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FRM FRM Quiz on THE CONCEPT OF RISK, created by f.yafai on 26/10/2013.

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THE CONCEPT OF RISK

Question 1 of 19

1

If different business and financial markets are known to be correlated:

Select one of the following:

  • Value at Risk (VaR) is the best mechanism to reduce risk

  • Such risks should be avoided by the treasury management committee

  • Enterprise wide risk is the addition of individual risks

  • The treasurer should not manage risks in isolation

Explanation

Question 2 of 19

1

A risk may be 'accepted and reduced' through

Select one of the following:

  • Internal controls

  • Monitoring

  • Insurance

  • Derivatives

Explanation

Question 3 of 19

1

In a Risk Management Framework, what activity is most likely to follow Risk Evaluation?

Select one of the following:

  • Risk Identification

  • Risk Reporting

  • Risk Response

  • Risk Assessment

Explanation

Question 4 of 19

1

You are a treasurer of a listed volume house builder. Which of the following benchmarking information is most likely to be DIFFICULT to obtain?

Select one of the following:

  • Average six moth LIBOR

  • Industry norm for interest cost as a proportion of input costs

  • Budgeted interest as a proportion of EBITDA for your company

  • Average interest cover of three main listed competitors

Explanation

Question 5 of 19

1

A company expects a $10 million receipt in one month's ( 30 days ) time and will invest these funds for three months (91 days) until they are required in the business.
By taking out an FRA, which of the following BEST describes the 'risk response' that Company A has taken to the $ interest rate risk?

Select one of the following:

  • Avoid

  • Accept and retain (monitor)

  • Accept and reduce ( internal controls)

  • Accept and transfer (hedge)

Explanation

Question 6 of 19

1

In a typical risk management framework, which of the following tasks would be the most likely to be carried out at the Risk Assessment stage?

Select one of the following:

  • Assess when to control, avoid or transfer risk

  • Classify risk by source

  • Carry out detailed scenario analysis

  • Prioritise risks

Explanation

Question 7 of 19

1

In a probability/impact matrix, the severity of consequence is LEAST likely to be measured in terms of:

Select one of the following:

  • Earnings per share

  • Net debt: EBITDA

  • Probability of occurrence

  • Value at Risk

  • Absolute loss per even

Explanation

Question 8 of 19

1

In a typical risk management framework, which of the following activities would be most likely to include a VaR calculation?

Select one of the following:

  • Risk Identification

  • Risk Assessment

  • Risk Evaluation

Explanation

Question 9 of 19

1

Which of the following time horizons are LEAST appropriate when assessing the frequency of a risk even in a Probability/Impact Matrix

Select one of the following:

  • Days, for FX exposure in financial service business

  • Minuties, for risk of delay in batch processing

  • Hours, for EPS measurement for a service industry

  • Weeks, for commodity prices relevant to a manufacturer

Explanation

Question 10 of 19

1

Treasury policy is most likely to prohibit:

Select one of the following:

  • Maintaining a forward contract after the corresponding exposure has expired

  • Choosing not to hedge a known future foreign currency cash inflow or outflow

  • Choosing to delay hedging a material highly probable future transaction

  • Purchasing option contracts to hedge known future income streams

Explanation

Question 11 of 19

1

An investment portfolio of USD shares has a value of USD 100 million and daily value standard deviation of EUR 250,000. The current exchange rate is EUR/USD 1.48, What is the best estimate of the daily Value at Risk at a 95 confidence level in EUR? Before you start on this type of question:
Make a note of the currency for the amount of VaR.
Make a note of the given standard deviation. Is it in the same currency as the amount of the VaR? If yes, you can ignore any forex rate details.

Select one of the following:

  • 41,000

  • 61,000

  • 279,000

  • 280,000

  • 410,000

  • 610,000

Explanation

Question 12 of 19

1

A US company holds USD 10 million of EUR dominated assets. The EUR/USD 30 day standard deviation is 1.6%, the EUR/USD spot rate is 1.6000, and the z score at 95% confidence is 1.65. what is the best estimate of the 95% 30 day value at risk on the EUR denominated assets?

Select one of the following:

  • $95,000

  • $155000

  • $165000

  • $265000

  • $420000

Explanation

Question 13 of 19

1

A US company holds USD 10 million of EUR dominated assets. The EUR/USD 30 day standard deviation is 1.6%, the EUR/USD spot rate is 1.6000, and the z score at 95% confidence is 1.65. what is the best estimate of the 95% 30 day value at risk on the EUR denominated assets?

Select one of the following:

  • $95,000

  • $155000

  • $165000

  • $265000

  • $420000

Explanation

Question 14 of 19

1

What is the daily VaR at 95% confidence level for a USD 5 million exposure against GBP if the standard deviation for the daily change in USD/GBP is 0.5000%

Select one of the following:

  • USD 2,375

  • USD 4,125

  • USD 5,825

  • USD 23,750

  • USD 41,250

Explanation

Question 15 of 19

1

An asset has a current value of 25 with a one-month standard deviation of 3. Its value follows a normal distribution. The best estimate of the probability of the investment being worth between 22 and 28 in one month's time is:

Select one of the following:

  • 16%

  • 32%

  • 34%

  • 66%

  • 68%

Explanation

Question 16 of 19

1

Red expects to convert USD 50 million into EUR in 6 months. Current rates are:
EUR/USD spot rate 1.1598
EUR/USD 6 months forward rate 1.1669
If the 6 month EUR/USD standard deviation is 6% what is the best estimate of the EUR value at risk on this receipt, in EUR, at a 99% confidence level?

Select one of the following:

  • 4 million

  • 5 million

  • 6 million

  • 7 million

Explanation

Question 17 of 19

1

The two dimensions of a risk occurrence are

Select one of the following:

  • uncertainty and VaR

  • Probability and Impact

Explanation

Question 18 of 19

1

Is it true that:

Select one of the following:

  • Deterministic models predict future outcomes precisely

  • VaR CANNOT take account of asset correlations

  • Debt/EBITDA is NOT used to measure risk

Explanation

Question 19 of 19

1

EUR/GBP spot is currently 0.7000, has a 30 day standard deviation of 8%, and can be assumed to be normally distributed. At a confidence level of 95%, EUR 7 million due to be received in 30 days will be worth at least GBP million:

Select one of the following:

  • 4.0

  • 4.3

  • 4.9

  • 5.7

  • 6.1

  • 7.0

Explanation

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