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FRM Exam Part 1 Full Access
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Question 1 of 30
1. Question
Which of the following could possibly be included in the methods to determine the optimal level of risk exposure?
I. Targeting a certain default probability
II. Credit rating and sensitivity
III. Risk management
IV. Scenario analysis
Correct
Methods to determine the optimal level of risk exposure include targeting a certain default probability or credit rating and sensitivity or scenario analysis.
Incorrect
Methods to determine the optimal level of risk exposure include targeting a certain default probability or credit rating and sensitivity or scenario analysis.
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Question 2 of 30
2. Question
The optimal level of risk depends on the specific focus of the bank’s activities so it will differ among banks. Which of the following are the examples of the bank’s activities?
I. Lending
II. Deposits
III. Derivatives
IV. Exchange information of banks
Correct
The optimal level of risk depends on the specific focus of the bank’s activities (e.g., lending, deposits, derivatives), so it will differ among banks.
Incorrect
The optimal level of risk depends on the specific focus of the bank’s activities (e.g., lending, deposits, derivatives), so it will differ among banks.
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Question 3 of 30
3. Question
Which of the following are analysis of the adverse impacts on the value of a bank due to changes?
I. Interest rates
II. Foreign exchange rates
III. Inflation
IV. Et cetera
Correct
There would be an analysis of the adverse impacts on the value of a bank due to changes in interest rates, foreign exchange rates, inflation, et cetera.
Incorrect
There would be an analysis of the adverse impacts on the value of a bank due to changes in interest rates, foreign exchange rates, inflation, et cetera.
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Question 4 of 30
4. Question
Which of the following statements regarding the optimal level of risk exposure is correct?
Correct
A bank that is focused more on transactional activities would usually set the level of risk higher and target a lower credit rating.
Incorrect
A bank that is focused more on transactional activities would usually set the level of risk higher and target a lower credit rating.
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Question 5 of 30
5. Question
What happens when a bank takes on too much risk?
I. May decrease the value of the subject bank
II. May increase the value of the subject bank
III. May impair its ability to provide safe and liquid investments
IV. May provide opportunity for further investments
Correct
If the bank takes on too much risk, then that may impair its ability to provide safe and liquid investments. Too much risk may reduce the value of the bank.
Incorrect
If the bank takes on too much risk, then that may impair its ability to provide safe and liquid investments. Too much risk may reduce the value of the bank.
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Question 6 of 30
6. Question
Which of the following statements regarding the amount of risk taken by a bank and the impact on the value o f a bank is most likely correct?
Correct
When a bank is valued for its ability to provide safe and liquid investments to its customers, it should not take on too much risk because that may impair its ability to provide safe and liquid investments and may ultimately reduce the value of the bank.
Incorrect
When a bank is valued for its ability to provide safe and liquid investments to its customers, it should not take on too much risk because that may impair its ability to provide safe and liquid investments and may ultimately reduce the value of the bank.
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Question 7 of 30
7. Question
What has become a crucial part of the bank’s operations that aims to create policies intended to increase the bank value?
Correct
risk management becomes a crucial part of the bank’s operations that aims to create policies intended to increase the bank’s value.
Incorrect
risk management becomes a crucial part of the bank’s operations that aims to create policies intended to increase the bank’s value.
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Question 8 of 30
8. Question
In which of the following situations would the existence or addition of an independent risk management department add value to a bank?
Correct
The total amount of risk that the bank is able to take is dependent on all of the risks taken by the various business units. As a result, the risk management function can add value by requiring the business units to take the perspective of the entire bank when making decisions regarding risks.
Incorrect
The total amount of risk that the bank is able to take is dependent on all of the risks taken by the various business units. As a result, the risk management function can add value by requiring the business units to take the perspective of the entire bank when making decisions regarding risks.
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Question 9 of 30
9. Question
What happens when a bank takes on a more flexible risk management system?
I. Increase risk management stills
II. May allow the bank to take on profitable risks
III. Reduce the advantage of investment opportunities
IV. Take advantage of investment opportunities that could increase its value
Correct
A more flexible risk management system may allow the bank to take on profitable risks and take advantage o f investment opportunities that could increase its value.
Incorrect
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Question 10 of 30
10. Question
Risk management through hedging alone will not result in risk management becoming a passive activity due to which of the following three limitations?
I. Hedging limitations
II. Risk taker incentive limitations
III. Information Technology limitations
IV. Risk measurement technology limitations
Correct
Risk management through hedging alone will not result in risk management becoming a passive activity due to (1) risk measurement technology limitations, (2) hedging limitations, and (3) risk taker incentive limitations.
Incorrect
Risk management through hedging alone will not result in risk management becoming a passive activity due to (1) risk measurement technology limitations, (2) hedging limitations, and (3) risk taker incentive limitations.
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Question 11 of 30
11. Question
Which of the following risks are least likely to be accounted for in a bankwide value at risk (VaR) measure?
I. Credit risk
II. Market risk
III. Operational risk
IV. Funding liquidity risk
Correct
Banks often break down their risks into three categories: market, credit, and operational. In measuring risk at the firm level, the resulting VaR is most likely not to account for all of the operational risk. In addition, firmwide VaR measures often do not consider funding liquidity risk, the sudden reduction in funding to the bank, which often necessitates a sale of assets at a discount or loss.
Incorrect
Banks often break down their risks into three categories: market, credit, and operational. In measuring risk at the firm level, the resulting VaR is most likely not to account for all of the operational risk. In addition, firmwide VaR measures often do not consider funding liquidity risk, the sudden reduction in funding to the bank, which often necessitates a sale of assets at a discount or loss.
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Question 12 of 30
12. Question
Which of the following risk has no impact when VaR is estimated at a probability level that is not exceedingly low.
Correct
Unknown risks have no impact when VaR is estimated at a probability level that is not exceedingly low.
Incorrect
Unknown risks have no impact when VaR is estimated at a probability level that is not exceedingly low.
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Question 13 of 30
13. Question
It is difficult to demonstrate that a bank’s governance has a significant impact on its risk profile and performance for three main reasons. Which of the following are the three main reasons?
I. Sufficient date on how the risk function operates in banks
II. Very limited data exists on how the risk function operates in banks.
III. Risk function characteristics are also affected by the bank’s risk appetite (in addition to governance).
IV. It is possible that at the firm level, poor performance will occur even in the presence of strong governance.
Correct
It is difficult to demonstrate that a bank’s governance has a significant impact on its risk profile and performance for three main reasons. First, very limited data exists on how the risk function operates in banks. Second, risk function characteristics are also affected by the bank’s risk appetite (in addition to governance). Third, it is possible that at the firm level, poor performance will occur even in the presence of strong governance.
Incorrect
It is difficult to demonstrate that a bank’s governance has a significant impact on its risk profile and performance for three main reasons. First, very limited data exists on how the risk function operates in banks. Second, risk function characteristics are also affected by the bank’s risk appetite (in addition to governance). Third, it is possible that at the firm level, poor performance will occur even in the presence of strong governance.
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Question 14 of 30
14. Question
Which of the following are the two studies examined the impact of culture?
I. The performance of the managers was rewarded based on their respective business units
II. Companies where managers were perceived as honest and trustworthy were more profitable and were given higher valuations.
III. Shareholder governance improvements would change a firm’s culture from focusing on employee integrity and customer service to focusing on end results.
IV. Shareholder governance improvements would change a firm’s culture from focusing on employee performance and the employee’s past experiences.
Correct
Two studies examined the impact of culture. One of these studies concluded that companies where managers were perceived as honest and trustworthy were more profitable and were given higher valuations. The other study concluded that shareholder governance improvements would change a firm’s culture from focusing on employee integrity and customer service to focusing on end results.
Incorrect
Two studies examined the impact of culture. One of these studies concluded that companies where managers were perceived as honest and trustworthy were more profitable and were given higher valuations. The other study concluded that shareholder governance improvements would change a firm’s culture from focusing on employee integrity and customer service to focusing on end results.
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Question 15 of 30
15. Question
Which of the following statements regarding the impact of a bank’s governance, incentive structure, and risk culture on its risk profile and performance is correct?
Correct
One risk culture study shows that banks that have chief risk officers with higher status have lower risk. However, there is no evidence that such stronger governance leads to higher performance in terms of ex-post returns.
Incorrect
One risk culture study shows that banks that have chief risk officers with higher status have lower risk. However, there is no evidence that such stronger governance leads to higher performance in terms of ex-post returns.
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Question 16 of 30
16. Question
Who was able to borrow $300 million in unsecured funds from Chase Manhattan by exploiting a flaw in the system for computing the value of collateral?
Correct
Drysdale Securities was able to borrow $300 million in unsecured funds from Chase Manhattan by exploiting a flaw in the system for computing the value of collateral.
Incorrect
Drysdale Securities was able to borrow $300 million in unsecured funds from Chase Manhattan by exploiting a flaw in the system for computing the value of collateral.
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Question 17 of 30
17. Question
Which of the following was least influential in the Metallgesellschaft debacle?
Correct
The fundamental problem at Metallgesellschaft was that the timing of the marked to market losses and margin calls on its futures contracts were mismatched with the cash flows on the forward contracts it was trying to hedge. The problem was compounded by the enormous size of the positions, which made liquidation costly, and by conservative financial reporting requirements that did not recognize the gains on the forward contracts. Neither fraud nor deception is central to the Metallgesellschaft case.
Incorrect
The fundamental problem at Metallgesellschaft was that the timing of the marked to market losses and margin calls on its futures contracts were mismatched with the cash flows on the forward contracts it was trying to hedge. The problem was compounded by the enormous size of the positions, which made liquidation costly, and by conservative financial reporting requirements that did not recognize the gains on the forward contracts. Neither fraud nor deception is central to the Metallgesellschaft case.
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Question 18 of 30
18. Question
In January 2008, who was one of the junior traders in Société Générale that was involved in unauthorized trading activity that resulted in losses of $7.1 billion?
Correct
In January 2008, it was discovered that one of Societe Generale’s junior traders, Jerome Kerviel, was involved in unauthorized trading activity that resulted in losses of $7.1 billion.
Incorrect
In January 2008, it was discovered that one of Societe Generale’s junior traders, Jerome Kerviel, was involved in unauthorized trading activity that resulted in losses of $7.1 billion.
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Question 19 of 30
19. Question
A number of reasons were cited that explained how Kerviel’s unauthorized trading activity went undetected, including:
I. The inability of managing a bank
II. The lack of proper supervision
III. The incorrect handling of trade cancellations
IV. The inability of the bank’s trading system to consider gross positions.
Correct
A number of reasons were cited that explained how Kerviel’s unauthorized trading activity went undetected, including the incorrect handling of trade cancellations, the lack of proper supervision, and the inability of the bank’s trading system to consider gross positions.
Incorrect
A number of reasons were cited that explained how Kerviel’s unauthorized trading activity went undetected, including the incorrect handling of trade cancellations, the lack of proper supervision, and the inability of the bank’s trading system to consider gross positions.
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Question 20 of 30
20. Question
Which are the additional reasons that contributed to the unauthorized positions going undetected?
I. The inaction of Kernel’s trading assistant to report fraudulent activity
II. The violation of the bank’s vacation policy
III. The weak reporting system for collateral and cash accounts
IV. The lack of investigation into unexpected reported trading gains.
Correct
Additional reasons that contributed to the unauthorized positions going undetected included the inaction of Kernel’s trading assistant to report fraudulent activity, the violation of the bank’s vacation policy, the weak reporting system for collateral and cash accounts, and the lack of investigation into unexpected reported trading gains.
Incorrect
Additional reasons that contributed to the unauthorized positions going undetected included the inaction of Kernel’s trading assistant to report fraudulent activity, the violation of the bank’s vacation policy, the weak reporting system for collateral and cash accounts, and the lack of investigation into unexpected reported trading gains.
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Question 21 of 30
21. Question
The lessons from this control failure are similar to lessons from the other case studies of Kidder Peabody, Barings, and Allied Irish Bank. Given the common events among these cases, the importance of tighter operational controls that lead to better detection of fictitious trading activities cannot be overstated.
Which of the following lessons to be learned specific to this case?
I. Mandatory vacation rules should be enforced.
II. Requirements for collateral and cash reports must be monitored for individual traders.
III. Tighter controls should be applied to situations that involve a new or temporary manager.
IV. Banks must check for abnormally high gross-to-net-position ratios. High ratios suggest a greater probability of unauthorized trading activities and/or basis risk measurement issues.
Correct
– Mandatory vacation rules should be enforced.
– Requirements for collateral and cash reports must be monitored for individual traders.
– Tighter controls should be applied to situations that involve a new or temporary manager.
– Banks must check for abnormally high gross-to-net-position ratios. High ratios suggest a greater probability of unauthorized trading activities and/or basis risk measurement issues.
Incorrect
– Mandatory vacation rules should be enforced.
– Requirements for collateral and cash reports must be monitored for individual traders.
– Tighter controls should be applied to situations that involve a new or temporary manager.
– Banks must check for abnormally high gross-to-net-position ratios. High ratios suggest a greater probability of unauthorized trading activities and/or basis risk measurement issues.
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Question 22 of 30
22. Question
Who was the treasury bond trader that covered up $1.1 billion in losses over an 11-year time span from 1984 to 1995?
Correct
A Treasury bond trader, Toshihide Iguchi, covered up $1.1 billion in losses over an 11-year time span from 1984 to 1995.
Incorrect
A Treasury bond trader, Toshihide Iguchi, covered up $1.1 billion in losses over an 11-year time span from 1984 to 1995.
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Question 23 of 30
23. Question
Who was the lead copper trader for Sumitomo, attempted to corner the copper market in a classic market manipulation strategy?
Correct
Yasuo Hamanaka, the lead copper trader for Sumitomo, attempted to corner the copper market in a classic market manipulation strategy.
Incorrect
Yasuo Hamanaka, the lead copper trader for Sumitomo, attempted to corner the copper market in a classic market manipulation strategy.
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Question 24 of 30
24. Question
What happened to Hamanaka after the $2.6 billion trading loss of plummeting copper prices and a $150 million fine from the CFTC?
I. Hamanaka was fired
II. Hamanaka was jailed
III. Hamanaka was prosecuted
IV. Hamanaka was sentenced to death
Correct
A continuation of plummeting copper prices resulted in a $2.6 billion trading loss and a $150 million fine from the CFTC. Hamanaka was fired, prosecuted, and jailed.
Incorrect
A continuation of plummeting copper prices resulted in a $2.6 billion trading loss and a $150 million fine from the CFTC. Hamanaka was fired, prosecuted, and jailed.
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Question 25 of 30
25. Question
He misled investors by valuing positions with incorrect values instead of dealer quotes. Askin reported these incorrect values to potential clients in order to generate interest in his funds. Both funds went bankrupt in 1994, suffering losses of $600 million.
Which capital did David Askin managed, which invested in mortgage securities?
I. Askin Capital Management
II. Granite Capital Hedge funds
III. Long-Term Capital Management
IV. Short-Term Capital Management
Correct
David Askin managed both the Askin Capital Management and Granite Capital hedge funds, which invested in mortgage securities. He misled investors by valuing positions with incorrect values instead of dealer quotes. Askin reported these incorrect values to potential clients in order to generate interest in his funds. Both funds went bankrupt in 1994, suffering losses of $600 million.
Incorrect
David Askin managed both the Askin Capital Management and Granite Capital hedge funds, which invested in mortgage securities. He misled investors by valuing positions with incorrect values instead of dealer quotes. Askin reported these incorrect values to potential clients in order to generate interest in his funds. Both funds went bankrupt in 1994, suffering losses of $600 million.
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Question 26 of 30
26. Question
National Westminster Bank’s (NatWest) was forced to sell the Royal Bank of Scotland due to which of the following reason?
Correct
NatWest was forced to sell the Royal Bank of Scotland due to investor’s loss of confidence in management’s oversight.
Incorrect
NatWest was forced to sell the Royal Bank of Scotland due to investor’s loss of confidence in management’s oversight.
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Question 27 of 30
27. Question
What happened between 1994 and 1997 in the National Westminster Bank (NatWest)?
I. Traders used incorrect volatility inputs for interest rate caps and swaptions
II. Traders were only using a sample of market volatility estimates due to the illiquid nature of these investments.
III. The loss from this incorrect reporting was close to $140 million
IV. NatWest was forced to sell the Royal Bank of Scotland due to investor’s loss of confidence in management’s oversight.
Correct
National Westminster Bank’s (NatWest) traders used incorrect volatility inputs for interest rate caps and swaptions between 1994 and 1997. It was reported that traders were only using a sample of market volatility estimates due to the illiquid nature of these investments. The loss from this incorrect reporting was close to $140 million. NatWest was forced to sell the Royal Bank of Scotland due to investor’s loss of confidence in management’s oversight.
Incorrect
National Westminster Bank’s (NatWest) traders used incorrect volatility inputs for interest rate caps and swaptions between 1994 and 1997. It was reported that traders were only using a sample of market volatility estimates due to the illiquid nature of these investments. The loss from this incorrect reporting was close to $140 million. NatWest was forced to sell the Royal Bank of Scotland due to investor’s loss of confidence in management’s oversight.
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Question 28 of 30
28. Question
Which of the following two cases illustrate financial disasters related to larger unexpected market movements?
I. Metallgesellschaft
II. Long-Term Capital Management
III. Askin Capital Management
IV. Granite Capital Hedge funds
Correct
The following two cases on Metallgesellschaft and Long-Term Capital Management illustrate financial disasters related to large unexpected market movements.
Incorrect
The following two cases on Metallgesellschaft and Long-Term Capital Management illustrate financial disasters related to large unexpected market movements.
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Question 29 of 30
29. Question
What puts Long-Term Capital Management in a cash flow crisis when an economic shock created intolerable marked to market losses and margin calls?
I. Extreme leverage
II. Appropriate cash flow
III. A lack of diversification
IV. Inadequate risk models
Correct
Extreme leverage, a lack of diversification, and inadequate risk models put Long-Term Capital Management in a cash flow crisis when an economic shock created intolerable marked to market losses and margin calls. A forced liquidation of its huge positions drove prices down, further compounding their losses.
Incorrect
Extreme leverage, a lack of diversification, and inadequate risk models put Long-Term Capital Management in a cash flow crisis when an economic shock created intolerable marked to market losses and margin calls. A forced liquidation of its huge positions drove prices down, further compounding their losses.
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Question 30 of 30
30. Question
Which of the following financial disasters created a situation that resembled a classic Ponzi scheme where artificial profits are shown, but never materialize into actual profits?
Correct
The head of the government bond trading desk at Kidder Peabody, Joseph Jett, misreported a series of trades, which allowed him to report substantial artificial profits. After these errors were detected, $350 million in falsely reported gains had to be reversed. This situation of hypothetical profits in place of promised profits resembles a classic Ponzi scheme.
Incorrect
The head of the government bond trading desk at Kidder Peabody, Joseph Jett, misreported a series of trades, which allowed him to report substantial artificial profits. After these errors were detected, $350 million in falsely reported gains had to be reversed. This situation of hypothetical profits in place of promised profits resembles a classic Ponzi scheme.