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FRM Exam Part 1 Full Access
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Question 1 of 30
1. Question
What does ‘risk management’ include in to incur expected losses?
I. The sequence of activities aimed to reduce or eliminate an entity’s potential to incur expected losses.
II. The style of activities aimed to reduce or eliminate an entity’s potential to incur expected losses.
III. Can be thought of as a defensive technique
IV. Nothing should be included in risk management.
Correct
risk management includes the sequence of activities aimed to reduce or eliminate an entity’s potential to incur expected losses.
Incorrect
risk management includes the sequence of activities aimed to reduce or eliminate an entity’s potential to incur expected losses.
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Question 2 of 30
2. Question
How many steps are there in the risk management process?
Correct
In its basic format, the risk management process is as follows:
Step 1: Identify the risks.
Step 2: Quantify and estimate the risk exposures or determine appropriate methods to transfer the risks.
Step3: Determinethecollectiveeffectsoftheriskexposuresorperformacost-benefit analysis on risk transfer methods.
Step 4: Develop a risk mitigation strategy (i.e., avoid, transfer, mitigate, or assume risk).
Step 5: Assess performance and amend risk mitigation strategy as needed.Incorrect
In its basic format, the risk management process is as follows:
Step 1: Identify the risks.
Step 2: Quantify and estimate the risk exposures or determine appropriate methods to transfer the risks.
Step3: Determinethecollectiveeffectsoftheriskexposuresorperformacost-benefit analysis on risk transfer methods.
Step 4: Develop a risk mitigation strategy (i.e., avoid, transfer, mitigate, or assume risk).
Step 5: Assess performance and amend risk mitigation strategy as needed. -
Question 3 of 30
3. Question
What does ‘risk taking’ refers to?
I. Specifically to the active assumption of incremental risk in order to generate incremental gains.
II. Can be thought of in an opportunistic context.
III. Managing the unexpected losses.
IV. How people are willing to take risk.Correct
Risk taking refers specifically to the active assumption of incremental risk in order to generate incremental gains. In that regard, risk taking can be thought of in an opportunistic context.
Incorrect
Risk taking refers specifically to the active assumption of incremental risk in order to generate incremental gains. In that regard, risk taking can be thought of in an opportunistic context.
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Question 4 of 30
4. Question
Please rearrange the correct sequence of the steps of risk management process.
I. Develop a risk mitigation strategy.
II. Assess performance and amend risk mitigation strategy as needed.
III. Identify the risks.
IV. Quantify and estimate the risk exposures or determine appropriate methods to transfer the risks.
V. Determine the collective effects of the risk exposures or perform a cost-benefit analysis on risk transfer methods.Correct
In its basic format, the risk management process is as follows:
Step 1: Identify the risks.
Step 2: Quantify and estimate the risk exposures or determine appropriate methods to transfer the risks.
Step3: Determinethecollectiveeffectsoftheriskexposuresorperformacost-benefit analysis on risk transfer methods.
Step 4: Develop a risk mitigation strategy (i.e., avoid, transfer, mitigate, or assume risk).
Step 5: Assess performance and amend risk mitigation strategy as needed.Incorrect
In its basic format, the risk management process is as follows:
Step 1: Identify the risks.
Step 2: Quantify and estimate the risk exposures or determine appropriate methods to transfer the risks.
Step3: Determinethecollectiveeffectsoftheriskexposuresorperformacost-benefit analysis on risk transfer methods.
Step 4: Develop a risk mitigation strategy (i.e., avoid, transfer, mitigate, or assume risk).
Step 5: Assess performance and amend risk mitigation strategy as needed. -
Question 5 of 30
5. Question
Which of the following statements regarding risk and risk management is correct?
Correct
Risk management is more concerned with the variability of losses, especially ones that could rise to unexpectedly high levels or ones that suddenly occur that were not anticipated (unexpected losses).
Incorrect
Risk management is more concerned with the variability of losses, especially ones that could rise to unexpectedly high levels or ones that suddenly occur that were not anticipated (unexpected losses).
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Question 6 of 30
6. Question
Which statement best describe Value at risk (VaR)?
Correct
Value at risk (VaR) states a certain loss amount and its probability of occurring.
Incorrect
Value at risk (VaR) states a certain loss amount and its probability of occurring.
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Question 7 of 30
7. Question
If one-day VaR is $2.5 million and the entity holds $2.5 million in liquid reserves, then it is unlikely to go bankrupt that day. Which statement best describe the meaning of Economic capital?
Correct
Economic capital refers to holding sufficient liquid reserves to cover a potential loss. For example, if one-day VaR is $2.5 million and the entity holds $2.5 million in liquid reserves, then it is unlikely to go bankrupt that day.
Incorrect
Economic capital refers to holding sufficient liquid reserves to cover a potential loss. For example, if one-day VaR is $2.5 million and the entity holds $2.5 million in liquid reserves, then it is unlikely to go bankrupt that day.
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Question 8 of 30
8. Question
“A form of scenario analysis that examines a financial outcome based on a given “stress” on the entity.” Which title matches this description?
Correct
Stress testing is a form of scenario analysis that examines a financial outcome based on a given “stress” on the entity.
Incorrect
Stress testing is a form of scenario analysis that examines a financial outcome based on a given “stress” on the entity.
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Question 9 of 30
9. Question
Which of the following items would be associated with unexpected losses?
Correct
Loan defaults are increasing simultaneously while recovery rates are decreasing is an example of correlation risk. Correlation risk could drive up the potential losses to unexpected levels.
Incorrect
Loan defaults are increasing simultaneously while recovery rates are decreasing is an example of correlation risk. Correlation risk could drive up the potential losses to unexpected levels.
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Question 10 of 30
10. Question
“considers how much an entity expects to lose in the normal course of business. It can often be computed in advance (and provided for) with relative ease because of the certainty involved.”
Which title best describe the above statement?Correct
Expected loss considers how much an entity expects to lose in the normal course of business. It can often be computed in advance (and provided for) with relative ease because of the certainty involved.
Incorrect
Expected loss considers how much an entity expects to lose in the normal course of business. It can often be computed in advance (and provided for) with relative ease because of the certainty involved.
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Question 11 of 30
11. Question
Please select the risks that are part of the ‘eight key classes of risk’.
I. Operational risk
II. Default risk
III. Reputation risk
IV. Legal and regulatory riskCorrect
There are eight key classes of risk: (1) market risk, (2) credit risk, (3) liquidity risk,
(4) operational risk, (5) legal and regulatory risk, (6) business risk, (7) strategic risk, and (8) reputation risk.Incorrect
There are eight key classes of risk: (1) market risk, (2) credit risk, (3) liquidity risk,
(4) operational risk, (5) legal and regulatory risk, (6) business risk, (7) strategic risk, and (8) reputation risk. -
Question 12 of 30
12. Question
Market risk considers how changes in market prices and rates will result in investment losses. There are four subtypes of market risk, which of the following are part of market risk?
I. General market risk
II. Foreign exchange risk
III. Interest rate risk
IV. Equity riskCorrect
Market risk considers how changes in market prices and rates will result in investment losses. There are four subtypes of market risk: (1) interest rate risk, (2) equity price risk, (3) foreign exchange risk, and (4) commodity price risk.
Incorrect
Market risk considers how changes in market prices and rates will result in investment losses. There are four subtypes of market risk: (1) interest rate risk, (2) equity price risk, (3) foreign exchange risk, and (4) commodity price risk.
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Question 13 of 30
13. Question
Which of the following best describe Commodity price risk?
Correct
Commodity price risk refers to the price volatility of commodities (e.g., precious metals, base metals, agricultural products, energy) due to the concentration of specific commodities in the hands of relatively few market participants.
Incorrect
Commodity price risk refers to the price volatility of commodities (e.g., precious metals, base metals, agricultural products, energy) due to the concentration of specific commodities in the hands of relatively few market participants.
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Question 14 of 30
14. Question
In considering the major classes of risks, which risk would best describe an entity with weak internal controls that could easily be circumvented with a lack of segregation of duties?
Correct
Weak internal controls and lack of segregation of duties would represent a non-financial risk and be best described as an operational risk.
Incorrect
Weak internal controls and lack of segregation of duties would represent a non-financial risk and be best described as an operational risk.
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Question 15 of 30
15. Question
Which major classes of risk best describe this description – “Arise partly due to the existence of the internet. For example, social networking sites and blogs could allow for rumours – true of false – to be spread about an entity very quickly.’
Correct
Reputation risk could arise partly due to the existence of the internet. For example, social networking sites and blogs could allow for rumors— true or false— to be spread about an entity very quickly.
Incorrect
Reputation risk could arise partly due to the existence of the internet. For example, social networking sites and blogs could allow for rumors— true or false— to be spread about an entity very quickly.
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Question 16 of 30
16. Question
Justin is a junior risk analyst who has recently prepared a report on the advantages and disadvantages of hedging risk exposures. An excerpt from his report contains four statements. Which of Justin’s statements is correct?
Correct
The complexity of derivatives pricing means the pricing may not always be as accurate as possible so it will not always reflect all of the relevant risk factors. As a result, in practice, hedging with derivatives may not be a zero-sum game of transferring risk between periods or between participants.
Incorrect
The complexity of derivatives pricing means the pricing may not always be as accurate as possible so it will not always reflect all of the relevant risk factors. As a result, in practice, hedging with derivatives may not be a zero-sum game of transferring risk between periods or between participants.
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Question 17 of 30
17. Question
What skills does hedging often requires to prevent the management to lose focus on the core business activities of the firm, possibly resulting in lost profits?
I. Very specific skills
II. Knowledge
III. Research
IV. TimeCorrect
Hedging activities may be extensive enough that they cause management to lose focus on the core business activities of the firm, possibly resulting in lost profits. Hedging often requires very specific skills, knowledge, research, and time, which may not be available within the management team.
Incorrect
Hedging activities may be extensive enough that they cause management to lose focus on the core business activities of the firm, possibly resulting in lost profits. Hedging often requires very specific skills, knowledge, research, and time, which may not be available within the management team.
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Question 18 of 30
18. Question
As a start, what does a firm need to know before embarking on a risk management plan?
Correct
As a start, a firm must know its risk and return goals before embarking on a risk management plan.
Incorrect
As a start, a firm must know its risk and return goals before embarking on a risk management plan.
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Question 19 of 30
19. Question
What are the clarifications required for Mapping risks?
I. Insurable
II. Hedgeable
III. Noninsurable or nonhedgeable
IV. RiskableCorrect
Mapping risks requires clarification as to which risks are insurable, hedgeable, noninsurable, or nonhedgeable.
Incorrect
Mapping risks requires clarification as to which risks are insurable, hedgeable, noninsurable, or nonhedgeable.
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Question 20 of 30
20. Question
What other risks that mapping risk could be performed for?
I. Market risk
II. Credit risk
III. Business risk
IV. Operational riskCorrect
Mapping risks could be performed for market risk, credit risk, business risk, and operational risk.
Incorrect
Mapping risks could be performed for market risk, credit risk, business risk, and operational risk.
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Question 21 of 30
21. Question
What should the management be aware to prevent potential loss?
I. Its general exposure to fluctuations in interest rates
II. Foreign exchange rates
III. Equity prices
IV. Commodity pricesCorrect
management should be aware of its general exposure to fluctuations in interest rates, foreign exchange rates, equity prices, and commodity prices.
Incorrect
management should be aware of its general exposure to fluctuations in interest rates, foreign exchange rates, equity prices, and commodity prices.
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Question 22 of 30
22. Question
The involvement of the board of directors is important within the context of a firm’s decision to hedge specific risk factors. Which of the following statements regarding the setting of risk appetite is correct?
I. Risk appetite may be conveyed strictly in a qualitative manner
II. Debtholders and shareholders are both likely to desire minimizing the firm’s risk appetite.
III. The board must be definitive in the time horizon when determining its risk management goals for management to achieve
IV. Must be clear which risks are insurable, hedgeable, noninsurable, or nonhedgeable in order to determine what items could be used to reduce the firm’s risk.Correct
Debtholders would likely be more concerned about minimizing all risks because their upside potential is generally limited to the rate of interest charged. In contrast, shareholders may be willing for the firm to accept a large but unlikely risk in order to increase equity prices.
Incorrect
Debtholders would likely be more concerned about minimizing all risks because their upside potential is generally limited to the rate of interest charged. In contrast, shareholders may be willing for the firm to accept a large but unlikely risk in order to increase equity prices.
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Question 23 of 30
23. Question
What does foreign currency risk mean?
I. The prices of foreign currency drop dramatically
II. The income and outcome from foreign currency
III. The risk of economic loss due to unfavourable changes in the foreign currency exchange rate
IV. There is production and sales activity in the foreign currency, pricing risk would exist simultaneouslyCorrect
Foreign currency risk refers to the risk of economic loss due to unfavorable changes in the foreign currency exchange rate; to the extent that there is production and sales activity in the foreign currency pricing risk would exist simultaneously
Incorrect
Foreign currency risk refers to the risk of economic loss due to unfavorable changes in the foreign currency exchange rate; to the extent that there is production and sales activity in the foreign currency pricing risk would exist simultaneously
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Question 24 of 30
24. Question
What factors needed to be considered with hedging strategy?
I. Time horizon
II. Accounting
III. Taxation
IV. RisksCorrect
factors such as time horizon, accounting, and taxation need to be considered within any hedging strategy.
Incorrect
factors such as time horizon, accounting, and taxation need to be considered within any hedging strategy.
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Question 25 of 30
25. Question
Which classes of risk best describe this description ‘The risk inherent in a firm’s net exposure to unfavorable interest rate fluctuations’?
Correct
Interest rate risk refers to the risk inherent in a firm’s net exposure to unfavorable interest rate fluctuations.
Incorrect
Interest rate risk refers to the risk inherent in a firm’s net exposure to unfavorable interest rate fluctuations.
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Question 26 of 30
26. Question
There are many reasons exist for a firm to hedge its risk exposures. Which are the key reason?
I. Lowering the cost of capital
II. Reducing volatility of reported earnings
III. Operational improvements
IV. Potential cost savings over traditional insurance productsCorrect
Many reasons exist for a firm to hedge its risk exposures. Key reasons include lowering the cost of capital, reducing volatility of reported earnings, operational improvements, and potential cost savings over traditional insurance products.
Incorrect
Many reasons exist for a firm to hedge its risk exposures. Key reasons include lowering the cost of capital, reducing volatility of reported earnings, operational improvements, and potential cost savings over traditional insurance products.
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Question 27 of 30
27. Question
What should be covered by hedging activities in order to fully account for the risks?
I. the firm’s assets
II. the firm’s liabilities
III. the firm’s safety
IV. the firm’s foreign salesCorrect
Hedging activities should cover both the firm’s assets and liabilities in order to fully account for the risks.
Incorrect
Hedging activities should cover both the firm’s assets and liabilities in order to fully account for the risks.
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Question 28 of 30
28. Question
Which of the following statements regarding the hedging of risk exposures is correct?
Correct
The use of a fixtures contract to hedge future sales receipts must take into account that sales revenue is recognized only upon completion of transaction, although the futures contract requires periodic marking to market. Therefore, if the futures contract is in a “gain” position at the end of the year, there may be taxes payable prior to the receipt of any sales receipts.
Incorrect
The use of a fixtures contract to hedge future sales receipts must take into account that sales revenue is recognized only upon completion of transaction, although the futures contract requires periodic marking to market. Therefore, if the futures contract is in a “gain” position at the end of the year, there may be taxes payable prior to the receipt of any sales receipts.
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Question 29 of 30
29. Question
Smith.Co is an Australian wine producer that purchases a significant amount of cork for its wine bottles from Asia. It also sells much of its wine to customers throughout New Zealand. Based on these two broad transactions, which of the following risks does Smith.Co most likely face?
Correct
Operational risk could cover activities pertaining to Smith’s input products (i.e., cork) and products exported to foreign countries (i.e., bottles of wine). In addition, there would be pricing risk for both the inputs and outputs. For example, the cost of the cork may have a significant impact on Smith’s ability to conduct business in a competitive manner. Also consider that Smith has sales to customers in foreign countries (with payment in the foreign currency) where there is the risk of the devaluation of the foreign currency in the future. Financial position risk refers to the balance sheet of a firm. Neither the purchases nor the sales impact Smith’s balance sheet.
Incorrect
Operational risk could cover activities pertaining to Smith’s input products (i.e., cork) and products exported to foreign countries (i.e., bottles of wine). In addition, there would be pricing risk for both the inputs and outputs. For example, the cost of the cork may have a significant impact on Smith’s ability to conduct business in a competitive manner. Also consider that Smith has sales to customers in foreign countries (with payment in the foreign currency) where there is the risk of the devaluation of the foreign currency in the future. Financial position risk refers to the balance sheet of a firm. Neither the purchases nor the sales impact Smith’s balance sheet.
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Question 30 of 30
30. Question
Which of the following statements regarding exchange-traded and over-the-counter (OTC) financial instruments is correct?
Correct
Exchange-traded instruments cover only certain underlying assets and are quite standardized in order to promote liquidity in the marketplace. As a result, there is less customization with exchange-traded instruments. OTC financial instruments, in exchange for greater customization, are less liquid and more difficult to price compared to exchange-traded instruments. In addition, there is credit risk by either of the counterparties that would generally not exist with exchange-traded instruments.
Incorrect
Exchange-traded instruments cover only certain underlying assets and are quite standardized in order to promote liquidity in the marketplace. As a result, there is less customization with exchange-traded instruments. OTC financial instruments, in exchange for greater customization, are less liquid and more difficult to price compared to exchange-traded instruments. In addition, there is credit risk by either of the counterparties that would generally not exist with exchange-traded instruments.