FRM MIDTERM REVIEWER
CHAPTER 4
1. A common risk management technique where the potential loss from an adverse outcome
faced by an individual or entity is shifted to a third party. risk transfer
2. A formal and documented decision to not remediate the level of risk that exceeds an
organizations risk appetite or tolerance. risk acceptance
3. A qualitative problem-solving approach that uses various tools of assessment to work out
and rank risks for the purpose of assessing and resolving them. risk analysis
4. A type of financial instrument whose value is based upon the value of an underlying asset,
index, rate or reference point. Derivatives
5. An investment technique designed to offset a potential loss on one investment by purchasi
ng a second investment that you expect to perform in the opposite way hedging
6. Elimination of activities that can increase the chance of a loss or claim. risk avoidance
7. Emerge as a result of a company regular business activities and include fraud, lawsuits,
and personnel issues. operational risk
8. Investing in a variety of assets that are not related to each other so that if one of these
declines, the others may rise. Diversification
9. It involves buying a product and selling it immediately in another market for a higher
price thus, making small but steady profits arbitrage
10. Measures to reduce the frequency or severity of losses, also known as loss control. risk
reduction
11. Provide the buyer of the contracts the right, but not the obligation, to purchase or sell the
underlying asset at a predetermined price. Options
12. Refers to the risk that a portfolio may experience changes in value due to price swings
based on the changes in value of its underlying assets.volatility risk
13. Sometimes called purchasing power risk. It is the risk that cash from an investment will
not be worth as much in the future.inflation risk
14. Strategy involves buying more units of a particular product even though the cost or selling
price of the product has declined. average down
15. The derivative contracts that allow the exchange of cash flows between two parties.
Swaps
16. The exposure a company has to various factors like competition, consumer preferences
and other metrics that might lower profits or endanger the company success. business risk
17. The level of risk that arises from exposure to a single counterparty or sector, and it offers
the potential to produce large amounts of losses that may threaten the lender core operations.
concentration risk
18. The possibility of losing money on an investment or business venture. financial risk
19. The possibility that an outcome will not be as expected specifically in reference to returns
on investment in finance. Risk
20. The process and strategy that investors and companies alike employ to minimize risks in a
variety of contexts.risk management
21. The process of selecting and implementing of measures to modify risk. Treatment
22. The risk that investments or equities will decline in value due to larger economic or
market changes or events. market risk
23. These are types of derivative that obligate the contract buyers to purchase an asset at a
pre-agreed price on a specified future date. forwards and future
24. This refers to the risk where there is the possibility of share prices changing. equity risk
25. When assets or securities cannot be turned into cash, fast enough to ride out an especially
volatile market. liquidity risk
CHAPTER 5
1. Credit rationing a situation in which lenders are unwilling to advance additional funds to
borrowers. True
2. Legal risk is the risk arising from failure to comply with statutory or regulatory
obligations. True
3. Credit risk is the probability of a financial loss resulting from a failure to repay a loan by
the borrower. True
4. Mortgages and car loans are two types of collateralized loans. True
5. Credit exposure is a measurement of the maximum potential loss to a lender if the
borrower defaults on payment. True
6. Country risk is the risk that a government could default on its debt or other
obligation.True
7. Contingent actions involve changes to an outstanding contract or agreement based on the
occurrence of certain key events.True
8. Credit risk arises through lending, investing and credit granting activities and concerns the
return of borrowed money or the payment of goods sold.True
9. A credit derivative is a financial contract that allows parties to minimize their exposure to
credit risk..True
10. The credit limit is a means to limit exposure of potential financial loss from a particular
debtor.True
11. Methods to reduce credit exposure include the use of limits and contingent actions.True
12. The purpose of diversification is to maximize returns by investing in different areas that
would yield higher and long term returns.True
13. Counterparty risk refers to the likelihood that a transactor might default on its contractual
obligation.True
14. Credit risk functions help in predicting and measuring the risk factor of any credit
transaction.True
15. A borrower has a higher default risk when they have a poor credit rating and limited cash
flow.True
16. Credit derivatives permit market participants to offset risks that arises as a result of their
core business or as a result of difficulty in diversification.True
17. Policy risk is a type of legal risk.True
18. Credit derivatives can be classified according to the underlying asset/credit that the parties
designed to hedge.True
19. The term protection seller and protection buyer are commonly used to differentiate the
perspective of parties to a credit derivatives transaction. True
20. Forward contract is a type of credit derivatives.True
CHAPTER 6
1. A process whereby an existing company purchases and assumes ownership over another
firm or asset. ACQUISITION
2. An important signal of performance expectations. COMPENSATION OF PERSONNEL
3. Arises when a person chooses personal gain over the duties to an organization in which
they are a stakeholder. CONFLICT OF INTEREST
4. Include analytical skills, communication skills, and problem- solving skills to identify
potential risks and develop strategies to mitigate them. STAFF TRAININGS AND SKILLS
5. Occurs when two companies agree to consolidate into a new entity MERGER
6. Refers to predicting or estimating future outcomes and aligning them with actual results.
FORECAST AND RECONCILIATION
7. The process of proactively identifying and assessing the exposure of a business to
potential operational risks. MONITORING EXPOSURE
8. These are essential tools for managing operational risk within an organization. POLICIES
9. These are the processes designed to help safeguard an organization and minimize risk to
its objectives INTERNAL CONTROLS
10. Used as a funding source when investing to expand a firm asset base and generate returns
on risk capital.LEVERAGE
