FRM FRM 3

Question 1

What is the primary purpose of netting agreements in counterparty credit risk management?

Accepted Answer

To offset positive and negative exposures with a counterparty

Answer

Netting reduces credit exposure by offsetting amounts owed in both directions with the same counterparty.

Question 2

The Liquidity Coverage Ratio (LCR) requires banks to hold high-quality liquid assets sufficient to cover net cash outflows over what stress horizon?

Accepted Answer

30 days

Answer

The LCR is calibrated to a 30-day stressed liquidity scenario.

Question 3

Which of the following best describes wrong-way risk?

Accepted Answer

Exposure rises as counterparty credit quality deteriorates

Answer

Wrong-way risk occurs when exposure to a counterparty increases just as that counterparty becomes more likely to default.

Question 4

In the Capital Asset Pricing Model, beta measures:

Accepted Answer

Systematic risk relative to the market

Answer

Beta captures an asset's sensitivity to market movements, representing systematic (non-diversifiable) risk.

Question 5

A trader uses historical simulation to compute VaR. A key limitation of this approach is that it:

Accepted Answer

Assumes the future will resemble the historical sample period

Answer

Historical simulation assumes past return patterns will repeat, so it may miss risks absent from the sample.

FRM Practice Test