ARM 402 REVIEW TIPS QUESTIONS AND
ANSWERS SET A+
✔✔The level of capital required to provide a cushion against unexpected loss of
economic value at a financial institution is known as
A. Supplementary capital.
B. Risk capital.
C. Core capital.
D. Preferred capital. - ✔✔B
✔✔Other than with catastrophe put notes, a disadvantage associated with contingent
capital arrangements is that
A. Ownership becomes more concentrated if a catastrophe equity put option is
exercised.
B. Funds received are equity, not loans.
C. Ownership becomes more concentrated if a standby credit facility is used.
D. Funds received are loans, not equity. - ✔✔D
✔✔Which one of the following statements is true regarding swaps?
A. Swaps are negotiated for indefinite time periods.
B. Parties to a swap pay all of the value and price upfront.
C. Swaps decrease portfolio diversification.
D. Swaps are commonly used to manage interest rate and currency rate of exchange
risk. - ✔✔D
✔✔If an organization directly securitized its income-producing assets without using a
special purpose vehicle (SPV) as an intermediary, investors
A. Must consider the overall credit risk of the organization.
B. Should examine individual borrowers' payments to the organization.
C. Should not consider the overall credit risk of the organization.
D. Would avoid investing in the organization altogether. - ✔✔A
,✔✔The BIS created a capital requirement for large, global, systemically important banks
as part of its global liquidity framework under
A. The standard ratings-based capital requirements.
B. The Basel II agreement.
C. The risk-adjusted assets in regulators' required capital.
D. The Basel III agreement. - ✔✔D
✔✔Which one of the following statements is true regarding a standby credit facility?
A. The terms of the credit arrangement are specified in advance for a standby credit
facility.
B. Standby credit facilities have no cash flow advantages over traditional insurance
policies.
C. Losses paid by funds from a standby credit facility do not have to be paid back.
D. Because their uses are incompatible, standby credit facilities are not used in
conjunction with an insurance policy. - ✔✔A
✔✔U.S. statutory accounting rules allow insurers to issue contingent surplus notes,
which
A. Decrease an insurer's assets on its balance sheet.
B. Are counted as policyholders' surplus rather than as a liability.
C. Allow the insurer to negotiate interest rates when funds are needed rather than at
issuance.
D. Increase an insurer's liabilities on its balance sheet. - ✔✔B
✔✔An option is an agreement that gives the holder the
A. Option to purchase a specified asset at a definite time in the future at a price
negotiated in the future.
B. Right, but not the obligation, to buy or sell an asset at a specific price over a period of
time.
C. Duty to sell an asset at a specified price at an unspecified time in the future.
D. Obligation to sell an asset at a specified time in the future, but the price is negotiable.
- ✔✔B
✔✔The process of creating a marketable investment security based on the expected
cash flows from a financial transaction is
A. Derivation.
B. Securitization.
C. Investment.
D. Trading. - ✔✔B
✔✔A facility established for the purpose of purchasing income-producing assets from
an organization, holding title to them and then using those assets to collateralize
securities that will be sold to investors is
A. A forward contract.
B. A special purpose vehicle.
,C. A catastrophe bond.
D. An insurance derivative. - ✔✔B
✔✔A major benefit of involving a special purpose vehicle (SPV) in a securitization
transaction is that investors can decide whether to invest in the securities based on the
A. Overall credit risk of the organization.
B. Risk presented by the income-producing assets held as collateral by the SPV.
C. Number of borrowers involved and their individual risk.
D. Organization's balance sheets. - ✔✔B
✔✔Regarding options, the strike price is the
A. The price at which the seller of the assets will make a profit.
B. Agreement that gives the holder the right to sell an asset at a specific price over a
period of time.
C. The price at which the holder of the option will profit.
D. Specific price at which the holder of an option can buy or sell the asset associated
with the option. - ✔✔D
✔✔When conducting a SWOT analysis, one method has three activities: Brainstorming,
Refining, and Prioritizing. When brainstorming:
A. Similar items are clustered together and alphabetized.
B. Factors are listed under each of the SWOT headings.
C. Strengths are ordered by quality and relative importance.
D. Factors are evaluated and accepted or rejected. - ✔✔B
✔✔During which one of the following stages of the strategic management process
would an organization use methods such as Porter's Five Forces Analysis and PESTLE
Analysis?
A. Analyzing Environments
B. Formulating Strategies
C. Evaluating Strategies
D. Developing Goals - ✔✔A
✔✔ABC Supplement Company has expanded its business from the Midwestern United
States into South America due to the popularity of a weight-loss product which has
increased ABC's revenue. The Chief Risk Officer (CRO) assigned to this new operation
has discussed different strategic risk scenarios with the board of directors and feels that
although the South American Market has strong demand to this new product, there
could be cases where some users have experienced negative effects from its use. The
CRO feels that foreign governments could eventually intervene and impose regulations
or significant tariffs which could be detrimental to the company. What kind of strategic
risk challenge does the CRO believe is the biggest obstacle for ABC?
A. Marketing
B. Liquidity/Financial
C. Competition
, D. Regulatory - ✔✔D
✔✔When assessing strategic risk, which one of the following represents the amount of
risk an organization is willing to take on in order to achieve an anticipated result or
return?
A. Risk threshold
B. Economic capital
C. Risk-adjusted return on capital
D. Risk appetite - ✔✔D
✔✔Organizations face strategic risks. Strategic risks
A. Are systemic risks that are outside the control of any single organization.
B. Impact all organizations in the same way.
C. Are internal risks for an organization.
D. Are pure risks, which always result in a loss. - ✔✔A
✔✔After an organization develops and implements its strategic plan, it needs to
determine how risk taking will be controlled. Which one of the following statements is
correct with respect to risk taking?
A. At all levels with an organization, decisions are made about which risks should be
taken to gain competitive advantage.
B. Organizations that are risk adverse usually have little difficulty meeting strategic
goals if managers are excessively cautious.
C. A factor in strategic decision making is whether an organization has an advantage in
controlling risk with a given activity.
D. In general, there is little difference between risk taking at the strategic and
operational levels within an organization. - ✔✔C
✔✔Taylor owns Paoli Hardware, a mid-sized hardware store with 25 employees. Taylor
would like to expand operations and has undertaken a SWOT analysis. One of the
major complaints Taylor hears from his customers is the difficulty finding local
contractors. So, he is considering hiring a general contractor at the store who would
also make house calls to assist customers. This will allow him to bill for labor and
increase the sale of his products, but he is concerned it may increase his insurance
claims and premiums. One of the younger store employees suggested they create a
website to expand sales to on-line purchases and target electronic advertisements to
commercial accounts. Taylor is not sure that he has the expertise to maintain a website
and run the store. The employee claims to know a company that can maintain a website
for Paoli at minimal cost. Taylor believes the website is a good idea and will increase
sales o - ✔✔A
✔✔Which one of the following statements is correct with respect to risk tolerance?
A. Risk tolerance is stated in both quantitative and qualitative terms.
B. Risk tolerance levels can have high-end thresholds, low-end thresholds, or both.
C. A zero-risk tolerance level will typically result in the best risk-based decisions.
ANSWERS SET A+
✔✔The level of capital required to provide a cushion against unexpected loss of
economic value at a financial institution is known as
A. Supplementary capital.
B. Risk capital.
C. Core capital.
D. Preferred capital. - ✔✔B
✔✔Other than with catastrophe put notes, a disadvantage associated with contingent
capital arrangements is that
A. Ownership becomes more concentrated if a catastrophe equity put option is
exercised.
B. Funds received are equity, not loans.
C. Ownership becomes more concentrated if a standby credit facility is used.
D. Funds received are loans, not equity. - ✔✔D
✔✔Which one of the following statements is true regarding swaps?
A. Swaps are negotiated for indefinite time periods.
B. Parties to a swap pay all of the value and price upfront.
C. Swaps decrease portfolio diversification.
D. Swaps are commonly used to manage interest rate and currency rate of exchange
risk. - ✔✔D
✔✔If an organization directly securitized its income-producing assets without using a
special purpose vehicle (SPV) as an intermediary, investors
A. Must consider the overall credit risk of the organization.
B. Should examine individual borrowers' payments to the organization.
C. Should not consider the overall credit risk of the organization.
D. Would avoid investing in the organization altogether. - ✔✔A
,✔✔The BIS created a capital requirement for large, global, systemically important banks
as part of its global liquidity framework under
A. The standard ratings-based capital requirements.
B. The Basel II agreement.
C. The risk-adjusted assets in regulators' required capital.
D. The Basel III agreement. - ✔✔D
✔✔Which one of the following statements is true regarding a standby credit facility?
A. The terms of the credit arrangement are specified in advance for a standby credit
facility.
B. Standby credit facilities have no cash flow advantages over traditional insurance
policies.
C. Losses paid by funds from a standby credit facility do not have to be paid back.
D. Because their uses are incompatible, standby credit facilities are not used in
conjunction with an insurance policy. - ✔✔A
✔✔U.S. statutory accounting rules allow insurers to issue contingent surplus notes,
which
A. Decrease an insurer's assets on its balance sheet.
B. Are counted as policyholders' surplus rather than as a liability.
C. Allow the insurer to negotiate interest rates when funds are needed rather than at
issuance.
D. Increase an insurer's liabilities on its balance sheet. - ✔✔B
✔✔An option is an agreement that gives the holder the
A. Option to purchase a specified asset at a definite time in the future at a price
negotiated in the future.
B. Right, but not the obligation, to buy or sell an asset at a specific price over a period of
time.
C. Duty to sell an asset at a specified price at an unspecified time in the future.
D. Obligation to sell an asset at a specified time in the future, but the price is negotiable.
- ✔✔B
✔✔The process of creating a marketable investment security based on the expected
cash flows from a financial transaction is
A. Derivation.
B. Securitization.
C. Investment.
D. Trading. - ✔✔B
✔✔A facility established for the purpose of purchasing income-producing assets from
an organization, holding title to them and then using those assets to collateralize
securities that will be sold to investors is
A. A forward contract.
B. A special purpose vehicle.
,C. A catastrophe bond.
D. An insurance derivative. - ✔✔B
✔✔A major benefit of involving a special purpose vehicle (SPV) in a securitization
transaction is that investors can decide whether to invest in the securities based on the
A. Overall credit risk of the organization.
B. Risk presented by the income-producing assets held as collateral by the SPV.
C. Number of borrowers involved and their individual risk.
D. Organization's balance sheets. - ✔✔B
✔✔Regarding options, the strike price is the
A. The price at which the seller of the assets will make a profit.
B. Agreement that gives the holder the right to sell an asset at a specific price over a
period of time.
C. The price at which the holder of the option will profit.
D. Specific price at which the holder of an option can buy or sell the asset associated
with the option. - ✔✔D
✔✔When conducting a SWOT analysis, one method has three activities: Brainstorming,
Refining, and Prioritizing. When brainstorming:
A. Similar items are clustered together and alphabetized.
B. Factors are listed under each of the SWOT headings.
C. Strengths are ordered by quality and relative importance.
D. Factors are evaluated and accepted or rejected. - ✔✔B
✔✔During which one of the following stages of the strategic management process
would an organization use methods such as Porter's Five Forces Analysis and PESTLE
Analysis?
A. Analyzing Environments
B. Formulating Strategies
C. Evaluating Strategies
D. Developing Goals - ✔✔A
✔✔ABC Supplement Company has expanded its business from the Midwestern United
States into South America due to the popularity of a weight-loss product which has
increased ABC's revenue. The Chief Risk Officer (CRO) assigned to this new operation
has discussed different strategic risk scenarios with the board of directors and feels that
although the South American Market has strong demand to this new product, there
could be cases where some users have experienced negative effects from its use. The
CRO feels that foreign governments could eventually intervene and impose regulations
or significant tariffs which could be detrimental to the company. What kind of strategic
risk challenge does the CRO believe is the biggest obstacle for ABC?
A. Marketing
B. Liquidity/Financial
C. Competition
, D. Regulatory - ✔✔D
✔✔When assessing strategic risk, which one of the following represents the amount of
risk an organization is willing to take on in order to achieve an anticipated result or
return?
A. Risk threshold
B. Economic capital
C. Risk-adjusted return on capital
D. Risk appetite - ✔✔D
✔✔Organizations face strategic risks. Strategic risks
A. Are systemic risks that are outside the control of any single organization.
B. Impact all organizations in the same way.
C. Are internal risks for an organization.
D. Are pure risks, which always result in a loss. - ✔✔A
✔✔After an organization develops and implements its strategic plan, it needs to
determine how risk taking will be controlled. Which one of the following statements is
correct with respect to risk taking?
A. At all levels with an organization, decisions are made about which risks should be
taken to gain competitive advantage.
B. Organizations that are risk adverse usually have little difficulty meeting strategic
goals if managers are excessively cautious.
C. A factor in strategic decision making is whether an organization has an advantage in
controlling risk with a given activity.
D. In general, there is little difference between risk taking at the strategic and
operational levels within an organization. - ✔✔C
✔✔Taylor owns Paoli Hardware, a mid-sized hardware store with 25 employees. Taylor
would like to expand operations and has undertaken a SWOT analysis. One of the
major complaints Taylor hears from his customers is the difficulty finding local
contractors. So, he is considering hiring a general contractor at the store who would
also make house calls to assist customers. This will allow him to bill for labor and
increase the sale of his products, but he is concerned it may increase his insurance
claims and premiums. One of the younger store employees suggested they create a
website to expand sales to on-line purchases and target electronic advertisements to
commercial accounts. Taylor is not sure that he has the expertise to maintain a website
and run the store. The employee claims to know a company that can maintain a website
for Paoli at minimal cost. Taylor believes the website is a good idea and will increase
sales o - ✔✔A
✔✔Which one of the following statements is correct with respect to risk tolerance?
A. Risk tolerance is stated in both quantitative and qualitative terms.
B. Risk tolerance levels can have high-end thresholds, low-end thresholds, or both.
C. A zero-risk tolerance level will typically result in the best risk-based decisions.
