FRM Advanced Topics 2

Question 1

Under Basel III, which capital buffer is designed to be built up in good times and released during periods of stress to reduce procyclicality?

Accepted Answer

Countercyclical capital buffer

Answer

The countercyclical capital buffer is varied by national regulators to lean against credit-driven booms and is released in downturns.

Question 2

A risk manager uses a Cornish-Fisher expansion when computing VaR primarily to adjust for what feature of the return distribution?

Accepted Answer

Skewness and kurtosis

Answer

The Cornish-Fisher expansion modifies the normal quantile to account for non-zero skewness and excess kurtosis.

Question 3

In a CDO structure, which tranche absorbs the first losses from the underlying collateral pool?

Accepted Answer

Equity tranche

Answer

The equity tranche is the most subordinated and takes the first losses, giving it the highest expected return and risk.

Question 4

The liquidity coverage ratio (LCR) requires banks to hold enough high-quality liquid assets to survive a stress period of how many days?

Accepted Answer

30 days

Answer

The LCR ensures sufficient HQLA to cover net cash outflows over a 30-day stress scenario.

Question 5

Which model is most commonly associated with estimating the probability of default from equity prices using the firm's asset value and volatility?

Accepted Answer

Merton structural model

Answer

The Merton model treats equity as a call option on firm assets, deriving default probability from asset value and volatility.

FRM Practice Test