FRM Review and Assessment 5

Question 1

A review of economic capital versus regulatory capital concludes that economic capital is:

Accepted Answer

An internal estimate of capital needed for the bank's actual risk profile

Answer

Economic capital is the institution's own assessment of capital required to remain solvent given its specific risks.

Question 2

Assessing a wrong-way risk situation, what is the defining characteristic?

Accepted Answer

Exposure rises as counterparty credit quality deteriorates

Answer

Wrong-way risk occurs when exposure to a counterparty increases precisely as its default probability rises.

Question 3

A review of a VaR model uses a 250-day backtest with 4 breaches at 99%. Under Basel's traffic-light approach this falls in which zone?

Accepted Answer

Green zone (acceptable)

Answer

At 99% over 250 days, up to 4 exceptions place the model in the green zone, indicating acceptable accuracy.

Question 4

When assessing interest rate risk in the banking book, which measure captures long-term value sensitivity?

Accepted Answer

Economic value of equity (EVE)

Answer

EVE measures the present-value sensitivity of the bank's equity to interest rate changes over the long term.

Question 5

A risk review identifies that a strategy has negative skew and positive carry. What is the typical hidden danger?

Accepted Answer

Steady small gains punctuated by rare large losses

Answer

Negative-skew carry strategies often earn small steady profits but are exposed to infrequent severe losses.

FRM Practice Test