Financial Risk Management (FRM): 2026
Practice
Market, Credit, Operational & Integrated Risk Management (100 Questions)
1. What is the primary definition of "Value at Risk" (VaR)?
A) The maximum profit a portfolio can make in a month
B) A statistical measure of the maximum potential loss over a specific time period at a given
confidence level
C) The average loss a company experiences annually
D) The total debt a company owes to its creditors
Correct Answer: B) A statistical measure of the maximum potential loss over a specific
time period at a given confidence level
2. "Expected Shortfall" (CVaR) is often considered superior to VaR because it:
A) Is easier to calculate
B) Measures the average loss beyond the VaR threshold, capturing "tail risk" more effectively
C) Does not require statistical data
D) Only measures the best-case scenarios
Correct Answer: B) Measures the average loss beyond the VaR threshold, capturing "tail
risk" more effectively
3. Which of the following is an example of "Market Risk"?
A) A computer virus deleting customer data
B) Losses due to fluctuations in interest rates, equity prices, or exchange rates
C) A supplier going bankrupt
D) A fraud committed by an internal employee
Correct Answer: B) Losses due to fluctuations in interest rates, equity prices, or
exchange rates
4. "Credit Risk" is the risk that:
A) The bank forgets to pay its employees
B) A counterparty fails to meet its contractual obligations (e.g., defaults on a loan)
C) The market price of a stock drops
D) A building catches fire
Correct Answer: B) A counterparty fails to meet its contractual obligations (e.g., defaults
on a loan)
,5. "Operational Risk" includes all of the following EXCEPT:
A) Internal fraud
B) System failures
C) Changes in the market price of oil
D) Legal risk
Correct Answer: C) Changes in the market price of oil
6. What is "Liquidity Risk"?
A) The risk of having too much cash in the bank
B) The inability to meet financial obligations as they fall due, or inability to sell an asset quickly
without significant price impact
C) The risk of a bank being closed for the weekend
D) The risk of a loan being paid back too early
Correct Answer: B) The inability to meet financial obligations as they fall due, or inability
to sell an asset quickly without significant price impact
7. "Stress Testing" in risk management is used to:
A) See how much stress an employee can handle
B) Simulate extreme but plausible economic/market scenarios to test portfolio resilience
C) Check if the office air conditioning works
D) Measure the speed of the company's website
Correct Answer: B) Simulate extreme but plausible economic/market scenarios to test
portfolio resilience
8. "Backtesting" evaluates a risk model by:
A) Comparing model-predicted losses against actual historical losses
B) Testing the model on future hypothetical data
C) Hiring a person to check the model by hand
D) Deleting the model and starting over
Correct Answer: A) Comparing model-predicted losses against actual historical losses
9. What is "Delta" in options pricing?
A) The speed of the stock market
B) The sensitivity of an option's price to changes in the underlying asset's price
C) The interest rate on a loan
D) The time remaining until the option expires
Correct Answer: B) The sensitivity of an option's price to changes in the underlying
asset's price
, 10. "Gamma" in options pricing measures:
A) The rate of change of Delta (sensitivity to changes in the underlying asset price)
B) The effect of time decay
C) The impact of interest rate changes
D) The risk of bankruptcy
Correct Answer: A) The rate of change of Delta (sensitivity to changes in the underlying
asset price)
11. "Theta" represents the sensitivity of an option's price to:
A) Changes in volatility
B) The passage of time (Time Decay)
C) Changes in interest rates
D) Changes in the underlying stock price
Correct Answer: B) The passage of time (Time Decay)
12. What does "Vega" measure?
A) The sensitivity of an option's price to changes in market volatility
B) The sensitivity to price changes
C) The sensitivity to interest rates
D) The total risk of a portfolio
Correct Answer: A) The sensitivity of an option's price to changes in market volatility
13. "Counterparty Credit Risk" (CCR) is the risk that:
A) The counterparty forgets to pay
B) The counterparty in a derivative contract defaults before the final settlement
C) The counterparty files for bankruptcy after the contract ends
D) The counterparty changes their company name
Correct Answer: B) The counterparty in a derivative contract defaults before the final
settlement
14. "CVA" (Credit Valuation Adjustment) is:
A) A fee paid to the bank
B) The market value adjustment to a derivative contract that accounts for counterparty credit risk
C) The value of the company's real estate
D) A type of tax deduction
Correct Answer: B) The market value adjustment to a derivative contract that accounts
for counterparty credit risk
15. "Wrong-Way Risk" occurs when:
Practice
Market, Credit, Operational & Integrated Risk Management (100 Questions)
1. What is the primary definition of "Value at Risk" (VaR)?
A) The maximum profit a portfolio can make in a month
B) A statistical measure of the maximum potential loss over a specific time period at a given
confidence level
C) The average loss a company experiences annually
D) The total debt a company owes to its creditors
Correct Answer: B) A statistical measure of the maximum potential loss over a specific
time period at a given confidence level
2. "Expected Shortfall" (CVaR) is often considered superior to VaR because it:
A) Is easier to calculate
B) Measures the average loss beyond the VaR threshold, capturing "tail risk" more effectively
C) Does not require statistical data
D) Only measures the best-case scenarios
Correct Answer: B) Measures the average loss beyond the VaR threshold, capturing "tail
risk" more effectively
3. Which of the following is an example of "Market Risk"?
A) A computer virus deleting customer data
B) Losses due to fluctuations in interest rates, equity prices, or exchange rates
C) A supplier going bankrupt
D) A fraud committed by an internal employee
Correct Answer: B) Losses due to fluctuations in interest rates, equity prices, or
exchange rates
4. "Credit Risk" is the risk that:
A) The bank forgets to pay its employees
B) A counterparty fails to meet its contractual obligations (e.g., defaults on a loan)
C) The market price of a stock drops
D) A building catches fire
Correct Answer: B) A counterparty fails to meet its contractual obligations (e.g., defaults
on a loan)
,5. "Operational Risk" includes all of the following EXCEPT:
A) Internal fraud
B) System failures
C) Changes in the market price of oil
D) Legal risk
Correct Answer: C) Changes in the market price of oil
6. What is "Liquidity Risk"?
A) The risk of having too much cash in the bank
B) The inability to meet financial obligations as they fall due, or inability to sell an asset quickly
without significant price impact
C) The risk of a bank being closed for the weekend
D) The risk of a loan being paid back too early
Correct Answer: B) The inability to meet financial obligations as they fall due, or inability
to sell an asset quickly without significant price impact
7. "Stress Testing" in risk management is used to:
A) See how much stress an employee can handle
B) Simulate extreme but plausible economic/market scenarios to test portfolio resilience
C) Check if the office air conditioning works
D) Measure the speed of the company's website
Correct Answer: B) Simulate extreme but plausible economic/market scenarios to test
portfolio resilience
8. "Backtesting" evaluates a risk model by:
A) Comparing model-predicted losses against actual historical losses
B) Testing the model on future hypothetical data
C) Hiring a person to check the model by hand
D) Deleting the model and starting over
Correct Answer: A) Comparing model-predicted losses against actual historical losses
9. What is "Delta" in options pricing?
A) The speed of the stock market
B) The sensitivity of an option's price to changes in the underlying asset's price
C) The interest rate on a loan
D) The time remaining until the option expires
Correct Answer: B) The sensitivity of an option's price to changes in the underlying
asset's price
, 10. "Gamma" in options pricing measures:
A) The rate of change of Delta (sensitivity to changes in the underlying asset price)
B) The effect of time decay
C) The impact of interest rate changes
D) The risk of bankruptcy
Correct Answer: A) The rate of change of Delta (sensitivity to changes in the underlying
asset price)
11. "Theta" represents the sensitivity of an option's price to:
A) Changes in volatility
B) The passage of time (Time Decay)
C) Changes in interest rates
D) Changes in the underlying stock price
Correct Answer: B) The passage of time (Time Decay)
12. What does "Vega" measure?
A) The sensitivity of an option's price to changes in market volatility
B) The sensitivity to price changes
C) The sensitivity to interest rates
D) The total risk of a portfolio
Correct Answer: A) The sensitivity of an option's price to changes in market volatility
13. "Counterparty Credit Risk" (CCR) is the risk that:
A) The counterparty forgets to pay
B) The counterparty in a derivative contract defaults before the final settlement
C) The counterparty files for bankruptcy after the contract ends
D) The counterparty changes their company name
Correct Answer: B) The counterparty in a derivative contract defaults before the final
settlement
14. "CVA" (Credit Valuation Adjustment) is:
A) A fee paid to the bank
B) The market value adjustment to a derivative contract that accounts for counterparty credit risk
C) The value of the company's real estate
D) A type of tax deduction
Correct Answer: B) The market value adjustment to a derivative contract that accounts
for counterparty credit risk
15. "Wrong-Way Risk" occurs when:
