FRM FRM 4

Question 1

A swap's value to the fixed-rate payer increases when:

Accepted Answer

Interest rates rise

Answer

The fixed-rate payer benefits when rates rise because the floating payments they receive increase in value.

Question 2

Which Basel III ratio is a non-risk-based backstop measure constraining a bank's leverage?

Accepted Answer

Leverage ratio

Answer

The leverage ratio compares Tier 1 capital to total non-risk-weighted exposures as a backstop.

Question 3

The marginal VaR of a position measures:

Accepted Answer

The change in portfolio VaR from a small change in that position

Answer

Marginal VaR is the sensitivity of total portfolio VaR to a small increase in a given position.

Question 4

Which of the following is an example of basis risk?

Accepted Answer

A hedge using a futures contract whose underlying differs slightly from the hedged asset

Answer

Basis risk arises when the hedging instrument and the hedged exposure do not move perfectly together.

Question 5

Under a Gaussian copula approach to portfolio credit risk, what does the copula primarily model?

Accepted Answer

The dependence structure among defaults

Answer

A copula links marginal default distributions to capture the correlation/dependence structure between defaults.

FRM Practice Test