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1. EXAMPLE 31.3: FRM EXAM 2004—QUESTION 70

Question: Under the market risk amendment to the Basel Accord, a bank can use its internal models to calculate its market risk charge subject to all the following provisions except: a. A time horizon of 10 trading days b. A 99% confidence level c. One year of historical observations, which are updated semiannually d. The market risk charge will be set at the higher of the previous day’s...
Question: Under the market risk amendment to the Basel Accord, a bank can use its internal models to calculate its market risk charge subject to all the following provisions except: a. A time horizon of 10 trading days b. A 99% confidence level c. One year of historical observations, which are updated semiannually d. The market risk charge will be set at the higher of the previous day’s...
Question: Under the market risk amendment to the Basel Accord, a bank can use its internal models to calculate its market risk charge subject to all the following provisions except: a. A time horizon of 10 trading days b. A 99% confidence level c. One year of historical observations, which...
Question: Under the market risk amendment to the Basel Accord, a bank can use its internal models to calculate its market risk charge subject to all the following provisions except: a. A time...
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2. EXAMPLE 31.2: FRM EXAM 1999—QUESTION 190

Question: The amendment to the Capital Accord requires that internal models a. Utilize at least six months of historical data b. Utilize at least one year of equally weighted historical data c. Utilize enough historical data so that the weighted average age of the data is at least six months d. Utilize two years of historical data, unequally weighted Answer: c) Answer b) is correct...
Question: The amendment to the Capital Accord requires that internal models a. Utilize at least six months of historical data b. Utilize at least one year of equally weighted historical data c. Utilize enough historical data so that the weighted average age of the data is at least six months d. Utilize two years of historical data, unequally weighted Answer: c) Answer b) is correct...
Question: The amendment to the Capital Accord requires that internal models a. Utilize at least six months of historical data b. Utilize at least one year of equally weighted historical data c. Utilize enough historical data so that the weighted average age of the data is at least six...
Question: The amendment to the Capital Accord requires that internal models a. Utilize at least six months of historical data b. Utilize at least one year of equally weighted historical data ...
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3. EXAMPLE 31.1: FRM EXAM 2002—QUESTION 10

Question: Banks have to meet a number of qualitative criteria before they are permitted to use a models-based approach. The qualitative criteria include: a. The bank should have an independent risk control unit that is responsible for the design and implementation of the bank’s risk management system; the unit should conduct a regular backtesting program. b. The board of directors and...
Question: Banks have to meet a number of qualitative criteria before they are permitted to use a models-based approach. The qualitative criteria include: a. The bank should have an independent risk control unit that is responsible for the design and implementation of the bank’s risk management system; the unit should conduct a regular backtesting program. b. The board of directors and...
Question: Banks have to meet a number of qualitative criteria before they are permitted to use a models-based approach. The qualitative criteria include: a. The bank should have an independent risk control unit that is responsible for the design and implementation of the bank’s risk...
Question: Banks have to meet a number of qualitative criteria before they are permitted to use a models-based approach. The qualitative criteria include: a. The bank should have an independent...
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4. EXAMPLE 30.17: FRM EXAM 2002—QUESTION 72

Question: Under the new Basel Accord, which of the following best defines the overall minimum capital ratio? a. (Total capital) / (Credit risk + Market risk + Operational risk) = Capital ratio 8% b. (Total capital) / (Credit risk + Market risk + Operational risk) = Capital ratio 8% c. (Total capital) / (Credit risk + Market risk) = 8% d. (Tier 1 capital) / (Market risk + Operational...
Question: Under the new Basel Accord, which of the following best defines the overall minimum capital ratio? a. (Total capital) / (Credit risk + Market risk + Operational risk) = Capital ratio 8% b. (Total capital) / (Credit risk + Market risk + Operational risk) = Capital ratio 8% c. (Total capital) / (Credit risk + Market risk) = 8% d. (Tier 1 capital) / (Market risk + Operational...
Question: Under the new Basel Accord, which of the following best defines the overall minimum capital ratio? a. (Total capital) / (Credit risk + Market risk + Operational risk) = Capital ratio 8% b. (Total capital) / (Credit risk + Market risk + Operational risk) = Capital ratio 8% c....
Question: Under the new Basel Accord, which of the following best defines the overall minimum capital ratio? a. (Total capital) / (Credit risk + Market risk + Operational risk) = Capital ratio...
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5. EXAMPLE 30.16: FRM EXAM 2003—QUESTION 30

Question: According to the Basel Committee, which of the options below is not a quantitative standard that a bank must meet before it is permitted to use the AMA for operational risk capital? a. A bank’s risk measurement system should be sufficiently granular to capture the major drivers of operational risk affecting the shape of the tail of the loss estimates. b. Supervisors will require...
Question: According to the Basel Committee, which of the options below is not a quantitative standard that a bank must meet before it is permitted to use the AMA for operational risk capital? a. A bank’s risk measurement system should be sufficiently granular to capture the major drivers of operational risk affecting the shape of the tail of the loss estimates. b. Supervisors will require...
Question: According to the Basel Committee, which of the options below is not a quantitative standard that a bank must meet before it is permitted to use the AMA for operational risk capital? a. A bank’s risk measurement system should be sufficiently granular to capture the major drivers of...
Question: According to the Basel Committee, which of the options below is not a quantitative standard that a bank must meet before it is permitted to use the AMA for operational risk capital? ...
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6. EXAMPLE 30.15: FRM EXAM 2004—QUESTION 42

Question: According to the Basel Accord’s advanced measurement approach, how areoperational capital requirements calculated? a. As in credit risk, there are formulae specified in the Accord so that only the inputs have to be estimated. b. Capital requirements have to be estimated using historical databases, but the Accord does not specify which statistical distribution has to be used. c....
Question: According to the Basel Accord’s advanced measurement approach, how areoperational capital requirements calculated? a. As in credit risk, there are formulae specified in the Accord so that only the inputs have to be estimated. b. Capital requirements have to be estimated using historical databases, but the Accord does not specify which statistical distribution has to be used. c....
Question: According to the Basel Accord’s advanced measurement approach, how areoperational capital requirements calculated? a. As in credit risk, there are formulae specified in the Accord so that only the inputs have to be estimated. b. Capital requirements have to be estimated using...
Question: According to the Basel Accord’s advanced measurement approach, how areoperational capital requirements calculated? a. As in credit risk, there are formulae specified in the Accord so...
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7. EXAMPLE 30.14: FRM EXAM 2004—QUESTION 53

Question: Which of the following statements about its methodology for calculating an operational risk capital charge in Basel II is correct? a. Basic indicator approach is suitable for institutions with sophisticated operational risk profile. b. Under the standardized approach, capital requirement is measured for each of the business line. c. Advanced measurement approaches will not...
Question: Which of the following statements about its methodology for calculating an operational risk capital charge in Basel II is correct? a. Basic indicator approach is suitable for institutions with sophisticated operational risk profile. b. Under the standardized approach, capital requirement is measured for each of the business line. c. Advanced measurement approaches will not...
Question: Which of the following statements about its methodology for calculating an operational risk capital charge in Basel II is correct? a. Basic indicator approach is suitable for institutions with sophisticated operational risk profile. b. Under the standardized approach, capital...
Question: Which of the following statements about its methodology for calculating an operational risk capital charge in Basel II is correct? a. Basic indicator approach is suitable for...
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8. EXAMPLE 30.13: FRM EXAM 2002—QUESTION 69

Question: The latest proposal of the Basel Committee on Banking Supervision (BCBS, Basel 2) for the new Basel Accord introduces the advanced internal rating approach for credit risk. Banks will input their own a. EDF b. LGD c. EDF and LGD d. None of the above Answer: c) Banks will provide their estimates of EDF and LGD, which will be entered into a risk weight function.
Question: The latest proposal of the Basel Committee on Banking Supervision (BCBS, Basel 2) for the new Basel Accord introduces the advanced internal rating approach for credit risk. Banks will input their own a. EDF b. LGD c. EDF and LGD d. None of the above Answer: c) Banks will provide their estimates of EDF and LGD, which will be entered into a risk weight function.
Question: The latest proposal of the Basel Committee on Banking Supervision (BCBS, Basel 2) for the new Basel Accord introduces the advanced internal rating approach for credit risk. Banks will input their own a. EDF b. LGD c. EDF and LGD d. None of the above Answer: c) Banks will...
Question: The latest proposal of the Basel Committee on Banking Supervision (BCBS, Basel 2) for the new Basel Accord introduces the advanced internal rating approach for credit risk. Banks will...
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9. EXAMPLE 30.12: FRM EXAM 2002—QUESTION 14

Question: Under the new Basel Accord credit risk charges may be calculated using the Internal Ratings Based Approach, which of the following is the best description of this approach? a. Banks estimate default probabilities of counterparties using their own methods. subject to regulatory standards, that then are used with modified standardized inputs that come from the standardized...
Question: Under the new Basel Accord credit risk charges may be calculated using the Internal Ratings Based Approach, which of the following is the best description of this approach? a. Banks estimate default probabilities of counterparties using their own methods. subject to regulatory standards, that then are used with modified standardized inputs that come from the standardized...
Question: Under the new Basel Accord credit risk charges may be calculated using the Internal Ratings Based Approach, which of the following is the best description of this approach? a. Banks estimate default probabilities of counterparties using their own methods. subject to regulatory...
Question: Under the new Basel Accord credit risk charges may be calculated using the Internal Ratings Based Approach, which of the following is the best description of this approach? a. Banks...
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10. EXAMPLE 30.11: FRM EXAM 2004—QUESTION 67

Question: Which of the following statements about the Basel II capital requirements is false? a. It increases the risk sensitivity of minimum capital requirements for internationally active banks. b. It only addresses credit risk and market risk. c. United States insurance companies are not required to comply with Basel II capital requirements. d. Banks are not allowed to use their...
Question: Which of the following statements about the Basel II capital requirements is false? a. It increases the risk sensitivity of minimum capital requirements for internationally active banks. b. It only addresses credit risk and market risk. c. United States insurance companies are not required to comply with Basel II capital requirements. d. Banks are not allowed to use their...
Question: Which of the following statements about the Basel II capital requirements is false? a. It increases the risk sensitivity of minimum capital requirements for internationally active banks. b. It only addresses credit risk and market risk. c. United States insurance companies are...
Question: Which of the following statements about the Basel II capital requirements is false? a. It increases the risk sensitivity of minimum capital requirements for internationally active...
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11. EXAMPLE 30.10: FRM EXAM 1998—QUESTION 3

Question: A bank that funds itself at LIBOR − 5bp., purchases an A+ rated corporate floating coupon loan paying LIBOR + 15bp. Based on the Basel I minimum capital requirements, what is the annualized return on regulatory capital for this loan? a. 2.5% b. 5.0% c. 11% d. None of the above Answer: a) An 8% capital charge applies to this bond. We buy $100 worth of the bond, which is... Question: A bank that funds itself at LIBOR − 5bp., purchases an A+ rated corporate floating coupon loan paying LIBOR + 15bp. Based on the Basel I minimum capital requirements, what is the annualized return on regulatory capital for this loan? a. 2.5% b. 5.0% c. 11% d. None of the above Answer: a) An 8% capital charge applies to this bond. We buy$100 worth of the bond, which is...
Question: A bank that funds itself at LIBOR − 5bp., purchases an A+ rated corporate floating coupon loan paying LIBOR + 15bp. Based on the Basel I minimum capital requirements, what is the annualized return on regulatory capital for this loan? a. 2.5% b. 5.0% c. 11% d. None of the above ...
Question: A bank that funds itself at LIBOR − 5bp., purchases an A+ rated corporate floating coupon loan paying LIBOR + 15bp. Based on the Basel I minimum capital requirements, what is the...
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12. EXAMPLE 30.9: FRM EXAM 2000—QUESTION 135

Question: As of November 2000, which one of the following will generally receive 8% BIS capital charge (100% asset weight)? a. Investment in a publicly traded stock for trading purposes b. Investment in a U.S. government bond c. Investment in a venture capital fund for speculation purposes d. None of the above Answer: c) The capital charges for the trading portfolio do not follow the...
Question: As of November 2000, which one of the following will generally receive 8% BIS capital charge (100% asset weight)? a. Investment in a publicly traded stock for trading purposes b. Investment in a U.S. government bond c. Investment in a venture capital fund for speculation purposes d. None of the above Answer: c) The capital charges for the trading portfolio do not follow the...
Question: As of November 2000, which one of the following will generally receive 8% BIS capital charge (100% asset weight)? a. Investment in a publicly traded stock for trading purposes b. Investment in a U.S. government bond c. Investment in a venture capital fund for speculation...
Question: As of November 2000, which one of the following will generally receive 8% BIS capital charge (100% asset weight)? a. Investment in a publicly traded stock for trading purposes b....
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13. EXAMPLE 30.8: FRM EXAM 2000—QUESTION 137

Question: The BIS requirement for capital charge of an unfunded commitment of original maturity of greater than one year, as compared to an equivalent funded commitment (or loan) is a. The same b. Half c. A quarter d. Zero Answer: b) Unfunded commitments with maturities greater than a year (and irrevocable) have a 50% conversion factor, or 4% BIS weight instead of the usual 8%.
Question: The BIS requirement for capital charge of an unfunded commitment of original maturity of greater than one year, as compared to an equivalent funded commitment (or loan) is a. The same b. Half c. A quarter d. Zero Answer: b) Unfunded commitments with maturities greater than a year (and irrevocable) have a 50% conversion factor, or 4% BIS weight instead of the usual 8%.
Question: The BIS requirement for capital charge of an unfunded commitment of original maturity of greater than one year, as compared to an equivalent funded commitment (or loan) is a. The same b. Half c. A quarter d. Zero Answer: b) Unfunded commitments with maturities greater than a...
Question: The BIS requirement for capital charge of an unfunded commitment of original maturity of greater than one year, as compared to an equivalent funded commitment (or loan) is a. The...
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14. EXAMPLE 30.7: FRM EXAM 2000—QUESTION 134

Question: BIS capital requirement for an unfunded, short-term (under one year) credit commitment is a. 0% b. 4% c. 8% d. 100% Answer: a) Unfunded commitments are off–balance sheet items (unlike funded commitments, which are loans). Below a year, the credit conversion factor is zero, which means zero BIS weight.
Question: BIS capital requirement for an unfunded, short-term (under one year) credit commitment is a. 0% b. 4% c. 8% d. 100% Answer: a) Unfunded commitments are off–balance sheet items (unlike funded commitments, which are loans). Below a year, the credit conversion factor is zero, which means zero BIS weight.
Question: BIS capital requirement for an unfunded, short-term (under one year) credit commitment is a. 0% b. 4% c. 8% d. 100% Answer: a) Unfunded commitments are off–balance sheet items (unlike funded commitments, which are loans). Below a year, the credit conversion factor is zero,...
Question: BIS capital requirement for an unfunded, short-term (under one year) credit commitment is a. 0% b. 4% c. 8% d. 100% Answer: a) Unfunded commitments are off–balance sheet items...
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15. EXAMPLE 30.6: FRM EXAM 2001—QUESTION 45

Question: The Basel Accord computes the credit exposure of derivatives using both replacement cost and an “add-on” to cover potential future exposure. Which of the following is the correct credit risk charge for a purchased seven year OTC equity index option of $50 million notional with a current mark to market of$15 million with no netting and a counterparty weighting of 100%? a. $1.6... Question: The Basel Accord computes the credit exposure of derivatives using both replacement cost and an “add-on” to cover potential future exposure. Which of the following is the correct credit risk charge for a purchased seven year OTC equity index option of$50 million notional with a current mark to market of $15 million with no netting and a counterparty weighting of 100%? a.$1.6...
Question: The Basel Accord computes the credit exposure of derivatives using both replacement cost and an “add-on” to cover potential future exposure. Which of the following is the correct credit risk charge for a purchased seven year OTC equity index option of $50 million notional with a... Question: The Basel Accord computes the credit exposure of derivatives using both replacement cost and an “add-on” to cover potential future exposure. Which of the following is the correct credit... Replies: 0 Views: 3 16. EXAMPLE 30.5: FRM EXAM 2001—QUESTION 38 Question: A bank subject to the Basel I Accord makes a loan of$100m to a firm with a risk weighting of 50%. What is the basic on-balance credit risk charge? a. $8m b.$4m c. $2m d.$1m Answer: b) Under the Basel I rules, the charge is $100 × 50% × 8% =$4 million.
Question: A bank subject to the Basel I Accord makes a loan of $100m to a firm with a risk weighting of 50%. What is the basic on-balance credit risk charge? a.$8m b. $4m c.$2m d. $1m Answer: b) Under the Basel I rules, the charge is$100 × 50% × 8% = $4 million. Question: A bank subject to the Basel I Accord makes a loan of$100m to a firm with a risk weighting of 50%. What is the basic on-balance credit risk charge? a. $8m b.$4m c. $2m d.$1m Answer: b) Under the Basel I rules, the charge is $100 × 50% × 8% =$4 million.
Question: A bank subject to the Basel I Accord makes a loan of $100m to a firm with a risk weighting of 50%. What is the basic on-balance credit risk charge? a.$8m b. $4m c.$2m d. \$1m ...
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17. EXAMPLE 30.4: FRM EXAM 2004—QUESTION 29

Question: Consider the following financial data for a bank, in millions of dollars: Shareholders’ funds: 627.4. Retained earnings: 65.6. Undisclosed reserves: 33.5. Goodwill: 21.3. Subordinated debt: 180.0. Specific provisions: 11.7. The ratio of tier 2 to tier 1 capital is: a. 30.81% b. 31.78% c. 33.53% d. 34.03% Answer: b) Tier 1 capital consists of shareholders’ funds plus...
Question: Consider the following financial data for a bank, in millions of dollars: Shareholders’ funds: 627.4. Retained earnings: 65.6. Undisclosed reserves: 33.5. Goodwill: 21.3. Subordinated debt: 180.0. Specific provisions: 11.7. The ratio of tier 2 to tier 1 capital is: a. 30.81% b. 31.78% c. 33.53% d. 34.03% Answer: b) Tier 1 capital consists of shareholders’ funds plus...
Question: Consider the following financial data for a bank, in millions of dollars: Shareholders’ funds: 627.4. Retained earnings: 65.6. Undisclosed reserves: 33.5. Goodwill: 21.3. Subordinated debt: 180.0. Specific provisions: 11.7. The ratio of tier 2 to tier 1 capital is: a. 30.81% b....
Question: Consider the following financial data for a bank, in millions of dollars: Shareholders’ funds: 627.4. Retained earnings: 65.6. Undisclosed reserves: 33.5. Goodwill: 21.3. Subordinated...
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18. EXAMPLE 30.3: FRM EXAM 2000—QUESTION 139

Question: Tier 1 capital includes all of the following except a. Asset revaluation reserves b. Common stock c. Noncumulative preferred shares d. Disclosed reserves Answer: a) Tier 1 capital includes common stock, disclosed reserves, and noncumulative preferred shares.
Question: Tier 1 capital includes all of the following except a. Asset revaluation reserves b. Common stock c. Noncumulative preferred shares d. Disclosed reserves Answer: a) Tier 1 capital includes common stock, disclosed reserves, and noncumulative preferred shares.
Question: Tier 1 capital includes all of the following except a. Asset revaluation reserves b. Common stock c. Noncumulative preferred shares d. Disclosed reserves Answer: a) Tier 1 capital includes common stock, disclosed reserves, and noncumulative preferred shares.
Question: Tier 1 capital includes all of the following except a. Asset revaluation reserves b. Common stock c. Noncumulative preferred shares d. Disclosed reserves Answer: a) Tier 1...
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19. EXAMPLE 30.2: FRM EXAM 2002—QUESTION 71

Question: What is the best definition of tier 1 regulatory capital? a. Equity capital, retained earnings, disclosed reserves b. Subordinated debt, undisclosed reserves c. Equity capital, subordinated debt with a maturity greater than five years d. Long-term debt, revaluation reserves Answer: a) Tier 1 capital includes equity capital, disclosed reserves, and retained earnings. Tier 2...
Question: What is the best definition of tier 1 regulatory capital? a. Equity capital, retained earnings, disclosed reserves b. Subordinated debt, undisclosed reserves c. Equity capital, subordinated debt with a maturity greater than five years d. Long-term debt, revaluation reserves Answer: a) Tier 1 capital includes equity capital, disclosed reserves, and retained earnings. Tier 2...
Question: What is the best definition of tier 1 regulatory capital? a. Equity capital, retained earnings, disclosed reserves b. Subordinated debt, undisclosed reserves c. Equity capital, subordinated debt with a maturity greater than five years d. Long-term debt, revaluation reserves ...
Question: What is the best definition of tier 1 regulatory capital? a. Equity capital, retained earnings, disclosed reserves b. Subordinated debt, undisclosed reserves c. Equity capital,...
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20. EXAMPLE 30.1: FRM EXAM 1997—QUESTION 17

Question: For regulatory capital calculation purposes, what market risks must be incorporated into a bank’s VAR estimate? a. Risks in the trading account relating to interest rate risk and equity risk b. Risks in the trading account relating to interest rate risk and equity risk, and risks throughout the bank related to foreign exchange and commodity risks c. Risk throughout the bank...
Question: For regulatory capital calculation purposes, what market risks must be incorporated into a bank’s VAR estimate? a. Risks in the trading account relating to interest rate risk and equity risk b. Risks in the trading account relating to interest rate risk and equity risk, and risks throughout the bank related to foreign exchange and commodity risks c. Risk throughout the bank...
Question: For regulatory capital calculation purposes, what market risks must be incorporated into a bank’s VAR estimate? a. Risks in the trading account relating to interest rate risk and equity risk b. Risks in the trading account relating to interest rate risk and equity risk, and risks...
Question: For regulatory capital calculation purposes, what market risks must be incorporated into a bank’s VAR estimate? a. Risks in the trading account relating to interest rate risk and...
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