FRM Examination Practice Exam CeCe120 Fr a nag Canton RA PS Intron «| {015 FRM Pat | Practica Ex Canaast Anewer Shot 7015 FR Pat | Practica Eur AnawerShac/Anewets 2015 Flv Pare acice Siam Arawer Shoet/Anawets 2015 FRM Pare Pactce Exam Explanations saphena teeter sta amesincites we epee tuned ik manana ‘once abd approaches Row they woul PB 23 fa rangers ey oda ees Seaton one category nthe real wr aka Ser unt eal ory any mb of rates Ieuan be eae th tan ooo {ramon Sy ar November 218. 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Wrong way to complete ™Financial Risk Manager (FRM) Examination 2013 Practice Exam PART I Questions291 Fl ac no aatraton 89 Pata Ean, ‘ou re daceng bowoon buying «fates conwact onan sicharge and buying a ora contact ectly from courrpary on Ye sre uring eset Bot contacts woul Rove the are matty on ivry Soecestens Yue hat th tues pric ees han he forward i, asuming Tomas SPT ‘ns, wt sino factr acing alone would bea elute explant for ha pie frenc? ‘Tha furs contract oc Ha and easier to wade ‘he forward contact eaunarpary mre aly 1 drat ‘The att fe stony nop coves Wh nee as 2 lc yess tader nthe eberge nk ots mustnasonsl bank: Hs tds nate waging 8 USD 1000 thence ofa yar urs coasts at suet USD TOs the pric of «2 hrs con tracts USD 1625 Assur tat here ao eash Rows om te asst or 28a. etn sutie F Interest rats ig ao 1 par yor whi fhe floueg ean pproprit bitags satay? Short er ruts aa tong 2-year tutes {Short Zea fits an long the uncerying ase funded by boron for 2 eure {short year tres na long te urdeingasne Andes owoning for yee 5. Te ple ote semanth European cal option an sac ZUSO 3. Tha sack pcs e USD 24 A in of USO i eected in torn month he continouy compounded aes ras fra matures eX. par {Rot When of th olowng ir ozs to the vue of put con on tha same underying ck wth sks ce of USD 25 a a na to matury ofa mothe? = usp sso‘4. Which fhe folowing statements egtdng the wustee named in 2 corporate ben ndetue sce? ‘The ruse may take action beyond the idea to protetbonaholers ‘The tree must aca th eect of stfeont numberof benches {4 The trates palsy the Boncholes or har rpresanatee ve 5. Pearine is manactre hat iehesty dependent on slasic pars sipped from Maa Pea wats to ‘age Is posure to ase arce shocks or the nat 7 Js marth Fara contacts, Noweer, eno ea ‘iyavlabe or laste After some research Pear tis furs contacts onset commectes whore ‘eas ae coaly corsa to paste pce Furs on Conmocty Ahave a cvelaon of O85 wth the ies of plac an furs on Carmody 8 Nav carlton of 092 wit th pce of este Futures on ‘ath ammodty A and Commadty 8 ate eviabe vith mont and month expan anering tau ‘enlderone. ch contact wou beth ba ominanze basil uur on Commo Ath 6 month to exeton Futzes on Commas & wth & monte te oration Futzes on Commodity B wits & months sera aree 6 Yeusre taming te sicrange ats betoen th US oss he sro ad re ae he oon nan ‘epuring the USO/EUR achange rat and tne respeivedomeste ia he ase Curent USEYEUR ekhange rt 125 ‘Caren EUR-oenoriates Hoa tte tet ate 17% bar Year ‘According the tres ats pty here, wht the ofr USD/EUR wenangy at? on pore1. Am investor sl 8 January 204 clone sock of XYZ Led wth 3 sre pice of USD 50 fr USD 10, ‘cl buys savory 20H cal enw Sor ureting sock wy sie pie of USD 0 for USD 2. What ty a Bowrspread USO 0sp2 {Samantha Xin isting to ge some es it he lta bstwaen ts eur a ta LMD a) And ‘he eum on he SAP 800 nde an) Ung stra eta she erates te lowing anal mea rato or: 1 ‘ban men tr or SP S00 ix ™ ‘ant velit for SP S00 ra = ‘Azauming she urs the sare dat to atimata he regression med en Boat 0 Bat si the eran lac equ tatu which a the febowing mad wil she cot? ug #902 +08 +5 002+ 186A + « Ress 004 asda 6 Funs= 004 1850 0 »19, Fer esarela of 40 frm th elstonaiobetuan corporate raven (an the aaage are of pperence Se onpiyee 09 i mosis alow BBX 1212.00 ‘You wih to este act rl petals hat «Oana Oa the 95% conience lve THe p-value for ‘no also, 07, ad the p-vaue for ha ttt for fs 005. The valu Tote sate Tor 2 You-can eect the nu ypothass becouse each 8 arent rom Oat the 95% confines ee. |S Yeu canot ect to null hypetess because nto isan rm atthe Ocontoece lve You san esc the ns ypothese bars tha Fata sean te 95% enor | Yeu cannot ject nll ypotese Bocce the ttt ents a the Sk conor a 10, \fiud income potsio manager caren hei 8 partoto of bod of vtous compares Aatring these Sends nave the sare arnutaed probaly of efoto! hat the delat re dependent he hur of pore TL portfoto manager has asd aah of four nats tous Monte Cafe simulation t pens path- dependent Serva conrart on 2 tock The dette expe nine month and hers erate Pe er COM ouna ortciay, The ays generate ott a 20000 phe ung» poem Boman ction ‘rede record he pay for ech path and prosatthe eautsnte tabs sown Bao Number of Pathe Average Daratie Pay per ath CSD) What the estimated vice of the deat? . om cruaaree tae rote satay Soli eet1, Suppose tat he correlation ofthe atu ots pot wth the return sbanchar 6 8 the volt ofthe ratrn ofthe portfons 5% arth voltiy of the etn of te Brak 4%, Wate Beta of ‘he peti? = 100 080 11, Firms conmenly nantes ther management toncreas te fm lu by ornting manggers acute tied 1% Deep nthe mana cll opton on the i tack 1B Atitermoney eal option an he Arm's ask Deep outalthesmoney ea opin a hes tock © en poston inthe t's stock 1. You havo bon ake chock for abtvage opportuni the Treasury bond marat by comparing the cash tows ct selected bore wth the cash ows of combinstlons of char bon Ha year so:caveon bond ie Priced a USO 9612 ans year bond pang» 1% coupon semi-annually & pied at USD 10820 what Shouidbethe pce os oar Heanuy Sond ht pays a coupon of semana? 80 10835 89 fou orethe curen maka ric f tack in USD 50 whi f the ftowing epins en the teks the Nahet ‘ca otonexpeing in 30 ne tn st pce of USO 50 1S at opon sxpeing nS cays th sie pris of USD 30, Calloton sxbing ns aay mth strike pie of USD 50 {4 ut eption sxring In 30 cays wth stk pice of USD 30 Jc Starwood an invent sora Metuchn investor Adicors (MA), Strood advising Michal {kes weaty srt of MA. Cooke woul Hf nse USD 500,000 ns bonded east Ad, Starond iS coniderng bonds sted by aM, GE apd Mizar and wants fo cous bond tat sists Codes rating ‘eure but abo tas Be gh it maturity es access othe foowing efematon Samson Coupen 75K 78K 1605 Temiomunyinwes 5 5S rice 50) os ors \Whicn band shouts Sarason purchacs for Cabte? ore ‘mananement 3 fuly informed srexment strona tot Younle te folowing rn ote stan We decreasing taucty re exsur tw aly erase mart rk exposure aree1X, A bane oagn oan paolo conan 3 large cncentrain of sare 03 cu whoze goverment Mi Bean ring ings exes Sete, owls te Vater ak might ous inthe tn of sete fest ‘asm sou be giant the posit that he sverdon wl noo rsfcbons on whch he FotoWNG 18, pontotl manager bought 1000 call anton ona non-Svdend- sing sock, wth a stk pic 2 USD 100, or USD 6 eaEh. The cuent stock pice USD Te wth 8 daly stock ret oat of 18% ah the elke Us 1546 Uso aoe nee 20, Which othe follning statement concering the messin epee is caret? (perctional es data eal rom data vendors tanto be based toners smal see, The standordzed approach sod by bank neluating oeraional i capa atows fer torent bata {actors tobe assigned to ferent buries os, aeee |2L The proper clacton offctorto ni nan ofr oat ears exteaton cial tothe securaey ot not a lormian of te dense vara Omit verb bas occurs whan he cid vrai independent ofthe nclae regret and ie Geterminat of he desendet arable. ret a determinant ofthe dependent vara122, Assume that you ar ont concares wth yom Whe fhe folowing wots be te Best maser te (io tore oder func wth aera bate Care on he fram elton wh he Marat poo? ‘reyer ato Sone io Jensen's hs acre 1%, The cotaps of Long Tem Capt Managemant (LTOM es ase i management ese uy. Wich OF the 1B ALTEM tess tating bese arisk management depart sure tht hed te influence onthe fev sate. TOMS usa of high overage is edence of oor isk managanant. 4 L1eH fad account propery fore Mauy of Rs ges poston as sk eeuatos, 24, Whe ofthe owing i potantal consequence west hs GARP Cad of Candis oes fms Forma otis tothe GARP Mamba’ employer sich vation ‘Suspeaion of he GARD Momoer's ght to work inthe ak ranapement presi amoral of ho CARP Members it to una FRM dsigraon Resured pateipatonin etl waning anor 2% Which of he fosowng i esured inthe muti lest squares eateson mode? Te dependent vrai staenary 1S Te raopendert arabes ae not perecty mutiotear Tha aorta are hatwokoaaee,Financial Risk Manager (FRM) Examination 2013 Practice Exam PART | Answerscomect way compteFinancial Risk Manager (FRM) Examination 2013 Practice Exam PART | Explanations1. Youlate dicing between buying futures contact nan exchange end bing a faa conract rectly ‘Spots Ya eat the tre pric alas han he forward in. Sesaming no wekegs SPSS its, ent sgl actor acting alone woul bea ana atplanaten for Wa prcn arene? ‘Thefts contracts meee Has an ease to ade ‘The forwr contec curator ie more salto cefot ‘Tha aso sony guy corte Wh rere rats anor xptaation Wan an asa stengynepvely covet WA rarest ats eres pcs wl eh tbe sana Toworthanfarwardpces When the undering seat insees in rs tho nats gan ais rm ha ely Inds cass ftres woud sl for hy ess tan forward contacts, whch ae re fected by neat ate Move: nants the same mansr snes fran contacts do not haw 3 ystems ‘he othe thee choices woud a most aly rest nthe fue rice bela ser then the forwards, eforace: oti Hu, Options Futures ar ther Destves th Eton (New Yt Posen, 20%) Chaptr |AMS: Expian the flstonsip between forvar and fare ries Dascrise th freee batch forard an futuroscontvct and exon the felons belwean forward and spt pics2. GricMeyers ee tader inthe atitrage unt ot 3 mutton Bank He tnd tat nase trading # US ‘tract sUSD 1025 Assure thot tar ro cash Now om the ast fa 2 yar the te suc oF Intonst aes it at par year le te flowing sah aporopiate waive tag? ‘Sher 2yeer utes and ong yea fates 1S Short yer tures aed lng 2a ture |e Sort Zyer ftw ding the undoing sz hn by borg 2 years (4S lear ftures ana oa the under se fined by Barowing fr yea ‘explanation: The Iya tts ple shou be 1000 *e = 1090.05, ‘he ay0ar hare pe ould be 1000 "= 102020, ‘he crore 26a fuues pcm the mara i cura compared tothe thacetcal ars. olck in prt, you ould short to 2 oar tures, borow USD 1000 at and uy the underyng set Aethe and of 2 ear YOU i {thease at USD 1025 and vet he berowed money with Mest hich wou be 000" es! = USD 62920, Reforence: J ull Ontos. Fates and Char Darates. Sh Eaten ch Ye Pear. 202 Caper». 92 [AMS: Casas the forward price, pan the undering aeats orc, with or mE Shot sas andi enters ton tothe nee of yes f th undrhing ast Deaebe an artrage argument in support of hese pies Sttlom Fania Masts and Products » (2 Stl anocaten of at Poland the tt‘he sie of asbemeonth Euspea calloption ona sacks USD The tack prics Ie USD 24 A cen ot USD is xpecndn tres meine. The cantina compounded ti sor atu tS par {oat Which fh folosng lors tote wiv ot a option on he same undain ock with the ‘hice of USD 25 aetna to matty ofS mothe?” are [eptntion: rom the equation fx Puc ary hs canbe Sled by the Toxoningeauaon: prerpvoorev@—s, whore PY reprsets the presee valu, so that PV G0 Ke and PY (B= Be Elen cat pre, ics esto pie of te put een, iste viens Slt cure stock pis Ts tha evo to matty of tho option and Tis thats tothe not idend seton, alousing PY C0, te een vl of he se vce, esd In wae 25 “2° 2458 whl PV CO) uate 100r" 9 O98, Hanes pe 3+ 2438+ 090 ~ 24 = US 47. etree Jon Hu Oates, Future, ad Cer Dera Btn tion (Ne Yor: Peron 2012), Chaska 5.18 [AM: Explain tho effects o liens onthe puta party, the Dun of put and eal option pica, an he ec ‘harcasfstre of Anecan options, (28 Gt aman of a Pn ae en ng eon | »‘The trusts fas he autor to doce 3 ctaut the ser mises a payent ‘The taste may ten atonbojona th sentra to peta bones The taste mus ac a the aquert of cfclort nero of Bonahoers ‘he use pa by be bondslar ther operatives Expansion: According othe Ts nature Ack fa corporat sur alt pay ilret a enc the tates ‘ray sacle acto ata sch ation of maybe necesny to rte the ight of bondholaes.Ttes {ny farfom te actions indlestd nth nde, but are cl der no saat to sure the powers |ganted ty te indartre ean a th recuse of borolders The see pay he Got ster NB bone Rafeence: Fran Fabez, The Handbook of Fs inom Scuriss St Eston Naw Yor Mer Hil 21, Caper [AIMS Doscbe 2 bond eure an explain th le ofthe crperate rate in bond indenture [5 Pea nie 2 manufocturr that shealy dependent on lst ats hipped fom Malaya Pear wants to esos ts oxpont to pats pce shocks otr tenet 7s month Futures contrat, Hower 8 Pte es re closaly coated t lati prices Future on Coroty Arava a crrason of OS wth he Src of pls. an futures on Conmadty & hove careistion of 82 with he anes of atc utc on beh Commosty A and Conmeaty oe aalabe with month ana S-month expeller. lancom lau naiertons which eantact would bs te bes enim Bs | Faurs on Commedty A with 6 months expaton 1S Fatuse on Commedty A with 9 martes expaton 2 Futune on Conmodty Bh 6 mone expiration {4 Fatuos on Conmodty Bh 9 monies essen planation: noc to inmiebasis isk one should choot he futures contact withthe highest corelation te lo changes an the one hth closet mau, fray exling ate the aur the ec Reference: John Hu, pons Ftwas ad Other Dehadves Bt ation Now YORE Pearson, 201), Caper 3 — Hedin Sagi Usng Faure 6. ‘Alm: tn the bad andthe various sores of bas sk nd xan Now as ape when edn Wh fares . ‘on renee erence ener te6 You sre eamming the change rae brwoan te Ucar arth iro anda gn te oFenng eermation regorang te USE/EUR exchange at and he Tospectve dost rity at ‘arent USE/EUR exchange rt 1125. ‘arent USD-denomneted 19ers ret ate A per yor Caren EUR-senominstes earns iar ta eT Par aor coring ste tr ate ay teste, what ths ear err USB/EUR change at? are corrat answer Explanation: The forward ate, Fe en by the intrastate party aquation: Fray terse Ste the st exenange ats 3 the domestic (USD) rere rte and ‘ns te foreign (UR) ake ate Substtutig the vues inthe equation: Fe 128 onsen eat Referees Actheny Saunders and Maca Mion Cams, Fnsnbl Inetutane Menagomont A Rk Mangement oarosch, 2h Eaton (New Yore McGraw Hl, 20% Chante p36 [AIN: Describe hows no-arbtvage ssation Inte foegnetchange markt ads oth ret ate pay ‘hore ute tit theorem to casas forward frign echange aes2, An str ssw nua 2016 cat othe tock of XYZ Litas 3 ate pcs of USD 50 for USO 10, (orl bys January 204 clon he same nding stock win ke pics of USD 60 for USD 2 What ‘the sare of he strates and what ether pre ana le the veto ould er xc? Steay Maximum rot Maxima Lose a Berard Use tse ‘& Baarspread Unites soz correct answer a Explanation Ths sratogy of buying 3 ct option at 2 Maher ste pike ad sang veal atom at var sk fee wth he same marty eon a9 Bars, esabsh 8b spon, ona woud ty the cat opto at "or pic and se onthe same secur wit he same metry & Sigh ska pice USD 40 + USO 2+ USO - @ negeve cst whch reprzens ain of USD 8 the son) ‘The mani salt ecu hen the stoce pce USD SO and ecu #9 USD @ he eh ow or “etatushing the poston a one ofthe eptone wl sexed The naru lees ccs when tha ook pice 5) 60.3 einen a bath opens wt be eats The Heo wow Wa be faced to ant XYZ saree SO to mses the obigitors onthe cal options tut coud eee tha sand ea to buy the ars back 6D for Ios of USD 0. However snce the ves rsavng sn intow of USO Sty enslahng the tte. he teal pref Wen the tek Is USO 50 <5; £ USD 60, nl th al optional bythe Investor woul Be xed hance tte yet il be 50 ~ 5, Since tha oo om astabining he eal stag) as USD 8, the nt Prof ll be, 153 5, whch wou aay be higher hen USO -2 Reference: ohn Hu, Options Futures and Othe Corvtven, Bt ean (New York: Pouron 20%), (Chapter 10.9 167168, ‘AIM: ety inept and comet upper and fone bounds freon prices. ‘Sectlon Francis! Marat na Product{4 Samanths Xo tying to at sme ight note rebtorsip between ren of SEK LD Rea? ‘ha aun on the S8P 500 inn a) Ug stor data so exes Ow flowing Anns mean tur tor LN: We ‘anna mean rtu SAP 600 nde ™ ‘anal vy for SAP S00 me 1 ‘Assuming She ues the same data to ostinato the reoresson mods hen by: Roar 24 AR an +6 Using the ana eet sare tctriqus ween of he flowing meds he ota? fh Rams=-202 +05 46 Rims 902+ tahoe © Rinyr004 + OS ¢ 4 @ Any=04 + 185mm Ewpanation: The regression coef fo 2 model Sosa by Y= b X-r2 Hee obtaned usa the formu: be SWS Sreoe ton ‘hen 2006/18) 195 37 £09“ bE00 = On -lastoan «902 2000) Chacter 4.9.64 ‘AN: Glan how rgrion anaes cones rsa the restoehio btaean depart an ndepandert1 Foraampecf 400 ms. te restore btwsen corporate reverus (9a the arora Yas of eptnee (er enpleyee 00 modeled fou =A XOe 121.2800 ‘ou we to teste onl hypotas tht =O and f+ OA the 95% confine ll. The ve or ‘he atic for 1s O07, a the pevue for he ttt for fs O09. The vl forthe Festa fo) ‘You can eet the nul hypothe because cach 8s cent rom Oat the 5% conic el ‘You cant rjc e al hypothesis because nator ere rom Oa the OS% confines lve ‘You can eet the ml ypothess because the tats Saniicae at the SSK conrasee ‘You cant rc eal poten becauia the Fata enor igufcare a he SEN conten le. comes newer ¢ cplaatin: The et wos not be aint to tsthe jor hypoth rd to tet he trl pth. xara te Patatst, whey ia hs cave statisaly aga a th 95% cofeoe hve Tus he Mul ean be ected aferne: Jes Stock and Mare Watson, voton to Eeonometics Bit eon (Sten Peteon Eduction, 2008) Chaser 7. po. 28128 ‘A: see ad art tes of go rstictons nvelvng mule costes, Ose annie the tat. ™ eagerness ts race12, fed nome potato manager cureny hols. pote of bonds of vaicus copa Asuning al hess tena av the came arustand probs of Salt ahd ht the efausawndepense. he number af ‘fads nthe potato ove the at er flows which typeof sbrbitor? 6 Eloanertit Care answer ‘xptration: The eat woud flow a hom ero a ter fad nub fandom varabes, ach Grete te baood of deft of one of te neal bon rater tan of the ate porte ia = Sema Stibsion esetaly vera» group of Baro drbued vise) normal deton wed to mode tious verbs, when ths cae the number of defaults with he peo Ie Sart ooreces: cos le; Madamanes and Sats er Fara sk Managaare GHeboken, NI Jokn Wey & Sons, ‘a Taled and Skene Asst Ret Ditbutons: molesters fer sk Naragenent. Foto Secon and Option ‘rang tcboken, N Vian Sons 2008), Cheptor 2 Derte Probably istoutons ‘Aim: Oserib the key proper ofthe unform detbton, Bemoul arto, inom! dsr2aion,Plson ‘atriowon,nrmel dou and lognormal dinner and Wty comenen occurences of exch bution. Seti: Quantative nals1h A porftormanager has ake 3c four anasto use Mente Calo simuaton to pc pat-deoenceat ‘ourdoacontuoisly Tha ants geraate a ttl a 20,000 sas ung »germati Btowran maton ‘ed acre pao foreach path and preset the euts nthe tbl show below Analyst Number of Paths _AverogeDervatve Payot pe Path (USD) so 458 Uso 4577 xpartion: owing the risk nau luton mthdsigy, the ce of the davai ican by calelting ‘me wanted average ne mortn pajama then courting ths faut by he Fl rete (200045 + 400044 s0000'46 + 4900°45720000 = 4510 Discounted pape cataton Storesrenn= 877 Reference: Philp Joven, Vase The New Bachar fr Managing Financ Ri Sy Esti (Ne Yok NeGre-hl 207, chapter Wz Monts Calo Methods pp 167 70. AINE Elan ha sirdason can be dea fr camputag akan pri option.12, Suppor hatte corlaton of the rtm of » orto withthe rele of eter 08 th veleity ofthat of the porto SX ne he vty of ha return ofthe esehmark eA Wate the Bet ot the peo? 190 80 peer correct answer 3 Explanation Tho following equation used 0 cleo bata ’ whore prpreantsthe conan cetlent an the volt, Rafernce el Arans an Vranigu Ls Sour Pato They and Pavarmarc Anaya (Nes uss, England Voy 2005) Chote secuon 2 \nSry omen winet proewito sopra ate ake san tae Matson hes18, Arma comonynctve thr manaparant i incre the fis ale by sing mindoes scutes ad \c the fm tec Some secartas however cn eave nage incentives to Manage rk mtn the try ‘ace ly he Bor otaple tthe ype ct ean? [Atthemone cal option onthe fs stock ‘xplation: Drop cut the money cals hae o value une the frm vai nase substantial 0 proving hop otal te-mnay cll ean nent oud cnure maneer 0 tate surat one ks on Petr ‘Sa hedging. than at-he-monay cal managers could rl be antic to take posta aks Bt thay WOU fot rs tos fora vg of stack pee mereaes to recog sgnifeatt value for ther opens 20 the dan {er olmismanegng kis et A dep nthe money cal nou havea alarineeimert profes slorseaulty Doutin ard batho the ter chicas eld prov tha art managerial cave ards ek manent Aeferncs: “Rk Taking A Corporate Govemance Perspect” drtmationa France Corporation, ‘ane Sul sk Maropeant 8 Devates ornes, KY. Tomson South West, 2002, Chaotr Bp 30. [AM Henly the method fn ean uf exc bata han Rs eampettors snd epi how a GAztioN (Gn erate 8 ctr of pcr tltlng cnang ts eroyes, DIM: Calculate and ently apton apa forward coiact pao Sectens Found ost Maragemant Prarie! Marat ana PoduteM4, Yu hove been ated to hac er atitageopportunties inthe Tear bond mat by comparing te cath nso ssectes boner withthe cash we of combinations ter bond a yea o-coupen bot i ‘iced a USD 9612 and» sar bond saying +19 eaueonsort-anly spiced et USD 10620 het Souldbe the pce of -aurTranury bond that pa ¢ coun a 6 sony? xptansion: Te soon eto oleate yer 9 Don aig the ther two teary bonds nor replicate (to cu flows of ho 85 ond ou col sv yom of eutons to deerine the maght far, Fae 2, ‘sich exrspond othe pronation ef the eo andthe OR bend tobe hal este ‘he te equtton ar fous (207FD + C05" FH) =104 —_Gaplesting he cash fw cluding prio and interest amen at he ornes ‘jeletng the cash ow trom tho couson payentin 8 months) Sotvingthe to cousins ge us F= 02 and #2=O8, Thur the pe of the 8 bons shuld be 02 (96:12 +08 (06.0 148 ‘efertce: Grace Tatra, Ftd nore Scuie, Sr Eton (Hoboken, NU Wy & Sons, 201, Chester ‘eginaly based on the na Eaton [AM: Det arepteatng pot using mute fied income secures in rd to mate theca Nos of singe (200, ota acinomae EAs wae al eae tr »1235 In Moron Sain Fe ate at 1, Cane cirant market pres of stocks USD 0, wich a he following option on hw sticks th hahest a optio exsing in 0 day nth srk price of USO 50 ale excing in ye wth ihe pce oF USD 80 {Ga optin sus in ae wth ae pres of USD SO Pat option exting a 30 de with ea pr of USD $0 eplnation: Graded the ate of change ofan opin dake with ama to he price of the ecrvng ssroto the second donate of he option pic wh epact othe ate vc, Thrfore the Mert gona a osened in sort maturty aa a thoroney open, see opis WE) those chatacters are Much ore Sra to hearin the uncryng ana ‘The cit chic 3 cl option Sot at the-meny and wth he shertermatuty, Feternce! John Hu, tons Fate, nd Other Deas, th Eton (New Yorke Person, 202), ‘Chap 18~ Te Ges Later. 104 ‘Section: Vataton and Rise ModelsSon 14 Joh Strwccle an etn seo at Matchan vant Adsos (MA), Starwood setng Micha ‘Sooke, s weamnyclrt of MIA Cooke wos ha tensa USD 820.000 ina bondated eet AA Stato 'S considera bonds sued by 1% GE ana Most an wants to choose a bond that sites Cooke's rating ‘aaromon xt ao fa th highest ato matty. He hs aes othe folowing omen: ce Merosot race Usb) ms oso ar ate cUSD) 1900 001000 hl band shouts Sarasa puchses fr Conte? ares Explanation: Trach the comet answer fil the bend th the highest ld to maturty CTY that euaes fr Incuson in Cakes parla. Aihough we an cleust the YM fr sach Bor uaing» mod sushaes tla {ori unnsceeary i do sont cre. Of he three banc the GE band oot nt ay forthe porte se Comparing the to bon, te UN bond pve sige couaon than the ict ban, yet tis cheaper a el There the yell onthe IM Bad einer ‘> foray calcul the yl, you coud so Use he lowing equation descnbng the rates Between gece tea ys Shea) eay Lng thie cuntin oan aqualnt clear ancin, he TM fr the IBM bond asine AOS% whe he YEH for Ue Mirosft nd equi 625 Reference: race Tuckman.Fe! Income Secu, 2nd Ecton Glbokan, Wu Wey & Sens 2002) Chapter — vad ts Many‘Sconome capa an purchase sar maa protectin fo gar aoa partly eet nar te ive ‘antgernt uly informos assent fs mportae tat You ot the obanng, led to Be tay 1 Whte decreasing Haut tle sxsaie, wl aly nr markt ek posi, 1 Wile deseasingcoreltion uk coeur, ley neee cad x Poe ie dcrwsing mart rat cxcour il ay nereae eat ra oxponre. “4 ite decreasing crest x expan wl ey Iereaea dl xponre corract anewor€ Explanatlor: Th purchase oF insurance protection can water malt rk to counerarycre k faferenca Pipe Joron Vato! Fis The New Berchtfor Maraing nan ik, a Eaton Ca Yorke growin 2007), Chapter. 354 [AM: Explain Pow the ests fa tee et can bee to krove ons sn nd ck management systems Srctlon: auton an ek Modes 18, A bons fran con pf conan ge cencntaton tors to & county whose goverment as been ‘oncom shell be avon the poss tat he svaraon we inpoe reer on wie teftning? © Goon eereee: ohn Cacuet, Edvard Anan Pol Narayanan and Robe No 2008), Mansa Crd Rk The Gres Chatonge forte Gita Franca Marts 296 Eaton (eben, Ni Jom Wy Sore, 2008) Caster 2,176 [AI: Define an afferent betosen cont) rk and ane rk and desete ane of th eco hat might {Gn to each Derenbe srr oth ealongeeIncunty rare, = S25 Sy ee th oot wien atom cr BA, Sad Aan fe cea a,19, potato manager bunt 1000 call eptons on a nendidend-pyng stock wth 2 te pce a USD 10, “or USD 6 enc Te curent ack pre USD JO4 wh daly 2a retur oat of 18% ante les “tthe opton leo Using the dana aoerosch to ec VaR wht Yan approxenaton ofthe oy 35K VaR oft poston? xptaation ‘Tre ia of open 806. THe VaR of he undoing i apy *165 "104 «224 ‘nero. the VaR ot one orton i ‘0612401046 anc muting by 1000 provides tha Va ofthe ents pean: L946, Refernce: Lind Allen, Jc Soudoule and Aethory Saunders (2008), Understanding Maret, Cel anc nersona se The Va at Rsk Approach (Onto, Salve Pubisting, 2008), Chap 5. 20. hich of the folowing satemants conceming the measurement of operations ak comact? ‘Opwratonal ow ta aaa rom data vendors tar tobe ted towards eee ‘he tardataedaperoes ued by banka in clang operational rk cata allo for tet Bate aore corset neva Explain: nthe anced approach to calling opraonl ik banks ate ae ve up to 6 ‘ra corent buses os ands beta factors alate foreach ito of Busnes. Econom cept coves the “franco baton the worst 1 te nares rata, ane Note ths te itr at corpone ote rauensy of the payment £5 unen wena monty saan 2m es crane te atu petertge tte (APR rat be des 2 Inti cas gen that the monty terest ate equls OOOSI667 (0.05 / snd 300 monty payments wil tbe made th 25 remaning years of haba, the mortgage payment at (008667 *aoosn™1/ cookies?” p= sosa4so ‘50 the total monty payment gue 0088489 * 100000 o USD 594.9. Nxt, compute the mony ines payment which seus! o 100,000 * (00 / 2) USD AE? Reference: Fan Fabozal Anand Shatacharya and Witlom Bein, Mortgage Bxcad Scuiis 2nd Eton (Giobokan ann Wioy Sens, 2006), Chapter s. ‘As: Caeult he morgage paymon actor Understand he aac of an pip anes ove fo4. Lebo random vari rorsaning the day ot of your porta. The “paks ovr trsholet (OTS oachconers a tehol alue w of and te datnon of css loses over ts esl Whit (Phe folonng statements sbou thes pplestono etree vue theory i coc? | To soph the POT soptcach the deuton of X must beet! and known, 5. nc norm atnbated te strain of xen loses reqs Oe esttin of ony one Pare Donon ie «peste al parameter {© Tony the POT opteach ane must chose a trashed whic Hoh enough that the mumbar oF 44. hottetreshotd«nrees, the dition of excess ost ovary converges 03 generaizd Preto Explansion: Te dstlovtion of xcs ones over converges to 8 generalized Pasta dition a he tasho ‘shou teva, ‘he stitution of Xitel cn ba ay of te corerety Used tributions nema bgnoma tad wi ws tr urkine. The dstibutlon of aces lowes aque the etiaton a wo partes 2 poh sale paramett Banca han ot index pater E One mst chose a teshol hat Nh encuahs that he teeny plies als low enough hat thee ate cberains In oxoss ‘eferane: Kein Oond, Messing Meet ik 2nd Eaton (bey, 2005), Chapter 7 — Parmetic Annroachas i IM: Deb the past ver hecheld (POT) eporoach5 Arist ansystie comparing the ure of paras rl non-parri pprosche for csting VAR ard ie | havcturtice vous make paramats appears fhe favered mated es? Sort of ih meant user aree correct ane € xptanston: Non parame anrosces can secommodte fat als skewness and any ther nnn features ‘ar can causa provlns for pret opproeshes However th dts prod thats sein ssimation lucas few fois o loss with low moghtde on-eramtv methods veto rode rik messes tae Ooo Nance paramtic metieds would be mete opproatein hee tusions. Faferance avn Dons Meesuring Marit Rc, 2d Eon Wes Sussex Engl John Wie & Sons 2005), apse In: Deseo the advantapas and denaintages of nen parr cetation methods Section: Meret Risk Mangement and Nessuroment ‘ontookcearsa tesseet hsm eae "2215 Fata nae arantn Pn Enh 6 tn Png lug yar ea deul nap (COS) contract whi il ny the buyer 75 of he foc va a bon ued by Hao orp. nesta after cal by i To purchare ns COS, the burt ay CDS apres which ies pocantape of he face aus, once a heen of he yer Li estates atthe, "Sena defi roma for io 5 per uae The rake leis 3% per Yer Assuring eats cy ‘ly eos haltway trouah th yur and hatte crue eremim sb evttey after © deta, Whats sas pons {300 bas points 400 be rons xplator The oy to COS vation to eat the ereset sli (PV) of payments othe PY of expect payor Inne ont of ela Lat = donot the CDS speed ratty of eau ng yor = 5 (de eheourt cor =e fr ye nd 5 COs soeed obese) ‘Tho rium eg. which clues tho speed paymant ane 3c Sako wo Gon) = MO OMETHO 97D = OES Sobvinfor the speed 51 9455 «003684 = s = 0.03902 prod f $00 bass pols. Fetereice: Aton Maz Financ Rsk Maregerrent Mode, Histon andlnstutons balan NU: ohn Wiley & Sor7. Yes ae the ic manage Vis, 9 zal fecincome hg ind that cacilzes in bale debt. Vale's atog ules both olive luce engony tases using et du swan (CS) and Bonde One ot ‘ne aden ha the portions desea the tbl Blo Bak Pasion crt Rating se {ene US W min COS a ce ‘Short USO 1 rion COS a Soro of Vion’ rewas lots are ested am wthdaning the fun forte years You are cuenty _eviustng the Impact of varous default seanais to astimate future ase ua You fave etme that {hemargnal probity deal of the Staroe Cons Shin as Toh in Yes 2, ah Sin Yor &. What ‘theprobabity tht te bon makes couoon payments for 3 yor ap then cout tho and of Yor 5? ane Explanation The pobabty tht he bond us ia yar ean be rode fauaton where H> sande or maria soba, emo len by the fon P (Det at and 0/03 8) = C7 pan) °° MP re” MP + 6005)* 0 010)*01 Referencs lan Matz Fnac Rik Management Model, Meter and neutens Meboken, Ni John Whey & Sane 200, chaotr 7.236, Jenn Hl, Opcans, Fates and Other Deatves at tion (Naw Yor Peason Prentee Hal 2012) ehaper 25. [ANE Beran now deta ik for «re company can be odd ws» Berout Wa {seen ret Rise Masstarant aa Manager ‘nov frat winet bro wit oes Chee Aoancn Ses Pras re °2s Pn tne Barta (Prec a | Camsder ear maturity zeo-aupen bond with 2 face value of UED 1000000 and = 04 recovery rate “Srey Company A Tha bona curently eng a 60% of fac aun Aaruming the ees reson ‘lures ced rand tha hereto at eS pr annum eke notral yes pokey or oxaule on campy Ais last to whch of slong? aoe ‘explanation: Ths an be cll by sing the formu whieh equates he utr veo ky bond wth ya {gyn fou ecb oi owas th yi Iersa-mraepene = Probaby f default = Recovery rte bn te stuaten where the racvery tei ame tobe zea, the oka robb of eu canbe eres fersaom* cep -crem evan Inputng he cant this equation ye == @09000108:71000000 = 016 Aeterence: Aan Maz Finan Ak Maragemen Node, History and nstutens Mabokan NI Joh Vey & Sons, 201). shana 6. 208, ‘AM: pln teflon batween thw yl sored ad the prbsby of dou an cle tat probabity fa abe cocanty ung ths crac ra ‘Secon: Crt Re Managemen na Measurement1 >ortnd Gear! etc (PGE) wat on von subir that ns ble to survive ater the Enon pos, | that tino thre wos atone tomate etc wy downarades,parteuary for Bose wtitescparatlng ‘stn ager corporate structures PE survived nat cet ing feng, Whi ofthe feloning sat ‘nant abou rng onc Is ore? 1 Acing-fencing assets apsoach is ypleay ery well when ow gaty fm wants nance | When in-fncna asats options for cet enhancoment inci overotateralzatey and franca ‘gunrartcs provided bythe pater gant deat of the susan ‘& A tubscary hota tho ng fnend ast maybe able fo gn higher cre tng than the pare, “4. Secmue the pen oe at otan an eauty aarti the ber Plana the r-fenced axes, Explanation: ing fencing i ten urdetakan to prove a higher crt atts subsiry ten xatable to ‘horians Societe 3 pater county fing-bncing canbe usin wo mn stson: ahr whan ow-uy fm camot are 2 Ne uaty poet. {han highly fem doesnot wan fo rn he nf bang ts sale anc os ow say proce ‘A subsary may rend conalated onthe parr compar’: bsanc seat caer var th paar etre 3 aterence: Cvstopher Clp The Stuctrng Proce, tetas Fiance and iran! The Ao Marais apts ana at Glabskan Nl Whey 8 Sons, 2008), chapte Bp. 274-299 ‘Aim: Dearbe the prec ana benefits of nafoncns ast. Section: Crea Rist Hessreant and Manageart18, 89: alorgeintmationa bank engages in tena wth counataies hovshout he ward Racor ft hhastarte to pay more tat to rang-way rin ts edn book When one the allowing for 2c | Sank asa arg exposure te Bank equity, end Benk oes to Sel put options eth tong matte nits on eauty te Bank A "Sank Arar rt a ocr tern opuchav agteoment wth Sank B wing cover diferent types of “zebleneoy bank clit Sank A actly manos cod ortoll sing cod defaut swaps an decd t salons _Zost protection to Bank® “anc ators tao forward te agreomat wih Bak 8 o ever st LIBOR2 SK. [xplanatin: Acorn to Section of Baa Ils bank exposed o “pec wang ik if itr xponire toa specie counterparty ih coveltes wth the counters’ probably of fast ex cramal company, iting Be options ons own sec rests rong-wayexoosrs fr the buyer that specie to he coup" IRaforene: si Comte on Banking Suporslon briny ¥, 212, Batt A Ciba! Regt Freer forkdore leer Bani and Banking Setar (acer 270 fovea in 279 Nek eo /euBDeS ‘AM: Desribe changes tthe rogustory cntalNamenork lua changes Rk covrae, the use of sess teats, thoestment of counterparty lt wih rust attr adutments he ue fener age ad 8 he ‘Section: éparatlonl and mteprata Rk Management‘1h The Chet Rick fcr of your bark as put ou i charge of operational sk management Ara ite, you ‘ole intra deta to xmas the fecuency an sve of operational eaten The abe elo ‘nears your tings Fraquony ctrasion ty Dsrbuton Number f Ocsirnet Probability Toews) Props, ° oe 1900 os ‘ssoconthisnformaton, what you estimate ofthe exoectad oss to opens usp 20000, Uso wos00 peer Explanation: The expect loss can bo acute by muliping the expected equaney an he exaected zeny, roe Requoney i acu (09+ 0"05)+ 2 on=0s, epee sevorty sous te: 1000 +05 + 0.00 +04) + c1900000 +9.» 49.500 oterenc: Mo Chaushuy “Reta fay lsum Operations Rk ant! Modeling ‘he Journal of Goerationa ck. Veune Suour © Fa 2050 eo 178 |AIM: Decero Now os seu ir obtains rom Faquancy ard seventy tins Section: Operational an neat Rik Manager12. hiss to enhane it antarance rik management function, Countie Sank medica ana ceo 1% conan baton thei in the asst and Eby sd ofthe balance shat can be enged by | Genoa correlations between broad rk tyes such as cac. mara, and opeatenl ck re Wel Uncersood and ee es) estimate the navi eve «.Conlatonsbatwnon busines na nly rela deciding ttl fmwdesconomic capt vale tnd ae not lovatfor doccene tho Intl buses Ute plete 44 Theltodicton of conlatons nt m-wide rl svation es a ota VaR tha ganar corres anor 8 Explain: Management has heat oinuance the otlns between hve rl by changing he tssetibaty ms So manageent decson making indeed gute rot eterno: sian Nocco and Red Stl, Ener Ask Management Theory and Paco Jura of Ae Corponte ance 1 No. & 008% 20820. IM: Eoerbe the ro ure nth costo ni garagton13, Inrecen yer, koe clr tanks anced sient action f tha ae ting shorten ofan ern gh ‘epuchase 00) sreernsin wish eres eld bank ences otra oat eds nee The {able below shows the aurea frag of for broker-dealer bat. Al lee in USD Bbone BankA Sank ® Banke Bank Finenaolincrumertsonned 2S ——~—Ga3 72S Poded a otal mm DS oui ere xptanaton 4 lousy rds cols materlze apo crore bocome news abou a bans sven an ‘hooss not ore tho poslons I enaugh tors choos not to rene he Bank Soul Mal Be unable to fase scant ca by oer meats on such shot note, heey Pract aerate Howe ne VUneratty x frac rele tthe prpotton af ate» ban os Hodged clit Bank Ais est vunoabie since thas the last andes on shet-term eb facing the lowest paren pe et HS aes ot the four bane i lodge ae ctatr 272/88, 0 38% ‘etrence: Care Due GOD), Fare Mecha of Dslr Bankura of eon Pectin (A, pa. 1-72 [AM ey fectrs that ean prc secre ust ce eal Ean and wht prudent rk Imanagomont sep can be an to mtg these ak1. Gio Vets (69 ard Laenrde Motor Mp ar oth cng ear manufactur In rd ar dao. Eat tis yor both consonaeteduced New hi od ht ate cooarble toch eter nsmot wre eat ‘bry However ater bo cmeuis rma ih fer Bo Ae mods moc 1208 Is xperie han (7s Asa rest Gs tock rice ceed Sarpy while Le tock prs ose darcy. Subsecuenty LM ara 1 anounce tat tay have eter no rev cusion whore the tee fhe pred EGET MOU Gs (6 staraidrsI sta of Lo par hres of GY prevouly hl, Pox te ements sack acing {USD 20 and ts tock x wang s USD 58 Fy a caret ta th merger wlbe compete eur) ‘Be waneetion cots whch th felon insert tous You al? {817300 starae of Band short 100 stare of 1 Share 300 snr of on buy 100 shares of corre newer b Explain: # te meer goes tough, te companies’ pce baud coraspond en 251 nees wh sate oF Lt ‘crresrondng 03 mare of GV Hower atte gen tng arce the ota doesnot hal wth ane share ot LF ‘bg tvs! t0 USD 58 / USD 2, or 29 share of GV. Te shoe that LM ir unceraued compared to GV s&s turns ets morse areement# tho merase coneite La stock wil appreciate aor GV lock Wl dete [terete to ach star unl hs ato reaches 5 ore to apo ths potent artitrge opentunty, ou can set 00 shar ofthe reatlyoveraluse stock Gy, reading na eas ion f USO 6000. ws Bung 100 shar ofthe ety undrvued stock UM for USD ‘S200. sung na net cnn tow of USD 200 the argerecamelta, ante log an! the ser postions ‘al exty ote eon other gen te 31 ati and the trae wl be ec The agin cash inflow of USD 200 “rule Sour pot om the bag fade the merger eameed Refrete: Dave Stowe 2010) an nrewucton fo vstmane Bas, Hedge Funes nd rae uly, aca 1 2m: Dssetbe a inteeret«rurrcl warp ofthe folowing sages merperartege pas tana1% 4 tho nd of 2007 Chas Cas pnson ha USD 30 millon wart of eas that wer aly ead cote ‘1a USD 160 malo nace lable wt diego ot. 2009, the widepread effets [ofthe subprime eras it e penn fund, cing ts eweatrat next to oso SO of ar maak ‘luc nadton the mene spore fem the goverment ~ eating rere ate ~to shoe the Suton causa bod ys to deca by 2. What as te change Inthe pasion fre srl in 2008? sD. miton {S024 mon 1S 25 malon {so 230.4 millon aoe corractanewer «| ‘pansion: The chang inthe pasion fan urls rte yea 2008's eal ote el suk a th end of 2007 less the ering srl 5 ae ed of 208, The al uu clested ws SA Ly = 350-180 170, ‘ore A= the frm itl ats and Ly the fs inl bles. Nave we have ocaleuate the sap the end 2008 Gen the SOK denen he waity ark the ne ove fase Althea of 2008 fol 10-05) "350 e175 The new lvl of lbitios can be clued a: Gece tam h \wnare MD the modes duration ane ay the change nye d= 04-0029 "180 «250.4 ‘Therefore the 2008 sph Sis el toA, = Ly = VE~ 2304 =-S54 (ich las he pension ue actualy ih det sation ath and of 008), The change sul er 2008s hence SS = SEA~ VO -2364 maen, ‘eGrew-Hil 2007. Chapa ~ va ana ak Busting in este Managenent. Pass [AIM: Describe th mvestment process 6 argo mvestts Sih 2b belo funds1, Ae vest ound ot tat ght cui baed by subprne rotaae Wa ne los he Ee fc fected one st crash of thefalonna machi paved ah ipotant rosin the WaPo [Sf thecras fom the subprime sect tater srt cae? neato ose cas king inca ond and commer merges hal banks Tahting of ucourewinsow ain tndar bythe US Fader Resor rise oie dea sues concise to abort ate al hall hfe shaet vei sere correct asi: Explanation bl excerpt tom We atte powdes a suremay “Unatain about tho soiency f counterparties, Fepo depoators brea concred tat the cotta bandh might not bea fm wane to Rad cash = {Tat to aay tan asters would have to Gece mpi tote Biers, Tet th cul tween te ‘bpime sock ap other ssl categorie “ie ecin inthe aun of alata Baca esr inthe rp incase nthe ops hart whl ths per= antag citron tween he mart ahve ofthe pldgod calaleraland te amount fn let. Far eam "apo hart rose dematicaly late 2007 and 2008, ftom ste a the being of Aust 2007 to smart 0% in tty 2008 and esching overs by emy 2008 As the vole of collar began t fal th edt dterration Invatuntons eos et clases nich als crnancnd In August 2007 when te UBO-O sored amped The csured ven though Be subprime sents (as measured by Uy ABK nar of ret deroes) had bean ‘eterrating for mont prior oa. ‘afernes: Gary Gorton (05-2006, Sisped in he Facey the nis Har Banking andthe Pan of 2007.5 [AMS! Expl tho function of and dine renos nd cus tha uo tho pray mechanism ding show ankng. Exp how the shock rom the subprime morgage salons fects mrt comes tha re uals