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Free Questions › FRM › Market Risk Measurement and Management
Free FRM Market Risk Measurement and Management Practice Questions & Answers
400 exam-style Market Risk Measurement and Management questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 301
Economic Value of Equity (EVE) measures:
Select an option first.
Correct answer: B — PV(assets) − PV(liabilities) — the balance sheet's long-term structural interest rate sensitivity
Explanation: B is correct: EVE captures long-term interest rate risk on the full balance sheet. Rising rates reduce EVE for banks with longer-duration assets than liabilities. A is wrong — market cap is external equity valuation. C is wrong — book value is historical cost. D is wrong — that is NII sensitivity.
Question 302
IRRBB standardised shock scenarios include:
Select an option first.
Correct answer: B — Six scenarios: parallel up, parallel down, short-rate up, short-rate down, flattener, and steepener
Explanation: B is correct: BCBS IRRBB standard specifies six scenarios for comprehensive coverage of yield curve movements. A is wrong — one scenario misses non-parallel risk. C is wrong — all six are required. D is wrong — banks' own scenarios supplement but don't replace the six.
Question 303
Scenario analysis differs from sensitivity analysis in that:
Select an option first.
Correct answer: B — Sensitivity analysis varies one factor at a time; scenario analysis simultaneously changes multiple factors in a correlated, internally consistent manner
Explanation: B is correct: sensitivity analysis = ∂V/∂(one factor). Scenario analysis = simultaneous realistic shifts in multiple factors (e.g. equity crash + credit spread widening + FX move). A is wrong — they are different tools. C is wrong — both historical and hypothetical scenarios exist. D is wrong — sensitivity analysis uses Greeks.
Question 304
The Basel SMA (standardised measurement approach) for operational risk uses:
Select an option first.
Correct answer: B — Business indicator (BI) × internal loss multiplier (ILM) — combining business scale with historical loss experience
Explanation: B is correct: SMA uses BI (proxy for business volume) and ILM (incorporating internal loss data relative to peers). A is wrong — ILM uses internal losses. C is wrong — not a simple average. D is wrong — old BIA used fixed %.
Question 305
FX forward VaR mapping decomposes the forward into:
Select an option first.
Correct answer: B — A long foreign currency spot position (PV of FX amount) and a short domestic money market position — capturing FX and interest rate exposures
Explanation: B is correct: FX forward = spot FX position + domestic funding leg. This allows each component's VaR to be computed separately and combined. A is wrong — ignores domestic funding leg. C is wrong — FX forwards have linear payoff (near-zero gamma). D is wrong — FX forwards are not equity-like.
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Question 306
FRTB's Residual Risk Add-On (RRAO) addresses:
Select an option first.
Correct answer: B — Exotic residual risks in structured products (gap risk, correlation risk, behavioral risk) not captured by the SBM
Explanation: B is correct: RRAO = 0.1% of notional for exotic risks, 1% for other residual risks not captured by standard sensitivity methods. A is wrong — banking book uses IRB/SA. C is wrong — operational risk has its own charge. D is wrong — illiquidity is addressed by NMRF charges.
Question 307
Basel IV output floor requires IMA capital to be at least:
Select an option first.
Correct answer: A — 60% of SA capital (phasing to 72.5% by 2028)
Explanation: A is correct: the output floor phases from 50% (2025) to 72.5% (2028) of SA capital, preventing excessive divergence between IMA and SA and capping the benefit of internal models. B is wrong — floor references SA, not old Basel. C is wrong — it is relative. D is wrong — 100% of SA would eliminate IMA benefit.
Question 308
FRTB equity risk distinguishes between:
Select an option first.
Correct answer: B — General risk (systematic factors: index/sector) and idiosyncratic risk (issuer-specific, captured by JtD and residual idiosyncratic risk)
Explanation: B is correct: both FRTB IMA and SA treat general equity risk (index exposures) and idiosyncratic equity risk (company-specific) separately. A is wrong — size is one dimension but not the full distinction. C is wrong — FX is separate. D is wrong — listing venue ≠ risk type.
Question 309
FRTB stressed ES computation uses:
Select an option first.
Correct answer: B — A 12-month stress period scaled via ES_{reduced,stress}/ES_{reduced,current} ratio — approximating stressed-period ES without full crisis historical data
Explanation: B is correct: FRTB IMA stressed ES is computed by: (1) identifying a 12-month stress period; (2) scaling using a ratio of stress/current ES from a reduced risk factor set. A is wrong — that is current ES. C is wrong — Monte Carlo is a method choice. D is wrong — FRTB replaced SVaR with stressed ES.
Question 310
FRTB PLA test passes when Spearman correlation between RTPL and HPL exceeds approximately:
Select an option first.
Correct answer: B — 0.80 (green zone threshold) — below 0.7 fails; 0.7–0.8 is amber
Explanation: B is correct: FRTB specifies: Spearman correlation > 0.80 → green zone; 0.70–0.80 → amber (scrutiny); < 0.70 → red (fails PLA). A is wrong — perfect correlation is unattainable. C is wrong — no such criterion. D is wrong — any positive correlation is insufficient.
Question 311
A risk factor is modellable under FRTB if it has:
Select an option first.
Correct answer: B — At least 24 verifiable real prices per year with no gap exceeding 31 days
Explanation: B is correct: FRTB modellability criterion: ≥24 real price observations/year, with ≤31 days between consecutive observations. A is wrong — 100 consecutive is more restrictive. C is wrong — different threshold. D is wrong — number of vendors not specified.
Question 312
Backtesting failures increase IMA capital through:
Select an option first.
Correct answer: B — The traffic light multiplier — more exceptions move the model from green (×3) to yellow (×3.4-3.85) to red (×4) zone
Explanation: B is correct: backtesting performance directly affects the capital multiplier applied to ES-based IMA capital. A is wrong — failures increase capital. C is wrong — backtesting directly impacts capital. D is wrong — capital adjustments are ongoing.
Question 313
Factor model equity VaR decomposes portfolio risk into:
Select an option first.
Correct answer: B — Systematic VaR (from portfolio β × market VaR) plus idiosyncratic VaR (from individual stock residuals)
Explanation: B is correct: portfolio variance = (Σw_iβ_i)² × σ²_M + Σw²_iσ²_{ε,i}. VaR is computed from both systematic and idiosyncratic components. A is wrong — summing individual VaRs ignores diversification. C is wrong — average beta misses specifics. D is wrong — maximum ignores diversification.
Question 314
Regulatory stress tests (CCAR/EBA) require banks to project:
Select an option first.
Correct answer: B — Net interest income, loan losses, and capital ratios under adverse macro scenarios over 2-3 years
Explanation: B is correct: regulatory stress tests project the full income statement and balance sheet under baseline and adverse macro scenarios (GDP decline, rising unemployment, falling property prices). A is wrong — tests cover the entire bank. C is wrong — no fixed RWA reduction. D is wrong — all risk types are included.
Question 315
The adverse scenario in regulatory stress tests typically includes:
Select an option first.
Correct answer: B — Severe recession with declining GDP, rising unemployment, falling property prices, widening credit spreads
Explanation: B is correct: adverse scenarios specify: GDP decline (~8%), unemployment rise (~10%), house prices down (~25%), equity markets down (~50%), credit spreads wide. These represent severe but plausible events. A is wrong — benign is the baseline. C is wrong — current conditions is the starting point. D is wrong — instantaneous crashes are VaR scenarios.
Question 316
FRTB SA uses three correlation scenarios for capital aggregation because:
Select an option first.
Correct answer: B — Correlation uncertainty is a key model risk — using low/medium/high correlations and taking the maximum is conservative and robust
Explanation: B is correct: FRTB SA uses prescribed low, medium, and high correlation scenarios for aggregating risk across buckets and classes, taking the maximum capital charge. This protects against correlation uncertainty. A is wrong — no accounting connection. C is wrong — three scenarios is more work. D is wrong — GARCH parameters are unrelated.
Question 317
Comprehensive VaR model validation includes:
Select an option first.
Correct answer: B — Backtesting, PLA testing, statistical distribution tests, stress testing, sensitivity analysis, and model benchmarking — a multi-method holistic assessment
Explanation: B is correct: robust model validation uses multiple complementary approaches to identify different types of model failure. A alone is insufficient. C is wrong — approval is an outcome. D is wrong — quantitative testing is essential.
Question 318
A bank has 60-day average 99% 10-day VaR of $200m and previous day VaR of $180m with multiplier 3. Regulatory capital is:
Select an option first.
Correct answer: B — $600m (3×$200m — using the 60-day average which exceeds yesterday's)
Explanation: B is correct: capital = max(VaR_{t-1}, m × 60-day average) = max($180m, 3×$200m) = max($180m, $600m) = $600m. A is wrong — 3×$180m = $540m < $600m. C is wrong — sum is not the formula. D is wrong — no multiplier applied.
Question 319
Supervisory vs internal stress tests differ in that:
Select an option first.
Correct answer: B — Supervisory use standardised scenarios applied consistently across all banks for cross-sectional comparison; internal tests are tailored to specific portfolio vulnerabilities
Explanation: B is correct: supervisory tests enable comparison across institutions; internal tests customise to the bank's own business model. They complement each other. A is wrong — no consistent severity relationship. C is wrong — frequencies vary. D is wrong — regulatory tests cover all material risks.
Question 320
The IRRBB outlier bank threshold for EVE sensitivity is:
Select an option first.
Correct answer: B — 15% of Tier 1 capital — if exceeded under any prescribed shock, supervisors must review
Explanation: B is correct: BCBS IRRBB standard: EVE change > 15% of Tier 1 capital under any of the six prescribed scenarios → bank is an 'outlier' → supervisory review may require additional capital. A is wrong — 5% is too low. C is wrong — assets-based threshold is not used. D is wrong — RWA-based threshold is not the IRRBB metric.
Question 321
The 'FRTB residual risk add-on' (RRAO) rate for instruments with 'exotic residual risks' is:
Select an option first.
Correct answer: A — 0.1% of gross notional
Explanation: A is correct: FRTB SA RRAO charges: 0.1% of gross notional for instruments with exotic residual risks (e.g. correlation products, gap risk instruments); 1% for other residual risks not captured by the SBM. The lower 0.1% applies to the most specifically identifiable exotic risks. B is wrong — 1% is for other residual risks. C is wrong — 5% is not a FRTB RRAO rate. D is wrong — RRAO addresses risks beyond the SBM.
Question 322
The 'trading book' versus 'banking book' distinction in FRTB is important because:
Select an option first.
Correct answer: B — Trading book positions (held for short-term trading or hedging) are subject to market risk capital (FRTB); banking book positions (held to maturity or for investment) face credit and IRRBB risk capital
Explanation: B is correct: FRTB reinforced the boundary: positions in the trading book must be held with trading intent and are subject to FRTB market risk capital. Banking book positions (loans, AFS/HTM securities) face IRRBB and credit risk capital. A is wrong — different frameworks apply. C is wrong — FRTB can produce either more or less capital. D is wrong — both books require fair value in some circumstances.
Question 323
The 'standardised approach' (SA) under FRTB acts as a:
Select an option first.
Correct answer: B — Capital floor for the internal models approach (IMA) and as a standalone approach for banks without IMA approval — ensuring minimum capital levels across all banks
Explanation: B is correct: the FRTB SA serves two roles: (1) standalone capital calculation for banks without IMA approval; (2) a floor for IMA banks through the output floor mechanism. The SA is more risk-sensitive than the pre-FRTB standardised approach. A is wrong — SA is a fallback and floor, not a replacement. C is wrong — model validation uses backtesting and PLA tests. D is wrong — backtesting remains a separate requirement.
Question 324
The 'CCAR' (Comprehensive Capital Analysis and Review) process in the US requires banks to:
Select an option first.
Correct answer: B — Submit capital plans and conduct stress tests under the Federal Reserve's adverse and severely adverse scenarios — demonstrating adequate capitalisation over a 9-quarter forward horizon
Explanation: B is correct: CCAR (applicable to large US bank holding companies) is an annual Fed review where banks submit: (1) 9-quarter forward projections under base, adverse, and severely adverse scenarios; (2) capital plans; (3) dividend and buyback proposals. The Fed assesses whether capital ratios remain above minimums. A is wrong — CCAR covers all risk types. C is wrong — forward projections are required. D is wrong — Fed provides the scenarios.
Question 325
'Scenario analysis' for commodity markets might include:
Select an option first.
Correct answer: B — Simultaneous changes in commodity prices, supply/demand shocks, currency movements, and correlations between commodity pairs — reflecting real-world interconnectedness
Explanation: B is correct: commodity market stress scenarios must account for the interconnected nature of commodity markets: oil price changes affect energy costs, feedstock costs, and currencies of commodity-exporting countries simultaneously. One-dimensional scenarios miss these connections. A is wrong — commodity scenarios focus on commodity-specific factors. C is wrong — simultaneous cross-commodity scenarios are more realistic. D is wrong — equity scenarios don't capture commodity-specific risks.
Question 326
The 'liquidity-adjusted VaR' (LVaR) for a large position in an illiquid asset is computed by adding to the standard VaR:
Select an option first.
Correct answer: B — An adjustment for the bid-ask spread and market impact: LVaR ≈ VaR + ½ × spread × position_size + market impact cost
Explanation: B is correct: liquidity-adjusted VaR accounts for: (1) bid-ask spread cost (selling at bid rather than mid-price); (2) market impact (moving the market by selling a large position). The ½ factor in the spread adjustment reflects that the mid-price is the starting point and the full spread cost is incurred when selling. A is wrong — 10% buffer is ad-hoc. C is wrong — an additional day would use the √T rule. D is wrong — regulatory liquidity buffer is separate.
Question 327
The 'enterprise risk management' (ERM) framework integrates which risk types?
Select an option first.
Correct answer: B — Market, credit, operational, and other risks (liquidity, reputational, strategic) into a unified framework — ensuring consistent measurement, aggregation, and reporting across all risk types
Explanation: B is correct: ERM (as defined by COSO and ISO 31000) takes a holistic view of all risks facing an enterprise. For financial institutions, this means aggregating market VaR, credit VaR, operational risk capital, and other risk measures into a firm-wide economic capital estimate. A is wrong — ERM covers all risks. C is wrong — ERM includes non-financial risks. D is wrong — ERM goes beyond regulatory definitions.
Question 328
The 'sensitivity VaR' approach in the FRTB SA computes delta VaR as:
Select an option first.
Correct answer: B — Σᵢ sᵢ × RWᵢ × aggregation factor, where sᵢ is the sensitivity (e.g. DV01, delta) and RWᵢ is the prescribed risk weight for that risk factor
Explanation: B is correct: the FRTB SA sensitivity-based method: delta risk = Σ(sensitivity × risk weight) for each risk factor, aggregated using prescribed bucket and cross-bucket correlations. Risk weights (RW) are prescribed by FRTB for each risk factor category. A is wrong — not a simple product. C is wrong — SA does not use historical VaR. D is wrong — incomplete formulation.
Question 329
A bank conducting an 'internal stress test' for a portfolio of corporate bonds during a recession scenario would typically assume:
Select an option first.
Correct answer: B — Widening credit spreads as default rates increase, falling bond prices, reduced liquidity, and correlation between credit and equity markets
Explanation: B is correct: a recession scenario for corporate bonds realistically includes: credit spreads widening (default risk rises), bond prices falling, trading volumes thin (liquidity dries up), and correlation with equity markets increasing (both fall together). A is wrong — recession causes spread widening. C is wrong — credit spreads typically widen in recession. D is wrong — corporate bond stress scenarios are specifically about credit risk.
Question 330
The 'Value at Risk' limit system in a trading floor context works by:
Select an option first.
Correct answer: B — Setting a threshold for each desk's VaR — if a desk's VaR exceeds its limit, the desk must reduce positions until VaR is back within the limit, regardless of expected profitability
Explanation: B is correct: VaR limits are risk management tools that constrain position sizes by their risk contribution. When a desk's VaR exceeds the limit, it must reduce risk (not guaranteed to avoid losses). VaR limits allocate risk budget across the firm. A is wrong — VaR limits control risk budgets, not actual losses. C is wrong — measuring actual losses is loss monitoring, not VaR limit management. D is wrong — VaR limits apply across all risk types.
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