2016-FRR Online Practice Questions and Answers

Which one of the following four statements does identify correctly the relationship between the value of an option and perceived exchange rate volatility?

A. With increases in perceived future foreign exchange volatility, the value of all foreign exchange

B. As the perceived future foreign exchange volatility decreases, the value of all options increases.

C. As the perceived future foreign exchange volatility increases, the value of all options increases.

D. Option values can only change due to the factors related to the demand for specific options

By lowering the spread on lower credit quality borrowers, the bank will typically achieve all of the following outcomes EXCEPT:

A. Aggressively courting of new business

B. Lower probability of default

C. Rapid growth

D. Higher losses in case of default

Which one of the following four statements about the relationship between exchange rates and option values is correct?

A. As the dollar appreciates relative to the pound, the right to buy dollars at a fixed pound exchange rate decreases.

B. As the dollar appreciates relative to the pound, the right to buy dollars at a fixed pound exchange rate increases.

C. As the dollar depreciates relative to the pound, the right to buy dollars at a fixed pound exchange rate increases.

D. As the dollar appreciates relative to the pound, the right to sell dollars at a fixed pound exchange rate increases.

A corporate bond gives a yield of 6%. A same maturity government bond yields 2%. The probability of the corporate bond defaulting is 2.5%. In case of default, investors expect to lose 60% of their investment. The risk premium in the credit spread is:

A. 1.5%

B. 4.5%

C. 2.5%

D. 0.5%

Short-selling is typically associated with the following risks:

I. Potential for extreme losses

II. Risk associated with the availability of shares to borrow

III.

Market behavior risk IV. Liquidity risk

A.

I, II

B.

I, III

C.

II, IV

D.

I, II, III, IV

James Johnson has a $1 million long position in ThetaGroup with a VaR of 0.3 million, and $1 million long position in VolgaCorp with a VaR of 0.4 million. The returns of the two companies have zero correlation. What is the portfolio VaR?

A. $1 million

B. $0.7 million

C. $0.5 million

D. $0.4 million

The Treasury function of a bank typically manages all of the following components EXCEPT:

A. Bank's assets and liabilities

B. Bank's liquidity

C. Bank's capital

D. Bank's performance estimates

Which one of the following four statements about the "market-maker" trading strategy is INCORRECT?

A. A market maker that attracts buy and sell orders can make a profit from the spread quoted between the buy and sell price.

B. A market maker can benefit from the market information she gets from the trades she is asked to execute.

C. This strategy is independent of market liquidity and number of other market makers.

D. This risk in this strategy is that traders have to take positions that may quickly incur a loss.

A trader for EtaBank wants to take a leveraged position in Collateralized Debt Obligations. These CDOs can be used in a repurchase transaction at a 20% haircut. Starting with $100 worth of CDOs, which one of the following four positions would completely utilize the available leverage?

A. The trader can buy $100 in CDO's, and repo the CDO's to get back $100, less interest.

B. The trader can buy $100 in CDO's, and repo the CDO's to get back $80, less interest.

C. The trader can buy $100 in CDO's, and repo the CDO's to get back $60, plus interest.

D. The trader can buy $100 in CDO's, and repo the CDO's to get back $20, plus interest.

Which of the following statements about implementation of a successful RCSA program is correct?

A. An RCSA is only complete after all possible mitigating actions have been identified and analyzed as a result of the assessment process.

B. Internal loss data help to identify the risks and control weaknesses that need to be addressed in the RCSA; external events are not helpful in informing the discussions around potential risks.

C. The RCSA scoring methodology should include only financial impacts and not include reputational, legal, regulatory, client and life safety impacts.

D. To ensure that the RCSA is well designed, it is important to interview participants, stakeholders and support functions prior to the launching the RCSA.