . a put option is worth the difference between the stock price and the strike price. C. A stock can be replicated using any call option. 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. the ability to avoid running out of cash. 53. 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. The remaining statements are true.671. raise debt without moving the market.554 .125 x exp(0. No arbitrage requires that using any three of the four instruments (stock. The value of an option is its time value plus its intrinsic value. $1. meet financial obligations as they arise.7 million. If the stock price is lower than the strike price at expiration. out-of-the-money options have no value. meet debt covenants. Assuming that the portfolio values are normally distributed. 52. Which of the following best explains put-call parity? A. Which statement about option valuation is least accurate? A. C. Balance sheet liquidity refers to the ability to: A. B.08 x 0. bond) the fourth can be synthetically replicated. 54. The buyer of a call option contract can never lose more than the initial premium. call. Correct answer: B While out-of-the-money options have no intrinsic value.498 = 6.price x exp(-Risk-free rate x Time to expiration) x N(d2) = 120 x 0. B. B.e.5) x 0. marketable securities and exiting credit lines. Correct answer: C Balance sheet liquidity refers to the ability to meet cash needs with the available cash. put option and bond. A portfolio has a mean value of $100 million and a daily standard deviation of $19 million. B. i. Prior to maturity. -$31.

A 3-month call with a strike of $42 has a premium of $2. A security sells for $40. As the number of periods in the binomial options-pricing model is increased toward infinity.e.645 standard deviations below the mean. $30.18. i. $1. Which of the following statements regarding the Black-Scholes-Merton option-pricing model is TRUE? A. $3.03 × 0. C. C. it converges to the Black-Scholes-Merton option-pricing model.18 57. What is the value of the put according to put-call parity? A. Which. if any.C. Correct answer: C Given that the daily standard deviation is $19 million. Bond C carries an S&P rating of BBB and a Moody’s rating of Baa. B. above $30.49 + 42 e –0.1 million. D. D. $6. 56. $4.45. B. 55. The Black-Scholes-Merton option-pricing model is the discrete time equivalent of the binomial option-pricing model. Given that the returns are normally distributed. it converges to the Black-Scholes-Merton option-pricing model. Correct answer:B p = c + X – S = 2. None of the above. the standard deviation over 5 days = $19 million x (5/1)^0.5 = $42. $57. D.49. B.03. Your investment guidelines require that any bond you invest in carry an investment grade rating from at least two recognized bond rating agencies.5 million. You are considering an investment in one of three different bonds. Bond B carries an S&P rating of BBB and a Moody’s rating of Ba.89.1 million. D. Correct answer: c Explain: The lowest investment-grade ratings are BBB and Baa. Bond A carries an S&P rating of BB and a Moody’s rating of Baa. 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. As the periods in the binomial option-pricing model are lengthened. of the bonds listed below would meet your investment guidelines? A.25 – 40 = $4. Correct answer: A .49 million. C. we know that 95% of the outcomes will be above 1. The risk-free rate is 3 percent.

4. C.25 percent. The continuously compounded risk-free rate is 2.6565.9] / [1. B. 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.5656. 2. Correct answer:A The question describes the process for finding the expected volatility implied by the market price of the option. we have found the: A.6655. 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. market volatility. A stock that is currently trading at $50 and can either move to $55 or $45 over the next 6-month period. option volatility.5566. B.0.5% Correct answer: d . p. d = 0. 2.0. D. What is the risk-neutral probability of an up movement? A.5566 60. can be calculated as . C.5% C. 0. In this case. 0.9] = . 58.1 . 0. 59. implied volatility.0% B. r = 0. 0.0% D.0225. Correct answer:C: The risk-neutral probability.1.0225*(6/12)] . A.As the option period is divided into more/shorter periods in the binomial option-pricing model. calculate the two-period cumulative probability of default for a B credit. D. which makes p equal to [e[0. historical volatility. Given the following ratings transition matrix.9. u = 1. 4.

C.25 = 0. 61.045. with probability of 0. The country’s willingness and its ability to pay must be analyzed. however. Scenario two: B could go to A then D. Correct Answer: a Explain: In the absence of transaction costs or fees. B. and absorbs the last loss on the structure.Explain: Scenario one: B can go into default the first year. the default probability for the immediate quarter is likely to be lower than the average of 0. With costs. with probability of 0. C.2% over a period of one year.02.90 × 0. 62. . C. 0.(1 . However. 0. the CBO yield will be slightly less.2%)^0. the yield on the underlying portfolio should be equal to the weighted average of the yields on the different tranches. with probability of 0.02 = 0. The equity tranche does not absorb the first losses of the structure.50%. 0. the senior tranche is typically rated AAA. The super senior tranche has expected loss rate higher than the junior tranche. What is the most significant difference to consider when assessing the creditworthiness of a country rather than a company? A.03 × 0.007. Based on this information the default probability over the next quarter will be CLOSEST to: A. A CBO (collateralized bond obligation) consists of several tranches of notes from a repackaging of corporate bonds. Otherwise. BBB-rated firms have default probability of 0.00 = 0. the marginal rate of default for high credits tends to rise with the time horizon. It is more costly to do due diligence on a country rather than on a company. 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. So.0005.05%.05 × 0. The super senior tranche is typically rated below AAA and sold to bond investors. Correct answer: A Assuming a constant marginal default probability. B.(1 Default probability over a year)^(1/4) = 1 . Scenario three: B could go to B then D. D. Scenario four: B could go to C then D.05%. The total is 0.45%.14 = 0.0. has the lowest loss rate of all tranches. with probability of 0. B.018. ranging from equity to super senior. Which of the following is generally true of these structures? A. D. 1. Financial data on a country is often available only with long lags. 63.50%. Default probability over a quarter = 1 .

102. D.02%. 2. 22. LGD = (2.102. Cubic SPLINE estimation. There is no enforcement mechanism for payment to creditors such as for private companies.01^5) / 10.50% C. 21.00% .00% D. None of the above. Hence.33% B. C. 20. Correct answer: A We need to find the present value recovery at the time of Scheduled Maturity. Correct answer: a Explain: Countries cannot be forced into bankruptcy. The concentration limit for this particular borrower is closest to: A. Answer: B Explanation: Cubic SPLINE estimation would make little sense here. C. 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%. D.000 = 20. A country is often unwilling to disclose sensitive financial information. B. we can expect to recover 2. Recent history has shown that a country can simply decide to renege on its debt. Your analysis shows that if a risky bond defaults.00%.D. 10. Nonparametric kernel estimation. B. 8. Which of the following is not a commonly used method for generating a recovery rate function? A.000 of face value.09%.02 / 1. 66. Assume the recovery rate follows a beta distribution. 25. willingness to pay is a major factor in assessing the creditworthiness of a country. What is the LGD ratio for this debt? A. after a period of five years from the scheduled maturity date of the bond? The yield curve for risk-free debt is flat at 1.02 per 10. 64. So.00%.00% Answer: C 5%/50%=10% 65. Estimate conditional densities with generalized method of moments.

Investors can borrow and lend at the same risk-free rate. hence. C. 13.8%. D.9%. All of the following are assumptions of the Capital Asset Pricing Model EXCEPT: A. 12. Which of the following strategies will be the best for this investor? A. 12. An at-the-money strip. 70. I and IV. 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. D. The estimated default frequency in KMV model are calculated using: I. 14. I and II. B. An at-the money strap. B. Each investor seeks to maximize the expected utility of wealth at the end of that investor’s horizon.5%. bond spreads. with an average number of defaults in the year equal to 7. III. The time horizons of investors are normally distributed. Correct answer: D Probability of three defaults = [7^6 x exp(-7)] / fact(6) = [117649 x 0.67. 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. D. This means that the distribution of the horizons is not normal because normality implies a bell-shaped curve distribution. What is the probability that there will be 6 defaults over the next year? A. asset volatilities. II. C. A. B. A protective put.1%. 68. Investors have the same expectations concerning returns. balance sheet items IV. C. Monte Carlo simulation.9%. B. dispersion. . 69. Answer: D The CAPM assumes that investors all have the same horizon (as well as expectations). A covered call. which would have a positive variance and. A credit manager discovers that the defaults by sub-investment grade clients of his bank follow a Poisson distribution.000912] / 720 = 14.

III. If the mean P/E of 30 stocks in a certain industrial sector is 18 and the sample standard deviation is 3. C.5 / 30^0. targeting company B. 72. Which of the following methods can be used to measure corporate "Cash-Flow at Risk"? I. Correct answer: D All these methods can be alternatively used to measure corporate Cash-Flow at Risk 74. respectively. $30 B. 0. III and IV.34. A hedge fund takes a long position in company B hedged with A's stock. C.64. II and III. 1.56.5 = 3.C. I and II. 0. II. Correct answer: C The estimated default frequency in KMV model is calculated using balance sheet items and the standard deviation of the assets. Correct answer: C Standard error of the mean = s / n^0. $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. Which of the following statements regarding the beta distribution used in the modeling of recovery functions is FALSE? . the prices move to $120 and $60. II and III. D. Just after the announcement. standard error of the mean is CLOSEST to: A. I. I and III.5. Monte Carlo Simulation. After the acquisition goes through. A major acquisition has just been announced. $10 D. Delta Normal. $20 C. the prices of A and B are $50 and $90. B. 73. II and III. The bid from Company A is an exchange offer with a ratio of 2. the gain is A. D. D. B.12.5 = 0.64. For each share of B. 0. 71. A. Historical Simulation. The payoff is ($120-$90)-2($60-$50)=$30-$20=$10.

5%.probability of default) = (1 + 2%) / (1 1%) . or convex. D. 1.A. The beta distribution only requires two inputs for calibration. B. Because they are exposed to changes in the hedge ratio. If the recovery rate in the case of default is zero. Calculate the 1-year forward rate. what is the continuous compounded yield on AAA 1-year zero? A.01%. The beta distribution does not fit bimodal recovery functions well. 3. 77. The beta distribution does not fit bimodal recovery functions well. The beta distribution can be skewed. D. 3.5207 D.5000. so they are said to be long vega. The 1-year US dollar interest rate is 3% and the 1-year Canadian dollar interest rate is 4.03%. short gamma and long vega Answer: C Convertible arbitrage managers hedge their equity exposure by shorting stocks using the delta hedge ratio. B.5218 C.5199 Answer: B . C. 2. 1. The current USD/CAD spot exchange rate is 1.03%. The beta distribution is a nonparametric distribution. A.98%. cumulative probability of default on AAA bonds is 1%. In addition. Correct answer: D AAA 1-year zero rate = (1 + default-free rate) / (1 . 1. 1. 75. They are also exposed to changes in the price volatility of the stock underlying the option embedded in the convertible security. short gamma and short vega C. Hedge fund managers following a convertible arbitrage strategy are said to be: A. long gamma and short vega B. or convex. long gamma and long vega D. 3. Answer: C The beta distribution is a parametric distribution.5225 B. Suppose that the yield on 1-year Treasury zero is 2% and the constant. C. it can be skewed.1 = 3. symmetric. 76. they are said to be long gamma. and only requires two inputs for calibration.00%. symmetric.

and iv only Correct answer: C iii 不对，资本超过 regulatory capital 不是无效的表现 79. you have to assume annual compounding.500 × answer 1. and their shareholders would benefit if they used all of their excess capital to repurchase shares or increase dividends. is lower than that of the securities issued. iii. Economics capital can be used to validate a firm’s regulatory capital requirement against its own assessment of the risks it is running. respectively. may be higher or lower than that of the securities issued depending on the number of tranches. ii. 78. Correct answer: B An issuer (SPV) needs to provide for a significantly higher collateral than the securities issued. D.5218 . A i. iv. B. Economic capital is designed to provide a cushion against unexpected losses at a specified confidence level over a set time horizon.03 = 1. you’ll get an 1.500 × e 0.In order to get the answer reported in GARP’s answer key.045 = 1. and iii only B iii and iv only C i and iv only D i. 80. economic capital models cannot help regulators in setting regulatory capital requirements. is same as that of the securities issued. Our advice is to be prepared for this type of ambiguity on the FRM exam. ii. If you use continuous compounding. A hedge fund with $100 million in equity is long $200 million in some stocks and short $150 million in other stocks.5227 . .03 which is actually closer to choice “a”: F = 1.045−0. Firms whose capital exceeds their required regulatory capital are firms that employ their capital inefficiently. Which of the following statements regarding economic capital are true? i. Since regulatory capital models and economic capital models have different objectives. is higher than that of the securities issued. C. 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. The gross leverage and net leverage are. iii. The weighted average rating of the collateral pool used to structure collateralized bond obligations: A. even though the question doesn’t specifically state that: F = 1.

The corporate bond could be upgraded so that it would have a higher rating than Malaysian sovereign debt. All of the above Correct Answer: a Explain: Part I.5 3. 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 total return swap on a loan portfolio III. Which of the following is a type of credit derivative? I. The net leverage is (200 . I. II and III only C. A put option on a corporate bond II. II only D. A note that pays an enhanced yield in the case of a bond downgrade IV. and III B. C. II.5 Answer: C The gross leverage is (200 + 150)/100 = 3. D. An option on a T-bond has no credit component. B. D.150)/100 = 0. B.5. 82.5. 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.5 3. Wallace. A put option on an off-the-run Treasury bond A.5 and 1. A short position in a 5-year U.0 and 0. but it is highly unlikely. 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 are correct. normally distributed with a constant . Answer: A Sovereign debt is typically rated higher than corporate debt in the same country. 81. He is concerned about the risk of his position. II. Consider a swap contract that has just been initiated with a term to maturity of 10 years. Which of the following statements concerning the risk of his position is incorrect? A.5 2.S.5 and 0.0 and 1. an emerging market bond trader.A. 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. parallel. C. 83. 2. is holding a 5-year USD Malaysian corporate bond in his book.

3. None of the above. A five-year U. B. 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.volatility. While determining initial margin at 99% 1-day VAR. the interest rate volatility of the past crises needs to be ignored as the regime has clearly shifted. this volatility is currently low. 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. However. it will give him a return very close to the return of the following position: A. Correct answer: C An unduly low margin would bankrupt the clearing house. B. A five-year IBM credit default swap on which he receives fixed and makes a payment in the event of default C. C. C. the interest rate volatility of the past crises needs to be accounted if these events have occurred in the recent past and could recur. while an unduly high margin . D. The decision to include or exclude high volatility samples can then be made on a real-time basis. The National Stock Exchange of India introduced bond futures trading in 2003. Correct answer: B If the DV01 is proportional to its term to maturity. the potential exposure of the swap will peak after: A.3 years.S.6 years. especially during international currency crises.S. Which of the following positions would you agree the most? A. If an investor holds a five-year IBM bond. 85. 84.5 years. While determining initial margin at 99% 1-day VAR. A five-year IBM credit default swap on which he pays fixed and receives a payment in the event of default B.7 years. interest rate volatility in India had been very high. 5. 6. the potential exposure peaks after one third of the initial life of the contract. We need to have an additional factor measuring (and possibly predicting) pressure on currency. In the past. A five-year U. 2. D.

Correct answer: B The credit market has enough issuers. The best compromise would be statement C. When choosing a hedging approach. Answer: B A. Need to maintain client relationship. B. . Illiquidity of the underlying. The firm has decided to raise much needed funds for renovation by securitizing these receivables. 88. Incorrect. static replication using an exchange-traded product. D. D. 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. C. because the need for rebalancing increases the chance of mishaps in implementing the strategy. where the clearing house can change the measurement of VAR. D. a product traded on an organized exchange. The bond issued in the securitization will be B1/B+ rated because the department store chain is rated B1/B+. The problem lies in the illiquidity of the papers. 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. dynamic replication using an exchange-traded product. 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.would kill trading interest. Serial correlations. A department store chain has a B1 rating from Moody’s and a B+ rating from S&P. C. 87. 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). B. an OTC product. Which of the following scenarios is the most likely outcome? A. you expect operational risks to be higher for: A. C. possible serial correlations in credit events and the need to accommodate clients. 86. Limited number of issuers. Which of the following in NOT an issue in the active risk management of a credit book? A. Answer: B Operational risks tend to be higher for dynamic replication using an exchange-traded product. Its balance sheet reflects a large number of receivables from shoppers who use the chain’s private label credit card. B.

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

IV. A mark-to-market model that cannot be understood by risk managers. uses variables based on roulette odds. Rounding estimation. Correct answer: B The range of the 95 percent confidence interval = mean ¡�1. B.5 = 35 ¡�1. . A mark-to-market model that relies on volatility figures prepared by the trader being monitored. we can say that the employees within the firm fall between: A. Correct answer:B The variance/covariance method relies on the assumption of normality. Historical. D. C. I and III. B.3 = between 31. C.0 and 50. uses randomly selected variables from future distributions.2 years.7 and 38. while a Monte Carlo simulation: A. 93.0 years. 33. A VaR model that has been prepared by an external contractor. B.historical simulation uses randomly selected variables from past distributions. 20.4 years. Correct answer: C.3 94. II. Assuming that the ages are normally distributed and using 95 percent confidence. 34. Monte Carlo simulation. III. Variance/covariance. A VaR model that does not allow for the adjustment of market correlations.3 years.96 x 15 / 80^0. Which of the following are examples of model risk? I. Which of the common methods of computing value at risk relies on the assumption of normality? A. uses a computer to generate random variables. A Monte Carlo simulation uses a computer to generate random variables from specified distributions. projects variables based on a priori principles. The mean age of the 80 employees in a company is 35 and the standard deviation is 15.5 = 35 ¡�3. B.8 and 36. D. 31. 92. D.96 x standard deviation / Number of employees^0.7 and 38. C. A. II and IV.6 and 35.

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

Individual responsible for committing to transaction should perform clearance and accounting functions. ab initio([拉](=from the beginning)从开始起 adv. I and II B. 99.160. it receives $50 million from the sale of securities. hence there is no netting 98. This is an example of: A. a reserve overdraft C. and the closing reserve account balance is $33 million.57. 315 Correct answer: C Step 1. In the afternoon.1160) + (69 57.150. III. Short positions in interest rate swaps.8)(1160 .100. ). A. IV. $64. An analyst observes that the closing price of a stock during a week as $55. Calculate the mean stock price = (55 + 43 + 58 + 64 + 69) / 5 = 57.190. Calculate the mean S&P level = (1.1160) + (64 . 45 B. lending of fed funds Answer: A The Fed allows banks to fund negative intra-day balances. borrowed reserves D.190) / 5 = 1.160. II.8. $58. the bank sends customer wires totaling $59 million.200 + 1. it poses a systemic risk as the Fed guarantees every wire that is sent through the system.8)(1190 1160)] / 5 = 252. 1. 252 D. 1. $69. $43. 1. Based on this data. While providing liquidity to the transaction settlement process.1160) + (43 57. price information should be obtained from external sources. A bank has an opening reserve account balance of $42 million.8)(1150 .57. Step 2.200. 108 C.57.D. Trade tickets need to be confirmed with the counterparty. Compensation scheme for trader should be directly linked to calendar revenues. During the morning. a daylight overdraft B. II and IV . Correct answer: A Short positions in options are obligations. To value current positions.8) (1100 .150 + 1.1160) + (58 . 1. On the corresponding days the S&P 500 closed at 1.100 + 1. 100. the covariance of the stock with the market is CLOSEST to: A. Which of the following strategies can contribute to minimizing operational risk? I. The covariance between the stock and S&P = [(55 . Step 3.8)(1200 .160 + 1.

C. Split loss is the loss affects more than one business line.400. 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. 101. D. B. and III Answer: B II and IV are both correct.400.750.000 = 1. 102. III and IV D.75%. D.000. each business line needs to be weighted. I.50%.65%. Answer:C Data capture bias is caused by a correlation between the probability of a loss been reported and the size of the loss. I is incorrect because it violates the separation of duties principle. 14. A spike in correlations B. Scale bias is caused by the possibility that larger firms could have large loss.400.97%. A drop in liquidity D. Which of the following reasons does not help explain the problems of LTCM in August and September 1998: A.000 = 14. Historical VAR of the portfolio at 5 percent probability level is $2. C. B. 12. Correct answer:B VAR = Portfolio Value [E(R)-z σ ]-br> -2. Portfolio A has total assets of $14 million and an expected return of 12. Data capture bias is caused by the fact that banks do not collect data below a given threshold.100.50 percent. 15.000. To deal with data capture bias. 103. II. In the approaches for weight data points in LDA model which one is incorrect？ A. the analysis can increase the probabilities of smaller losses and decrease the possibility of larger losses.C. Note that VAR value is always negative. An increase in interest rates on on-the-run Treasuries . 17. What is the portfolio’s standard deviation? A.125 -(1.97%. An increase in stock index volatilities C.000[0.000-23.65)(X)]-br> -2.000(X) X = 17.

After a recent trip to India. The Peyton Formika Fund is a global macro asset allocation hedge fund designed to provide low correlations with U. style drift would be a concern with a decrease. The R2 of the fund versus the global macro peer group has changed from 0.78 over the past 12 months. so that would not indicate style drift. Due to outstanding returns. treasury rates and Russian government rates resulted in significant losses. A significant drop in market liquidity forced LTCM to liquidate these highly-leveraged positions at substantial discounts. 104. . assets. 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. An increase in the spread between U. III. not an increase in the R-squared measure against the peer group. I and II only C. Excessive cash inflows which may be more money than the manager can sustain is also a potential indicator of style drift. The fund made a major shift in allocation by moving 40 percent of its holdings from Eastern European equities to Asian equities.S. notably through leverage. Also.S. James makes note of the following findings about the fund: I.72 to 0. Even though the initial position is small. 105. II and III only D. II and IV only B. 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. Which of James’ findings are indicators that the Peyton Formika Fund is at risk for style drift? A. Using leverage only for his Indian equity position would definitely be an indicator of style drift.Answer: D Increased volatility and higher correlations led to substantial losses in LTCM’s highly-leveraged portfolio. IV. assets in the fund have increased from $70 million to $430 million over the past 12 months. a 10 to 1 leverage ratio would significantly change the risk of the fund. The change in allocation from Eastern European equities to Asian equities is within the objectives of a global allocation fund. I. James Henry is preparing a presentation on the calculation of VAR for his supervisor. II. Dominic James is a fund of hedge funds manager that is analyzing the Peyton Formika Fund for signs of style drift.

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. B. 34% and 66%.Henry is having trouble， however. 42% and 58%. C. The demand of riskier assets. Absolute return. In this environment we would expect the demand for safer assets. choice D contains two asset classes which differ on the basis of risk. Correct answer: A The continuously compounded return is the most appropriate return calculation to use in estimating VAR. D. Long 5-year on the run US treasury C. the price of US treasuries will increase. Thus. 66% and 34%. Geometric mean return. D. and hence their prices. Which of the following portfolios would have suffered the greatest drop in value as a result of the Russian debt crisis in 1998? A. A portfolio contains two perfectly negatively correlated investments with volatilities of 5 percent and 7 percent. Using continuously compounded returns. 58% and 42%. Which of the following types of return calculations should Henry select in order to estimate VAR? A. We would see the prices of US corporates decline relative to US treasuries. Continuously compounded return. long US Low-grade corporate bonds. and hence their price would decline. Correct answer: A . 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. 107. to increase. The proportion of these two securities that would lead to the lowest risk are: A. determining which return calculation will maintain the distribution assumptions of a 1-day VAR when converting to a multiple-day VAR. Duration-matched portfolio. Simple return. Of the four choices. 106. B. Long-short market neutral US equity fund B. A flight-to-quality is a flow of funds from riskier to safer investments in times of uncertainty. short US treasuries Answer: D The Russian Crisis is an example of an environment in which there would be fight to quality. C.

5 = 39.154538 Step 4. I and III only .Since the investments are perfectly negatively correlated the volatility of the portfolio = (w1 x v1 . B. 108. giving shareholders an incentive to take on negative NPV projects.e. and -42.857% = -2%. Daiwa had a fixed income rogue doing unauthorized trades. LTCM was subject to operational risks like model risk. Allied Irish Bank involved a rogue trader making fx trades. C.857%)^2 = 0.35) / 35] Step 2. I. A. LTCM was an example of strategies that were deliberately undertaken and approved but that didn’t pay off. An analyst is studying a stock that is currently trading at $35. w1/w2 = v2/v1). The returns for the three scenarios given are: 42. and a 47 percent chance that the stock will trade at $20. Sumitomo D. D.857% [= (20 .857% + 20% x 20% + 47% x -42. excessive hedging by managers. Calculate volatility/standard deviation = 0. Allied Irish Bank C. Calculate expected price = 33% x 42. C.857% [= (50 . IV. Step 3. 20% [= (42 35) / 35]. excessive managerial focus on bondholders’ interests at shareholders’ expense. Calculate Variance = 33% x (-2% . II. a reduction in risk at bondholders’ expense. The costs that are usually associated with debt overhang include: I.857%)^2 + 20% x (-2% . 24%. Which of the following cases of losses was not the result of unauthorized or rogue trading? A. 110. Daiwa Answer: A A. Risk management activities can reduce the probability that a firm will experience a debt overhang in the future. D. 13%. III. 31%.42. What is the implied volatility of this stock price? A. a 20 percent probability that the stock will trade at $42. Long-Term Capital Management B. but the trades that led to the losses were not unauthorized. II. 109. B.w2 x v2). The analyst estimates that there is 33 percent probability that the stock will trade at $50 after one year.154538^0.35)/35]. and IV B. Sumitomo’s rogue trading in copper killed it. This can be reduced to zero by adjusting the amounts invested in the inverse of the ratios of the volatilities (i.31%.20%)^2 + 47% x (2% + 42. 39%. Correct answer: D Step 1.

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

C. not the probability. 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. Bank B lends $10 million to Company C for six months and receives $12 million worth of US Treasuries as collateral. II and IV II and IV I. The 6-month default probability of the Company C is 2 percent and the 6-month 99% VaR on the Treasuries is $2 million.2%. D. C. 114. 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. the probability of Bank B not recovering the full principal of the loan is most will be closest to: A. The bank purchases and writes options. but its options trading is insignificant in relation to its overall business activities. B. and III I. You are an analyst at Bank Alpha. IV. 0. D. 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. but its option trading is insignificant. II. Probability is measured by the net likelihood assessment. and its options trading is insignificant in relation to its overall business activities. 0. B. Which of the following criteria would your bank have to satisfy in order for it to use the simplified approach? A. Assuming that the performance of Company C is not affected by interest rates. C. III and IV Answer: B I is incorrect. operational strategic risk and external dependency risk. The bank solely purchases options. D. II is a correct. B. A.002%. The three components identified are operational failure risk. 2%.III. IV is correct. III is incorrect. Duration management is not part of strategic operational risk. 0. The bank purchases and writes options and has significant option trading. The bank writes options. C 115. .02%.

13%. Since the performance of Company C does not depend on interest rates. C. Reliance on overly complex pricing models. C. Therefore.02%. 118. B. B. D.13%.62%. this is a wager and so the contract is void.95^5) = 40.95^5) + 0. Which of the following is NOT one of the three traits common to past major financial shocks? A. A. Consider a portfolio of five equally-weighted bonds. D.0. In this situation. Answer: A The three common traits associated with past major financial shocks are: a triggering event leads to a sharp decline in asset prices. but a financial derivative. 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. the events of default by Company C and the extreme fall in the value of Treasures (more than $2 million) will be independent.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%). 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 . 117.0.95^5 x (1 . A lack of market liquidity. 17. None of the above. Insufficient Information. leverage concerns. Leverage concerns. 22. A sharp decline in asset prices due to a triggering event. B.50%. . the joint probability of both occurring together will be 2% x 1% = 0. this is an insurance contract. liquidity pressures. 116. As per UK law. 40. Each bond has default probability of 5% per annum and the defaults are independent of each other. 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. which of the following is correct? A. C. As per the State of NY Insurance Department. this is not an insurance contract. As per the State of NY Insurance Department. D.

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

200) of is value.600 (= $4. given the default. At what price will the trader receive a maintenance margin call? A. Thus the margin call would come when the contract lost $1. A In this process we estimate a threshold then calculate the conditional probability of . 121.89 .800 . $1.89 per bushel.000 = $1. C. the returns are normally distributed and the volatility in the market value of the swap is $40 million. I and II. A. II and III. the history of rating changes of the counterparty. II.800 at the outset and would receive a margin call if the value of this margin fell to $3. Over a horizon of one year. To compute expected default loss. I. 122.21.600 / 5. This translates in to a price level = Current price Dollar loss/Underlying quantity = $1. Correct answer: B The trader would have to post a margin of $4. D.57. A trader buys one wheat contract (underlying = 5. The initial margin on the contract is $4. 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.C. you need to know: I.25. I and III. the expected recovery rate. the expected default rate of the counterparty. B. C. Step 2: The VAR for the portfolio of derivatives is then calculated from the simulated outcomes.200. Correct answer: A The expected default loss = expected exposure x 0. II only. B. $1. D. $2.200. Consider a 5-year interest rate swap with notional of $500 million. II and III. $2. I and III.$1. III. 123.000 bushels) at a price of $1.5 x default probability x (1 recovery rate).57. In the peaks-over-threshold to estimate parametric tails in distributions which of the statements is incorrect.$3.800 and the maintenance margin is $3. with analysis of the balance sheet to find out leverage ratio.53.

it indicates a fat tail. of which ξ is the shape parameter. P(max( X 1. The model consist of two parameter this shape and scaling parameter. The equation lim P ( X 1 + . + X n > X ) = 1 is satisfied. 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. this indicating a fat To deals with varying parameters the maximum likelihood method can be used. Answer: C ξ X −ξ The POT model is f ( x) = 1 − (1 + ) . 125.. D. B Insurance companies do not have any comparative advantage in bearing or measuring operational risk and thus make poor risk management partners for banks. B. and Parto distribution. C. D a loss above this level. In the is description about the subexponential distribution which one is incorrect. The sum of n independent distributed severities will tend to be large due to the severity a single large loss event.. Parto distribution decays more slowly than exponential distribution prior to the tail. X n ) > X ) Answer: A Subexpoential distribution does not include negative binomial distribution. 124. Negative binomial. A. Which of the following risks is not included in the Basel II definition of operational risk? . If the parameter indicating the fatness of the tail is below zero... 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. 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.B C tail. D Policy limits often limit insurance coverage to levels well below the catastrophic levels for which banks actually need protection. If it is β 1 larger than 0. Subexpoential distribution includes Weibull.

Both survivorship and selection bias D. Which of the following statements about this approach is incorrect? A It assumes market. . Selection bias only C. C It ignores strategic risks. there is selection bias because the publication focuses on just the popular funds. which are large and likely to have done well. and the Advanced Measurement Approach for operational risk. Process Failure Risk. Taking the average performance of this group of funds will create A. Every year Business Week reports the performance of a group of existing equity mutual funds. Answer d) is also incomplete. so it must be subject to survivorship bias. D It ignores the interest risk associated with the bank’s loans. Your bank is implementing the advanced Internal Rating Based Approach of Basel II for credit risk. Answers a) and b) are incomplete. Legal Risk. credit.A. Reputation Risk. and operational risk. C. because dead funds are not considered. The bank uses the model approach for market risk. In addition. D. credit risk. B. B It uses a 10-day horizon for market risk. Systems Failure Risk. The Chief Risk Officer (CRO) wants to estimate the bank’s total risk by adding up the regulatory capital for market risk. 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. Answer: B Reputation risk 和 Strategy Risk 不属于 Operational risk 127. and operational risks have zero correlation. Survivorship bias only B. Instant-history bias only Answer: C The publication lists existing funds. The CRO asks you to identify the problems with using this approach to estimate the bank’s total risk. selected for their popularity.

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

084 USD 337. Correct. Marginal VaR of Euro = (USD 324.446 B. compares the portfolio return to the return of a benchmark portfolio.700 × 0.058 USD 58.110 Answer: A A.446 B.deviation of the returns below the minimum acceptable return in the denominator. Which of the following models for interest rates would allow for mean reversion? A. dr = a × dt + s × dz B. Because of the use of incorrect variable and/or incorrect formula. A financial institution does not have the cash to meet its capital withdrawals. B.90 • Portfolio beta of Peso = 1.700 Based on the given information. is the only model given above that allows for the interest rate r to mean revert to a level b.30 • Diversified Portfolio VaR = USD 324. 133. .000.230 C.292 USD 292.90 = USD 0. III – The Sortino ratio allows one to evaluate portfolios obtained through an optimization algorithm that uses semi-variance.688 D. Incorrect. Because of the use of incorrect variable and/or incorrect formula. not the Sortino ratio.90 × (1. not variance. Suppose a portfolio consists of a USD 1 million investment in Euros and a USD 4 million investment in Mexican Pesos.000. Additional information is given below: • Portfolio beta of Euro = 0. 131. Incorrect. USD 0. the marginal VaR and the component VaR of the Euro position are closest to: Marginal VaR Component VaR A. D. as a risk metric.700 / USD 5. 132. Because of the use of incorrect variable and/or incorrect formula. USD 0.106 USD 422.000)×0. USD 0.000 / 5. II – The information ratio. dr = a × (b − r ) × dt + s × dz D. Incorrect. Which of the following is an example of liquidity risk? A.000) = USD 58.000. dr = a × (r − b) × dt + s × dz Correct answer: C dr = a × (b − r ) × dt + s × dz . The bid-ask spread for an actively traded asset is close to zero. dr = a × dt − b × dt + s × dz C. C.058 Component VaR of Euro = USD 324. USD 0.

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

Their strategy to hedge this exposure: A. a shift in the market from backwardation to contango. C. You need to update a daily volatility forecast using the RiskMetricsTM exponential method with a decay factor of 0.970% D. the updated forecast for standard deviation is: (h t ) 2 = 1 [(0. where r is the return for time t-1. what will be the new forecast of standard deviation? A. 1. D. 138. 1. the approximation is simply the marginal VAR multiplied by the dollar weight in position . failed because of improper internal controls.C. Using the information provided. did not account for funding risk created by a mismatch between the timing of the hedge cash flows and the contract cash flows. No offsetting interim cash inflows were available on their long-term customer contracts.97 )(0. ht −1 and 2 ht are forecast variances at time t-1 and t respectively. suffered from poor diversification. 137.02) 1 2 2 ] = 1. was based on fraudulent reporting.where is the value of the portfolio. Correct answer:D In a large portfolio with many positions. Answer: A Metallgesellschaft implemented a stack-and-roll hedge strategy.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 ) . 1.044%. Given that you just observed a return of 2%. 1.97. and other factors.044% C. 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. Metallgesellschaft Refining and Marketing offered customers long-term contracts with fixed prices for petroleum contracts. B. creating a liquidity . The stack-and-roll hedge strategy proved ineffective due to interim funding cash outflows created by margin calls. D.01) 2 + (1 − 0. which uses short-term futures contracts to hedge long-term risk exposure.97)(0. is the weight in the portfolio.030% B. Yesterday's forecast of standard deviation was 1%. and λ is an exponential deny factor.

compute 2-year bond price FV = I00.72 I/Y =2. Master netting agreements have been used effectively to reduce the occurrence of contract disputes.crisis that was exacerbated by their size of their futures positions in relation to the liquidity of the market. I/Y =2.5%，zero rates for 2. Lawsuits about derivatives to major corporations are most likely to involve which of the following issues? A. compute semiannual zero rates for the 1.5/2），CPT PV =-89. N =4. PV =-95.and 3-year bonds.5%=5. Broker size C. N = 2. 95. 89.%)/2=0.75 respectively. what should be the price of a two year zero coupon bond using linear interpolation on zero rates (semiannual compounding)? A.5008*2=5. . use linear interpolation on zero rates for 2.18， CPT 3-year bond: FV = I00.75（5. or operational controls.47 C. PMT =0.18 and 83. Enforceability of contract Answer: D Most lawsuits involving derivatives are the result of the enforceability of the provisions of the derivatives contract.75 Answer: C Step 1. 1-year bond: FV = I00. 83. N = 6.year bond (6%-5. I/Y =3*2=6% 140. Given a one-year and a three-year zero coupon bond price of 95. PV =-83. The type of derivative. These contracts contain carefully-formulated.18 B. fraud.75， CPT Step 2.72 D.0%. reducing both legal and credit risk.5% Step3. PMT =0. B.year bonds=5%+0. standardized language that minimizes the chances of mistakes or misunderstandings. D. 89. Breach of fiduciary duty. PMT =0. 139. Central themes were not diversification.

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