ARM 402 STUDY GUIDE 2026 EXAM QUESTIONS AND
SOLUTIONS RATED A+
✔✔ABC Company and XYZ Company have entered into a contract which stipulates
that, in the event of a breach, the breaching party will pay the non-breaching party the
sum of $250,000. Such stipulations are called
A. Assigned damages provision.
B. Liquidated damages provision.
C. Nominal damages provision.
D. Consequential damages provision. - ✔✔B
✔✔The catastrophe losses that trigger payment under a catastrophe bond
A. Are priced at a level to ensure that investors can only break even or lose money on
the investment.
B. Can be based on aggregate catastrophe losses over a defined period of time or the
occurrence of a single catastrophic event.
C. Are based solely on a noninsurance organization's losses over an unspecified period
of time.
D. Are measured using financial indexing techniques to discount losses to present
value. - ✔✔B
✔✔Which one of the following is the method often used to assess IT operational risk?
A. SWOT analysis
B. Phishing
C. Scenario analysis
D. Regulatory compliance - ✔✔C
✔✔Preventive controls assist the overall control environment of an organization by
A. Comparing different sets of data and investigating any differences.
B. Reducing risk of unauthorized actions.
C. Detecting errors or inconsistencies after they occur.
D. Addressing reconciliation of accounting errors. - ✔✔B
✔✔Which one of the following statements is true regarding operational risk?
A. Most current methods of managing operational risk are informal.
B. Operational risk is best managed during the course of business by an organization's
front-line managers.
C. Financial institutions and their regulators typically define operational risk to include
market risk and credit risk.
D. Operational risk is integrated in every activity of an organization. - ✔✔D
✔✔One category of operational risk includes procedures and practices organizations
use to conduct their business activities. This category is
A. Systems risk.
B. Process risk.
,C. Business complexity risk.
D. Technological risk. - ✔✔B
✔✔Catastrophe bonds
A. Are typically structured to cover frequent, low-severity losses.
B. Can be issued for any type of catastrophic insurable risk.
C. Were developed in response to the excess capacity of catastrophe reinsurers.
D. Transfer insurable catastrophe risk to traditional reinsurers. - ✔✔B
✔✔Which one of the following major IT risks is likely to arise when an organization's
revenue stream falls?
A. Software malfunction
B. Phishing
C. Data breach
D. Project back-log - ✔✔D: Project back-log is likely to arise when an organization's
revenue stream falls. When the revenue stream fall, the organization may need to cut
the budget for future IT projects or cut staff, resulting in delayed upgrades to equipment
or capabilities.
✔✔Which one of the following commonly used categories of operational risk includes
risks associated with technology and equipment?
A. Systems
B. External events
C. People
D. Process - ✔✔A
✔✔COBIT's management approach to control operational risks focuses on
A. Balancing the costs of IT-related risks with their benefits.
B. Ensuring that IT endeavors do not create more risk than the organization can
tolerate.
C. Soliciting input from senior management on all IT-related risk.
D. Creating buy-in for IT initiatives across all departments of the organization. - ✔✔A:
COBIT's management approach to control operational risks focuses on balancing the
costs of IT-related risks with their benefits.
✔✔The IT operational risk caused by a natural disaster such as a tornado or hurricane
would be assigned to which one of the following classifications?
A. Compliance
B. Performance
C. Security
D. Availability - ✔✔D: The IT operational risk caused by a natural disaster such as a
tornado or hurricane would be classified as availability. Security risks are those dealing
with a data breach that could result in unauthorized access to, use of, or alteration of an
organization's information.
,✔✔Which one of the following statements is true regarding a generic model of a
securitization?
A. The Special Purpose Vehicle (SPV) uses income-producing assets from investors to
fund debt from the organization.
B. Investors purchase securities from the organization that are then used as a
guarantee for the purchase of income-producing assets.
C. The SPV sells income-producing assets to the organization in exchange for
securities purchased by investors.
D. The organization sells income-producing assets to an SPV in exchange for cash. -
✔✔D
✔✔In a forward contract, the buyer and seller of a commodity
A. Speculate on the price in the future.
B. Estimate prices initially and finalize prices in the future.
C. Know its price prior to delivery.
D. Calculate prices based on industry indexes. - ✔✔C
✔✔Basel I and Basel II prescribe capital requirements for
A. Government operated businesses.
B. Financial institutions.
C. International corporations.
D. Commercial insurers. - ✔✔B
✔✔The level of capital required to provide a cushion against unexpected loss of
economic value at a financial institution is known as
A. Supplementary capital.
B. Risk capital.
C. Core capital.
D. Preferred capital. - ✔✔B
✔✔Other than with catastrophe put notes, a disadvantage associated with contingent
capital arrangements is that
A. Ownership becomes more concentrated if a catastrophe equity put option is
exercised.
B. Funds received are equity, not loans.
C. Ownership becomes more concentrated if a standby credit facility is used.
D. Funds received are loans, not equity. - ✔✔D
✔✔Which one of the following statements is true regarding swaps?
A. Swaps are negotiated for indefinite time periods.
B. Parties to a swap pay all of the value and price upfront.
C. Swaps decrease portfolio diversification.
D. Swaps are commonly used to manage interest rate and currency rate of exchange
risk. - ✔✔D
, ✔✔If an organization directly securitized its income-producing assets without using a
special purpose vehicle (SPV) as an intermediary, investors
A. Must consider the overall credit risk of the organization.
B. Should examine individual borrowers' payments to the organization.
C. Should not consider the overall credit risk of the organization.
D. Would avoid investing in the organization altogether. - ✔✔A
✔✔The BIS created a capital requirement for large, global, systemically important banks
as part of its global liquidity framework under
A. The standard ratings-based capital requirements.
B. The Basel II agreement.
C. The risk-adjusted assets in regulators' required capital.
D. The Basel III agreement. - ✔✔D
✔✔Which one of the following statements is true regarding a standby credit facility?
A. The terms of the credit arrangement are specified in advance for a standby credit
facility.
B. Standby credit facilities have no cash flow advantages over traditional insurance
policies.
C. Losses paid by funds from a standby credit facility do not have to be paid back.
D. Because their uses are incompatible, standby credit facilities are not used in
conjunction with an insurance policy. - ✔✔A
✔✔U.S. statutory accounting rules allow insurers to issue contingent surplus notes,
which
A. Decrease an insurer's assets on its balance sheet.
B. Are counted as policyholders' surplus rather than as a liability.
C. Allow the insurer to negotiate interest rates when funds are needed rather than at
issuance.
D. Increase an insurer's liabilities on its balance sheet. - ✔✔B
✔✔An option is an agreement that gives the holder the
A. Option to purchase a specified asset at a definite time in the future at a price
negotiated in the future.
B. Right, but not the obligation, to buy or sell an asset at a specific price over a period of
time.
C. Duty to sell an asset at a specified price at an unspecified time in the future.
D. Obligation to sell an asset at a specified time in the future, but the price is negotiable.
- ✔✔B
✔✔The process of creating a marketable investment security based on the expected
cash flows from a financial transaction is
A. Derivation.
B. Securitization.
C. Investment.
SOLUTIONS RATED A+
✔✔ABC Company and XYZ Company have entered into a contract which stipulates
that, in the event of a breach, the breaching party will pay the non-breaching party the
sum of $250,000. Such stipulations are called
A. Assigned damages provision.
B. Liquidated damages provision.
C. Nominal damages provision.
D. Consequential damages provision. - ✔✔B
✔✔The catastrophe losses that trigger payment under a catastrophe bond
A. Are priced at a level to ensure that investors can only break even or lose money on
the investment.
B. Can be based on aggregate catastrophe losses over a defined period of time or the
occurrence of a single catastrophic event.
C. Are based solely on a noninsurance organization's losses over an unspecified period
of time.
D. Are measured using financial indexing techniques to discount losses to present
value. - ✔✔B
✔✔Which one of the following is the method often used to assess IT operational risk?
A. SWOT analysis
B. Phishing
C. Scenario analysis
D. Regulatory compliance - ✔✔C
✔✔Preventive controls assist the overall control environment of an organization by
A. Comparing different sets of data and investigating any differences.
B. Reducing risk of unauthorized actions.
C. Detecting errors or inconsistencies after they occur.
D. Addressing reconciliation of accounting errors. - ✔✔B
✔✔Which one of the following statements is true regarding operational risk?
A. Most current methods of managing operational risk are informal.
B. Operational risk is best managed during the course of business by an organization's
front-line managers.
C. Financial institutions and their regulators typically define operational risk to include
market risk and credit risk.
D. Operational risk is integrated in every activity of an organization. - ✔✔D
✔✔One category of operational risk includes procedures and practices organizations
use to conduct their business activities. This category is
A. Systems risk.
B. Process risk.
,C. Business complexity risk.
D. Technological risk. - ✔✔B
✔✔Catastrophe bonds
A. Are typically structured to cover frequent, low-severity losses.
B. Can be issued for any type of catastrophic insurable risk.
C. Were developed in response to the excess capacity of catastrophe reinsurers.
D. Transfer insurable catastrophe risk to traditional reinsurers. - ✔✔B
✔✔Which one of the following major IT risks is likely to arise when an organization's
revenue stream falls?
A. Software malfunction
B. Phishing
C. Data breach
D. Project back-log - ✔✔D: Project back-log is likely to arise when an organization's
revenue stream falls. When the revenue stream fall, the organization may need to cut
the budget for future IT projects or cut staff, resulting in delayed upgrades to equipment
or capabilities.
✔✔Which one of the following commonly used categories of operational risk includes
risks associated with technology and equipment?
A. Systems
B. External events
C. People
D. Process - ✔✔A
✔✔COBIT's management approach to control operational risks focuses on
A. Balancing the costs of IT-related risks with their benefits.
B. Ensuring that IT endeavors do not create more risk than the organization can
tolerate.
C. Soliciting input from senior management on all IT-related risk.
D. Creating buy-in for IT initiatives across all departments of the organization. - ✔✔A:
COBIT's management approach to control operational risks focuses on balancing the
costs of IT-related risks with their benefits.
✔✔The IT operational risk caused by a natural disaster such as a tornado or hurricane
would be assigned to which one of the following classifications?
A. Compliance
B. Performance
C. Security
D. Availability - ✔✔D: The IT operational risk caused by a natural disaster such as a
tornado or hurricane would be classified as availability. Security risks are those dealing
with a data breach that could result in unauthorized access to, use of, or alteration of an
organization's information.
,✔✔Which one of the following statements is true regarding a generic model of a
securitization?
A. The Special Purpose Vehicle (SPV) uses income-producing assets from investors to
fund debt from the organization.
B. Investors purchase securities from the organization that are then used as a
guarantee for the purchase of income-producing assets.
C. The SPV sells income-producing assets to the organization in exchange for
securities purchased by investors.
D. The organization sells income-producing assets to an SPV in exchange for cash. -
✔✔D
✔✔In a forward contract, the buyer and seller of a commodity
A. Speculate on the price in the future.
B. Estimate prices initially and finalize prices in the future.
C. Know its price prior to delivery.
D. Calculate prices based on industry indexes. - ✔✔C
✔✔Basel I and Basel II prescribe capital requirements for
A. Government operated businesses.
B. Financial institutions.
C. International corporations.
D. Commercial insurers. - ✔✔B
✔✔The level of capital required to provide a cushion against unexpected loss of
economic value at a financial institution is known as
A. Supplementary capital.
B. Risk capital.
C. Core capital.
D. Preferred capital. - ✔✔B
✔✔Other than with catastrophe put notes, a disadvantage associated with contingent
capital arrangements is that
A. Ownership becomes more concentrated if a catastrophe equity put option is
exercised.
B. Funds received are equity, not loans.
C. Ownership becomes more concentrated if a standby credit facility is used.
D. Funds received are loans, not equity. - ✔✔D
✔✔Which one of the following statements is true regarding swaps?
A. Swaps are negotiated for indefinite time periods.
B. Parties to a swap pay all of the value and price upfront.
C. Swaps decrease portfolio diversification.
D. Swaps are commonly used to manage interest rate and currency rate of exchange
risk. - ✔✔D
, ✔✔If an organization directly securitized its income-producing assets without using a
special purpose vehicle (SPV) as an intermediary, investors
A. Must consider the overall credit risk of the organization.
B. Should examine individual borrowers' payments to the organization.
C. Should not consider the overall credit risk of the organization.
D. Would avoid investing in the organization altogether. - ✔✔A
✔✔The BIS created a capital requirement for large, global, systemically important banks
as part of its global liquidity framework under
A. The standard ratings-based capital requirements.
B. The Basel II agreement.
C. The risk-adjusted assets in regulators' required capital.
D. The Basel III agreement. - ✔✔D
✔✔Which one of the following statements is true regarding a standby credit facility?
A. The terms of the credit arrangement are specified in advance for a standby credit
facility.
B. Standby credit facilities have no cash flow advantages over traditional insurance
policies.
C. Losses paid by funds from a standby credit facility do not have to be paid back.
D. Because their uses are incompatible, standby credit facilities are not used in
conjunction with an insurance policy. - ✔✔A
✔✔U.S. statutory accounting rules allow insurers to issue contingent surplus notes,
which
A. Decrease an insurer's assets on its balance sheet.
B. Are counted as policyholders' surplus rather than as a liability.
C. Allow the insurer to negotiate interest rates when funds are needed rather than at
issuance.
D. Increase an insurer's liabilities on its balance sheet. - ✔✔B
✔✔An option is an agreement that gives the holder the
A. Option to purchase a specified asset at a definite time in the future at a price
negotiated in the future.
B. Right, but not the obligation, to buy or sell an asset at a specific price over a period of
time.
C. Duty to sell an asset at a specified price at an unspecified time in the future.
D. Obligation to sell an asset at a specified time in the future, but the price is negotiable.
- ✔✔B
✔✔The process of creating a marketable investment security based on the expected
cash flows from a financial transaction is
A. Derivation.
B. Securitization.
C. Investment.
