FRM Advanced Topics 3

Question 1

When hedging a bond portfolio, immunization that matches both duration and convexity provides protection against:

Accepted Answer

Larger parallel shifts more accurately than duration alone

Answer

Only small parallel yield shifts

Answer

Non-parallel twists in the curve

Answer

Credit spread widening

Question 2

A key limitation of historical simulation VaR compared to parametric VaR is that historical simulation:

Accepted Answer

Relies entirely on the observed sample period and may miss unobserved events

Answer

Assumes normally distributed returns

Answer

Cannot capture fat tails

Answer

Requires a variance-covariance matrix

Question 3

In a total return swap, the total return payer effectively:

Accepted Answer

Transfers the credit and market risk of the reference asset to the receiver

Answer

Retains the credit and market risk of the reference asset

Answer

Buys protection on its own debt

Answer

Earns the reference asset's price appreciation

Question 4

Wrong-way risk in counterparty credit exposure refers to the situation where:

Accepted Answer

Exposure increases as counterparty credit quality worsens

Answer

Exposure decreases as counterparty credit quality worsens

Answer

Collateral fully offsets exposure

Answer

Exposure is uncorrelated with default probability

Question 5

Which Greek measures the rate of change of an option's delta with respect to the underlying price?

Accepted Answer

Gamma

Answer

Vega

Answer

Theta

Answer

Rho

Question 6

A risk manager backtesting a 99% one-day VaR over 250 days using the Basel traffic-light approach would fall in the 'red zone' starting at approximately how many exceptions?

Accepted Answer

10 exceptions

Answer

1 exception

Answer

4 exceptions

Answer

5 exceptions

Question 7

The funding valuation adjustment (FVA) in derivatives pricing primarily reflects:

Accepted Answer

The cost of funding uncollateralized derivative positions

Answer

The cost of counterparty default

Answer

The benefit of posting collateral

Answer

Regulatory capital charges