2016-FRR Online Practice Questions and Answers

Which of the following statements about the interest rates and option prices is correct?

A. If rho is positive, rising interest rates increase option prices.

B. If rho is positive, rising interest rates decrease option prices.

C. As interest rates rise, all options will rise in value.

D. As interest rates fall, all options will rise in value.

In the United States, foreign exchange derivative transactions typically occur between

A. A few large internationally active banks, where the risks become concentrated.

B. All banks with international branches, where the risks become widely distributed based on trading exposures.

C. Regional banks with international operations, where the risks depend on the specific derivative transactions.

D. Thrifts and large commercial banks, where the risks become isolated.

Which one of the following four models is typically used to grade the obligations of small- and medium-size enterprises?

A. Causal models

B. Historical frequency models

C. Credit scoring models

D. Credit rating models

As Japan ___ its budget deficits and ___ its dependence on debt, the Japanese currency, JPY, would ___ in value against other currencies.

A. Reduces, reduces, appreciate

B. Reduces, reduces, depreciate

C. Increases, reduces, appreciate

D. Reduces, increases, depreciate

Jack Richardson wants to compute the 1-month VaR of a portfolio with a market value of USD 10 million, with an average monthly return of 1% and average monthly standard deviation of 1.5%. What is the portfolio VaR at 99% confidence level?

Probability Cumulative Normal distribution

0.90 1.282

0.91 1.341

0.92 1.405

0.93 1.476

0.94 1.555

0.95 1.645

0.96 1.751

0.97 1.881

0.98 2.054

0.99 2.326

A. 164,500

B. 232,600

C. 246,750

D. 348,900

When operating in a heavily traded currency, a commercial and retail bank's treasury is likely to focus on cover operations. Which one of the following four commercial and retails treasury's operations is known as a cover operation?

A. Ensuring that the risks generated by the bank's business are mitigated in the market.

B. Managing the net interest rate risk in the banking book directly with market counterparties by operating a derivatives trading desk.

C. Effectively transferring the interest rate risk in the banking book to the investment bank at a fair transfer price.

D. Mitigating liquidity risk, or effectively managing the balance sheet and its funding.

Which one of the four following statements regarding minimum loss data standards is not correct?

A. The loss data entry must include the actual loss amount.

B. The loss data program must comprehensively capture all material activities.

C. The loss data entry should only include the date when the event was reported.

D. The loss data entry may include descriptive information about the drivers or causes of the loss event.

In hedging transactions, derivatives typically have the following advantages over cash instruments:

I. Lower credit risk

II. Lower funding requirements

III. Lower dealing costs

IV.

Lower capital charges

A.

I, II

B.

I, III

C.

II, IV

D.

I, II, III, IV

A trader for EtaBank wants to take a leveraged position in Collateralized Debt Obligations. If these CDOs can be used in a repo transaction at a 20% haircut, what is the maximum leverage factor for a transaction with the CDOs?

A. 0.8

B. 1.5

C. 3

D. 5

Which one of the following four examples would not be considered a typical source of market risk?

A. Unexpected changes in the term structure of interest rates.

B. The JPY depreciating against the USD.

C. Increased default rate on commercial mortgages due to higher interest rates.

D. Changes in the oil price due to the discovery of new oil fields.