Question 1

At-the-point approaches tend to be:

Options :

A : neither counter- nor procyclical because they rarely change.

B : procycyclical.

C : countercyclical.

D : neither counter- nor procyclical because they change randomly.

Answer: B

Question 2

A risk manager at an investment bank is examining the forward and futures contracts the bank’s clients use as hedging instruments. The manager compares the way the two types of contracts are priced, how profits and losses are calculated, and how decisions to offset or deliver against the contracts are made. Which of the following statements is correct?

Options :

A : When the price of an asset is positively correlated with interest rates, the forward contract will typically have a higher price than the futures contract.

B : The daily profit and loss on forward and futures contracts differ, since futures contracts realize profits and losses each day while forward contracts realize them at maturity.

C : Prices on similar forward and futures contracts will be the same due to the no-arbitrage relationship between forwards and futures.

D : If interest rates are higher than the income generated by a financial asset, delivery of the asset against the futures contract will take place on the latest date possible.

Answer: B

Question 3

Regarding a xed-rate, level payment, and fully amortized mortgage loan, which of the following statements is false?

Options :

A : Each payment consists of an interest component and a principal component.

B : Payments are equal over the life of the loan.

C : Principal repayment falls as interest payments rise over the life of the loan.

D : Interest payments fall as principal payments rise over the life of the loan.

Answer: C

Question 4

Suppose you have a two-security portfolio containing bonds A and B. The book value of bond A is $20 and the market value is $35. The book value of bond B is $40 and the market value is $50. The duration of bond A is 4.7 and the duration of bond B is 5.9. Which of the following amounts is closest to the duration of the portfolio?

Options :

A : 5.3.

B : 5.6.

C : 5.4.

D : 5.5.

Answer: C

Question 5

An operational risk manager is presenting to a group of risk analysts about different techniques to model operational risk. An analyst asks the manager about the appropriate use of the power law in estimating operational losses. Which of the following would be a correct statement for the manager to make about the use of the power law?

Options :

A : It is suitable for modeling the tail of the operational loss distribution, but not for modeling the body of the distribution.

B : It implies that operational losses tend to follow a normal distribution.

C : It is more effective in modeling some types of operational risk, such as losses from fraud, than others, such as losses from natural disasters.

D : It is generally used to estimate routine operational losses which occur at a relatively high frequency.

Answer: A

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