FRM

Question 1

Which of the following will lead to credit loss to bank ABC if its counterparty defaults before maturity of the contract?
Select one

a. Bank ABC is short EUR through an FX forward contract and the EUR has appreciated
b. Bank ABC is short EUR through an FX forward contract and the EUR has depreciated
c. Bank ABC sold a Call Option an EUR and the EUR has appreciated
d. Bank ABC sold a Call Option an EUR and the EUR has depreciated.

Answer 1

b. Bank ABC is short EUR through an FX forward contract and the EUR has depreciated

Question 2

Which of the following statements best describes hedging?

a. Hedging involves taking on positions with the objective of minimizing the risk profile of the portfolio
b. Hedging involves taking on positions with the objective of maximizing the risk profile of the portfolio
c. Hedging is the process of closing out positions by terminating outstanding transactions
d. Hedging is the process of doubling up existing positions

Answer 2

a. Hedging involves taking on positions with the objective of minimizing the risk profile of the portfolio

Question 3

Which one of the following statements about multilateral netting systems is not accurate?
Select one

a. Systemic risks can actually increase because they concentrate risks on the central counterparty the failure of which exposes all participants to risk.
b. The concentration of risks on the central counterparty eliminates risk because of the high quality of the central counterparty
c. By altering settlement costs and credit exposures, multilateral netting systems for foreign exchange contracts could alter the structure of credit relations and affect competition in the foreign exchange markets
d. None of the above

Answer 3

b. The concentration of risks on the central counterparty eliminates risk because of the high quality of the central counterparty

Question 4

When would it be prudent for a trader to direct accounting entries?

a. Never
b. When senior management and the board are aware and have approved the practice
c. When audit controls are sufficient to ensure detection of irregularities.
d. Only during times of staffing turnover

Answer 4

a. Never

Question 5

Which of the following statements about the delta of a put option is true?

Select one

a. The delta of a put option approaches -0.50 as the spot price approaches the strike price
b. The delta of a put option approaches 1 as the spot price approaches the strike price.
c. The delta of a put option approaches -0.50 as time approaches expiry
d. The delta of a put option approaches 1 as the spot price approaches the strike price

Answer 5

a. The delta of a put option approaches -0.50 as the spot price approaches the strike price

Question 6

Which one of the following cases or events can be considered as resulting from operational risk?

Select one

a. A bank reports losses on a portfolio of stocks during the stock market crash of 2008.
b. A bank reports losses on a portfolio of European bonds during the European sovereign debt Crisis In 2012
c. A foreign bank reports losses on a portfolio of currencies during the Asian Financial Crisis of 1997 selling practices
d. A bank becomes involved in a high-profile lawsuit with a customer that accuses it of improper

Answer 6

d. A bank becomes involved in a high-profile lawsuit with a customer that accuses it of improper

Question 7

In the early 1990, Metallgesellschaft, a German oil company, suffered a loss of S1.33 billion in their hedging program They rolled over short- dated futures to hedge long-term exposure created through their fixed-price contracts to sell heating oil and gasoline to their customers. After a time, they abandoned the hedge because of large negative cash flow The cash flow pressure was due to the fact that the company had to hedge its exposure by

Select one:

a. Long futures and there was an increase in oil price.
b. Short futures and there was a decline in oil price.
c. Long futures and there was a decline in oil price.
d. Short futures and there was an increase in oil price.

Answer 7

c. Long futures and there was a decline in oil price.

Question 8

Which of the following best reflects an operational risk faced by a bank?

Select one

a. The Bangko Sentral ng Pilipinas Unexpectedly cuts interest rates by 25 bps)
b. A power outage shuts down the trading floor indefinitely with no backup facility
c. The USD/PHP spot exchange rate
d. The credit rating of the Republic of the Philippines improves to investment-grade status

Answer 8

b. A power outage shuts down the trading floor indefinitely with no backup facility

Question 9

Which of the following statements about option theta is true?
Select one

a. Theta increases as the option approaches expiry
b. Theta remains constant as the option approaches expiry
c. Theta is positive for call and negative for puts
d. None of the above

Answer 9

a. Theta increases as the option approaches expiry

Question 10

Which of the following portfolios is not applicable to a linear method in computing VAR?

Select one

a. Portfolio for USD/PHP spot trading
b. Portfolio of peso government securities
c. Portfolio USD/PHP options
d. Portfolio of dollar ROP securities

Answer 10

a. Portfolio for USD/PHP spot trading

Question 11

Stress testing is designed to complement VAR in which of the following way

Select one

a. Stress testing aims to account for extreme losses that is not captured by VAR.
b. Stress testing aims to account for losses occurring beyond the assumed horizon by the VAR.
c. Stress testing aims to account for possible gains that VAR overlooks.
d. Stress testing assesses a portfolio based on a fixed 99% confidence level

Answer 11

a. Stress testing aims to account for extreme losses that is not captured by VAR.

Question 12

Which of the following statements about operations risk is not correct?

Select one

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 transaction, 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

Answer 12

c. Because the business unit is responsible for the profitability of a derivatives transaction, it should be responsible for ensuring proper reconciliation of front- and back-office databases on a regular basis

Question 13

What is the correct interpretation of a $5 million overnight VAR figures with 95% confidence level?

Select one

a. Can be expected to lose at most $5 million in 5 out of next 100 days
b. Can be expected to lose at least $5 million in 5 out of next 100 days.
c. Can be expected to lose at least $5 million in 95 out of 100 days
d. Can be expected to lose at least $95 million in 95 out of 100 days.

Answer 13

b. Can be expected to lose at least $5 million in 5 out of next 100 days.

Question 14

Which of the following statements about option vega is true?

Select one

a. Vega is highest for in the money options
b. Vega is highest for short term options
c. Vega highest for out of the money options
d. Vega is highest for longest term options

Answer 14

d. Vega is highest for longest term options

Question 15

Loss given default represents the non-recoverable amount portion of

Select one

a. Exposure at Default
b. Credit VAR
c. Potential Exposure
d. None of the above

Answer 15

a. Exposure at Default

Question 16

A portfolio of stock A and options on stock A is currently delta neutral but has a positive gamma. Which of the following actions will make the portfolio both delta and gamma neutral?

Select one

a. Sell put options on stock A and sell stock A
b. Sell put options on stock A and buy stock A
c. Sell call options on stock A and sell stock A
d. Buy call options on stock A and

Answer 16

a. Sell put options on stock A and sell stock A

Question 17

Given that two currencies. X and Y are perfectly positively correlated and the volatility (expressed in dollars) of X is twice the volatility Y If a long position in X is to be hedged using Y the optimal hedge ratio can be achieved by

Select one

a. Taking a long position in Y with dollar value equal to twice the dollar value of X
b. Taking a long position in Y with dollar value equal to half the dollar value of X
c. Taking a short position in Y with dollar value equal to twice the dollar value of X
d. Taking a short position in Y with dollar value equal to half the dollar value of X

Answer 17

c. Taking a short position in Y with dollar value equal to twice the dollar value of X

Question 18

Which of the following example does not indicate a type of liquidity risk?

Select one.

a. Bank ABC bought a large position in a stock with very thin bid-offer quotes As a result of doing So the offers at various prices were taken pushing the stock price higher to trade at significantly higher prices,
b. Bank XYZ is currently short USD (long PHP) because it believes the peso will appreciate in the weeks ahead At the end of the day the bank tries to cover for dollars but is unable to do so because the most of the market players are short USD as well and are scrambling for dollars Bank XYZ has no choice but to raise USD by offering extremely high USD interest rates
c. Bank ABC has a total of PhP 20 billion assets maturing today as compared to a total of PhP 30 billion liabilities maturing today. To pay off the P 10 billion remaining liabilities, the bank has to scramble for funds in the market at distressed interest rates in order to meet its obligations.
d. Bank XYZ bought a $20 million position to position for a possible USD appreciation However, the market moved against the position causing the bank to record PhP 10 million in mark-to-market losses

Answer 18

d. Bank XYZ bought a $20 million position to position for a possible USD appreciation However, the market moved against the position causing the bank to record PhP 10 million in mark-to-market losses

Question 19

Which of the following statements about the delta of a call option is true?

a. The delta of a call option approaches 0.50 as the spot price approaches the strike price.
b. The delta of a call option approaches 1 as the spot price approaches the strike price.
c. The delta of a call option approaches 0.50 as time approaches expiry.
d. The delta of a call option approaches -1 as the spot price approaches the strike price

Answer 19

a. The delta of a call option approaches 0.50 as the spot price approaches the strike price.

Question 20

Which of the following is a weakness of the top-down approach to measuring operational risk?

a. It fails to consider historical information.
b. It does not allow the use of earnings volatility as an indicator of risk potential
c. It is not based on firm wide or industrywide data
d. It does not provide information on specific sources of risk.

Answer 20

d. It does not provide information on specific sources of risk.

Question 21

Which of the following statements about the risk involved in Investment Banking is the most accurate?

a. Investment Banking has no exposure to operational Risk.
b. Investment Banking is exposed mainly to market risk than to credit risk.
c. Investment Banking is exposed mainly to credit risk than to market risk.
d. Investment Banking is more exposed to credit risk than Commercial Banking

Answer 21

b. Investment Banking is exposed mainly to market risk than to credit risk.

Question 22

Settlement risk can be minimized by bilateral netting agreements wherein

a. It involves two banks settling only the net balance instead of the gross amounts.
b. It involves two banks settling gross amounts
c. It involves two banks settling the net mark-to-market.
d. None of the above

Answer 22

a. It involves two banks settling only the net balance instead of the gross amounts.

Question 23

Consider a short position of $50 million on gold for two weeks and a long position of $50 million on gold for 1 month. Which of the following risks is not present in such a position?

a. Gold spot rate risk
b. Gold lease rate risk
c. USD interest rate risk
d. None of the above

Answer 23

a. Gold spot rate risk

Question 24

Which of the following are the categories of Operational Risk as defined by the Basel Committee?

a. Fraud. Settlement, Strategic, and Disaster
b. Political, Social, and Environmental
c. People, Process, System, and External Events
d. Health, Transaction, Security, and Legal

Answer 24

c. People, Process, System, and External Events

Question 25

Which of the following statements best describes the difference between static hedging and dynamic hedging?

a. Static hedging involves putting on a position with the objective of minimizing risk whereas dynamic hedging involves putting on a position with the objective of maximizing gains.
b. Static hedging involves non-derivative products whereas dynamic hedging involves derivative products.
c. Static hedging involves positions in an illiquid market whereas dynamic hedging involves positions in a liquid market.
d. Static hedging involves putting on and leaving a position until the hedging horizon whereas Dynamic hedging involves continuously rebalancing the portfolio up until the horizon.

Answer 25

d. Static hedging involves putting on and leaving a position until the hedging horizon whereas Dynamic hedging involves continuously rebalancing the portfolio up until the horizon.

Question 26

Which of the following statements about the risk involved in Commercial Banking is the most accurate?

a. Commercial Banking has no exposure to operational Risk.
b. Commercial Banking is exposed mainly to market risk than to credit risk.
c. Commercial Banking is exposed mainly to credit risk than to market risk
d. Commercial Banking is more exposed to market risk than Investment Banking.

Answer 26

c. Commercial Banking is exposed mainly to credit risk than to market risk

Question 27

Why is the delta normal approach not suitable for measuring options portfolio risk?

a. There is a lack of data to compute the variance/covariance matrix.
b. Options are generally short-dated instruments.
c. There are nonlinearities in option payoff.
d. Black-Scholes pricing assumptions are violated in the real world.

Answer 27

c. There are nonlinearities in option payoff.

Question 28

What assumption does a duration-based hedging scheme make about the way in which interest rates move

Select one

a. All interest rates change by the same amount
b. Any parallel shift occurs in the yield curve.
c. Interest rate movements are highly correlated
d. A small parallel shift occurs in the yield curve

Answer 28

d. A small parallel shift occurs in the yield curve

Question 29

The best example of an effective risk control function is a unit that

Select one

a. Uncovers numerous control exceptions, violations of law, and procedural errors while maintaining a noncontroversial relationship with risk-taking unit
b. Is staffed by competent personnel who report to the head of the trading department while maintaining independence from front-office personnel
c. Conveys issues regarding control mechanisms, risk levels, and the quality of managerial governance, achieve timely and constructive action by responsible personnel and thereby has few repeat criticisms
d. Efficiently skews reviews coverage toward areas experiencing high losses or mediocre performance, thereby reducing resource requirement

Answer 29

c. Conveys issues regarding control mechanisms, risk levels, and the quality of managerial governance, achieve timely and constructive action by responsible personnel and thereby has few repeat criticisms

Question 30

Which of the future cash and futures price tends to make hedging possible?

a. They always move together in the same direction and by the same amount
b. They move in opposite directions by the same amount
c. They tend to move together, generally in the same direction and by the same amount
d. They move in the same direction by different amounts

Answer 30

c. They tend to move together, generally in the same direction and by the same amount

Question 31

A 90-day European put option on PLDT shares has an exercise price of PhP 2, 500.The current market price of PLDT shares is PhP 2, 502 The delta for this option is close to
Select one

a. 1
b. -0.5
c. 0.5
d. -1

Answer 31

b. -0.5

Question 32

Which of the following statements about the option gamma is true?
Select one.

a. Gamma is greatest for out of the money options.
b. Gamma is greatest for long term options.
c. Gamma is greatest for at the money options.
d. Gamma is greatest for in the money options

Answer 32

c. Gamma is greatest for at the money options.

Question 33

Which of the following is not a problem of having one employee perform both front-office (trading) functions and back-office functions?

Select one

a. The employee gets paid more because she performs two functions.
b. The employee can hide trading mistakes when processing the trades.
c. The employee can hide the size of her book
d. The employee’s firm may not know its true exposure

Answer 33

a. The employee gets paid more because she performs two functions.

Question 34

All of the following strengthen the internal controls for sales personnel except

Select one

a. Tape-recording of incoming and outgoing calls
b. Prompt confirmation of trades and acquisition of completed legal agreements
c. Compensation schemes directly linked to calendar-year revenues
d. Independent credit department personnel reviewing and approving as deemed appropriate all over-line requests

Answer 34

c. Compensation schemes directly linked to calendar-year revenues

Question 35

The credit exposure of an interest rate swap differs from that of a bond in that

a. II and IV
b. I and III
c. I, II and III
d. II, III and IV

Answer 35

a. II and IV

Question 36

Which of the following statements about VAR is not true?
Select one

a. VAR describes the worst loss. Actual loss will never exceed the VAR number.
b. VAR is does not describe the distribution of losses in the left tail
c. VAR is measured with some error. This is because VAR number itself is just an estimate
d. VAR is a measure of downside risk to

Answer 36

a. VAR describes the worst loss. Actual loss will never exceed the VAR number.

Question 37

Which of the terms below is used in the insurance industry to refer to the effect of a reduction in the control of losses by an entity that is insured because of the protection provided by insurance?

Select one:

a. Control Hazard
b. Adverse Selection
c. Moral Hazard
d. Feedback Process

Answer 37

c. Moral Hazard

Question 38

In measuring credit exposure, the current exposure component is

Select one:

a. The current market value of the asset.
b. The current potential movement in the market value of the asset.
c. The current remaining notional amount of the asset.
d. The current remaining tenor of the asset.

Answer 38

a. The current market value of the asset.

Question 39

Which of the terms below refers to the situation where the various buyers of insurance have different expected losses, but the insurer is unable to distinguish between the different types of insurance buyer and is therefore unable to charge differentiated premiums.

Select one

a. Control Hazard
b. Adverse Selection
c. Moral Hazard
d. Feedback Process

Answer 39

b. Adverse Selection

Question 40

Which of the following statements are true regarding the position assumptions when computing VAR?

Select one

a. It is assumed that all positions are constant over the horizon
b. It is assumed that positions are increasing over the horizon
c. It is assumed that positions are decreasing over the horizon
d. It is assumed that positions are varying randomly over the horizon

Answer 40

a. It is assumed that all positions are constant over the horizon

Question 41

Which transaction does not result in a credit risk for party A?
Select one:

a. Party A sells a put option to Party B
b. Party A makes an unsecured loan to Party B
c. Party A buys a call option from Party B
d. Party A enters into an Interest Rate Swap transaction with Party B

Answer 41

a. Party A sells a put option to Party B

Question 42

In futures contract a backwardation occurs when

Select one

a. The convenience yield is higher than the discount rate
b. The convenience yield is equal to the discount rate
c. The convenience yield is lower than the discount rate
d. None of the above

Answer 42

a. The convenience yield is higher than the discount rate

Question 43

When inflationary expectations increases, prices of fixed-coupon bonds will

a. Decrease

Answer 43

a. Decrease

Question 44

Which of the following statements are not consistent with the G-30 report on sound risk management practices?

a. Dealers should ensure that mark to market computations of their own positions are carried out by a unit directly reporting to the risk-taking unit.

Answer 44

a. Dealers should ensure that mark to market computations of their own positions are carried out by a unit directly reporting to the risk-taking unit.

Question 45

A portfolio manager has been asked to take the risk related to the default of two securities A and B. She has to make a large payment if, and only if, both A and B default. For taking this risk, she will be compensated by receiving a fee. What can be said about this fee?

a. The fee will be larger if the default of A and B are highly positively correlated
b. The fee will be smaller if the default of A and of B are highly correlated.
c. The fee is independent of the correlation between the default of A and of B.
d. None of the above is correct

Answer 45

a. The fee will be larger if the default of A and B are highly positively correlated

Question 46

Which of the following statements about the delta of a put option is true?

Select one

a. The delta of a put option approaches 0.50 as it becomes deeper out of the money
b. The delta of a put option approaches 1 as it becomes deeper out of the money
c. The delta of a put option approaches 0 as it becomes deeper out of the money
d. None of the above

Answer 46

c. The delta of a put option approaches 0 as it becomes deeper out of the money

Question 46

Which of the following Ayala Corporation stock options has the highest gamma given that the current market price of its stock is at PhP 400?

a. Put option expiring in 1 year with strike PhP 400.
b. Put option expiring in 1 month with strike at PhP 350
c. Call option expiring in 1 year with strike at PhP 400.
d. Call option expiring in 1 month with strike at PhP 400.

Answer 46

d. Call option expiring in 1 month with strike at PhP 400.

Question 47

Which of the following statements about limits are correct?

a. Stop loss limits are forward-looking limits which are effective in preventing losses before they even occur
b. Exposure limits are backward-looking limits which are not effective in preventing losses before they even occur
c. VAR limits are backward-looking limits which is not effective in preventing losses before they even occur
d. VAR limits are forward-looking limits which are effective in preventing losses before they even occur

Answer 47

d. VAR limits are forward-looking limits which are effective in preventing losses before they even occur

Question 48

Settlement risk in foreign exchange is generally due to:

a. Notionals being exchanged
b. Net value being exchanged
c. Multiple currencies and countries involved
d. High volatility of exchange rates

Answer 48

a. Notionals being exchanged

Question 48

The Basel Committee establishes capital charges for which type/s of risk

I. Market risk
II. Credit risk
III. Operational risk

a. I only
b. I and II only
c. II and III only
d. I, II, and III

Answer 48

d. I, II, and III

Question 49

Capital is used to protect the bank from which of the following events?

a. Low frequency, High Severity events

Answer 49

a. Low frequency, High Severity events

Question 50

Which of the following assumptions must be satisfied in order for a one-day VAR to be extended to a T-day VAR by multiplying the square root of T?

a. The daily returns are independent and identically distributed, and are normally distributed.

Answer 50

a. The daily returns are independent and identically distributed, and are normally distributed.

Question 51

How does the credit exposure of a long OTC put option on XYZ stock change when the stock price decreases?

a. It increases

Answer 51

a. It increases

Question 52

Which of the following statements describes the diffusion effect that occurs in measuring credit exposure of an interest rate swap?

A. As time approaches maturity, the volatility risk of the risk factor increase
B. As time approaches maturity, the volatility of the risk factor decreases
C. As time approaches maturity, duration of the swap increases
D. As time approaches maturity, duration of the swap decreases

Answer 52

a. As time approaches maturity, the volatility risk of the risk factor increase

Question 53

To reduce credit risk, a company can

a. Expose itself to many different counterparties
b. Take on a variety of positions
c. Set up netting agreements with all of its approved trading partners
d. All of the above

Answer 53

d. All of the above

Question 54

Which of the following is not an essential feature of organizational structure for it to be sound and effective?

a. Risk management should be decentralized and must be segregated among separate lines
b. Risk managers should report not to traders but to top management.
c. The Chief Risk Officer (CRO) must not report directly to head of Treasury.
d. Risk management should be decentralized to enable a firm-wide approach covering market. credit and operational risks

Answer 54

a. Risk management should be decentralized and must be segregated among separate lines

Question 55

A 90-day European call option on PLDT shares has an exercise price of PhP 2,500. The current market price of PLDT shares is PhP 2,502. The delta for this option is close to

a. -0.5
b. 1
c. 0.5
d. -1

Answer 55

c. 0.5

Question 56

Which of the following statements describes the amortization effect that occurs in measuring credit exposure of an interest rate swap?

a. As time approaches maturity, the volatility of the risk factor increases.
b. As time approaches maturity, the volatility of the risk factor decreases
c. As time approaches maturity, duration of the swap increases
d. As time approaches maturity, duration of the swap decreases

Answer 56

d. As time approaches maturity, duration of the swap decreases

Question 57

Which of the following strategies can contribute to minimizing operational risk?

I. Individuals responsible for committing to transactions should perform clearance and accounting functions
II. To value current positions, price information should be obtained from external sources
IlI. Compensation schemes for traders should be directly linked to calendar revenues
IV. Trade tickets need to be confirmed with the counterparty

a. I and II
b. II and IV
c. III and IV
d. I, II, and Ill

Answer 57

b. II and IV

Question 58

Beta, or systematic risk can be viewed as a measure of the exposure of the rate of return of a stock (or portfolio of stocks) to movements in the

a. Market
b. Futures
c. Exchange Rate
d. Dividend Yield

Answer 58

a. Market

Question 59

The VAR of a portfolio of stocks using a two- day horizon is Php 20,000,000. Assuming daily returns are independent, identically distributed and are normally distributed, the VAR using a 5-day horizon is

Select one

a. PhP 31,622,776.6
b. PhP 14,142,135 62
c. PhP 22,360, 67977
d. PhP 4,472,135.96

Answer 59

a. PhP 31,622,776.6

Question 60

What is the implied correlation between JPY/EUR and EUR/USD when given the following volatilities for foreign exchange rates?
● JPY/USD at 10%
● JPY/EUR at 12%
● EUR/USD at 8%.

Select one
a. 0. 375
b. -0.625
c. -0.5625
d. -0.125F

Answer 60

c. -0.5625

Question 61

An airline knows that it will need to purchase 10,000 metric tons of jet fuel in three months. It wants some protection against an upturn in prices using futures contracts. The company can hedge using heating oil futures contracts traded on NYMEX. The notional for one contract is 42.000 gallons As there is no futures contract on jet fuel, the risk manager wants to check if heating oil could provide an efficient hedge instead. The current price of jet fuel is $277/metric ton The futures price of heating oil is $0.6903 /gallon The standard deviation of the rate of change in jet fuel prices over three months is 21.17% that of futures price is 18.59% and the correlation is 0.8243 The optimal hedge ratio can be achieved by

Select one

a. Selling 377 futures contract
b. Buying 377 futures contract
c. Selling 90 futures contract
d. Buying 90 futures contract

Answer 61

d. Buying 90 futures contract

Question 62

Consider the following Sample Loss Frequency and Severity Distributions. Assume also that these distributions are independent. What is the probability of having a total loss of 75,000?

Frequency Distribution
Severity Distribution
Probability
Frequency

• provided table*

Select one

a. 0.028
b. 0.056
c. 0.9
d. 0.18

Answer 62

b. 0.056

Question 63

A bronze producer will sell 10,000 metric tons of bronze in three months at the prevailing market price at that time. The standard deviation of the price of bronze is 32%. The company decides to use three month futures on copper to hedge The copper futures contract is for 50 metric tons of copper The standard deviation of the futures price is 48% The correlation between the changes in futures price and the price of bronze is 0.75 To hedge its exposure and minimize the resulting variance, how many futures contracts should the company buy/sell?
Select one

a. Sell 100 futures contract
b. Buy 100 futures contract
c. Sell 211 futures contract
d. Buy 211 futures contract

Answer 63

a. Sell 100 futures contract

Question 64

A company expects to buy 1 million barrels of West Texas Intermediate crude oil in one year The annualized volatility of the price of a barrel of WTI is calculated as 18%. The company chooses to hedge using futures contract on Brent Crude The futures contract is for 100,000 barrels. The annualized volatility of the Brent futures is 20% and the correlation coefficient between W TI crude oil and Brent futures is 0 89 To hedge its exposure and minimize the resulting variance. how many futures contracts should the company buv/sell?

Select one

a. Buy 8 futures contract
b. Sell 8 futures contract
c. Buy 9 futures contract
d. Sell 9 futures contract

Answer 64

a. Buy 8 futures contract

Question 65

Consider the Following single bond position with market value of PhP 1,000,000, a modified duration of 4 years, an annualized yield volatility of 12% Using the duration method and assuming that the daily returns on the bond position are independent, identically distributed and are normally distributed calculate the VAR of the positions with 99% confidence level and 5-days holding period and assume that there are 260 business days in a year

Select one

a. 155094.17
118400
292451.46
51698.06

Answer 65

a. 155094.17

Question 66

An airline knows that it will need to purchase 10,000 metric tons of jet fuel in three months It wants some protection against an upturn in prices using futures contracts. The company can hedge using heating oil futures contracts traded on NYMEX. The current price of jet fuel is $277/metric ton. The standard deviation of the rate of change in jet fuel prices over three months is 21.17% and the correlation between rate of change in jet fuel prices and rate of change in heating oil futures prices is 0.8243 Assuming the company hedges at the optimal hedge ratio, what is the resulting standard deviation of the value of the hedged portfolio?

Select one

a. 402762.79
b. 273665.43
c. 110222250414
d. 331997.37

Answer 66

d. 331997.37

Question 67

What is the implied correlation between JPY/USD and EUR/USD when given the following volatilities for foreign exchange rates?

● JPY/USD at 10%
● JPY/EUR at 12%
● EUR/USD at 8%.

Select one

-0.125
0.5625
-0.5625
0.125

Answer 67

0.125

Question 68

Consider an A-rated bond and a B-rated bond Assume that the one-year probabilities of default for the A-rated and B-rated bonds are 2% and 3%, respectively, and that the joint probability of default of the two bonds is 0.25%. What is the default correlation between the two bonds?

Select one

a. 0.438511
b. 0.025516
c. 0.079557
d. 0.055692

Answer 68

c. 0.079557

Question 69

Consider an A-rated bond and a B-rated bond Assume that the one-year probabilities of default for the A-rated and B-rated bonds are 1% and 4%, respectively, and that the joint probability of default of the two bonds is 0.25%. What is the default correlation between the two bonds?

Select one

a. 0.189451
b. 0.107705
c. 0.126557
d. 0.148692

Answer 69

b. 0.107705

Question 70

Given the following frequency and severity distributions, find the Operational VAR (unexpected loss) at a confidence level of 95% Assume that the distributions are independent.

a. 93100
b. 6900
c. 100000
d. 93000

Answer 70

a. 93100

Question 71

The VAR of a portfolio of stocks using a one-day horizon is Php 5.000,000. Assuming daily returns are independent, identically distributed and are normally distributed, the VAR using a 10-day horizon is
​​​​​​
a. PHP 1,581,138.83
​​b. PHP 11,180,339.89
c. PHP 15,811,388.3
d. PHP 2,236,067.98

Answer 71

c. PHP 15,811,388.3

Question 72

Consider the following Sample Loss Frequency and Severity Distributions. Assume also that these distributions are independent. What is the expected loss?

a. 37375
b. 57500
c. 91667
d. 33735

Answer 72

a. 37375

Question 73

Assume that swap rates are identical for all swap tenors. A swap dealer entered into a plain vanilla swap one year ago as the received fixed party when the price of the swap was 7%. Today this dealer will face credit risk exposure from this swap only if the value of the swap dealer is

Select one

a. Negative, which will occur if new swaps are being priced at 6%
b. Negative which will occur if new swaps are being priced at 8%
c. Positive which will occur if new swaps are being priced at 6%
d. Positive which will occur if new swaps are being priced at 8%

Answer 73

c. Positive which will occur if new swaps are being priced at 6%

Question 74

Given the following 30 ordered percentage returns of an asset, calculate the VAR at 90% confidence level -20, -18, -15. -10, -7. -6, -5. -5. -4. -4. -3. -3. -1 -1. -1 -1. 0. 0, 0. 1 1, 1, 3. 3. 3. 3. 7. 10,15. 21

a. 15

Answer 74

a. 15

Question 75

Assume that the DV01 of an interest rate swap is proportional to is time to maturity (which at initiation is equal to T). Assume that interest rate curve moves are parallel stochastic with constant volatility. normally distributed, and independent. At that time will the maximum potential exposure be reached?

a. T/3

Answer 75

a. T/3

Question 76

An investor holds a portfolio of Php 100 million. The portfolio consists of AAA-rated bonds (Php 30 million) and BBB-rated bonds (Php 70 million). Assume that the one-year probabilities of default for AAA-rated and BBB-rated bonds 1% and 2% respectively, and that they are independent. If the recovery value for AAA-rated bonds in the event of default is 80% and the recovery value for BBB-rated bonds is 70%. What is the one-year expected credit loss from this portfolio

a. Php 480,000

Answer 76

a. Php 480,000

Question 77

You have granted an unsecured loan to a company. This loan will be paid off by a single payment of Php 50,000,000. The company has a 5% chance of defaulting over the life of the transaction and your calculations indicate that if they default you would recover 80% of your loan from the bankruptcy courts. If you are required to hold a credit reserve equal to your expected credit loss, how great of a reserve should you hold?

a. Php 450,000
b. Php 500,000
c. Php 350,000
d. Php 400,000

Answer 77

b. Php 500,000

Question 78

The VAR of a portfolio of stocks using a five-day horizon is PhP 10,000,000. Assuming daily returns are independent, identically distributed and are normally distributed, the VAR using a 10-day horizon is

a. PhP 31.622,776.6
b. PhP 14.142,135.62
c. PhP 22.360,679.77
d. PhP 4.472.135.96

Answer 78

b. PhP 14.142,135.62

Question 79

Based on a 95% confidence level, how many exceptions in back testing a VAR would be expected over a 260-day trading year?

a. 247
b. 26
c. 13
d. 60

Answer 79

c. 13