[2024] 2016-FRR All-in-One Exam Guide Practice To your 2016-FRR Exam!
Preparations of 2016-FRR Exam 2024 Financial Risk and Regulation Unlimited 344 Questions
GARP 2016-FRR Certification Exam is offered by the Global Association of Risk Professionals (GARP), a leading provider of risk management education and certification programs. 2016-FRR exam is based on the latest industry standards and practices, and is designed to provide candidates with the knowledge and skills necessary to succeed in today's fast-paced and ever-changing financial industry.
NEW QUESTION # 100
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. $180 million
- B. $200 million
- C. $150 million
- D. $100 million
Answer: B
Explanation:
* Net Interest Income Calculation:
* As previously calculated, the net interest income is $9 million per year.
* Present Value of Perpetuity Formula:
* Present Value (PV) = Net Interest Income / Discount Rate
* PV = $9 million / 0.05 = $180 million
Correction:
* The net interest income was stated as $9 million earlier, but here, let's verify this calculation:
* Interest income from $120 million at 10% = $12 million
* Interest expense on $100 million at 3% = $3 million
* Net interest income = $12 million - $3 million = $9 million
* Correct Present Value Calculation:
* PV = $9 million / 0.05 = $180 million
Final Verification:
* The previous net interest income used is correct and the final PV calculation should stand corrected as per the perpetual formula:
* PV = $9 million / 0.05 = $180 million, confirming the right choice should be $180 million.
ReferencesSource: How Finance Works
NEW QUESTION # 101
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?
- A. 33%
- B. 17.5%
- C. 25%
- D. 12%
Answer: B
Explanation:
To calculate the Risk-Adjusted Return on Capital (RAROC), we use the formula:
RAROC=Net IncomeValue at Risk (VaR)RAROC=Value at Risk (VaR)Net Income
Here, the net income from the transaction is the fees minus the financing costs:
Net Income=$2,000,000$600,000=$1,400,000Net Income=$2,000,000$600,000=$1,400,000 The VaR is given as $8,000,000. So, the RAROC is:
RAROC=$1,400,000$8,000,000=0.175 or 17.5%RAROC=$8,000,000$1,400,000=0.175 or 17.5%
NEW QUESTION # 102
Which one of the following four variables of the Black-Scholes model is typically NOT known at a point in
time?
- A. The future volatility of the exchange rates
- B. The time to maturity
- C. The underlying relevant exchange rates
- D. The underlying interest rates
Answer: A
NEW QUESTION # 103
Which one of the following four statements correctly identifies the Basel II Accord's definition of operational risk?
- A. Operational risk is the risk of loss resulting from inadequate or failed processes, people and systems or from external events.
- B. Operational risk is all the risk that is not captured by market and credit risks.
- C. Operational risk is a form of risk that summarizes the risks a company or firm undertakes when it attempts to operate within a given field or industry.
- D. Operational risk is a risk arising from execution of a company's business functions.
Answer: A
Explanation:
The Basel II Accord defines operational risk as the risk of loss resulting from inadequate or failed processes, people, and systems, or from external events. This definition encompasses a wide range of potential risks that banks must manage.
NEW QUESTION # 104
Suppose that a regulator deems all corporate debt to have the same risk level. Which of the following behavior of banks would be an example of regulatory arbitrage?
- A. Banks decrease their exposure to corporate debt.
- B. Banks increase their exposure to corporate debt.
- C. Banks shift their exposure to less risky corporate debt.
- D. Banks shift their exposure to more risky corporate debt.
Answer: D
Explanation:
Regulatory arbitrage occurs when banks or other financial institutions exploit differences in regulations to circumvent unfavorable regulation without actually violating the regulation. If a regulator deems all corporate debt to have the same risk level, banks can exploit this by shifting their exposure to more risky corporate debt.
This is because they are required to hold the same amount of capital against the riskier debt as they would against safer debt, which provides them with higher returns for the same capital requirement, thereby engaging in regulatory arbitrage.
NEW QUESTION # 105
Mega Bank holds a $250 million mortgage loan portfolio, which reprices every 5 years at LIBOR + 10%. The
bank also has $150 million in deposits that reprices every month at LIBOR + 3%. What is the amount of Mega
Bank's rate sensitive assets?
- A. $200 million
- B. $250 million
- C. $150 million
- D. $100 million
Answer: B
NEW QUESTION # 106
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?
- A. Importance
- B. Relevance
- C. Security
- D. Independence
Answer: C
NEW QUESTION # 107
Which one of the following four features is NOT a typical characteristic of futures contracts?
- A. Fixed notional amount per contract
- B. Fixed dates for delivery
- C. Traded Over-the-counter only
- D. Daily margin calls
Answer: C
NEW QUESTION # 108
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 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 and sells the real at
this quoted price. Then the bank immediately buys the real at the market rate and completes foreign exchange
matched transaction. What is the impact of this transaction on the bank's risk profile?
- A. This transaction eliminates market risk.
- B. This transaction eliminates operational risk.
- C. This transaction eliminates credit risk.
- D. This transaction eliminates counterparty risk.
Answer: A
NEW QUESTION # 109
Which of the following statements about a bank's behavior regarding Risk Adjusted Return on Capital (RAROC) is correct?
I. A bank should always seek to maximize their overall RAROC.
II. A bank should consider investing in a business even with negative RAROC if it increases the RAROC of the bank as a whole.
III. A bank should minimize its overall RAROC by controlling the absolute and relative amount of risk of its businesses.
IV. A bank should maximize its RAROC by always investing in a new business that maximizes the RAROC for that business unit.
- A. II and IV
- B. II, III, and IV
- C. I, II and III
- D. I and II
Answer: D
Explanation:
A bank's behavior regarding RAROC should consider:
* Maximizing overall RAROC: This ensures that the bank is efficiently managing its capital and generating the highest possible returns relative to the risks taken.
* Investing in a business even with negative RAROC if it increases the RAROC of the bank as a whole: This can be beneficial if the investment contributes to the diversification or other strategic goals that enhance the bank's overall risk-return profile.
These principles guide banks in optimizing their capital allocation and improving their financial performance.
NEW QUESTION # 110
Which one of the following four statements presents a challenge of using external loss databases in the operational risk framework?
- A. If the external data is gathered from news sources, it may only reflect events that are interesting to the press.
- B. External events are usually not of interest to senior management.
- C. They provide a source of data on what operational loss events will occur.
- D. Use of benchmarked data reflects similar data collection standards.
Answer: A
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 # 111
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.
- A. 40%
- B. 50%
- C. 30%
- D. 60%
Answer: B
Explanation:
* T Identify the regulation:
* Regulation T of the Federal Reserve Bank governs the amount of credit that brokers and dealers can extend to investors for the purchase of securities.
* Borrowing limit:
* Regulation T allows investors to borrow up to 50% of the value of the securities from their brokers.
* Explanation:
* This regulation is in place to limit the amount of leverage investors can use when buying securities, aiming to reduce the risk of significant market volatility and potential defaults.
References:
* From the search results and standard financial regulations knowledge, the limit specified in Regulation T is consistent with 50% of the value of the securities.
opic 3, Volume C
NEW QUESTION # 112
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?
- A. The option positions hedge the forward position by 75%.
- B. The option positions hedge the forward position by 50%.
- C. The option positions hedge the forward position by 100%.
- D. The options positions hedge the forward position by 25%.
Answer: B
Explanation:
The risk manager has a long forward position of USD 1 million. The options portfolio decreases by JPY 0.50 for every JPY 1 increase in the forward position. This indicates that the options provide a hedge that is half the size of the forward position because a JPY 1 increase in the forward position is offset by only JPY 0.50 from the options. Thus, the options positions hedge the forward position by 50%.
NEW QUESTION # 113
Which one of the following four alternatives lists the three most widely traded currencies on the global foreign
exchange market, as of April 2007, in the decreasing order of market share? EUR is the abbreviation of the
European euro, JPY is for the Japanese yen, and USD is for the United States dollar, respectively.
- A. USD, JPY, EUR
- B. EUR, USD, JPY
- C. USD, EUR, JPY
- D. JPY, EUR, USD
Answer: C
NEW QUESTION # 114
Which of the following measure describes the symmetry of a statistical distribution?
- A. Mean
- B. Standard deviation
- C. Kurtosis
- D. Skewness
Answer: D
Explanation:
Skewness measures the asymmetry of the return distribution. Positive skewness indicates a distribution with a longer or fatter right tail, while negative skewness indicates a distribution with a longer or fatter left tail. It is the correct measure for describing the symmetry of a statistical distribution.
NEW QUESTION # 115
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?
- A. $1,050
- B. $550
- C. $300
- D. $750
Answer: D
Explanation:
The same approach as question 29 is applied here but focuses on the straightforward default calculation without collateral consideration:
* Loan Amount (EAD): $100,000
* Loss Given Default (LGD): 50% of EAD =50%×$100,000=$50,000LGD=50%×$100,000=$50,000
* Annual Expected Default Rate: 2%
* Expected Loss: Annual Expected Default Rate × LGD
Expected Loss=2%×$50,000=0.02×50,000=$1,000Expected Loss=2%×$50,000=0.02×50,000=$1,000 Hence, the expected loss due to default is $1,000 without considering the collateral. If considering the collateral explicitly, it would be slightly different as the collateral reduces the direct exposure.
NEW QUESTION # 116
Counterparty credit risk assessment differs from traditional credit risk assessment in all of the following features EXCEPT:
- A. Counterparty risk creates a two-way credit exposure
- B. Exposure at default may be negatively correlated to the probability of default
- C. Exposures can often be netted
- D. Collateral arrangements are typically static in nature
Answer: D
Explanation:
Counterparty credit risk assessment differs from traditional credit risk assessment primarily in the features of exposures being netted, the possibility of negative correlation between exposure at default and the probability of default, and the two-way nature of credit exposure. Collateral arrangements in counterparty credit risk management are typically dynamic, not static, as they can change based on market conditions and the credit quality of the counterparty. Therefore, the feature that does not differ is that collateral arrangements are typically static in nature.
NEW QUESTION # 117
Which one of the four following aspects of legal risk is NOT included in the Basel II Accord?
- A. Punitive damages resulting from supervisory actions
- B. Negative publicity resulting from reputational damages
- C. Exposure to fines
- D. Private settlements
Answer: B
NEW QUESTION # 118
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 # 119
Which of the following bank events could stress the bank's liquidity position?
I. Maturing of bank debt
II. Repurchase agreements
III. Futures margins
IV. Staff turnover
- A. III, IV
- B. I, II
- C. IV
- D. I, II and III
Answer: D
NEW QUESTION # 120
Which one of the following four examples would not be considered a typical source of market risk?
- A. Increased default rate on commercial mortgages due to higher interest rates.
- B. The JPY depreciating against the USD.
- C. Changes in the oil price due to the discovery of new oil fields.
- D. Unexpected changes in the term structure of interest rates.
Answer: A
NEW QUESTION # 121
Which of the activities represent examples of market manipulation?
- A. Short squeeze
- B. Crowded trades
- C. Stop-loss order
- D. Market gap
Answer: A
NEW QUESTION # 122
Altman's Z-score incorporates all the following variables that are predictive of bankruptcy EXCEPT:
- A. Sales to total assets
- B. Return on total assets
- C. Return on equity
- D. Equity to debt
Answer: C
NEW QUESTION # 123
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?
- A. 7%
- B. 25%
- C. 2%
- D. 43%
Answer: A
Explanation:
During the second quarter of 2009, transactions in foreign exchange derivative contracts comprised approximately 7% of all types of derivative transactions between financial institutions in the United States.
This data point reflects the proportion of foreign exchange derivatives within the broader context of derivative transactions during that period.
NEW QUESTION # 124
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