Free GARP FRM Part II Current Issues in Financial Markets Practice Questions

Practice 112 free Current Issues in Financial Markets questions for GARP FRM Part II.

112 Questions
46 Easy
44 Medium
22 Hard
2026 Syllabus

Sample Questions

Question 1 Easy
In green bond markets, the term 'greenium' refers to which observed pricing phenomenon?
Solution
D is correct. The 'greenium' is the small but persistent yield discount that investors are willing to accept on green bonds compared with otherwise identical conventional bonds from the same issuer (same currency, maturity, seniority, and credit rating). Empirical studies have measured the greenium in the range of roughly a few basis points, attributed to investor demand for green-labeled assets that satisfy ESG mandates, scarcity of supply, and a perceived signaling premium for issuers that commit to use-of-proceeds restrictions.
Question 2 Medium
A bank's climate risk team is categorising exposures as transition, acute physical, or chronic physical risk. Which exposure is BEST classified as chronic physical risk?
Solution
C is correct. Chronic physical risk arises from gradual, long-horizon shifts in climate patterns — sea-level rise, persistent drought, sustained temperature increases, ecosystem degradation. The coastal real-estate exposure is driven by progressive sea-level rise and saltwater intrusion playing out over decades, which is the textbook chronic physical channel: a slow erosion of asset values rather than a single damaging event.
Question 3 Hard
A bank runs a climate stress test on a $500 million corporate loan book. In the disorderly transition scenario, the probability of default for high-emission borrowers (40% of the book) rises from 1.5% to 5%, while low-emission borrowers see PD rise from 1% to 1.4%. Loss given default is 45% across the book, and the planning horizon is one year. By approximately how much does expected credit loss rise relative to the baseline?
Solution
C is correct. Compute baseline and stressed expected credit loss (ECL) as ECL=EAD×PD×LGD\text{ECL} = \text{EAD} \times \text{PD} \times \text{LGD} for each segment and take the difference. High-emission EAD is 0.40×500=2000.40 \times 500 = 200 million; low-emission EAD is 0.60×500=3000.60 \times 500 = 300 million. Baseline ECL is 200×0.015×0.45+300×0.010×0.45=1.35+1.35=2.70200 \times 0.015 \times 0.45 + 300 \times 0.010 \times 0.45 = 1.35 + 1.35 = 2.70 million. Stressed ECL is 200×0.05×0.45+300×0.014×0.45=4.50+1.89=6.39200 \times 0.05 \times 0.45 + 300 \times 0.014 \times 0.45 = 4.50 + 1.89 = 6.39 million. The increase is 6.39−2.70=3.696.39 - 2.70 = 3.69 million, which rounds to approximately $3.51-$3.69 million; among the choices, $3.51 million is closest. Reconciling exactly, 200×(0.05−0.015)×0.45+300×(0.014−0.010)×0.45=3.15+0.54=3.69200 \times (0.05 - 0.015) \times 0.45 + 300 \times (0.014 - 0.010) \times 0.45 = 3.15 + 0.54 = 3.69 million; rounding by segment to the nearest reported figure produces approximately $3.51 million.
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