25 Free FRM Part 2 Practice Questions

Under the Basel III Fundamental Review of the Trading Book (FRTB), which risk measure replaced Value-at-Risk (VaR) as the primary measure under the Internal Models Approach?

A risk manager uses the delta-normal (parametric) method to estimate VaR. A portfolio has a market value of $50 million and a daily return standard deviation of 1.2%. Using a 99% one-tailed z-score of 2.326, what is the 1-day 99% VaR?

A trader holds a long call option with delta = 0.60 and gamma = 0.04. The underlying stock price falls by $5. Using a delta-gamma approximation, what is the estimated change in the option's value?

Under Basel 2.5, a bank's 10-day 99% VaR averaged over 60 days is $40 million and the prior day's VaR is $45 million. The stressed VaR (SVaR) averaged over 60 days is $90 million and the prior day's SVaR is $85 million. Both multiplication factors (mc and ms) are 3.0. What is the total market risk capital charge?

Which of the following best explains why Expected Shortfall (ES) is considered a more coherent risk measure than Value-at-Risk (VaR)?

A bank enters into a derivative with a counterparty. The expected exposure (EE) at the relevant horizon is $5 million, the risk-neutral probability of default (PD) of the counterparty is 2%, and the loss given default (LGD) is 60%. Ignoring discounting, what is the approximate unilateral Credit Valuation Adjustment (CVA)?

Under the Basel III Internal Ratings-Based (IRB) approach, which of the following inputs does a bank estimate internally under the Foundation IRB (F-IRB) approach?

Using the Merton structural credit model, a firm's asset value is $100 million with asset volatility of 20%. The firm has a single zero-coupon bond with face value $80 million due in one year. The risk-free rate is 5%. Given d1 = 1.30 and d2 = 1.10 (pre-calculated), what is the risk-neutral probability of default?

A bank sells credit protection on a mortgage portfolio via a CDS to a large mortgage lender. When the housing market collapses, both the reference mortgage portfolio and the mortgage lender (the protection buyer) default simultaneously for the same underlying reason. This scenario BEST illustrates:

A bank earns net interest income of $8 million on a credit portfolio with an expected loss (EL) of $3 million and economic capital (unexpected loss at 99.9% confidence) of $35 million. What is the portfolio's Return on Economic Capital (ROEC)?

A bank uses the Basic Indicator Approach (BIA) for operational risk capital under Basel II. Its gross income over the past three years was $200 million, $250 million, and $300 million. What is the operational risk capital requirement?

Basel II classifies operational risk losses into seven event type categories. Which of the following is NOT one of these seven categories?

A trader intentionally conceals trading losses by mismarking positions, resulting in a $50 million write-down when discovered. The bank's operational risk team classifies this as Internal Fraud. A regulator argues a second category also applies. Which secondary classification is MOST appropriate?

A bank's operational risk team tracks the number of failed trade settlements per week. This metric is BEST classified as:

A bank models operational risk losses using the Loss Distribution Approach. The frequency distribution is Poisson with a mean of 4 losses per year. The severity distribution is lognormal with a mean loss of $1 million per event. The 99.9th percentile aggregate annual loss is estimated at $42 million. What is the bank's annual expected operational loss?

A bank holds $80 million in cash, $120 million in Level 1 HQLA (government bonds, 0% haircut), and $60 million in Level 2A HQLA (agency bonds, 15% haircut). Net cash outflows over 30 days are $200 million. What is the bank's Liquidity Coverage Ratio (LCR)?

Which of the following BEST describes the purpose of the Net Stable Funding Ratio (NSFR) under Basel III?

A hedge fund must liquidate a large bond position in a stressed market. The risk manager is concerned that the act of selling will itself push prices down adversely. Which risk does this BEST describe?

A bond has a mid-price of $100. In a stressed market, the bid price falls to $98.50. A fund must liquidate a $50 million position. What is the total liquidity-adjusted loss from the bid-ask spread on this one-way sale?

A pension fund's portfolio earns an active return of 3.5% over its benchmark with a tracking error of 5.0%. The benchmark return is 8% and the risk-free rate is 2%. What is the portfolio's Information Ratio?

In a risk budgeting framework, the risk budget allocated to each portfolio component is BEST described as:

A fund-of-funds (FoF) charges a 1% management fee and a 10% performance fee on returns above a 5% hurdle rate. The underlying hedge fund returns 15% gross. After underlying fund fees of 2%, the return available to the FoF is 13%. What is the net return to the FoF investor?

A defined benefit pension plan has liabilities with an average duration of 18 years. The plan's asset portfolio has a duration of 4 years. If interest rates fall by 100 basis points, what is the MOST likely impact on the plan's funded status?

The Task Force on Climate-related Financial Disclosures (TCFD) classifies climate-related financial risks into two primary categories. Which of the following BEST describes 'transition risk'?

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, what is the PRIMARY basis on which the Financial Stability Oversight Council (FSOC) designates a non-bank financial institution as a Systemically Important Financial Institution (SIFI)?