[Nov 02, 2024] Today Updated 2016-FRR Exam Dumps Actual Questions
2016-FRR exam dumps with real GARP questions and answers
NEW QUESTION # 64
Which one of the following four statements presents a challenge of using external loss databases in the operational risk framework?
- A. Use of benchmarked data reflects similar data collection standards.
- B. External events are usually not of interest to senior management.
- C. If the external data is gathered from news sources, it may only reflect events that are interesting to the press.
- D. They provide a source of data on what operational loss events will occur.
Answer: C
Explanation:
* Option A: Use of benchmarked data reflects similar data collection standards.
* Incorrect. Benchmarking ensures that data is collected using similar standards, enhancing comparability and reliability.
* Option B: External events are usually not of interest to senior management.
* Incorrect. External events provide valuable insights and lessons that are often of significant interest to senior management.
* Option C: If the external data is gathered from news sources, it may only reflect events that are interesting to the press.
* Verified and correct. Data sourced from news can be biased towards more sensational events, potentially missing out on less newsworthy but equally important incidents.
* Option D: They provide a source of data on what operational loss events will occur.
* Incorrect. External databases provide historical data that can inform risk assessments but do not predict future events directly.
NEW QUESTION # 65
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?
- A. Package the loans into a securitized vehicle and sell the low risk portion of the portfolio.
- B. Set up a marketing team to sell individual loans to investors.
- C. Merge with another bank.
- D. Obtain a stronger credit rating so that the bank could borrow at a cheaper rate.
Answer: A
Explanation:
When a bank has a large number of auto loans and finds it difficult to sell them individually, it can take the following steps to raise cash:
* Packaging into a Securitized Vehicle: The bank can package these auto loans into a securitized vehicle, such as a collateralized loan obligation (CLO) or an asset-backed security (ABS). By doing so, the bank can create a portfolio of loans that can be sold as a single security.
* Selling the Low-Risk Portion: Once the loans are securitized, the bank can sell the low-risk portion of the portfolio to investors. This part of the portfolio is more attractive to investors because it typically offers lower risk and stable returns, making it easier to sell compared to individual loans.
References: This approach is detailed in "How Finance Works," where securitization is described as a method for banks to sell illiquid assets by packaging them into marketable securities.
NEW QUESTION # 66
A portfolio manager is interested in computing risk measures for his bond investment portfolio. Which of the
following measures the sensitivity of duration to interest rates?
- A. Credit spread.
- B. Convexity.
- C. Modified duration.
- D. Yield curve
Answer: B
NEW QUESTION # 67
To protect the oranges harvest price level, a farmer needs to take a hedge position. Provided that he produces the amount he hedged, which one of the following four strategies will allow the farmer to accomplish his goal?
- A. Entering into a customized forward contract with the bank
- B. Negotiating a credit line facility
- C. Going short on oranges futures contracts
- D. Going long on oranges futures contacts
Answer: C
Explanation:
* To hedge against the price risk of a future harvest, a farmer would take a position opposite to their exposure.
* By going short on futures contracts, the farmer locks in a selling price for the oranges, protecting against a potential decline in market prices at the time of harvest.
* This strategy effectively sets a future selling price, ensuring revenue stability regardless of market
* fluctuations.
NEW QUESTION # 68
A financial analyst is trying to distinguish credit risk from market risk. A $100 loan collateralized with $200 in
stock has limited ___, but an uncollateralized obligation issued by a large bank to pay an amount linked to the
long-term performance of the Nikkei 225 Index that measures the performance of the leading Japanese stocks
on the Tokyo Stock Exchange likely has more ___ than ___.
- A. Credit risk, legal risk; market risk
- B. Market risk; market risk; credit risk
- C. Market risk; credit risk; market risk
- D. Legal risk; market risk; credit risk
Answer: B
NEW QUESTION # 69
To estimate a partial change in option price, a risk manager will use the following formula:
- A. Partial change in option price = Delta x Gamma x Change in underlying price
- B. Partial change in option price = Delta x (1+ Change in underlying price)
- C. Partial change in option price = Delta x Gamma x (1+ Change in underlying price)
- D. Partial change in option price = Delta x Change in underlying price
Answer: D
NEW QUESTION # 70
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?
- A. 8%
- B. 9%
- C. 12%
- D. 10%
Answer: D
Explanation:
To determine the appropriate interest rate to charge, Alpha Bank needs to cover the risk-free rate, the spread, and the expected loss due to default. The formula used is: Risk-free rate + Spread + (Probability of Default x Loss Given Default). Substituting the given values: 6% (risk-free rate) + 3% (spread) + (0.02 x 0.50) = 6% +
3% + 1% = 10%.
NEW QUESTION # 71
A risk associate is trying to determine the required risk-adjusted rate of return on a stock using the Capital Asset Pricing Model. Which of the following equations should she use to calculate the required return?
- A. Required return = risk-free return + beta x market risk
- B. Required return = risk-free return + beta x (1 - market risk)
- C. Required return = risk-free return + 1/beta x market risk
- D. Required return = (1-risk free return) + beta x market risk
Answer: A
Explanation:
* The Capital Asset Pricing Model (CAPM) equation used to calculate the required return on a stock is:Required return = risk-free return + beta × (market risk premium).
* This formula helps determine the return an investor should expect for taking on additional risk compared to a risk-free asset.
NEW QUESTION # 72
Which of the following statements describes correctly the objectives of position mapping ?
- A. I and II
- B. Position mapping models risk factors affecting the value of a position as combination of core risk factors
used in the VaR calculations. - C. II, III, and IV
- D. For VaR calculations, mapping converts positions based on their deltas to underlying factor risks.
- E. II and IV
- F. I, II and III
- G. Position mapping groups similar positions into one group based on the closeness of their respective
VaR. - H. Position mapping reduces the possible number of risk factors to a computationally manageable level.
Answer: B
NEW QUESTION # 73
Which of the following statements about endogenous and exogenous types of liquidity are accurate?
I. Endogenous liquidity is the liquidity inherent in the bank's assets themselves.
II. Exogenous liquidity is the liquidity provided by the bank's liquidity structure to fund its assets and maturing liabilities.
III. Exogenous liquidity is the non-contractual and contingent capital supplied by investors to support the bank in times of liquidity stress.
IV. Endogenous liquidity is the same as funding liquidity.
- A. I, II, IV
- B. II, III
- C. I, III
- D. I, II
Answer: D
Explanation:
* Statement I: "Endogenous liquidity is the liquidity inherent in the bank's assets themselves." This is correct as endogenous liquidity refers to the natural liquidity of the assets.
* Statement II: "Exogenous liquidity is the liquidity provided by the bank's liquidity structure to fund its assets and maturing liabilities." This is also correct as exogenous liquidity comes from external sources and the bank's liquidity management framework.
* Statement III: Incorrect because exogenous liquidity is not necessarily non-contractual and contingent capital; it is more about external sources like interbank loans and central bank facilities.
* Statement IV: Incorrect as endogenous liquidity is not the same as funding liquidity, which generally refers to the bank's ability to meet its liabilities.
ReferencesBased on detailed descriptions of endogenous and exogenous liquidity concepts in the document.
NEW QUESTION # 74
A financial analyst is trying to distinguish credit risk from market risk. A $100 loan collateralized with $200 in stock has limited ___, but an uncollateralized obligation issued by a large bank to pay an amount linked to the long-term performance of the Nikkei 225 Index that measures the performance of the leading Japanese stocks on the Tokyo Stock Exchange likely has more ___ than ___.
- A. Credit risk, legal risk; market risk
- B. Market risk; market risk; credit risk
- C. Market risk; credit risk; market risk
- D. Legal risk; market risk; credit risk
Answer: B
Explanation:
When distinguishing between credit risk and market risk, the nature of the financial instrument and its backing is crucial:
* A $100 loan collateralized with $200 in stock has limited market risk because the collateral's value is higher than the loan amount, providing a cushion against market fluctuations.
* An uncollateralized obligation issued by a large bank linked to the performance of the Nikkei 225 Index has high market risk due to its dependency on the stock market's performance and high credit risk due to the lack of collateral and reliance on the issuer's creditworthiness.
NEW QUESTION # 75
Which one of the following statements regarding collateralized mortgage obligations (CMO) is incorrect?
- A. CMOs are pools of mortgages that are divided according to the timing of cash flows.
- B. CMOs are generally less risky investment than CDOs.
- C. CMOs have senior tranches which are considered short-term, low-risk instruments by banks
- D. CMOs are asset-backed securities that have pools of collateralized debt obligations (CDOs) as underlying collateral.
Answer: D
Explanation:
Collateralized mortgage obligations (CMOs) are a type of asset-backed security that pools together mortgages and then issues tranches with different maturities and levels of risk. They do not have CDOs as their underlying collateral; instead, they are backed by mortgage loans. Therefore, the statement that CMOs have pools of CDOs as underlying collateral is incorrect.
NEW QUESTION # 76
Which one of the following four statements correctly identifies disadvantages of using the economic capital?
- A. Economic capital estimates the level of expected losses.
- B. Economic capital may do not take into consideration the regulatory requirements.
- C. The economic capital models used by banks may be subject to significant model risk.
- D. Since banks are putting their money at risk they have an incentive to increase economic capital.
Answer: C
NEW QUESTION # 77
Which statements correctly describe the features of using subscription databases for operational loss data
analysis?
Subscription databases
I. Provide central data repositories and benchmarking services to their members.
II. Can provide insight into whether the losses in a firm reflect the usual losses in their industry.
III. Assist with mapping the events to the appropriate business lines, risk categories and causes.
IV. Reflect only events that are interesting to the press and are reported in the press.
- A. I and II
- B. II, III, and IV
- C. II and III
- D. I, II and III
Answer: C
NEW QUESTION # 78
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 ___.
- A. Credit risk; market risk
- B. Credit risk; performance risk
- C. Market risk; credit risk
- D. Performance risk; credit risk
Answer: D
Explanation:
The potential failure of a manufacturer to honor a warranty is a type of performance risk because it relates to the manufacturer's performance under the terms of the warranty contract. Conversely, the potential failure of a borrower to fulfill its payment requirements, including both the repayment of the amount borrowed (principal) and the contractual interest payments, is known as credit risk. Credit risk specifically deals with the likelihood of a borrower defaulting on their debt obligations.
NEW QUESTION # 79
Which one of the four following statements about Basis point values is correct?
Basis point value:
- A. Refers to the change in the value of a fixed income position for a very small change yields.
- B. Is a risk sensitivity measure used to measure the point spread risk in the banking book.
- C. Is a widely used statistical tool used to measure market risk.
- D. Provides a quick estimate of the sensitivity of the bank's banking book, to increasing volatility in interest
rates.
Answer: A
NEW QUESTION # 80
In analyzing market option pricing dynamics, a risk manager evaluates option value changes throughout the entire trading day. Which of the following factors would most likely affect foreign exchange option values?
I. Change in the value of the underlying
II. Change in the perception of future volatility
III. Change in interest rates
IV. Passage of time
- A. I, II
- B. I, II, III, IV
- C. I, II, III
- D. II, III
Answer: B
Explanation:
The value of foreign exchange options is influenced by several factors, including:
* Change in the value of the underlying (I): This directly affects the option's intrinsic value.
* Change in the perception of future volatility (II): Higher expected volatility increases the option's potential payoff.
* Change in interest rates (III): This affects the cost of carrying positions in the underlying asset.
* Passage of time (IV): This influences the time value of the option. All these factors collectively impact the pricing dynamics of options throughout the trading day.
NEW QUESTION # 81
Which one of the following four statements correctly describes an American call option?
- A. An American call option gives the buyer of that call option the right to sell the underlying instrument on the expiry date.
- B. An American call option gives the buyer of that call option the right to buy the underlying instrument on the expiry date.
- C. An American call option gives the buyer of that call option the right to sell the underlying instrument on any date up to and including the expiry date.
- D. An American call option gives the buyer of that call option the right to buy the underlying instrument on any date up to and including the expiry date.
Answer: D
Explanation:
An American call option allows the holder to purchase the underlying asset at any time before the option's expiration. This is in contrast to a European call option, which can only be exercised at the expiry date. The ability to exercise at any time gives the American option greater flexibility and potential value.
NEW QUESTION # 82
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