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FRM Exam 2024/2025 with 100% Accurate Solutions, Exams of Nursing

A comprehensive overview of various financial risk management concepts, including the definition of risk, the two broad categories of risk (business and financial), the primary function of financial institutions, the concept of derivatives and financial engineering, the importance of financial risk management, and the different types of financial risks such as market risk, liquidity risk, credit risk, and operational risk. The document also discusses the limitations of using notional amounts and sensitivity-based limits, and the advantages of using value-at-risk (var) as a risk measure. The detailed and precise answers provided in the document make it a valuable resource for students and professionals preparing for the frm (financial risk manager) exam in 2024/2025.

Typology: Exams

2024/2025

Available from 09/27/2024

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FRM EXAM 2024/2025 WITH 100% ACCURATE

SOLUTIONS

What exactly is risk? - Precise Answer ✔✔Risk can be defined as the volatility of unexpected outcomes. What two broad categories of risk are firms subject to? - Precise Answer ✔✔Business and Financial risks. What are business risks? - Precise Answer ✔✔Are those risks which the corporation assumes willingly to add value to shareholders. This includes business decisions and strategic risks. What are financial risks? - Precise Answer ✔✔Are those risks which relate to possible losses owing to financial market activity. What is the primary function of financial institutions? - Precise Answer ✔✔To assume, intermediate, or advise on financial risks. What are derivatives? - Precise Answer ✔✔Instruments designed to manage financial risks efficiently. What is a derivatives contract? - Precise Answer ✔✔A private contract deriving its value from some underlying asset price, reference rate, or index. They are private agreements between two parties.

What makes a derivative position different than a cash position - Precise Answer ✔✔Derivative positions are leveraged making it an efficient instrument for hedging and speculation owing to low transaction costs, but more difficult to assess the potential downside risk. What is Financial engineering - Precise Answer ✔✔The development and creative application of financial technology to solve financial problems and exploit financial opportunities. Why are Notional amounts highly misleading? - Precise Answer ✔✔Notional amounts do not describe market risks. Actual market risk is far less than outstanding Notional amounts, since much of the notional amount reflects hedging activity against other positions including cash market risk. What is Finanical Risk Management? - Precise Answer ✔✔The design and implentation of procedures for identifying, measuring and managing financial risks. What is VAR? - Precise Answer ✔✔Var is a statistical risk measure of potential losses. Var summarizes the worst loss over a target horizon that will not be exceeded with a given level of confidence. Var accounts for leverage and diversification effects. What is a frequency distribution? - Precise Answer ✔✔A count of how many occurance have been observed within a particular range.

Market Risk - Precise Answer ✔✔The risk of losses owing to movements in the level or volatility of market prices. Liquidity Risk - Precise Answer ✔✔Comes in two forms: A. Asset liquidity risk: arises when a transaction cant be conducted at prevailing prices owing to the size of the position relative to normal trading lots. B. Funding liquidity risk: refers to the inablity to meet payments obligations. Credit Risk - Precise Answer ✔✔Risk of losses owing to the fact that counterparties may be unwilling or uable to fufill their contractual obligations. a. Sovereign risk: occurs when countries i.e. imposse foreign exchange controls that make it impossible for counterparties to honor obligation b.Settlement risk: occurs when two payments are to be exchanged on the same day, and one counterparty may default after the other counterparty has already paid. Operational Risk - Precise Answer ✔✔Risk of loss resulting from inadequate or failed internal process, peop and systems or external events. a:Model risk: losses owing to the fact that valuation models may be flawed

b:Legal risk: losses from exposure to fines, penalties, supervisory actions as well as private settlements. Why are Var limits more advisable than limits based on Notional amount? - Precise Answer ✔✔Limits on Notional amounts are not useful since a portfolio could have bonds with extreme risks and bonds with virtually no risk. Why are Var limits more advisable than limits based on sensitivity? - Precise Answer ✔✔Limits based on sensitivity are not as useful as VAR because it does not consider the volatility of the risk factors. It cannot be used to set consistent limits across bond and equities.