GARP 2016-FRR Dumps (V8.02) – Reliable Study Materials for Earning the Financial Risk and Regulation (FRR) Series Certification

1. According to a Moody's study, the most important drivers of the loss given default historically have been all of the following EXCEPT:

I. Debt type and seniority

II. Macroeconomic environment

III. Obligor asset type

IV. Recourse

2. Alpha Bank determined that Delta Industrial Machinery Corporation has 2% change of default on a one-year no-payment of USD $1 million, including interest and principal repayment. The bank charges 3% interest rate spread to firms in the machinery industry, and the risk-free interest rate is 6%. Alpha Bank receives both interest and principal payments once at the end the year. Delta can only default at the end of the year. If Delta defaults, the bank expects to lose 50% of its promised payment.

What interest rate should Alpha Bank charge on the no-payment loan to Delta Industrial Machinery Corporation?

3. Which one of the following four features is NOT a typical characteristic of futures contracts?

4. A credit associate extending a loan to an obligor suspects that the obligor may change his behavior after the loan has been originated. The obligor in this case may use the loan proceeds for purposes not sanctioned by the lender, thereby increasing the risk of default. Hence, the credit associate must estimate the probability of default based on the assumptions about the applicability of the following tendency to this lending situation:

5. Which one of the following four statements about hedging is INCORRECT?

6. Which one of the following four statements regarding bank's exposure to credit and default risk is INCORRECT?

7. Which of the following attributes are typical for early models of statistical credit analysis?

8. Counterparty credit risk assessment differs from traditional credit risk assessment in all of the following features EXCEPT:

9. To quantify the aggregate average loss for the credit portfolio and its possible constituent subportfolios, a credit portfolio manager should use the following metric:

10. Bank Sigma has an opportunity to do a securitization deal for a credit card company, but has to retain a portion of the residual risk of the deal with an estimated VaR of $8 MM. Its fees for the deal are $2 MM, and the short-term financing costs are $600,000.

What would be the RAROC for this transaction?

11. Financial regulators in a European country are considering banning trading in highly complex derivative instruments that are not settled through a centralized clearinghouse.

This ban can result in:

I. The value of the country's currency dropping

II. Counterparties involved in trading of these derivative instruments failing to fulfill their obligations

III. The business model relying on these instruments failing

IV. Certain activities becoming illegal

12. A bank has a large number of auto loans and would prefer to sell them to raise cash for more funding. However, selling individual auto loans is difficult.

What could the bank do?

13. What are the add-on losses faced by a bank that is going bankrupt?

I. The discount accepted by the bank for selling its assets in a fire sale.

II. The increased cost of funding liabilities in a financially distressed situation.

III. The reduction in the present value of future growth opportunities.

IV. Loss of goodwill and intangible assets.

14. In additional to the commodity-specific risks, which of the following risks represent the main commodity derivative risks?

I. Basis

II. Term

III. Correlation

IV. Seasonality

15. Which of the following are conclusions that could be drawn from the shape of the statistical distribution of losses that a bank might incur over a future time period?

I. In most years a bank would look more profitable than it will be on average.

II. Most of the time a sufficiently well capitalized bank will appear over-capitalized.

III. Bad years do not come along very often, but when they do they lead to enormous losses.

16. Bank Muri has $4 million in cash and $5 million in loans coming due tomorrow with an expected default rate of 1%. The proceeds will be deposited overnight. The bank owes $ 9 million on a securities purchase that settles in two days and pays off $8 million in commercial paper in three days that is not expected to renew. On day 2, $1 million in loans is coming in with an expected default rate of 1% and on day 3, $2 million in loans is coming in with expected default rate of 2%.

How much should the bank plan to raise in order to avoid liquidity problems?

17. An endowment asset manager with a focus on long/short equity strategies is evaluating the risks of an equity portfolio.

Which of the following risk types does the asset manager need to consider when evaluating her diversified equity portfolio?

I. Company-specific projected earnings and earnings risk

II. Aggregate earnings expectations

III. Market liquidity

IV. Individual asset volatility

18. As Japan ___ its budget deficits and ___ its dependence on debt, the Japanese currency, JPY, would ___ in value against other currencies.

19. An asset-sensitive bank will have a ___ cumulative gap and will benefit from ___ interest rates.

20. A risk associate responsible for the operational risk function wants to evaluate the upward reporting governance structure and to assess its critical features.

Which one of the four attributes does not represent a critical feature of the upward reporting governance structure?

21. The market risk manager of SigmaBank is concerned with the value of the assets in the bank's trading book.

Which one of the four following positions would most likely be not included in that book?

22. Modified duration of a bond measures:

23. Securitization is the process by which banks

I. Issue bonds where the payment of interest and repayment of principal on the bonds depends on the cash flow generated by a pool of bank assets.

II. Issue bonds where the bank has transferred its legal right to payment of interest and repayment of principal to bondholders.

III. Sell illiquid assets.

24. Typically, which one of the following four option risk measures will be used to determine the number of options to use to hedge the underlying position?

25. Suppose Delta Bank enters into a number of long-term commercial and retail loans at fixed rate prevailing at the time the loans are originated.

If the interest rates rise:

26. In the United States, Which one of the following four options represents the largest component of securitized debt?

27. Gamma Bank provides a $100,000 loan to Big Bath retail stores at 5% interest rate (paid annually). The loan is collateralized with $55,000. The loan also has an annual expected default rate of 2%, and loss given default at 50%.

In this case, what will the bank's exposure at default (EAD) be?

28. A large energy company has a recurring foreign currency demands, and seeks to use options with a pay-off based on the average price of the underlying asset on either a few specific chosen dates or all dates within a specific pricing window.

Which one of the following four option types would most likely meet these specific foreign currency demands?

29. James Johnson manages a bond portfolio with all investment grade bonds.

Adding which of the following bonds would minimize the credit risk of his portfolio?

30. BetaFin has decided to use the hybrid RCSA approach because it believes that it fits its operational framework.

Which of the following could be reasons to use the hybrid RCSA method?

I. BetaFin has previously created series of RCSA workshops, and the results of these workshops can be used to design the questionnaires.

II. BetaFin believes that using the questionnaire approach should be more useful.

III. BetaFin had used the questionnaire approach successfully for certain businesses and the workshop approach for others.

IV. BetaFin had already implemented a sophisticated RCSA IT-system.

31. Interest rate swaps are:

32. Which one of the following four statements about the relationship between exchange rates and option values is correct?

33. Which of the following are among the main uses of risk reports?

I. Identification of exceptional situations that require managerial attention.

II. Display the relative risk among different trades.

III. Specify how RAROC will be maximized within the bank.

IV. Estimate the overall risk levels of the bank.

34. 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?

35. Which of the following assets on the bank's balance sheet has greatest endogenous liquidity risk?

36. The potential failure of a manufacturer to honor a warranty might be called ____, whereas the potential

failure of a borrower to fulfill its payment requirements, which include both the repayment of the amount borrowed, the principal and the contractual interest payments, would be called ___.

37. In hedging transactions, derivatives typically have the following advantages over cash instruments:

I. Lower credit risk

II. Lower funding requirements

III. Lower dealing costs

IV. Lower capital charges

38. Which one of the four following statements about Basis point values is correct?

Basis point value:

39. A trader attempts to hold long positions when markets are rising and hold short positions when markets are falling.

Which one of the following four trading styles is she likely to use?

40. Which one of the following four statements represents a possible disadvantage of using total return swap to manage equity portfolio risks?

41. John owns a bond portfolio worth $2 million with duration of 10.

What positions must he take to hedge this portfolio against a small parallel shifts in the term structure.

42. Which of the following statements about the option gamma is correct?

I. Second derivative of the option value with respect to the volatility.

II. Percentage change in option value per percentage change in the price of the underlying instrument.

III. Second derivative of the value function with respect to the price of the underlying instrument.

IV. Rate of change of the option delta with respect to changes in the underlying price.

43. Which of the following statements depicts a difference between funding liquidity risks and trading liquidity risks?

44. 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?

45. What are some of the drawbacks of correlation estimates? Which of the following statements identifies major problems with correlation calculations?

I. Correlation estimates are not able to capture increases in factor co-movements in extreme market scenarios.

II. Correlation estimates tend to be unstable.

III. Historical correlations may not forecast future correlations correctly.

IV. Correlation estimates assume normally distributed returns.

46. A risk associate evaluating his current portfolio of assets and liabilities wants to determine how sensitive this portfolio is to changes in interest rates.

Which one of the following four metrics is typically used for this purpose?

47. The data available to estimate the statistical distribution of bank losses is difficult to assemble for which of the following reasons?

I. The needed data is vast in quantity.

II. The data requires bringing together significantly different measures of risk.

III. Some risks are difficult to quantify and hence the data might involve subjective elements.

48. Which of the following statements about parametric and nonparametric methods for calculating Value-at-risk is correct?

49. Banks duration match their assets and liabilities to manage their interest risk in their banking book. A bank has $100 million in interest rate sensitive assets and $100 million in interest rate sensitive liabilities. Currently the bank's assets have a duration of 5 and its liabilities have a duration of 2. The asset-liability management committee of the bank is in the process of duration-matching.

Which of the following actions would best match the durations?

50. 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.

51. On January 1, 2010 the TED (treasury-euro dollar) spread was 0.4%, and on January 31, 2010 the TED spread is 0.9%. As a risk manager, how would you interpret this change?

52. Rising TED spread is typically a sign of increase in what type of risk among large banks?

I. Credit risk

II. Market risk

III. Liquidity risk

IV. Operational risk

53. Which one of the following four statements regarding floating rate bonds is incorrect?

54. James Johnson bought a coupon bond yielding 4.7% for $1,000.

Assuming that the price drops to $976 when yield increases to 4.71%, what is the PVBP of the bond.

55. Which of the following statements regarding CDO-squared is correct?

I. CDO-squared use other CDOs and CMOs as collateral.

II. Risk assessment of CDO-squared is almost impossible due to their complexity.

III. CDO-squared have lower credit risk than CMOs but higher than CDOs.

56. Which one of the following four statements represents the advantages of the historical sim-ulation method when calculating VaR?

57. The Basel II Accord's operational risk definition excludes all of the following items EXCEPT:

58. Bank customers traditionally trade commodity futures with banks in order to achieve which of the following goals?

I. To express their own price views

II. To reverse undesired short-term exposure created from fixed commodity sales

III. To reach short-term budgetary targets

59. To estimate the responsiveness of a particular equity portfolio to the overall market, a trader should use the portfolio's

60. For a bank a 1-year VaR of USD 10 million at 95% confidence level means that:

61. Which of the following statements is a key difference between customer loans and interbank loans?

62. Which of the following statements defines Value-at-risk (VaR)?

63. A risk manager analyzes a long position with a USD 10 million value. To hedge the portfolio, it seeks to use options that decrease JPY 0.50 in value for every JPY 1 increase in the long position. At first approximation, what is the overall exposure to USD depreciation?

64. Which one of the following four statements about equity indices is INCORRECT?

65. In the United States, during the second quarter of 2009, transactions in foreign exchange derivative contracts comprised approximately what proportion of all types of derivative transactions between financial institutions?

66. Beta Insurance Company is only allowed to invest in investment grade bonds.

To maximize the interest income, Beta Insurance Company should invest in bonds with which of the following ratings?

67. Using a forward transaction, Omega Bank buys 100 metric tones of aluminum for delivery in six-months' time. However, after two months, the bank becomes concerned with the potential fluctuations in aluminum prices and wants to hedge its potential exposure against a possible decline in aluminum prices.

Which one of the following four strategies could the bank use to offset the risk from its current exposure to aluminum as it sets the price for selling the commodity in four-months' time?

68. How could a bank's hedging activities with futures contracts expose it to liquidity risk?

69. Which one of the following four exercise features is typical for the most exchange-traded equity options?

70. James Johnson has a $1 million long position in ThetaGroup with a VaR of 0.3 million, and $1 million long position in VolgaCorp with a VaR of 0.4 million. The returns of the two companies have zero correlation.

What is the portfolio VaR?

71. Which type of risk does a bank incur on loans that are in the "pipeline", i.e loans that are in the process of origination but not yet originated?

72. Why is economic capital across market, credit and operational risks simply added up to arrive at an estimate of aggregate economic capital in practice?

73. Present value of a basis point (PVBP) is one of the ways to quantify the risk of a bond, and it measures:

74. To estimate the required risk-adjusted rate of return on a highly volatile energy stock, a risk associate compiled the following statistics:

Risk-free rate = 5%

Beta = 2.5

Market Risk = 8%

Using the Capital Asset Pricing Model, she estimates the rate of return to be equal:

75. If a bank is long £500 million pounds, short £300 million in delta-equivalent pound options, and long £100 million in pound-denominated stocks, what is the amount of pound exposure that would be shown in the aggregated risk reports?

76. Which of the following statements describes correctly the objectives of position mapping?

I. For VaR calculations, mapping converts positions based on their deltas to underlying factor risks.

II. Position mapping models risk factors affecting the value of a position as combination of core risk factors used in the VaR calculations.

III. Position mapping groups similar positions into one group based on the closeness of their respective VaR.

IV. Position mapping reduces the possible number of risk factors to a computationally manageable level.

77. Alpha Bank, a small bank,has a long position with larger BetaBank and has an identical short position with another larger bank GammaBank. Each large bank requires a 20% initial collateral to support the trade. As prices fluctuate in either direction, one large bank will require additional collateral from the small bank, while the risk of loss to the other large bank will increase.

By running the trades through a clearinghouse, the small bank can achieve all of the following objectives EXCEPT:

78. An associate from the finance group has been identified as an operational risk coordinator (ORC) for her department.

To fulfill her ORC responsibilities the associate will need to:

I. Provide main communication contact with operational risk department

II. Provide main reporting contact with audit department

III. Coordinate collection of key risk indicators in her area

IV. Coordinate training and awareness activities in her area

79. What is a common implicit assumption that is made when computing VaR using parametric methods?

80. In the United States, stock investors must comply with the Regulation T of the Federal Reserve Bank and may borrow up to ___ of the value of the securities from their brokers.

81. Gamma Bank has a significant number of retail customers and finds its balance sheet shape and structure difficult to manage.

Which one of the following characteristics of a bank with wide retail operations is INCORRECT?

82. Which one of the following four statements presents a challenge of using external loss databases in the operational risk framework?

83. A key function of treasuries in commercial/retail banks is:

I. To manage the interest margin of the banks.

II. To focus on underwriting risk.

III. To ensure strong earnings.

IV. To increase profit margins.

84. An options trader is assessing the aggregate risk of her currency options exposures. As an options buyer, she can potentially ___ lose more than the premium originally paid. As an option seller, however, she has a ___ risk on the contract and always receives a premium.

85. Which one of the following four statements about regulatory capital for a bank is accurate?

86. According to Basel II what constitutes Tier 1 capital?

87. When looking at the distribution of portfolio credit losses, the shape of the loss distribution is ___ , as the likelihood of total losses, the sum of expected and unexpected credit losses, is ___ than the likelihood of no credit losses.

88. 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?

89. What is a difference between currency swaps and interest rate swaps?

90. Which one of the following four statements correctly defines chooser options?