FRM Part I Exam

Mock Questions - FRM Part I - Mock Exam #1

Offered by AnalystPrep

Last Updated: Apr 26, 2024

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Q.1 Fatima Dow, a derivatives trader at HEC Hedge Fund, entered into a March silver futures
contract on the New York Mercantile Exchange (NYMEX) to purchase 5,000 troy ounces of silver
at the futures price of USD 16.96 per ounce. According to NYMEX rules, an initial margin of USD
6,400 and a maintenance margin of USD 3,000 is required to enter and retain the futures
position.
If the price of silver futures contracts dropped to USD 16.92, USD 16.90, and USD 16.73, at the
end of the first, second, and third day, respectively, then what is the margin account balance at
the end of the second day?

A. USD 5,750

B. USD 1,850

C. USD 6,100

D.USD 2,700

Q.2 An exotic option where the payoff of the option is not based on the price of the underlying at
the end of the contract, but on the arithmetic average of the prices during the life of the option is
most likely called a/an:

A. Gap option

B. Lookback option

C. Asian option

D.Compound option

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Q.3 Which of the following cases includes a violation of GARP’s rules of conduct?

A. Frank Benton - a risk manager and participant in the FRM program - oversees all
investments in the healthcare startups for an investment bank. After thorough analysis
and evaluating all necessary disclosures, Benton approves a significant loan facility to
LLL Medicine (a young startup initiated by Frank’s brother).

B. Andrea Jenkins, FRM, is a rising star at Trust Hedge Fund. Behind Jenkins’ success is
her ability to fully concentrate on investment analysis since all other concerns – like the
evaluation of an investment’s suitability based on funds’ internal rules, verification of
compliance with laws, etc. – are handled by a third-party accounting firm.

C. On a quarterly basis, Lisa Stone, a bank manager, presents to the board of directors a
summary of the key ratios used to identify the credit quality of existing borrowers with
large exposures. The analysis is based on quarterly reports published by clients. In
addition, she always includes one slide with her own opinion on changes in ratios
presented in case of adverse market movements. The slide has a footnote clarifying that
the presented information is based on Stone’s estimations.

D.Jack Merton, who recently passed part one of the FRM exam, was reviewing his
analysis on interest rate risk presented to the ALCO committee of Warsaw Bank last
week. He noticed a major mistake and immediately informed all parties involved in this
mistake.

Q.4 Enterprise-wide VaR is not likely to account for all types of risk. In particular, enterprise-
wide VaR may not factor in:

A. Credit risk

B. Market risk

C. Funding liquidity risk

D.None of the above. Enterprise-wide risk is likely to account for all types of risk.

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Q.5 A regional bank recently invested in a new bond-pricing software. To test it, the risk
management team priced a bond at 3 different rates. The results are presented below:

Interest Rate Price of Bond

2.13% USD 100.115
2.15% USD 99.100
2.17% USD 98.250

What is the estimate of the bond’s convexity?

A. 104.06

B. 416.25

C. 10,406.15

D.41,624.62

Q.6 An analyst believes that future 15-year real earnings of the S&P 500 are a function of the
trailing dividend payout ratio of the stocks in the index (DB) and the yield curve slope (YC). She
collects data and obtains the following multiple regression results:

Coefficient Standard error

Intercept −15.2% 3.589%
DB 0.37 0.099
YC 0.18 0.133

If the number of observations is assumed to be 1003, test the statistical significance of the
independent variable DB at the 1% level of significance, quoting the value of the test statistic
and the conclusion. If needed, refer to the t-table by clicking the link below: t-distribution-table

A. Test statistic = 0.2676; The DB regression coefficient is statistically different from

zero

B. Test statistic = 3.7373; The DB regression coefficient is statistically different from

zero

C. Test statistic = 0.2676; The DB regression coefficient is not statistically different from
zero

D.Test statistic = 3.7373; The DB regression coefficient is not statistically different from
zero

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Q.7 Karsley Bank, located in Arizona, wishes to establish its footing in Delaware by acquiring
Quota Bank. Employees and senior management of the latter do not want their business to be
enjoined to that of the former in part because they feel their bank’s future is bright. In particular,
the directors of Quota Bank fear that the new owners may opt to fire them in favor of new
management located in Arizona. The directors decide to seek advice from a reputable investment
bank on how to fend off the takeover. Assuming you were one of the advisory panel members,
which of the following would likely not form part of your advice?

A. That Quota Bank adds to its charter a provision that if another company acquires one-
third of the shares, other shareholders have the right to sell their shares to that company
for a large premium over market prices

B. That Quota Bank should file a lawsuit to dispute the possible takeover

C. That Quota Bank adds to its charter a provision making it impossible for any new
owners to terminate the contracts of existing directors

D.That Quota Bank grants its employees stock options that can be exercised in the event
of a takeover

Q.8 In an options trading seminar, an instructor presents a case where a trader buys a European
call option on a stock currently priced at $100. The option has a strike price of $100 and expires
in one year. Given the stock's volatility and the market conditions, the instructor calculates the
delta of the option and uses it to discuss hedging strategies. What does the delta of this call
option primarily represent?

A. The probability that the option will be exercised at expiration.

B. The rate of change of the option's price with respect to the stock's price.

C. The rate of change of the option's price with respect to the stock's price.

D.The time decay of the option's value as it approaches expiration.

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Q.9 Ganz Hertz is the CEO of one of the biggest investment funds in Germany. Although the fund
has always followed a balanced equity/fixed income allocation strategy, a recent rally in the real
estate market prompted a reevaluation. Fritz Wolfgang, the chief investment officer, proposed to
enlarge the fund’s investment horizon and reallocate 10% of the fund’s assets from bonds to real
estate. According to Wolfgang, the investment in a new asset class, which is not perfectly
correlated with stocks and bonds, will not only help to increase returns but will also diversify
risks and decrease the firm’s VaR. To prove that Wolfgang is incorrect, Hertz quickly calculates
VaR for the stock, bond, and real estate portfolios separately add them up (taking into account
the proposed allocation proportions), and compares the final result with the VaR of the current
portfolio. Wolfgang is disappointed with the results because the VaR of the current portfolio
turns out to be lower than the one calculated by Hertz. Based on the information provided, which
of the following statements is correct?

A. The impact of the new asset class inclusion on portfolio VaR is correct, and the
portfolio VaR calculation approach is also correct

B. The impact of the new asset class inclusion on portfolio VaR is correct, while the
portfolio VaR calculation approach is incorrect

C. The impact of the new asset class inclusion on portfolio VaR is incorrect, while the
portfolio VaR calculation approach is correct

D.The impact of the new asset class inclusion on portfolio VaR is incorrect, and the
portfolio VaR calculation approach is also incorrect

Q.10 A retail investor has recently bought two stocks – UUK and LLY – which have a correlation
of 0.72. The covariance between UUK and LLY is 0.032. Given that LLY’s return has a standard
deviation of 0.17, the variance of returns for UUK is closest to:

A. 0.13

B. 0.06835

C. 0.0385

D.0.0148

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Q.11 Caterpillar sales were USD 45.5 billion for the year 2017. The following table presents the
sales for each of the four quarters of 2017:

Quarter Q1 Q2 Q3 Q4
Sales (in billion USD ) 15.2 17.2 8.3 4.8

Which of the following is the seasonal index for Q2 of 2017?

A. 1.38

B. 0.38

C. 0.51

D.1.51

Q.12 The estimated standard error for a Monte Carlo simulation without antithetic variables is
3.65. The antithetic variables are now included so that the correlation between the pairs is -0.65
and the simulation is repeated 100 times. What is the percentage change in standard error?

A. 45.65%

B. -46.45%

C. 40.84%

D.-40.84%

Q.13 A hedge fund manager purchases a seasoned 4.5% agency MBS with a weighted average
loan age of 48 months. The current balance on the loans at the beginning of this month is USD
15 million, and the conditional prepayment rate is assumed to be constant at 3% per year. What
is the closest to the expected principal prepayment this month?

A. USD 42,200

B. USD 91,667

C. USD 38,025

D.USD 90,000

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Q.14 Which of the following risk metrics measures the risk as downside deviation instead of
standard deviation?

A. Treynor ratio

B. Sharpe ratio

C. Sortino ratio

D.Jensen measure

Q.15 Consider the following statements regarding closed-end mutual funds:

I. The funds offer investors professional management

II. Shares at times trade at a discount to the NAV
III. Shares at times trade at a premium to the NAV
IV. Funds are redeemed at their NAVs

Which of the statements above is/are incorrect?

A. IV only

B. II and III only

C. II, III and IV

D.All of the above

Q.16 A random sample of 120 portfolio managers in the United States was found to have an
average salary of USD 72,000. The standard deviation among portfolio managers is known as
approximately USD 7,800. Assuming that salaries follow a normal distribution, what is the 2-
sided 95% confidence interval for the mean salary of FRM portfolio managers in the United
States?

A. (USD 70,162.94, USD 73,837.06)

B. (USD 56712, USD 87,288)

C. (USD 71,872.60, USD 72,127.40)

D.(USD 70,604.40, USD 73,395.60)

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