FRM I - Foundations of Risk Management Questions with Complete Solutions 100% Verified|
Latest Update Graded A+
Derivative contract -Derives value from an underlying asset, rate, or index
-Derives value from a security
Nonparametric VaR -Quantile of an empirical distribution
Parametric VaR -Quantile of a statistical distribution
VaR -Value at Risk
-Summarizes the worst loss over a period that will not be exceeded by a given level of
confidence
-Always one tailed
Four major types of risk -Market risk
-Liquidity risk
-Credit risk
-Operational risk
Basis risk -Unanticipated movements in relative prices of assets in a hedged position
-All hedges imply some basis risk
Options motivation on volatility -Long in options = expecting volatility increase
-Short in options = expecting volatility decrease
Funding-liquidity risk Inability to make payment obligations (ex. Margin calls)
, Asset-liquidity risk Cannot exit position in market due to size of the position
Exposure Potential amount that can be lost
Recovery rate -Proportion of loss that is recovered
-Also referred to as "cents on the dollar"
Sovereign risk -Country specific
-Foreign exchange controls that prohibit counterparty's obligations
Settlement risk When two payments are exchanged the same day and one party may
default after payment is made
3 main types of operational risk -People risk = fraud, etc.
-Model risk = flawed valuation models
-Legal risk = exposure to fines and lawsuits
Risks excluded from operational risk -Strategic risk
-Business risk
-Reputational risk
Market imperfections that can create value -Capital structure (financial distress)
-Taxes
-Agency and information asymmetries
Latest Update Graded A+
Derivative contract -Derives value from an underlying asset, rate, or index
-Derives value from a security
Nonparametric VaR -Quantile of an empirical distribution
Parametric VaR -Quantile of a statistical distribution
VaR -Value at Risk
-Summarizes the worst loss over a period that will not be exceeded by a given level of
confidence
-Always one tailed
Four major types of risk -Market risk
-Liquidity risk
-Credit risk
-Operational risk
Basis risk -Unanticipated movements in relative prices of assets in a hedged position
-All hedges imply some basis risk
Options motivation on volatility -Long in options = expecting volatility increase
-Short in options = expecting volatility decrease
Funding-liquidity risk Inability to make payment obligations (ex. Margin calls)
, Asset-liquidity risk Cannot exit position in market due to size of the position
Exposure Potential amount that can be lost
Recovery rate -Proportion of loss that is recovered
-Also referred to as "cents on the dollar"
Sovereign risk -Country specific
-Foreign exchange controls that prohibit counterparty's obligations
Settlement risk When two payments are exchanged the same day and one party may
default after payment is made
3 main types of operational risk -People risk = fraud, etc.
-Model risk = flawed valuation models
-Legal risk = exposure to fines and lawsuits
Risks excluded from operational risk -Strategic risk
-Business risk
-Reputational risk
Market imperfections that can create value -Capital structure (financial distress)
-Taxes
-Agency and information asymmetries
