Review and Assessment Flashcards
7 cards from real FRM practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Review and Assessment flashcards as text
An assessment of a CDO tranche structure shows the equity tranche absorbs losses first. What does this make it?
Answer: The highest-risk, highest-yield tranche
The equity tranche bears the first losses, making it the riskiest and offering the highest potential yield.
Reviewing counterparty risk, what does a credit valuation adjustment (CVA) represent?
Answer: The market value of counterparty default risk
CVA is the adjustment to a derivative's value reflecting the possibility that the counterparty defaults.
An assessment finds a risk model ignores tail dependence. Which copula choice would better capture joint extreme events?
Answer: Student's t copula
The Student's t copula exhibits tail dependence, modeling joint extreme moves better than the Gaussian copula.
When reviewing a bond portfolio, what does key rate duration assess that effective duration does not?
Answer: Sensitivity to changes at specific points on the yield curve
Key rate duration measures sensitivity to non-parallel shifts at specific maturities along the curve.
A risk assessment uses RAROC. What is its primary purpose?
Answer: Measure return relative to economic capital at risk
Risk-Adjusted Return on Capital evaluates profitability against the economic capital required to support the risk.
Reviewing a hedge, basis risk arises when:
Answer: The hedge and the exposure are imperfectly correlated
Basis risk is the residual risk from imperfect correlation between the hedging instrument and the hedged exposure.
An assessment of model assumptions flags a constant volatility assumption in option pricing. Which model relaxes this?
Answer: A stochastic volatility model like Heston
Stochastic volatility models such as Heston allow volatility to vary randomly over time, addressing the constant-vol limitation.