Killtest Free Online Test ICBRR GARP Financial Risk and Regulation Exam V8.02 - Get To Pass 100%

2. The safer , easier way to help you pass any IT exams. Exam:ICBRR KillTest Title: GARP International Certificate in Banking Risk and Regulation (ICBRR) Version:V8.02 1 / 18

3. The safer , easier way to help you pass any IT exams. 1.Which one of the following four statements correctly defines credit risk? A. Credit risk is the risk that complements market and liquidity risks. B. Credit risk is a form of performance risk in contractual relationship. C. Credit risk is the risk arising from execution of a company's strategy. D. Credit risk is the risk that summarizes the exposures a company or firm assumes when it attempts to operate within a given field or industry. Answer: B 2.A credit analyst wants to determine a good pricing strategy to compensate for credit decisions that might have been made incorrectly. When analyzing her credit portfolio, the analyst focuses on the spreads in each loan to determine if they are sufficient to compensate the bank for all of the following costs and risks EXCEPT. A. The marginal cost of funds provided. B. The overhead cost of maintaining the loan and the account. C. The inherent risk of lending to this borrower while providing a return on the risk capital used to the support the loan. D. The opportunity cost of risk-adjusted marginal cost of capital. Answer: D 3.To estimate the interest charges on the loan, an analyst should use one of the following four formulas: A. Loan interest = Risk-free rate - Probability of default x Loss given default + Spread B. Loan interest = Risk-free rate + Probability of default x Loss given default + Spread C. Loan interest = Risk-free rate - Probability of default x Loss given default - Spread D. Loan interest = Risk-free rate + Probability of default x Loss given default - Spread Answer: B 4.Alpha Bank determined that Delta Industrial Machinery Corporation has 2% change of default on a one-year no-payment of USD $1 million, including interest and principal repayment. The bank charges 3% interest rate spread to firms in the machinery industry, and the risk-free interest rate is 6%. Alpha Bank receives both interest and principal payments once at the end the year. Delta can only default at the end of the year. If Delta defaults, the bank expects to lose 50% of its promised payment. Hence, the loss KillTest rate in this case will be A. 1% B. 3% C. 5% D. 10% Answer: A 5.Alpha Bank determined that Delta Industrial Machinery Corporation has 2% change of default on a one-year no-payment of USD $1 million, including interest and principal repayment. The bank charges 3% interest rate spread to firms in the machinery industry, and the risk-free interest rate is 6%. Alpha Bank receives both interest and principal payments once at the end the year. Delta can only default at the end of the year. If Delta defaults, the bank expects to lose 50% of its promised payment. What interest rate should Alpha Bank charge on the no-payment loan to Delta Industrial Machinery 2 / 18

4. The safer , easier way to help you pass any IT exams. Corporation? A. 8% B. 9% C. 10% D. 12% Answer: C 6.Alpha Bank determined that Delta Industrial Machinery Corporation has 2% change of default on a one-year no-payment of USD $1 million, including interest and principal repayment. The bank charges 3% interest rate spread to firms in the machinery industry, and the risk-free interest rate is 6%. Alpha Bank receives both interest and principal payments once at the end the year. Delta can only default at the end of the year. If Delta defaults, the bank expects to lose 50% of its promised payment. What may happen to the Delta's initial credit parameter and the value of its loan if the machinery industry experiences adverse structural changes? A. Probability of default and loss at default may decrease simultaneously, while duration rises causing the loan value to decrease. B. Probability of default and loss at default may decrease simultaneously, while duration falls causing the loan value to decrease. C. Probability of default and loss at default may increase simultaneously, while duration rises causing the loan value to decrease. D. Probability of default and loss at default may increase simultaneously, while duration falls causing the loan value to decrease. Answer: D 7.Alpha Bank determined that Delta Industrial Machinery Corporation has 2% change of default on a one-year no-payment of USD $1 million, including interest and principal repayment. The bank charges 3% interest rate spread to firms in the machinery industry, and the risk-free interest rate is 6%. Alpha Bank receives both interest and principal payments once at the end the year. Delta can only default at the end of the year. If Delta defaults, the bank expects to lose 50% of its promised payment. Six months after Alpha Bank provides USD $1 million loan to the Delta Industrial Machinery Corporation, a new competitor enters the machinery industry, causing Delta to adjust its prices and mark down the value of its inventory. KillTest Hence, the probability of default increases from 2% to 10% and the loss given default increases from 50% to 75%. If Alpha Bank can reprice the loan, what should the new rate be? A. 10% B. 13% C. 16.5% D. 20.5% Answer: D 8.Which one of the following four model types would assign an obligor to an obligor class based on the risk characteristics of the borrower at the time the loan was originated and estimate the default probability based on the past default rate of the members of that particular class? A. Dynamic models 3 / 18

5. The safer , easier way to help you pass any IT exams. B. Causal models C. Historical frequency models D. Credit rating models Answer: C 9.Which one of the following four models is typically used to grade the obligations of small- and medium-size enterprises? A. Causal models B. Historical frequency models C. Credit scoring models D. Credit rating models Answer: C 10.A credit associate extending a loan to an obligor suspects that the obligor may change his behavior after the loan has been originated. The obligor in this case may use the loan proceeds for purposes not sanctioned by the lender, thereby increasing the risk of default. Hence, the credit associate must estimate the probability of default based on the assumptions about the applicability of the following tendency to this lending situation: A. Speculation B. Short bias C. Moral hazard D. Adverse selection Answer: C 11.A bank customer chooses a mortgage with low initial payments and payments that increase over time because the customer knows that she will have trouble making payments in the early years of the loan. The bank makes this type of mortgage with the same default assumptions uses for ordinary mortgages, thus underestimating the risk of default and becoming exposed to: A. Moral hazard B. Adverse selection C. Banking speculation D. Sampling bias Answer: B 12.The potential failure of a manufacturer to honor a warranty might be called ____, whereas the potential failure of a borrower to fulfill its payment requirements, which include both the repayment of the amount borrowed, the principal and the contractual interest payments, would be called ___. A. Credit risk; market risk B. Market risk; credit risk C. Credit risk; performance risk D. Performance risk; credit risk Answer: D 13.Which one of the following four options does NOT represent a benefit of compensating balances to the KillTest 4 / 18

6. The safer , easier way to help you pass any IT exams. bank? A. Compensating balances allow the bank to net some of the exposure they may have in case of default, by taking funds from these specific deposit account one the borrower defaults. B. Since the compensating balances cannot be withdrawn at short notice, if at all, they are not considered transaction accounts and are able to provide a stable funding to the bank, reducing its reliance on more volatile external inter-bank based funding sources. C. Compensation balances influence the expected loss rate of the bank given the default obligor and improve capital structure by controlling obligor type and avoiding payment delays. D. Since the compensating balances reduce the next amount lent to the borrower, the earned return on the loan is increased, further widening the bank's interest rate margin and profitability. Answer: C 14.According to a Moody's study, the most important drivers of the loss given default historically have been all of the following EXCEPT: I. Debt type and seniority II. Macroeconomic environment III. Obligor asset type IV. Recourse A. I B. II C. I, II D. III, IV Answer: D 15.A credit rating analyst wants to determine the expected duration of the default time for a new three-year loan, which has a 2% likelihood of defaulting in the first year, a 3% likelihood of defaulting in the second year, and a 5% likelihood of defaulting the third year. What is the expected duration for this three-year loan? A. 1.5 years B. 2.1 years C. 2.3 years D. 3.7 years Answer: C 16.Of all the risk factors in loan pricing, which one of the following four choices is likely to be the least significant? A. Probability of default B. Duration of default C. Loss given default D. Exposure at default Answer: B 17.By lowering the spread on lower credit quality borrowers, the bank will typically achieve all of the following outcomes EXCEPT: KillTest 5 / 18

7. The safer , easier way to help you pass any IT exams. A. Aggressively courting of new business B. Lower probability of default C. Rapid growth D. Higher losses in case of default Answer: B 18.In the United States, which one of the following four options represents the largest component of securitized debt? A. Education loans B. Credit card loans C. Real estate loans D. Lines of credit Answer: C 19.From the bank's point of view, repricing the retail debt portfolio will introduce risks of fluctuations in: I. Duration II. Loss given default III. Interest rates IV. Bank spreads A. I B. II C. I, II D. III, IV Answer: D 20.Altman's Z-score incorporates all the following variables that are predictive of bankruptcy EXCEPT: A. Return on total assets B. Sales to total assets C. Equity to debt D. Return on equity Answer: D KillTest 21.Counterparty credit risk assessment differs from traditional credit risk assessment in all of the following features EXCEPT: A. Exposures can often be netted B. Exposure at default may be negatively correlated to the probability of default C. Counterparty risk creates a two-way credit exposure D. Collateral arrangements are typically static in nature Answer: D 22.All of the following performance statistics typically benefit country's creditworthiness EXCEPT: A. Low unemployment B. Low inflation C. High degrees of investment 6 / 18

8. The safer , easier way to help you pass any IT exams. D. Low degrees of savings Answer: D 23.A financial analyst is trying to distinguish credit risk from market risk. A $100 loan collateralized with $200 in stock has limited ___, but an uncollateralized obligation issued by a large bank to pay an amount linked to the long-term performance of the Nikkei 225 Index that measures the performance of the leading Japanese stocks on the Tokyo Stock Exchange likely has more ___ than ___. A. Legal risk; market risk; credit risk B. Market risk; market risk; credit risk C. Market risk; credit risk; market risk D. Credit risk, legal risk; market risk Answer: B 24.Which one of the following four statements regarding counterparty credit risk is INCORRECT? A. Counterparty credit risk refers to the inability to realize gains in a contract with a counterparty due to its default. B. The exposure at default is variable due to fluctuations in swap valuations. C. The exposure at default can be negatively correlated to probability of default. D. Dynamic collateral provisions often increase counterparty risk considerably. Answer: B 25.A credit risk analyst is evaluating factors that quantify credit risk exposures. The risk that the borrower would fail to make full and timely repayments of its financial obligations over a given time horizon typically refers to: A. Duration of default. B. Exposure at default. C. Loss given default. D. Probability of default. Answer: D 26.Which one of the following four options correctly identifies the core difference between bonds and loans? KillTest A. These instruments receive a different legal treatment. B. These instruments have different pricing drivers. C. These instruments cannot be used to estimate credit capital under provisions of the Basel II Accord. D. These instruments are subject to different credit counterparty regulations. Answer: A 27.Which one of the following four formulas correctly identifies the expected loss for all credit instruments? A. Expected Loss = Probability of Default x Loss Given Default x Exposure at Default B. Expected Loss = Probability of Default x Loss Given Default + Exposure at Default C. Expected Loss = Probability of Default x Loss Given Default - Exposure at Default D. Expected Loss = Probability of Default x Loss Given Default / Exposure at Default 7 / 18

9. The safer , easier way to help you pass any IT exams. Answer: A 28.Gamma Bank provides a $100,000 loan to Big Bath retail stores at 5% interest rate (paid annually). The loan is collateralized with $55,000. The loan also has an annual expected default rate of 2%, and loss given default at 50%. In this case, what will the bank's exposure at default (EAD) be? A. $25,000 B. $50,000 C. $75,000 D. $105,000 Answer: B 29.Gamma Bank provides a $100,000 loan to Big Bath retail stores at 5% interest rate (paid annually). The loan is collateralized with $55,000. The loan also has an annual expected default rate of 2%, and loss given default at 50%. In this case, what will the bank's expected loss be? A. $500 B. $750 C. $1,000 D. $1,300 Answer: A 30.Gamma Bank provides a $100,000 loan to Big Bath retail stores at 5% interest rate (paid annually). The loan also has an annual expected default rate of 2%, and loss given default at 50%. In this case, what will the bank's expected loss be? What is the expected loss of this loan? A. $300 B. $550 C. $750 D. $1,050 Answer: D KillTest 31.Which of the following attributes are typical for early models of statistical credit analysis? A. These models assumed the default of any obligor was independent of the default of any other. B. The underlying default assumptions were analytically inconvenient. C. The underlying default assumptions failed to develop relatively simple formulas for the determination of portfolio credit risk. D. These models effectively incorporated herd behavior. Answer: A 32.A credit analyst wants to determine if her bank is taking too much credit risk. Which one of the following four strategies will typically provide the most convenient approach to quantify the credit risk exposure for the bank? A. Assessing aggregate exposure at default at various time points and at various confidence levels B. Simplifying individual credit exposures so that they can be combined into a simplified expression of 8 / 18

10. The safer , easier way to help you pass any IT exams. portfolio risk for the bank C. Using stress testing techniques to forecast underlying macroeconomic factors and bank's idiosyncratic risks D. Analyzing distribution of bank's credit losses and mapping credit risks at various statistical levels Answer: A 33.When looking at the distribution of portfolio credit losses, the shape of the loss distribution is ___ , as the likelihood of total losses, the sum of expected and unexpected credit losses, is ___ than the likelihood of no credit losses. A. Symmetric; less B. Symmetric; greater C. Asymmetric; less D. Asymmetric; greater Answer: D 34.Which one of the following four statements regarding bank's exposure to credit and default risk is INCORRECT? A. The more the bank diversifies its credit portfolio, the better spread its credit risks become. B. In debt management, the value of any loan exposure will change typically in a fashion similar the same way that an equity investment can. C. In debt management, the goal is to minimize the effect of any defaults. D. Default risk cannot be hedged away fully, and it will always exist for the holder of the credit or for the person insuring against the credit or default event. Answer: B 35.To manage its credit portfolio, Beta Bank can directly sell the following portfolio elements: I. Bonds II. Marketable loans III. Credit card loans A. I B. II C. I, II D. II, III Answer: C 36.As DeltaBank explores the securitization business, it is most likely to embrace securitization to: I. Bring transparency to the bank's balance sheet II. Create a new profit center for the bank III. Strategically release risk capital and regulatory capital for redeployment IV. Generate cash for additional debt origination A. I, III B. II, IV C. I, II, III D. II, III, IV KillTest 9 / 18

11. The safer , easier way to help you pass any IT exams. Answer: D 37.After entering the securitization business, Delta Bank increases its cash efficiency by selling off the lower risk portions of the portfolio credit risk. This process ___ risk on the residual pieces of the credit portfolio, and as a result it ___ return on equity for the bank. A. Decreases; increases; B. Increases; increases; C. Increases; decreases; D. Decreases; increases; Answer: B 38.Which of the following risk types are historically associated with credit derivatives? I. Documentation risk II. Definition of credit events III. Occurrence of credit events IV. Enterprise risk A. I, IV B. I, II C. I, II, III D. II, III, IV Answer: C 39.The pricing of credit default swaps is a function of all of the following EXCEPT: A. Probability of default B. Duration C. Loss given default D. Market spreads Answer: B 40.To safeguard its capital and obtain insurance if the borrowers cannot repay their loans, Gamma Bank accepts financial collateral to manage its credit risk and mitigate the effect of the borrowers' defaults. KillTest Gamma Bank will typically accept all of the following instruments as financial collateral EXCEPT? A. Unrated bonds issued and traded on a recognized exchange B. Equities and convertible bonds included in a main market index C. Commercial debts owed to a company in a form of receivables D. Mutual fund shares and similar unit investment vehicles subject to daily quotes Answer: C 41.Except for the credit quality of the Credit Default Swap protection seller, the following relationship correctly approximates the yield on a risk-free instrument: A. Bond + CDS B. Bond + CDS + Market Spread C. Bond - CDS D. Bond - CDS - Market spread 10 / 18

12. The safer , easier way to help you pass any IT exams. Answer: A 42.Which of the following factors can cause obligors to default at the same time? I. Obligors may be harmed by exposures to similar risk factors simultaneously. II. Obligors may exhibit herd behavior. III. Obligors may be subject to the sampling bias. IV. Obligors may exhibit speculative bias. A. I B. II, III C. I, II D. III, IV Answer: C 43.After entering the securitization business, Delta Bank increases its cash efficiency by selling off the lower risk portions of the portfolio credit risk. This process ___ return on equity for the bank, because the cash generated by the risk-transfer and the overall ___ of the bank's exposure to the risk. A. Increases; increase; B. Increases; reduction; C. Decreases; increase; D. Decreases; reduction; Answer: B 44.When a credit risk manager analyzes default patterns in a specific neighborhood, she finds that defaults are increasing as the stigma of default evaporates, and more borrowers default. This phenomenon constitutes A. Moral hazard B. Speculative bias C. Herd behavior D. Adverse selection Answer: C KillTest 45.ThetaBank has extended substantial financing to two mortgage companies, which these mortgage lenders use to finance their own lending. Individually, each of the mortgage companies has an exposure at default (EAD) of $20 million, with a loss given default (LGD) of 100%, and a probability of default of 10%. ThetaBank's risk department predicts the joint probability of default at 5%. If the default risk of these mortgage companies were modeled as independent risks, what would be the probability of a cumulative $40 million loss from these two mortgage borrowers? A. 0.01% B. 0.1% C. 1% D. 10% Answer: C 46.ThetaBank has extended substantial financing to two mortgage companies, which these mortgage 11 / 18

13. The safer , easier way to help you pass any IT exams. lenders use to finance their own lending. Individually, each of the mortgage companies have an exposure at default (EAD) of $20 million, with a loss given default (LGD) of 100%, and a probability of default of 10%. ThetaBank's risk department predicts the joint probability of default at 5%. If the default risk of these mortgage companies were modeled as independent risks, the actual probability would be underestimated by: A. 1% B. 2% C. 3% D. 4% Answer: D 47.A credit portfolio manager analyzes a large retail credit portfolio. Which of the following factors will represent typical disadvantages of market-linked credit risk drivers? I. Need to supply a large number of input parameters to the model II. Slow computation speed due to higher simulation complexity III. Non-linear nature of the model applicable to a specific type of credit portfolios IV. Need to estimate a large number of unknown variable and use approximations A. I B. I, II C. II, III D. III, IV Answer: B 48.Which one of the following four metrics represents the difference between the expected loss and unexpected loss on a credit portfolio? A. Credit VaR B. Probability of default C. Loss given default D. Modified duration Answer: A KillTest 49.Gamma Bank is active in loan underwriting and securitization business, and given its collective credit exposure, it will be typically most interested in the following types of portfolio credit risk: I. Expected loss II. Duration III. Unexpected loss IV. Factor sensitivities A. I B. II C. I, III D. I, III, IV Answer: D 50.To quantify the aggregate average loss for the credit portfolio and its possible constituent subportfolios, 12 / 18

14. The safer , easier way to help you pass any IT exams. a credit portfolio manager should use the following metric: A. Credit VaR B. Expected loss C. Unexpected loss D. Factor sensitivity Answer: B 51.Which one of the following four alternatives lists the three most widely traded currencies on the global foreign exchange market, as of April 2007, in the decreasing order of market share? EUR is the abbreviation of the European euro, JPY is for the Japanese yen, and USD is for the United States dollar, respectively. A. JPY, EUR, USD B. USD, EUR, JPY C. USD, JPY, EUR D. EUR, USD, JPY Answer: B 52.An asset manager for a large mutual fund is considering forward exchange positions traded in a clearinghouse system and needs to mitigate the risks created as a result of this operation. Which of the following risks will be created as a result of the forward exchange transaction? A. Exchange rate risk B. Exchange rate and interest rate risk C. Credit risk D. Exchange rate and credit risk Answer: B 53.Which one of the following statements correctly identifies risks in foreign exchange forwards? A. Short-term forward price fluctuations are driven by changes in the spot exchange rate, since most inter-country interest rates differentials are significant, and the effect of compounding is large for short periods of time. B. Short-term forward price fluctuations are driven by changes in the spot exchange rate, since most KillTest inter-country interest rates differentials are small, and the effect of compounding is small for short periods of time. C. Long-term forward price fluctuations are driven by changes in the spot exchange rate, since most inter-country interest rates differentials are small, and the effect of compounding is large for short periods of time. D. Long-term forward price fluctuations are driven by changes in the spot exchange rate, since most inter-country interest rates differentials are significant, and the effect of compounding is small for short periods of time. Answer: B 54.Which one of the four following statements regarding foreign exchange (FX) swap transactions is INCORRECT? A. FX swap is a common short-term transaction. 13 / 18

15. The safer , easier way to help you pass any IT exams. B. FX swap is normally used for hedging various currency positions. C. FX swap generates more exchange rate risk than simple forward transactions. D. FX swap is generally used to for funding foreign currency balances and currency speculation. Answer: C 55.To hedge a foreign exchange exposure on behalf of a client, a small regional bank seeks to enter into an offsetting foreign exchange transaction. It cannot access the large and liquid interbank market open primarily to larger banks. At which one of the following exchanges can the smaller bank trade the currency futures contracts? I. The Tokyo Futures Exchange II. The Euronext-Liffe Exchange III. The Chicago Mercantile Exchange A. I B. III C. II, III D. I, II, III Answer: D 56.Which one of the following four features is NOT a typical characteristic of futures contracts? A. Fixed notional amount per contract B. Fixed dates for delivery C. Traded Over-the-counter only D. Daily margin calls Answer: C 57.Which one of the following statements about futures contracts is correct? I. Futures contracts are subject to the same risks as the underlying instruments. II. Futures contracts have additional interest rate risk die to the future delivery date. III. Futures contracts traded in a clearinghouse system are exposed to credit risk with numerous counterparties. A. I B. I, III C. II, III D. I, II, III Answer: A 58.Which one of the following four options is NOT a typical component of a currency swap? A. An initial currency exchange of the notional amount B. Denomination of the original notional amount into a foreign currency C. Periodic exchange of interest payments in different currencies D. A final currency exchange Answer: B 59.An options trader is assessing the aggregate risk of her currency options exposures. As an options KillTest 14 / 18

16. The safer , easier way to help you pass any IT exams. buyer, she can potentially ___ lose more than the premium originally paid. As an option seller, however, she has a ___ risk on the contract and always receives a premium. A. Never, unlimited B. Sometimes, unlimited C. Never, limited D. Sometimes, limited Answer: A 60.Which one of the following four statements correctly defines a non-exotic call option? A. A call option gives the call option buyer the obligation, but not the right, to buy the underlying instrument at a known price in the future. B. A call option gives the call option buyer the obligation, but not the right, to sell the underlying instrument at a known price in the future C. A call option gives the call option buyer the right, but not the obligation, to buy the underlying instrument at a known price in the future D. A call option gives the call option buyer the right, but not the obligation, to sell the underlying instrument at a known price in the future Answer: C 61.Which one of the following four statements correctly describes an American call option? A. An American call option gives the buyer of that call option the right to buy the underlying instrument on any date up to and including the expiry date. B. An American call option gives the buyer of that call option the right to sell the underlying instrument on any date up to and including the expiry date. C. An American call option gives the buyer of that call option the right to buy the underlying instrument on the expiry date. D. An American call option gives the buyer of that call option the right to sell the underlying instrument on the expiry date. Answer: C 62.According to the largest global poll of foreign exchange market participants, which one of the following KillTest four global financial institutions was the most active participant in the global foreign exchange market? A. Citibank B. UBS AG C. Deutsche Bank D. Barclays Capital Answer: C 63.In analyzing market option pricing dynamics, a risk manager evaluates option value changes throughout the entire trading day. Which of the following factors would most likely affect foreign exchange option values? I. Change in the value of the underlying II. Change in the perception of future volatility III. Change in interest rates 15 / 18

17. The safer , easier way to help you pass any IT exams. IV. Passage of time A. I, II B. I, II, III C. II, III D. I, II, III, IV Answer: D 64.Which one of the following four statements about the relationship between exchange rates and option values is correct? A. As the dollar appreciates relative to the pound, the right to buy dollars at a fixed pound exchange rate decreases. B. As the dollar appreciates relative to the pound, the right to buy dollars at a fixed pound exchange rate increases. C. As the dollar depreciates relative to the pound, the right to buy dollars at a fixed pound exchange rate increases. D. As the dollar appreciates relative to the pound, the right to sell dollars at a fixed pound exchange rate increases. Answer: B 65.Which one of the following four statements does identify correctly the relationship between the value of an option and perceived exchange rate volatility? A. With increases in perceived future foreign exchange volatility, the value of all foreign exchange B. As the perceived future foreign exchange volatility decreases, the value of all options increases. C. As the perceived future foreign exchange volatility increases, the value of all options increases. D. Option values can only change due to the factors related to the demand for specific options Answer: C 66.Which one of the following four mathematical option pricing models is used most widely for pricing European options? A. The Black model B. The Black-Scholes model KillTest C. The Garman-Kohlhagen model D. The Heston model Answer: B 67.A risk manager is considering how to best quantify option price dynamics using mathematical option pricing models. Which of the following variables would most likely serve as an input in these models? I. Implicit parameter estimate based on observed market prices II. Estimates of sensitivity of option prices to parameter changes III. Theoretical option determination based on assumptions A. I, III B. II C. II, III 16 / 18

18. The safer , easier way to help you pass any IT exams. D. I, II, III Answer: D 68.Which one of the following four parameters is NOT a required input in the Black-Scholes model to price a foreign exchange option? A. Underlying exchange rates B. Underlying interest rates C. Discrete future stock prices D. Option exercise price Answer: C 69.Which one of the following four variables of the Black-Scholes model is typically NOT known at a point in time? A. The underlying relevant exchange rates B. The underlying interest rates C. The future volatility of the exchange rates D. The time to maturity Answer: C 70.A risk manager analyzes a long position with a USD 10 million value. To hedge the portfolio, it seeks to use options that decrease JPY 0.50 in value for every JPY 1 increase in the long position. At first approximation, what is the overall exposure to USD depreciation? A. His overall portfolio has the same exposure to USD as a portfolio that is long USD 5 million. B. His overall portfolio has the same exposure to USD as a portfolio that is long USD 10 million. C. His overall portfolio has the same exposure to USD as a portfolio that is short USD 5 million. D. His overall portfolio has the same exposure to USD as a portfolio that is short USD 10 million. Answer: A 71.A risk manager has a long forward position of USD 1 million but the option portfolio decreases JPY 0.50 for every JPY 1 increase in his forward position. At first approximation, what is the overall result of the options positions? KillTest A. The options positions hedge the forward position by 25%. B. The option positions hedge the forward position by 50%. C. The option positions hedge the forward position by 75%. D. The option positions hedge the forward position by 100%. Answer: B 72.Which one of the following four statements correctly defines an option's delta? A. Delta measures the expected decline in option with time and is usually expressed in years. B. Delta measures the effect of 1 bp in interest rate change on the option price. C. Delta is the multiplier that best approximates the short-term change in the value of an option. D. Delta measures the impact of volatility on the price of an option. Answer: C 17 / 18

19. The safer , easier way to help you pass any IT exams. 73.In the United States, during the second quarter of 2009, transactions in foreign exchange derivative contracts comprised approximately what proportion of all types of derivative transactions between financial institutions? A. 2% B. 7% C. 25% D. 43% Answer: B 74.Which of the following statements about the interest rates and option prices is correct? A. If rho is positive, rising interest rates increase option prices. B. If rho is positive, rising interest rates decrease option prices. C. As interest rates rise, all options will rise in value. D. As interest rates fall, all options will rise in value. Answer: A 75.To estimate a partial change in option price, a risk manager will use the following formula: A. Partial change in option price = Delta x Change in underlying price B. Partial change in option price = Delta x (1+ Change in underlying price) C. Partial change in option price = Delta x Gamma x Change in underlying price D. Partial change in option price = Delta x Gamma x (1+ Change in underlying price) Answer: A 76.Which one of the following four statements on factors affecting the value of options is correct? A. As volatility rises, options increase in value. B. As time passes, options will increase in value. C. As interest rates rise and option's rho is positive, option prices will decrease. D. As the value of underlying security increases, the value of the put option increases. Answer: A 77.A risk manager is analyzing a call option on the GBP with a vega of 0.02. KillTest When the perceived future volatility increases by 1%, the call option A. Increases in value by 0.02. B. Increases in value by 2. C. Decreases in value by 0.02. D. Decreases in value by 2. Answer: A 18 / 18