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P1.T1.415. Miscellaneous Foundation

Nicole Seaman

Director of FRM Operations
Staff member
Concept: These on-line quiz questions are not specifically linked to AIMs, but are instead based on recent sample questions. The difficulty level is a notch, or two notches, easier than bionicturtle.com's typical AIM-by-AIM question such that the intended difficulty level is nearer to an actual exam question. As these represent "easier than our usual" practice questions, they are well-suited to online simulation.


415.1. When approaching financial derivatives--e.g., stock options--which are common hedging instruments, there is a thematic distinction between valuation (a.k.a, pricing) and risk measurement. While the approaches to pricing and risk measurement often share much in common (e.g., risk factors), there are some key differences. Each of the following is true about a difference between valuation and risk measurement approaches EXCEPT which is NOT true?

a. Risk measurement tends to estimate a distribution of future values, which derivatives valuation tends to compute a discounted expected present value (PV)
b. Risk measurement is focused on distributional tails (and second or higher moments), while derivatives valuation is focused on the center of the distribution
c. Risk measurement requires high precision, while derivatives valuation is satisfied with approximations
d. Risk measurement prefers actual (aka, physical) distributions, while derivatives valuation prefers risk-neutral distributions

415.2. Each of the following is an obvious, blatant failure of risk management EXCEPT which of the following by itself does not necessarily imply a risk management failure?

a. The firm realizes a loss of more than 20% of its capital in the period of only a single year
b. Risk models assume positions are independent, but in reality the firm's positions are highly correlated
c. Market, credit, and operational risks are measured, but liquidity risk is forgotten (and therefore inadvertently omitted) due to this three-bucket typology
d. The firm's risk managers correctly specify the firm's risk profile but they fail to successfully and timely communicate these risks to the firm's executives and the board of directors.

Answers here: