2016-FRR Online Practice Questions and Answers

Forward rate agreements (FRA) are:

A. Exchange traded derivative contracts that allow banks to take positions in forward interest rates.

B. OTC derivative contracts that allow banks and customers to obtain the risk/reward profile of long-term interest rates by relying on long-term funding.

C. Exchange traded derivative contracts that allow banks to take positions in future exchange rates.

D. OTC derivative contracts that allow banks to take positions in forward interest rates.

James Johnson bought a 3-year plain vanilla bond that has yield of 4.7% and 4% coupon paid annually, for $87,139. Macauley's duration of the bond is 2.94 years. Rate volatility is 20% of the yield. The bond's annualized volatility is therefore:

A. 3.15%.

B. 2.90%.

C. 2.81%.

D. 2.64%.

In analyzing the historical performance of a financial product, you are concerned about "fat tails", the probability of extreme returns compared to realized returns. Which of the following measures should you use to determine if the product return distribution of the product has "fat tails"?

A. Mean

B. Standard deviation

C. Skewness

D. Kurtosis

For two variables, which of the following is equal to the average product of the deviations from their respective means?

A. Standard deviation

B. Kurtosis

C. Correlation

D. Covariance

10 basis points are equal to:

A. 10%

B. 1%

C. 0.1%

D. 0.01%

Which of the following statements describes a bank's reasons to set risk limits?

I. To control and minimize a bank's current risk exposure.

II. To predict future risks.

III. To allocate risks to business units.

IV.

To keep risk within tolerance levels.

A.

I and II

B.

III and IV

C.

I, II, and III

D.

I, III, and IV

To ensure good risk management which of the following should be true about the CRO role and function?

A. The CRO should receive compensation that is directly determined by the profit of the trading desk.

B. The CRO should report to the CEO or the Board of Directors.

C. The CRO should not be involved with the setting of risk limits.

D. To ensure efficient flow of information the CRO should not be independent of business units.

What are the add-on losses faced by a bank that is going bankrupt?

I. The discount accepted by the bank for selling its assets in a fire sale.

II. The increased cost of funding liabilities in a financially distressed situation.

III. The reduction in the present value of future growth opportunities.

IV.

Loss of goodwill and intangible assets.

A.

I, II

B.

II, III, IV

C.

III, IV

D.

I, II, III, IV.

Which one of the following four statements about hedging is INCORRECT?

A. Traders can hedge their risks by taking an appropriate position in the underlying instrument.

B. Traders can hedge their portfolio risks by taking a position in a different instrument.

C. For a fully hedged portfolio, any changes in markets prices will typically produce significant changes in the market value of the portfolio.

D. A large number of hedge positions is generally required to match the underlying transaction completely.

Which one of the following four statements about planning for the operational risk framework is INCORRECT?

A. Planning for the operational risk framework involves setting clear goals, realistic milestones and achievable deliverables that add value.

B. An operational risk framework is a complex and evolving challenge, and to keep its development under control it is important to apply strong project management skills to the design and implementation of each new element.

C. Planning for the operational risk framework suggests that short-term planning and focus on immediate benefits is strongly preferred to the long-term planning approach.

D. Once the elements of an operational risk framework are up and running, they need to be monitored to ensure they maintain their integrity and do not deteriorate over time.