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FRM Exam Part 1 Full Access
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Question 1 of 30
1. Question
What happened in 1993, resulting in losses of $900 million on MGRM’s long positions, which were realized immediately as the futures contracts were marked to market.
Correct
During 1993, oil prices dropped from a high of about $21 per barrel to about $14 per barrel, resulting in losses of $900 million on MGRM’s long positions, which were realized immediately as the futures contracts were marked to market
Incorrect
During 1993, oil prices dropped from a high of about $21 per barrel to about $14 per barrel, resulting in losses of $900 million on MGRM’s long positions, which were realized immediately as the futures contracts were marked to market
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Question 2 of 30
2. Question
Which hedge fund was founded in early 1994, generated stellar returns in its first few years of operation: 43% in 1995 and 41% in 1996?
Correct
Long-Term Capital Management (LTCM), a hedge fund founded in early 1994, generated stellar returns in its first few years of operation: 43% in 1995 and 41% in 1996.
Incorrect
Long-Term Capital Management (LTCM), a hedge fund founded in early 1994, generated stellar returns in its first few years of operation: 43% in 1995 and 41% in 1996.
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Question 3 of 30
3. Question
How did Long-Term Capital Management (LCTM) grew enormously?
I. Fixed income
II. Positions in equity
III. Fixed deposit
IV. Derivatives markets all around the globe
Correct
With positions in equity, fixed income, and derivatives markets all around the globe, LTCM grew enormously.
Incorrect
With positions in equity, fixed income, and derivatives markets all around the globe, LTCM grew enormously.
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Question 4 of 30
4. Question
Which of the following could the LTCM’s investment strategies be classified as?
I. Relative value
II. Credit spreads
III. Equity volatility.
IV. Riskless fixed-income
Correct
Most of LTCM’s investment strategies could be classified as relative value, credit spreads, and equity volatility.
Incorrect
Most of LTCM’s investment strategies could be classified as relative value, credit spreads, and equity volatility.
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Question 5 of 30
5. Question
Which of the following would increase if being defaulted by Russia?
I. Its debt and credit spreads
II. Risk premiums
III. Liquidity premiums
IV. Volatility around the world increased.
Correct
When Russia defaulted on its debt, credit spreads, risk premiums, liquidity premiums, and volatility around the world increased.
Incorrect
When Russia defaulted on its debt, credit spreads, risk premiums, liquidity premiums, and volatility around the world increased.
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Question 6 of 30
6. Question
How was Long-Term Capital Management (LTCM) diversified?
I. LCTM was diversified across the globe
II. LCTM was diversified across the country
III. LCTM was diversified across different asset classes
IV. LCTM was diversified across different trading strategies
Correct
LTCM was diversified across the globe, across different asset classes, and across different trading strategies.
Incorrect
LTCM was diversified across the globe, across different asset classes, and across different trading strategies.
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Question 7 of 30
7. Question
Which of the following used to sought the assistance of Bankers Trust (BT) to help them reduce funding costs?
I. Procter & Gamble (P&G)
II. Gibson Greetings
III. Citigroup
IV. JPMorgan
Correct
Procter & Gamble (P&G) and Gibson Greetings sought the assistance of Bankers Trust (BT) to help them reduce funding costs.
Incorrect
Procter & Gamble (P&G) and Gibson Greetings sought the assistance of Bankers Trust (BT) to help them reduce funding costs.
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Question 8 of 30
8. Question
Which of the following misled investors regarding the risk of investments in limited partnership?
Correct
Prudential-Bache Securities misled investors regarding the risk of investments in limited partnerships.
Incorrect
Prudential-Bache Securities misled investors regarding the risk of investments in limited partnerships.
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Question 9 of 30
9. Question
Which trader for Allid Irish Bank hid $691 million in losses? He also bullied back-office workers into not following-up on trade confirmations for imaginary trades.
Correct
A currency trader for Allied Irish Bank, John Rusnak, hid $691 million in losses. Rusnak bullied back-office workers into not following-up on trade confirmations for imaginary trades.
Incorrect
A currency trader for Allied Irish Bank, John Rusnak, hid $691 million in losses. Rusnak bullied back-office workers into not following-up on trade confirmations for imaginary trades.
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Question 10 of 30
10. Question
The losses were mostly due to incorrect modelling of long-dated options and the firm’s stake in Long-Term Capital Management. Which business lost millions in 1997 and 1998?
Correct
UBS’s equity derivatives business lost millions in 1997 and 1998. The losses were mostly due to incorrect modelling of long-dated options and the firm’s stake in Long-Term Capital Management.
Incorrect
UBS’s equity derivatives business lost millions in 1997 and 1998. The losses were mostly due to incorrect modelling of long-dated options and the firm’s stake in Long-Term Capital Management.
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Question 11 of 30
11. Question
Which of the following two main factors that led to the housing bubble?
I. Risk credit
II. Cheap credit
III. Accept in lending standards
IV. Decline in lending standards
Correct
The housing bubble, which later burst and caused a liquidity squeeze, can been seen as the product of the following two broad factors: Cheap credit & Decline in lending standards.
Incorrect
The housing bubble, which later burst and caused a liquidity squeeze, can been seen as the product of the following two broad factors: Cheap credit & Decline in lending standards.
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Question 12 of 30
12. Question
“Large capital inflows from abroad plus the Fed’s lax interest rate policy lead to a low interest rate environment in the United States, making mortgages less expensive for borrowers.”
Which of the following matches the above description?
Correct
Cheap credit: Large capital inflows from abroad plus the Fed’s lax interest rate policy lead to a low interest rate environment in the United States, making mortgages less expensive for borrowers.
Incorrect
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Question 13 of 30
13. Question
“The originate-to-distribute model allowed banks to offload risk to investors, which led to falling lending standards because banks had less incentive to exercise care when approving and monitoring loans. ”
Which of the following matches the above description?
Correct
Decline in lending standards: The originate-to-distribute model allowed banks to offload risk to investors, which led to falling lending standards because banks had less incentive to exercise care when approving and monitoring loans.
Incorrect
Decline in lending standards: The originate-to-distribute model allowed banks to offload risk to investors, which led to falling lending standards because banks had less incentive to exercise care when approving and monitoring loans.
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Question 14 of 30
14. Question
The 2007—2008 U.S. mortgage crisis produced unprecedented financial turmoil—indeed, the worst since the Great Depression. The related liquidity squeeze was caused by which of the following two major banking industry trends?
I. Risk transference through asset securitization
II. Asset-liability maturity mismatch
III. Decline in lending standards
IV. Cheap credit
Correct
The 2007—2008 U.S. mortgage crisis produced unprecedented financial turmoil—indeed, the worst since the Great Depression.
The related liquidity squeeze was caused by two major banking industry trends:
– Risk transference through asset securitization: through the originate-to-distribute model.
– Asset-liability maturity mismatch, the purchase of long-term assets through the rollover of short-term debt instruments.
Incorrect
The 2007—2008 U.S. mortgage crisis produced unprecedented financial turmoil—indeed, the worst since the Great Depression.
The related liquidity squeeze was caused by two major banking industry trends:
– Risk transference through asset securitization: through the originate-to-distribute model.
– Asset-liability maturity mismatch, the purchase of long-term assets through the rollover of short-term debt instruments.
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Question 15 of 30
15. Question
Regarding banking industry trends that lead to the liquidity crisis, which of the following statements is correct?
Correct
The subprime mortgage crisis reached its peak in June and July of 2007. Asset-liability maturity mismatch refers to the purchase of long-term assets through short-term financing. Banks used commercial paper and repurchase agreements to finance the purchase of long- term assets. Securitization (and not management of asset-liability maturity mismatch) refers to risk transference through asset securitization.
Incorrect
The subprime mortgage crisis reached its peak in June and July of 2007. Asset-liability maturity mismatch refers to the purchase of long-term assets through short-term financing. Banks used commercial paper and repurchase agreements to finance the purchase of long- term assets. Securitization (and not management of asset-liability maturity mismatch) refers to risk transference through asset securitization.
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Question 16 of 30
16. Question
How many steps are there in a Collateralized debt obligation (CDO)?
Correct
The creation of a CDO might be thought of as a three-step process:
– Form a diversified portfolio.
– Slice the portfolio into tranches.
– Sell tranches to investors.
Incorrect
The creation of a CDO might be thought of as a three-step process:
– Form a diversified portfolio.
– Slice the portfolio into tranches.
– Sell tranches to investors.
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Question 17 of 30
17. Question
Which of the following are three-step process of Collateralized debt obligation (CDO)?
I. Form a diversified portfolio.
II. Slice the portfolio into tranches.
III. Sell tranches to investors.
IV. Buy tranches from investors
Correct
The creation of a CDO might be thought of as a three-step process:
– Form a diversified portfolio.
– Slice the portfolio into tranches.
– Sell tranches to investors.
Incorrect
The creation of a CDO might be thought of as a three-step process:
– Form a diversified portfolio.
– Slice the portfolio into tranches.
– Sell tranches to investors.
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Question 18 of 30
18. Question
Which of the following best describe ‘Sell tranches to investors’?
Correct
Sell tranches to investors: Different groups of investors have varying appetites for risk.
Incorrect
Sell tranches to investors: Different groups of investors have varying appetites for risk.
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Question 19 of 30
19. Question
Which of the following best describe ‘Slice the portfolio into tranches’?
Correct
Slice the portfolio into tranches: The cash flows from the portfolio of collected securities are sliced into a number of investable tranches (a French word meaning “slices”), each with different characteristics.
Incorrect
Slice the portfolio into tranches: The cash flows from the portfolio of collected securities are sliced into a number of investable tranches (a French word meaning “slices”), each with different characteristics.
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Question 20 of 30
20. Question
What bank assets does the bank collect to form a diversifies portfolio?
I. Mortgages
II. Corporate bonds
III. Different kinds of loans
IV. Other types of debt instruments such as credit card receivables
Correct
Form a diversified portfolio: The bank collects a number of debt assets, such as mortgages, corporate bonds, various kinds of loans, as well as other types of debt instruments such as credit card receivables.
Incorrect
Form a diversified portfolio: The bank collects a number of debt assets, such as mortgages, corporate bonds, various kinds of loans, as well as other types of debt instruments such as credit card receivables.
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Question 21 of 30
21. Question
‘Insurance contracts that pay off when some reference instrument (such as a bond or a CDO tranche) defaults’. Which of the following best describe the above description?
Correct
Credit default swaps (CDSs) are insurance contracts that pay off when some reference instrument (such as a bond or a CDO tranche) defaults.
Incorrect
Credit default swaps (CDSs) are insurance contracts that pay off when some reference instrument (such as a bond or a CDO tranche) defaults.
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Question 22 of 30
22. Question
Which of the following statements regarding securitization is least accurate?
Correct
After securitization, banks have less incentive to be careful in making loans because much of the risk will be borne by other institutions. Instead of retaining loans and carrying the risk of default of borrowers, banks can transfer this risk to investors through securitization. Securitization enabled the originate-to-distribute model of banking (in which loans are securitized and resold) to replace the traditional model of banking (where banks held loans until repaid). Securitization can allow institutional investors to indirectly hold assets that regulations have prohibited the institution from holding directly.
Incorrect
After securitization, banks have less incentive to be careful in making loans because much of the risk will be borne by other institutions. Instead of retaining loans and carrying the risk of default of borrowers, banks can transfer this risk to investors through securitization. Securitization enabled the originate-to-distribute model of banking (in which loans are securitized and resold) to replace the traditional model of banking (where banks held loans until repaid). Securitization can allow institutional investors to indirectly hold assets that regulations have prohibited the institution from holding directly.
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Question 23 of 30
23. Question
Why are the months of June and July 2007 important in the financial history of the United States?
I. The subprime mortgage crisis reached its peak.
II. The subprime mortgage crisis reached its lowest point.
III. The downgrading of subprime and other tranches of mortgage-related securitized assets by three major rating agencies.
IV. The upgrading of subprime and other tranches of mortgage-related securitized assets by three major rating agencies.
Correct
The months of June and July 2007 are important in the financial history of the United States, as the subprime mortgage crisis reached its peak. Perhaps the most important development in these two months was the downgrading of subprime and other tranches of mortgage-related securitized assets by three major rating agencies.
Incorrect
The months of June and July 2007 are important in the financial history of the United States, as the subprime mortgage crisis reached its peak. Perhaps the most important development in these two months was the downgrading of subprime and other tranches of mortgage-related securitized assets by three major rating agencies.
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Question 24 of 30
24. Question
Which of the following description best describe ‘Funding Liquidity’?
Correct
Funding liquidity refers to an institution’s ability to immediately settle obligations when they are due. If a bank is not able to settle its obligations on time, the bank is illiquid.
Incorrect
Funding liquidity refers to an institution’s ability to immediately settle obligations when they are due. If a bank is not able to settle its obligations on time, the bank is illiquid.
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Question 25 of 30
25. Question
Leveraged investors pledge the asset that they purchase as collateral; however, they cannot borrow 100% of the price of the asset. What must the investor provide?
Correct
Leveraged investors pledge the asset that they purchase as collateral; however, they cannot borrow 100% of the price of the asset. Rather, the investor must provide equity capital to finance the margin in an amount equal to the difference between the purchase price and the collateral value of the asset.
Incorrect
Leveraged investors pledge the asset that they purchase as collateral; however, they cannot borrow 100% of the price of the asset. Rather, the investor must provide equity capital to finance the margin in an amount equal to the difference between the purchase price and the collateral value of the asset.
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Question 26 of 30
26. Question
‘The possibility that an institution will not be able to settle its obligations when they are due’.
Which of the following matches the above description?Correct
Funding liquidity risk refers to the possibility that an institution will not be able to settle its obligations when they are due.
Incorrect
Funding liquidity risk refers to the possibility that an institution will not be able to settle its obligations when they are due.
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Question 27 of 30
27. Question
Which of the following are the three forms of funding liquidity risk?
I. Margin/haircut funding risk
II. Rollover risk
III. Redemption risk
IV. Management risk
Correct
Three forms of funding liquidity risk are as follows:
– Margin/haircut funding risk
– Rollover risk
– Redemption risk
Incorrect
Three forms of funding liquidity risk are as follows:
– Margin/haircut funding risk
– Rollover risk
– Redemption risk
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Question 28 of 30
28. Question
‘The ease or difficulty of selling an asset to raise money’.
Which of the following matches the above description?Correct
Market liquidity refers to the ease or difficulty of selling an asset to raise money.
Incorrect
Market liquidity refers to the ease or difficulty of selling an asset to raise money.
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Question 29 of 30
29. Question
Regarding funding liquidity and market liquidity, which of the following statements is correct?
Correct
A loss spiral is a negative function of market liquidity. The first statement refers to funding liquidity and not market liquidity. A decline in funding has the same effect as an increase in required margin. Statement D refers to loss spiral and not margin spiral.
Incorrect
A loss spiral is a negative function of market liquidity. The first statement refers to funding liquidity and not market liquidity. A decline in funding has the same effect as an increase in required margin. Statement D refers to loss spiral and not margin spiral.
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Question 30 of 30
30. Question
Which of the following statements related to counterparty credit risk is least accurate?
Correct
CDOs and swaps are traded in the over-the-counter market, not on organized trading exchanges. A clearinghouse can facilitate multilateral netting arrangements, eliminating counterparty credit risk, and thus lowering network risk.
Incorrect
CDOs and swaps are traded in the over-the-counter market, not on organized trading exchanges. A clearinghouse can facilitate multilateral netting arrangements, eliminating counterparty credit risk, and thus lowering network risk.