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**Sample Questions Source: FRM Exam 2000
**

Montgomery Investment Technology, Inc. Financial Modeling Software and Consulting

www.fintools.com

**Question 1: An investment in a callable bond can be analytically decomposed into a:
**

A. Long position in a non-callable bond and a short position in a put option.

B. Short position in a non-callable bond and a long position in a call option.

C. Long position in a non-callable bond and a long position in a call option.

**D. Long position in a non-callable and a short position in a call option.
**

www.fintools.com title

FRM 2000 Credit Risk Q. 9

**Question 1: Correct Answer is D An investment in a callable bond can be analytically decomposed into a:
**

A. Long position in a non-callable bond and a short position in a put option.

B. Short position in a non-callable bond and a long position in a call option.

C. Long position in a non-callable bond and a long position in a call option.

**D. Long position in a non-callable and a short position in a call option.
**

www.fintools.com title

FRM 2000 Credit Risk Q. 9

**Question 2: According to Put-Call parity, buying a call option on a stock is equivalent to:
**

A. Writing a put, buying the stock, and selling short bonds (borrowing).

B. Writing a put, selling the stock, and buying bonds (lending).

C. Buying a put, selling the stock, and buying bonds (lending).

**D. Buying a put, buying the stock, and selling short bonds (borrowing).
**

www.fintools.com title

FRM 2000 Credit Risk Q. 18

**Question 2: Correct Answer is D According to Put-Call parity, buying a call option on a stock is equivalent to:
**

A. Writing a put, buying the stock, and selling short bonds (borrowing).

B. Writing a put, selling the stock, and buying bonds (lending).

C. Buying a put, selling the stock, and buying bonds (lending).

**D. Buying a put, buying the stock, and selling short bonds (borrowing).
**

www.fintools.com title

FRM 2000 Credit Risk Q. 18

**Question 3: Which one of the following statements about SFAS 133 is NOT TRUE?
**

A. Fair value is the relevant measure for derivatives. B. Even though derivatives are assets and liabilities, they should be recorded off the balance sheet. C. Derivatives are assets and liabilities and should be reported on the balance sheet. D. Special hedge accounting is limited to offsetting changes in fair value or cash flows for the risk being hedged.

FRM 2000 Credit Risk Q. 21

www.fintools.com

title

**Question 3: Correct Answer is B Which one of the following statements about SFAS 133 is NOT TRUE?
**

A. Fair value is the relevant measure for derivatives. B. Even though derivatives are assets and liabilities, they should be recorded off the balance sheet. C. Derivatives are assets and liabilities and should be reported on the balance sheet. D. Special hedge accounting is limited to offsetting changes in fair value or cash flows for the risk being hedged.

FRM 2000 Credit Risk Q. 21

www.fintools.com

title

Question 4:

Assume the one-year T-bill yield is 6.25 percent and the risk neutral default probability of one-year Commercial Paper is 0.85 percent. What should the yield of one-year Commercial Paper be assuming a 50 percent recovery rate?

**A. 6.7 percent B. 6.9 percent C. 7.2 percent D. 7.5 percent
**

www.fintools.com title

FRM 2000 Credit Risk Q. 32

**Question 4: Correct Answer is A
**

Assume the one-year T-bill yield is 6.25 percent and the risk neutral default probability of one-year Commercial Paper is 0.85 percent. What should the yield of one-year Commercial Paper be assuming a 50 percent recovery rate?

**A. 6.7 percent B. 6.9 percent C. 7.2 percent D. 7.5 percent
**

www.fintools.com title

FRM 2000 Credit Risk Q. 32

Question 5: What is the difference between the marginal default probability and the cumulative default probability?

A. Marginal default probability is the probability that a borrower will default in any given year, while the cumulative default probability is over a specified multi-year period. B. Marginal default probability is the probability that a borrower will default due to a particular credit event, while the cumulative default probability is for all possible credit events. C. Marginal default probability is the minimum probability that a borrower will default, while the cumulative default probability is the maximum probability. D. Both a and c.

www.fintools.com title

FRM 2000 Credit Risk Q. 34

Question 5: Correct Answer is A What is the difference between the marginal default probability and the cumulative default probability?

A. Marginal default probability is the probability that a borrower will default in any given year, while the cumulative default probability is over a specified multi-year period. B. Marginal default probability is the probability that a borrower will default due to a particular credit event, while the cumulative default probability is for all possible credit events. C. Marginal default probability is the minimum probability that a borrower will default, while the cumulative default probability is the maximum probability. D. Both a and c.

www.fintools.com title

FRM 2000 Credit Risk Q. 34

**Question 6: Which one of the following statements about operations risk is NOT correct?
**

A. The operations unit for derivatives activities, consistent with other trading and investment activities should report to an independent unit and should be managed independently of the business unit. B. It is essential that operational units be able to capture all relevant details of transactions, identify errors and process payments or move assets quickly and accurately. C. Because the business unit is responsible for the profitability of a derivatives function, it should be responsible for ensuring proper reconciliation of front and back office databases on a regular basis. D. Institutions should establish a process through which documentation exceptions are monitored, resolved and appropriately reviewed by senior management and legal counsel.

www.fintools.com title

FRM 2000 Credit Risk Q. 63

**Question 6: Correct Answer is C Which one of the following statements about operations risk is NOT correct?
**

A. The operations unit for derivatives activities, consistent with other trading and investment activities should report to an independent unit and should be managed independently of the business unit. B. It is essential that operational units be able to capture all relevant details of transactions, identify errors and process payments or move assets quickly and accurately. C. Because the business unit is responsible for the profitability of a derivatives function, it should be responsible for ensuring proper reconciliation of front and back office databases on a regular basis. D. Institutions should establish a process through which documentation exceptions are monitored, resolved and appropriately reviewed by senior management and legal counsel.

www.fintools.com title

FRM 2000 Credit Risk Q. 63

Question 7: If portfolio A has a VaR of 100 and portfolio B has a VaR of 200, then the VaR of the portfolio C=A+B:

A. Will certainly be smaller than or equal to 300 B. Will be exactly equal to 300 C. Can be greater or smaller than 300 D. Will be greater than 300

www.fintools.com title

FRM 2000 Credit Risk Q. 75

Question 7: Correct Answer is A If portfolio A has a VaR of 100 and portfolio B has a VaR of 200, then the VaR of the portfolio C=A+B:

A. Will certainly be smaller than or equal to 300 B. Will be exactly equal to 300 C. Can be greater or smaller than 300 D. Will be greater than 300

www.fintools.com title

FRM 2000 Credit Risk Q. 75

Question 8: A trader has put on a long position in a 2-year call on a stock whose strike will be determined by the value of the stock in 1 year's time. You can expect this position:

A. To have no delta, no gamma, and no vega. B. To have no delta, no gamma, and appreciable vega. C. To have small delta, no gamma, and appreciable vega. D. To have small delta, no gamma, no vega.

www.fintools.com title

FRM 2000 Credit Risk Q. 77

Question 8: Correct Answer is C A trader has put on a long position in a 2-year call on a stock whose strike will be determined by the value of the stock in 1 year's time. You can expect this position:

A. To have no delta, no gamma, and no vega. B. To have no delta, no gamma, and appreciable vega. C. To have small delta, no gamma, and appreciable vega. D. To have small delta, no gamma, no vega.

www.fintools.com title

FRM 2000 Credit Risk Q. 77

Question 9: If the F-test shows that the set of X variables explain a significant amount of variation in the Y variable, then:

A. Another linear regression model should be tried. B. A t-test should be used to test which of the individual X variables, if any, should be discarded. C. A transformation of the Y variable should be made. D. Another test should could be done using an indicator variable to test the significance level of the model.

www.fintools.com title

FRM 2000 Credit Risk Q. 125

Question 9: Correct Answer is B If the F-test shows that the set of X variables explain a significant amount of variation in the Y variable, then:

A. Another linear regression model should be tried. B. A t-test should be used to test which of the individual X variables, if any, should be discarded. C. A transformation of the Y variable should be made. D. Another test should could be done using an indicator variable to test the significance level of the model.

www.fintools.com title

FRM 2000 Credit Risk Q. 125

**Question 10: FAS133 requires that firms listed in the US:
**

A. Use VaR for their internal models. B. Mark all the derivatives in the banking book to market. C. Prove “hedge effectiveness” in order to apply accrual accounting to derivatives. D. None of the above.

FRM 2000 Credit Risk Q. 133

www.fintools.com

title

**Question 10: Correct Answer is C FAS133 requires that firms listed in the US:
**

A. Use VaR for their internal models. B. Mark all the derivatives in the banking book to market. C. Prove “hedge effectiveness” in order to apply accrual accounting to derivatives. D. None of the above.

FRM 2000 Credit Risk Q. 133

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title

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Test it! (hard!)

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