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

Adding convexity matching improves the approximation of price changes for larger parallel rate moves beyond first-order duration.

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

Historical simulation is bounded by the scenarios in the lookback window, so events not in the sample are not represented.

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

The total return payer passes all economic performance of the asset to the receiver, shedding both market and credit risk.

Question 4

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

Accepted Answer

Exposure increases as counterparty credit quality worsens

Answer

Wrong-way risk arises when the exposure to a counterparty rises at the same time its probability of default increases.

Question 5

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

Accepted Answer

Gamma

Answer

Gamma is the second derivative of option value with respect to the underlying, i.e., the sensitivity of delta.

FRM Practice Test