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GARP 2016-FRR Financial Risk and Regulation (FRR) Series Exam Practice Test

Demo: 51 questions
Total 342 questions

Financial Risk and Regulation (FRR) Series Questions and Answers

Question 1

Forward rate agreements (FRA) are:

Options:

A.

Exchange traded derivative contracts that allow banks to take positions in forward interest rates.

B.

OTC derivative contracts that allow banks and customers to obtain the risk/reward profile of long-term interest rates by relying on long-term funding.

C.

Exchange traded derivative contracts that allow banks to take positions in future exchange rates.

D.

OTC derivative contracts that allow banks to take positions in forward interest rates.

Question 2

The exercise for an American type option prior to expiration day is virtually certain in the following case:

Options:

A.

In the event of a high dividend for an in-the-money call option

B.

In the event of a high dividend for an in-the-money put option

C.

In the event of a low dividend for an in-the-money call option

D.

In the event of a low dividend for an in-the-money put option

Question 3

Which one of the following four physical commodities markets has the right combination of characteristics that generally allows short selling in the market, without making the short-selling transaction prohibitively expensive?

Options:

A.

Oil

B.

Natural Gas

C.

Grain

D.

Gold

Question 4

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

Options:

A.

VaR is the worst possible loss on a financial instrument or a portfolio of financial instruments over a given time period.

B.

VaR is the minimum likely loss on a financial instrument or a portfolio of financial instruments with a given degree of probabilistic confidence.

C.

VaR is the maximum of past losses over a given period of time.

D.

VaR is the maximum likely loss on a financial instrument or a portfolio of financial instruments over a given time period with a given degree of probabilistic confidence.

Question 5

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.

Options:

A.

30%

B.

40%

C.

50%

D.

60%

Question 6

Which one of the following four statements regarding commodity derivative risks is INCORRECT?

Options:

A.

Because of the different demand/supply balance in each region and the cost of transporting the oil between regions, a tanker of Brent crude oil in the UK will have a different value to a UK buyer than a tanker of Arab light crude oil in Singapore, which results in the basis risk.

B.

Calendar spreads represent a special case of basis risk and occur when the relative prices of commodity futures do not come in alignment and the trader becomes exposed to the absolute price movements.

C.

In most commodities, the longest term contracts are the most volatile, while the shortest term forward contract are the least volatile.

D.

Some commodities can be both in backwardation and a have a strong seasonal element.

Question 7

Gamma Bank estimates its monthly portfolio volatility at 5%.The portfolio's annual volatility is closest to which of the following?

Options:

A.

8%

B.

17%

C.

30%

D.

35%

Question 8

Jack Richardson wants to compute the 1-month VaR of a portfolio with a market value of USD 10 million, with an average monthly return of 1% and average monthly standard deviation of 1.5%. What is the portfolio VaR at 99% confidence level?

Probability Cumulative Normal distribution

0.90 1.282

0.91 1.341

0.92 1.405

0.93 1.476

0.94 1.555

0.95 1.645

0.96 1.751

0.97 1.881

0.98 2.054

0.99 2.326

Options:

A.

164,500

B.

232,600

C.

246,750

D.

348,900

Question 9

An options trader for a large institutional investor takes a long equity option position. Which of the following risks need to be considered when taking this position?

I. All the risks of underlying equities

II. Perceived volatility changes

III. Future dividends yields

IV. Risk-free interest rates

Options:

A.

I, II

B.

II, III

C.

III, IV

D.

I, II, III, IV

Question 10

Which one of the following four interest rate related yield curves is used to revalue loan and deposit positions in banks?

Options:

A.

Derivative

B.

Bond

C.

Cash

D.

Basis

Question 11

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

Options:

A.

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

B.

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

C.

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

D.

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

E.

I and II

F.

II and IV

G.

I, II and III

Question 12

Which one of the following four statements about preferred shares is INCORRECT?

Options:

A.

Preferred shares refer to a class of securities that is a cross between equity and debt.

B.

Preferred shares represent residual of a corporation after its other liabilities have been paid.

C.

Preferred shares are subordinated to debt.

D.

Preferred shares can be perpetual or have maturities far exceeding debt maturities.

Question 13

For two variables, which of the following is equal to the average product of the deviations from their respective means?

Options:

A.

Standard deviation

B.

Kurtosis

C.

Correlation

D.

Covariance

Question 14

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.

Options:

A.

I only

B.

I and II

C.

II and III

D.

I, II, and III

Question 15

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.

Options:

A.

I and II

B.

I, II, and III

C.

I, III, and IV

D.

I, II, III, and IV

Question 16

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.

Options:

A.

I and II

B.

I and IV

C.

I, II and III

D.

II, III, and IV

Question 17

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?

Options:

A.

Modified duration.

B.

Yield curve

C.

Convexity.

D.

Credit spread.

Question 18

In its VaR calculations, JPMorgan Chase uses an expected tail-loss methodology which approximates losses at the 99% confidence level. This methodology consists of two subsequent steps to estimate the VaR. Which of the following explains this two-step methodology?

Options:

A.

After VaR is computed at the 97% confidence level, the expected tail loss in excess of that confidence level is determined, which is then compared with the VaR estimate at the 99% confidence level.

B.

After VaR is computed at the 99% confidence level, the expected tail loss in excess of that confidence level is determined, which is then compared with the VaR estimate at the 98% confidence level.

C.

After VaR is computed at the 99% confidence level, the expected tail loss in excess of that confidence level is determined, which is then compared with the VaR estimate at the 99% confidence level.

D.

After VaR is computed at the 1% confidence level, the expected tail loss in excess of that confidence level is determined, which and is then compared with the VaR estimate at the 98% confidence level.

Question 19

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

Options:

A.

A 2-year U.S treasury bond

B.

A 1-week corporate loan with a AAA rated company

C.

A 10-year U.S treasury bond

D.

A 3-year subprime mortgage

Question 20

Which one of the following four attributes would likely help a trader using exchange-traded options to establish a leveraged position?

Options:

A.

Higher degrees of exposure at less cash cost

B.

Unlimited losses for long option positions

C.

Option positions have the same credit risks as a margined long forward.

D.

Option positions have the same cash risks as a margined short futures purchase.

Question 21

Gamma Bank has $300 million in loans and $200 million in deposits. If the modified duration of the loans is estimated to be 2, and the modified duration of the deposits is estimated to be 1, then the change in Gamma Bank's equity value per 1% change in yield will be:

Options:

A.

-$1 million

B.

-$2 million

C.

-$3 million

D.

-$4 million

Question 22

A customer of EtaBank, Alfred Fall, fell on the marble floors of the bank and sustained substantial injuries. Subsequently, he won a personal injury claim of $50,000 against EtaBank. How should EtaBank's operational loss data event information database categorize this event?

Options:

A.

This event would qualify as "Business Disruption and System Failures".

B.

This event would qualify as "Employment Practices and Workplace Safety".

C.

This event would not qualify as an operational risk event.

D.

This event would qualify as "Legal Risk".

Question 23

To improve the culture and awareness of the operational risk, Gamma Bank's CRO decides to promote three activities within her organization. Which one of the following four activities is NOT typically used to develop an operational risk framework?

Options:

A.

Marketing

B.

Planning

C.

Training

D.

Auditing

Question 24

Nijenhaus Bruch is currently creating a program of operational loss data collection at a bank with a large branch network. Which minimal data standards should this collection approach include to meet minimum loss data collecting standards?

Options:

A.

Reports should only include the actual loss date.

B.

Reports should capture both the date of the event and the amount of loss.

C.

Reports should capture the date of the event, the amount of loss, and recoveries of gross loss amounts.

D.

Reports should be designed to be shared with external data loss consortia recipients.

Question 25

A bank customer expecting to pay its Brazilian supplier BRL 100 million asks Alpha Bank to buy Australian dollars and sell Brazilian reals. Alpha bank does not hold Brazilian reals so it asks for a quote to buy Brazilian reals in the market. The market rate is 100. The bank quotes a selling rate of 101 to its customer, sells the reals, and receives AUD 1,010,000. To perform foreign exchange matched position trading, the banks should

Options:

A.

Immediately buy the real at the market rate of 100 and pay AUD 1,000,000.

B.

Immediately buy the real above the market rate of 105 and pay AUD 1,050,050.

C.

Immediately sell the real at the market rate of 100 and receive AUD 1,000,000.

D.

Immediately sell the real above the market rate of 105 and receive AUD 1,050,050.

Question 26

According to the principles of the Basel II Accord, the implementation and relative weights of the elements of the operational risk framework depend on:

I. The culture of the financial institution

II. Regulatory drivers

III. Business drivers

IV. The bank's reporting currency

Options:

A.

I, IV

B.

II, III

C.

II, IV

D.

I, II, III

Question 27

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?

Options:

A.

$500 million

B.

$510 million

C.

$508 million

D.

$550 million

Question 28

Bank Milo 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 what days does the bank face negative cumulative liquidity?

Options:

A.

Day 3 only.

B.

Days 2 and 3.

C.

Day 2 only.

D.

Days 1, 2 and 3.

Question 29

Which of the following reports have been suggested by the FDIC that banks should produce in addition to the usual probabilistic analysis and stress tests in order to gauge liquidity issues?

I. Cash flow gaps

II. Funding availability

III. Critical assumptions used in credit projections

Options:

A.

I, II

B.

I, II, III

C.

I

D.

I, III

Question 30

Gamma Bank is operating in a highly volatile interest rate environment and wants to stabilize its net income by shifting the sources of its earnings from interest rate sensitive sources to less interest rate sensitive sources. All of the following strategies can help achieve this objective EXCEPT:

Options:

A.

Charge bank fees for underwriting loans

B.

Provide trust, asset management, and trading services to customers

C.

Extend different types of credit

D.

Originate more floating interest rate loans

Question 31

The Sarbanes-Oxley Act includes one of the following four requirements for financial institutions in the United States:

Options:

A.

Risk and control requirements

B.

Market discipline requirements

C.

Capital allocation requirements

D.

Regulatory response to systemic risk requirements

Question 32

Which of the following are the most common methods to increase liquidity in stressed conditions?

I. Selling or securitizing assets.

II. Obtaining additional credit lines.

III. Securing a better credit rating.

Options:

A.

I

B.

I, II

C.

I, II, III

D.

II, III

Question 33

A customer asks a broker employed by AlphaBank to buy Eureka Corporation bonds for her account. While this trade was executed correctly and the bonds were bought, the trade was mistakenly accounted for as a sell order. If the price of Eureka Corporation bonds goes up, this trade would result in a significantly larger loss than if the market had remained stable. However, if the market drops, the customer will benefit from the incorrect accounting and gain from this trade. This trading scenario can serve as an example that

Options:

A.

Market risk in this transaction can magnify operational risk.

B.

Credit risk in this transaction can magnify operational risk.

C.

Liquidity risk in this transaction can magnify operational risk.

D.

Strategic risk in this transaction can magnify operational risk.

Question 34

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

Options:

A.

I, II

B.

II, III, IV

C.

I, II, III

D.

I, III, IV

Question 35

Which one of the following statements correctly identifies risks in foreign exchange forwards?

Options:

A.

Short-term forward price fluctuations are driven by changes in the spot exchange rate, since most inter-country interest rates differentials are significant, and the effect of compounding is large for short periods of time.

B.

Short-term forward price fluctuations are driven by changes in the spot exchange rate, since most inter-country interest rates differentials are small, and the effect of compounding is small for short periods of time.

C.

Long-term forward price fluctuations are driven by changes in the spot exchange rate, since most inter-country interest rates differentials are small, and the effect of compounding is large for short periods of time.

D.

Long-term forward price fluctuations are driven by changes in the spot exchange rate, since most inter-country interest rates differentials are significant, and the effect of compounding is small for short periods of time.

Question 36

Gamma Bank provides a $100,000 loan to Big Bath retail stores at 5% interest rate (paid annually). 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 expected loss be? What is the expected loss of this loan?

Options:

A.

$300

B.

$550

C.

$750

D.

$1,050

Question 37

Which one of the following four options is NOT a typical component of a currency swap?

Options:

A.

An initial currency exchange of the notional amount

B.

Denomination of the original notional amount into a foreign currency

C.

Periodic exchange of interest payments in different currencies

D.

A final currency exchange

Question 38

Which one of the following four mathematical option pricing models is used most widely for pricing European options?

Options:

A.

The Black model

B.

The Black-Scholes model

C.

The Garman-Kohlhagen model

D.

The Heston model

Question 39

A risk manager is analyzing a call option on the GBP with a vega of 0.02. When the perceived future volatility increases by 1%, the call option

Options:

A.

Increases in value by 0.02.

B.

Increases in value by 2.

C.

Decreases in value by 0.02.

D.

Decreases in value by 2.

Question 40

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.

Options:

A.

I

B.

II and III

C.

I and IV

D.

I, II, and IV

Question 41

Which of the following risk types are historically associated with credit derivatives?

I. Documentation risk

II. Definition of credit events

III. Occurrence of credit events

IV. Enterprise risk

Options:

A.

I, IV

B.

I, II

C.

I, II, III

D.

II, III, IV

Question 42

From the bank's point of view, repricing the retail debt portfolio will introduce risks of fluctuations in:

I. Duration

II. Loss given default

III. Interest rates

IV. Bank spreads

Options:

A.

I

B.

II

C.

I, II

D.

III, IV

Question 43

A risk manager has a long forward position of USD 1 million but the option portfolio decreases JPY 0.50 for every JPY 1 increase in his forward position. At first approximation, what is the overall result of the options positions?

Options:

A.

The options positions hedge the forward position by 25%.

B.

The option positions hedge the forward position by 50%.

C.

The option positions hedge the forward position by 75%.

D.

The option positions hedge the forward position by 100%.

Question 44

The pricing of credit default swaps is a function of all of the following EXCEPT:

Options:

A.

Probability of default

B.

Duration

C.

Loss given default

D.

Market spreads

Question 45

An asset manager for a large mutual fund is considering forward exchange positions traded in a clearinghouse system and needs to mitigate the risks created as a result of this operation. Which of the following risks will be created as a result of the forward exchange transaction?

Options:

A.

Exchange rate risk

B.

Exchange rate and interest rate risk

C.

Credit risk

D.

Exchange rate and credit risk

Question 46

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?

Options:

A.

2%

B.

7%

C.

25%

D.

43%

Question 47

All of the four following exotic options are path-independent options, EXCEPT:

Options:

A.

Chooser options

B.

Power options

C.

Asian options

D.

Basket options

Question 48

To safeguard its capital and obtain insurance if the borrowers cannot repay their loans, Gamma Bank accepts financial collateral to manage its credit risk and mitigate the effect of the borrowers' defaults. Gamma Bank will typically accept all of the following instruments as financial collateral EXCEPT?

Options:

A.

Unrated bonds issued and traded on a recognized exchange

B.

Equities and convertible bonds included in a main market index

C.

Commercial debts owed to a company in a form of receivables

D.

Mutual fund shares and similar unit investment vehicles subject to daily quotes

Question 49

To estimate a partial change in option price, a risk manager will use the following formula:

Options:

A.

Partial change in option price = Delta 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 Change in underlying price

D.

Partial change in option price = Delta x Gamma x (1+ Change in underlying price)

Question 50

Which one of the following changes would typically increase the price of a fixed income instrument, such as a bond?

Options:

A.

Decrease in inflation rates in a country.

B.

Increase in time to maturity.

C.

Increase in risk premium.

D.

Increase in demand for goods and services.

Question 51

In the United States, foreign exchange derivative transactions typically occur between

Options:

A.

A few large internationally active banks, where the risks become concentrated.

B.

All banks with international branches, where the risks become widely distributed based on trading exposures.

C.

Regional banks with international operations, where the risks depend on the specific derivative transactions.

D.

Thrifts and large commercial banks, where the risks become isolated.

Demo: 51 questions
Total 342 questions