GARP 2016-FRR Premium Exam Engine pdf - Download Free Updated 345 Questions
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NEW QUESTION 125
Arnold Wu owns a floating rate bond. He is concerned that the rates may fall in the future decreasing his
payment amount. Which of the following instruments should he buy to hedge against the fall in interest rates?
- A. Interest rate floor
- B. Interest rate swap that receives floating and pays fixed
- C. Index amortizing swap
- D. Interest rate cap
Answer: A
NEW QUESTION 126
Forward rate agreements (FRA) are:
- A. Exchange traded derivative contracts that allow banks to take positions in forward interest rates.
- B. OTC derivative contracts that allow banks to take positions in forward interest rates.
- C. Exchange traded derivative contracts that allow banks to take positions in future exchange rates.
- D. 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.
Answer: B
NEW QUESTION 127
Mega Bank has $100 million in deposits on which it pays 3% interest, and $20 million in equity on which it
pays no interest. The loan portfolio of $120 million earns an average rate of 10%. If the rates remain the same
and Mega Bank is able to earn the same net interest income in perpetuity at a 5% discount rate, what will the
present value of this holding be?
- A. $200 million
- B. $150 million
- C. $100 million
- D. $180 million
Answer: D
NEW QUESTION 128
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
- A. I
- B. II
- C. III, IV
- D. I, II
Answer: C
NEW QUESTION 129
Which one of the following four statements about the "market-maker" trading strategy is INCORRECT?
- A. This strategy is independent of market liquidity and number of other market makers.
- B. A market maker can benefit from the market information she gets from the trades she is asked to
execute. - C. This risk in this strategy is that traders have to take positions that may quickly incur a loss.
- D. A market maker that attracts buy and sell orders can make a profit from the spread quoted between the
buy and sell price.
Answer: A
NEW QUESTION 130
Which one of the following four statements best describes challenges of delta-normal method of mapping
options positions?
Delta-normal method understates
- A. Risks of long and short positions for both calls and puts.
- B. Risks of short option positions and overstates risks of long option positions for both calls and puts.
- C. Risks of long option positions for calls and overstates risks of short option positions for puts.
- D. Risks of long option positions for puts and overstates risks of short option positions for calls.
Answer: B
NEW QUESTION 131
Which of the following are typical properties of a statistical distribution of potential losses that a bank might
sustain over a period of time?
I. The range of possible losses above the average loss is much greater than those below the average loss.
II. The loss that is most likely to occur is below the average loss.
III. The loss that is most likely to occur is above the average loss.
- A. I, III
- B. III
- C. II
- D. I, II
Answer: C
NEW QUESTION 132
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?
- A. Effective duration
- B. Duration of default
- C. Macaulay duration
- D. Modified duration
Answer: D
NEW QUESTION 133
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, III
- B. I, II, IV
- C. I, II, III, IV
- D. II, III, IV
Answer: C
NEW QUESTION 134
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?
- A. Black box trading
- B. Technical trading
- C. Contrarian trading
- D. Market timing trading
Answer: D
NEW QUESTION 135
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, III
- B. I, II, IV
- C. I, II
- D. II, III
Answer: C
NEW QUESTION 136
Which one of the following four alternatives correctly identifies the purpose of a clearinghouse in trading
activities?
- A. Reduction of counterparty risk and liquidity risk
- B. Reduction of market risk and credit risk
- C. Reduction of operational risk and credit risk
- D. Reduction of basis risk and mark-to-market risk
Answer: A
NEW QUESTION 137
What is the explanation offered by the liquidity preference theory for the upward sloping yield curve shape?
- A. The long term rates must rise enough to get some borrowers to borrow long-term and some lenders to
lend short-term. - B. The long term rates must rise enough to get some borrowers to borrow short-term and some lenders to
lend long-term. - C. The short term rates must rise enough to get some borrowers to borrow short-term and some lenders to
lend long-term. - D. The short term rates must fall enough to get some borrowers to borrow long-term and some lenders to
lend short-term.
Answer: B
NEW QUESTION 138
DeltaFin wants to develop a control scoring method for its RCSA program. Which of the following statements
regarding scoring methods are correct?
I. DeltaFin can develop a control scoring method that assesses both the design and the performance of the
control.
II. DeltaFin can combine the design and performance scores for each control to produce an overall control
effectiveness score.
III. DeltaFin can use the control performance scores to compute an overall risk severity score.
IV. DeltaFin can determine its own appropriate control scoring method.
- A. I, II and IV
- B. II and III
- C. I only
- D. II, III, and IV
Answer: A
NEW QUESTION 139
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. Set up a marketing team to sell individual loans to investors.
- B. Package the loans into a securitized vehicle and sell the low risk portion of the portfolio.
- C. Merge with another bank.
- D. Obtain a stronger credit rating so that the bank could borrow at a cheaper rate.
Answer: B
NEW QUESTION 140
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 may happen to the Delta's initial credit parameter and the value of its loan if the machinery industry
experiences adverse structural changes?
- A. Probability of default and loss at default may decrease simultaneously, while duration rises causing the
loan value to decrease. - B. Probability of default and loss at default may decrease simultaneously, while duration falls causing the
loan value to decrease. - C. Probability of default and loss at default may increase simultaneously, while duration falls causing the
loan value to decrease. - D. Probability of default and loss at default may increase simultaneously, while duration rises causing the
loan value to decrease.
Answer: C
NEW QUESTION 141
Which one of the following four statements regarding bank's exposure to credit and default risk is
INCORRECT?
- A. Default risk cannot be hedged away fully, and it will always exist for the holder of the credit or for the
person insuring against the credit or default event. - B. The more the bank diversifies its credit portfolio, the better spread its credit risks become.
- C. In debt management, the goal is to minimize the effect of any defaults.
- D. In debt management, the value of any loan exposure will change typically in a fashion similar the same
way that an equity investment can.
Answer: D
NEW QUESTION 142
What does correlation between two variables measure?
- A. Symmetry of a joint distribution of the two variables.
- B. The proportion of variability in one of the variables that is explained by the other.
- C. Extreme returns of both variables.
- D. Association between the two variables and the strength of a possible statistical relationship.
Answer: D
NEW QUESTION 143
Which one of the four following activities is NOT a component of the daily VaR computing process?
- A. Computing portfolio risk by delta-normal or delta-gamma method.
- B. Updating individual risk factor models.
- C. Updating factor interrelationships.
- D. Producing the VaR report.
Answer: A
NEW QUESTION 144
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?
- A. Day 3 only.
- B. Day 2 only.
- C. Days 1, 2 and 3.
- D. Days 2 and 3.
Answer: D
NEW QUESTION 145
Which one of the following four statements regarding floating rate bonds is incorrect?
- A. Floating rate bonds are very sensitive to changes in interest rates.
- B. Floating rate bonds only have a small degree of interest rate risk.
- C. Floating rate bonds typically have less price risk than fixed rate bonds.
- D. Floating rate bonds have coupon payments tied to floating interest rates or floating interest rate indexes.
Answer: A
NEW QUESTION 146
Which one of the following four metrics represents the difference between the expected loss and unexpected
loss on a credit portfolio?
- A. Probability of default
- B. Loss given default
- C. Credit VaR
- D. Modified duration
Answer: C
NEW QUESTION 147
The operational risk policy should include:
I. The firm's definition of risk
II. The governance of operational risk including who owns it, what it owns, and how issues should be
escalated
III. The main activities and elements that are managed by the operational risk function
- A. I, III
- B. I, II, III
- C. II, III
- D. I, II
Answer: B
NEW QUESTION 148
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