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GARP 2016-FRR exam is a challenging and comprehensive test of knowledge and skills related to financial risk management. Financial Risk and Regulation (FRR) Series certification is highly respected in the financial industry and can open up a wide range of career opportunities for risk professionals. Candidates who are interested in earning the FRR certification should devote significant time and effort to studying for the exam and preparing themselves for the challenges ahead.
The Global Association of Risk Professionals (GARP) 2016-FRR certification exam is designed for professionals who work in the financial industry and specialize in risk management and regulation. Financial Risk and Regulation (FRR) Series certification exam is part of GARP's Financial Risk and Regulation (FRR) series, which is designed to help professionals develop their skills and knowledge in the field of risk management.
NEW QUESTION # 160
Which one of the following four examples would not be considered a typical source of market risk?
- A. Unexpected changes in the term structure of interest rates.
- B. Changes in the oil price due to the discovery of new oil fields.
- C. The JPY depreciating against the USD.
- D. Increased default rate on commercial mortgages due to higher interest rates.
Answer: D
NEW QUESTION # 161
What does correlation between two variables measure?
- A. Symmetry of a joint distribution of the two variables.
- B. Extreme returns of both variables.
- C. The proportion of variability in one of the variables that is explained by the other.
- D. Association between the two variables and the strength of a possible statistical relationship.
Answer: D
Explanation:
Correlation between two variables measures the degree to which the variables move in relation to each other.
It indicates both the direction (positive or negative) and the strength (magnitude) of a relationship between the two variables. A correlation of 1 indicates a perfect positive relationship, while a correlation of -1 indicates a perfect negative relationship. A correlation of 0 means there is no linear relationship between the variables.
NEW QUESTION # 162
For two variables, which of the following is equal to the average product of the deviations from their
respective means?
- A. Correlation
- B. Covariance
- C. Kurtosis
- D. Standard deviation
Answer: B
NEW QUESTION # 163
When trading exotic options, one needs to consider the following risks:
I. Spot foreign exchange risks
II. Forward foreign exchange risks
III. Plain vanilla options risks
IV. Option-specific risks
- A. I, II, III, IV
- B. II, III, IV
- C. I, III
- D. I, II, IV
Answer: A
Explanation:
When trading exotic options, various risks need to be considered. Spot foreign exchange risks (I) involve the risk associated with the current exchange rate fluctuations. Forward foreign exchange risks (II) pertain to the risks related to future exchange rate changes agreed upon in forward contracts. Plain vanilla options risks (III) include the standard risks associated with basic option trading, such as volatility and time decay.
Option-specific risks (IV) refer to the unique risks inherent in the specific exotic option being traded, such as path-dependency, barrier levels, and the complexity of modeling their payoffs. All these risks collectively impact the trading of exotic options.
NEW QUESTION # 164
Which of the following statements presents an advantage of using risk and control self-assessments (RCSA) in the operational risk framework?
I. RCSA provides very accurate scoring of risks and controls due to its subjective nature.
II. RCSA program provides insight into risks that exist in a firm, but that may or may not have occurred before.
III. RCSA program can produce biased but transparent operational risk reporting.
IV. RCSA program allows each department to take ownership of its own risks and controls.
- A. II and IV
- B. I and III
- C. I, II and III
- D. II, III, and IV
Answer: A
Explanation:
Risk and control self-assessments (RCSA) have several advantages:
* They provide insight into risks that exist in a firm but may not have occurred before (II).
* They allow each department to take ownership of its own risks and controls (IV). However, RCSA may not always provide very accurate scoring of risks and controls due to its subjective nature (I), and while it can produce biased operational risk reporting, the primary advantage is the transparency it offers, not the bias (III).
NEW QUESTION # 165
Which one of the following is a reason for a bank to keep a commercial loan in its portfolio until maturity?
I. Commercial loans usually have attractive risk-return profile.
II. Commercial loans are difficult to sell due to non standard features.
III. Commercial loans could be used to maintain good relations with important customers.
IV. The credit risk in commercial loans is low.
- A. IV only
- B. III and IV
- C. II and IV
- D. I, II and III
Answer: D
NEW QUESTION # 166
AlphaBank's management is evaluating how changes in its business environment could materially impact risk categories. As a result, bank's management decides to implement the structure, which facilitates the discussion in an integrative context, spanning market, credit, and operational risk factors, and encourages transparency and communication between risk disciplines. Which one of the following four approaches should the management choose to achieve this strategic goal?
- A. Regulatory risk management approach
- B. Taxonomy-based risk management approach
- C. Scenario-based risk management approach
- D. Enterprise risk management approach
Answer: D
Explanation:
To achieve a strategic goal that facilitates discussion in an integrative context spanning market, credit, and operational risk factors, and encourages transparency and communication between risk disciplines, AlphaBank's management should choose the enterprise risk management (ERM) approach. ERM integrates all types of risks and promotes a comprehensive risk management culture within the organization.References:Enterprise risk management approach as described in Financial Risk and Regulation documents.
NEW QUESTION # 167
The retail banking business of BankGamma has an expected P & L of $50 million and a VaR of $100 million.
The bank seeks to diversify its revenue, and is considering the opportunity to acquire a credit card business with an expected P & L of $50 million and a VaR of $150 million. What will be the overall RAROC if the bank acquires the new business?
- A. 33.3%.
- B. 58%.
- C. 72%.
- D. 50%.
Answer: A
Explanation:
To calculate the overall RAROC after acquiring the new business:
* Expected P&L (Profit and Loss): $50million+$50million=$100million\$50 \, \text{million} + \$50 \,
\text{million} = \$100 \, \text{million}$50million+$50million=$100million
* VaR (Value at Risk): Assuming diversification benefits are not considered, the total VaR would be
$100million+$150million=$250million\$100 \, \text{million} + \$150 \, \text{million} = \$250 \,
\text{million}$100million+$150million=$250million
* RAROC Calculation: \frac{\text{Expected P&L}}{\text{VaR}} = \frac{100 \, \text{million}}{250 \,
\text{million}} = 0.4 or 40%
Thus, the closest answer from the provided options is 33.3%.
NEW QUESTION # 168
Which one of the following statements describes Macauley's duration?
- A. The change in value of a bond when yields increase by 1 basis point.
- B. The percentage change in a bond price when the yields change by 1%.
- C. The present value of the future cash flows of a bond calculated at a yield equal to 1%.
- D. The weighted average life of the bond payments.
Answer: D
NEW QUESTION # 169
An organization's enterprise risk management framework defines its risk profile and typically reflects the
organization's
I. Market and credit risks
II. Operational and liquidity risks
III. Strategic and geopolitical risks
IV. Structural developments and industry position
- A. I, IV
- B. I, II
- C. II, III
- D. I, II, III
Answer: D
NEW QUESTION # 170
How could a bank's hedging activities with futures contracts expose it to liquidity risk?
- A. Since futures require margins which are settled every day, the bank could find itself scrambling for funds.
- B. Prices may move such that a loss results on the hedge.
- C. The futures hedge may not work due to the widening of basis which could result in a loss for the bank.
- D. The bank could get exposed to liquidity risk since futures trade on an exchange.
Answer: A
Explanation:
When a bank hedges with futures contracts, it needs to maintain margin accounts which are settled daily to reflect market changes:
* Margin Calls: If the market moves against the position of the futures, the bank must add funds to the margin account to cover potential losses. This can create significant liquidity risk if large sums are needed quickly.
* Daily Settlements: Futures markets require daily mark-to-market settlements which means that any adverse movement in prices necessitates immediate liquidity to meet the margin requirements.
* Market Volatility: In times of high volatility, the daily margin requirements can be substantial, potentially causing a scramble for liquidity if the bank has not pre-arranged sufficient liquidity buffers.
Thus, the need for daily margin settlements exposes the bank to liquidity risk as it must be able to provide cash on short notice.References: How Finance Works, relevant sections on liquidity risks in derivative markets.
NEW QUESTION # 171
As an example of the balance sheet effect, if rates rise, Delta Bank can expect:
- A. Its fixed rate assets to increase in value, although that effect will be offset by a reduction in the value of its fixed rate liabilities.
- B. Its fixed rate assets to drop in value, although that effect will be offset by a reduction in the value of its fixed rate liabilities.
- C. Its fixed rate assets to increase in value, while that effect will be amplified by a reduction in the value of its fixed rate liabilities.
- D. Its fixed rate assets to drop in value, while that effect will be amplified by a reduction in the value of its fixed rate liabilities.
Answer: B
Explanation:
When interest rates rise, the value of fixed-rate assets held by a bank, such as bonds, will typically decrease because newer bonds will offer higher yields. However, the value of fixed-rate liabilities, such as fixed-rate deposits or debt, will also decrease. This decrease in liabilities can offset the drop in asset values to some extent, stabilizing the bank's balance sheet.
References: No specific reference found in the document for this question. The provided answer is based on standard financial principles related to interest rate risk and balance sheet effects.
NEW QUESTION # 172
US-based BetaBank have accumulated Japanese yen, Japanese government bonds, options on Japanese yen,
and positions in commodities that have a positive correlation with yen. Which one of the four following
non-statistical risk measures could be used to evaluate the BetaBank's exposure to the Japanese economy?
- A. Position sensitivities
- B. Position volatility
- C. Position turnover
- D. Position concentrations
Answer: D
NEW QUESTION # 173
Which of the following factors would typically increase the credit spread?
I. Increase in the probability of default of the issuer.
II. Decrease in risk premium.
III. Decrease in loss given default of the issuer.
IV. Increase in expected loss.
- A. II and III
- B. I and IV
- C. I
- D. I, II, and IV
Answer: B
Explanation:
The credit spread reflects the additional yield over the risk-free rate that investors demand to compensate for the risk of default. An increase in the probability of default of the issuer (I) would directly increase the credit spread as investors require more return for higher risk. Similarly, an increase in expected loss (IV) would increase the credit spread since the potential loss in the event of default is greater. On the other hand, a decrease in risk premium (II) or a decrease in loss given default (III) would typically lower the credit spread, not increase it.
NEW QUESTION # 174
Which of the following statements about the interest rates and option prices is correct?
- A. If rho is positive, rising interest rates increase option prices.
- B. As interest rates rise, all options will rise in value.
- C. If rho is positive, rising interest rates decrease option prices.
- D. As interest rates fall, all options will rise in value.
Answer: A
Explanation:
Rho is a measure of the sensitivity of an option's price to changes in interest rates. If rho is positive, it means that the price of the option will increase when interest rates rise. This is because higher interest rates generally increase the cost of carry, which can make holding the underlying asset more expensive and thus increase the value of the option.
NEW QUESTION # 175
Which of the following risk measures are based on the underlying assumption that interest rates across all maturities change by exactly the same amount?
I. Present value of a basis point.
II. Yield volatility.
III. Macaulay's duration.
IV. Modified duration.
- A. I, III, and IV
- B. I, II, and III
- C. I, II, III, and IV
- D. I and II
Answer: A
Explanation:
Risk measures such as the present value of a basis point (I), Macaulay's duration (III), and modified duration (IV) are based on the underlying assumption that interest rates across all maturities change by exactly the same amount. These measures rely on the concept of a parallel shift in the yield curve, where all interest rates move together in a uniform manner. Yield volatility (II), on the other hand, is not predicated on this assumption as it measures the variability in yields over time and does not assume uniform changes across all maturities.
NEW QUESTION # 176
A credit rating analyst wants to determine the expected duration of the default time for a new three-year loan,
which has a 2% likelihood of defaulting in the first year, a 3% likelihood of defaulting in the second year, and
a 5% likelihood of defaulting the third year. What is the expected duration for this three-year loan?
- A. 1.5 years
- B. 2.1 years
- C. 3.7 years
- D. 2.3 years
Answer: D
NEW QUESTION # 177
A multinational bank just bought two bonds each worth $10,000. One of the bonds pays a fixed interest of 5%
semi-annually and the other pays LIBOR semi-annually. The six month LIBOR is at 5% currently. The risk
manager of the bank is concerned about the sensitivity to interest rates. Which of the following statements are
true?
- A. The price of the bond paying floating interest is more sensitive to interest rates than the bond paying
fixed interest. - B. The given information is not enough to determine the sensitivity of the bond prices.
- C. Both bond prices are equally sensitive to interest rates.
- D. The price of the bond paying fixed interest is more sensitive to interest rates than the bond paying
floating interest.
Answer: D
NEW QUESTION # 178
An asset and liability manager for a large financial institution has to recognize that retail products ___ include
embedded options, which are often not rationally exercised, while wholesale products ___ carry penalties for
repayment or include rights to terminate wholesale contracts on very different terms than are common in retail
products.
- A. Frequently; rarely
- B. Hardly ever; rarely
- C. Hardly ever; typically
- D. Frequently; typically
Answer: D
NEW QUESTION # 179
A trader for EtaBank wants to take a leveraged position in Collateralized Debt Obligations. If these CDOs can
be used in a repo transaction at a 20% haircut, what is the maximum leverage factor for a transaction with the
CDOs?
- A. 0
- B. 1
- C. 1.5
- D. 0.8
Answer: A
NEW QUESTION # 180
A proprietary trading desk for a large bank hedges an Arab light OTC forward position with Brent crude oil
forwards. The trading desk benefits from using the most liquid OTC market to hedge, the market for the Brent
crude, but hedging its using the Brent contract, exposes itself to the following type of risk:
- A. Seasonality risk
- B. Term risk
- C. Basis risk
- D. Correlation risk
Answer: C
NEW QUESTION # 181
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