GARP GARP Certifications 2016-FRR Questions & Answers

• Question 111:

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

  A. Market, credit and operational risks are perfectly correlated which justifies adding up their associated economic capital.

  B. In practice, it is very difficult to estimate the correlations between the risk categories and as a result a conservative estimate is obtained by adding up the risks.

  C. Regulators require banks to add up economic capital across market, credit and operational risks.

  D. Since market, credit and operational risks are significantly different measures of risk, there is no

  diversification benefit to computing economic capital to banks across types of risks.

  Correct Answer: B

• Question 112:

  A. 10,000 shares of IBM worth $10,000,000.

  B. $10,000,000 loan to IBM worth $9,800,000.

  C. $10,000,000 bond issued by IBM worth $11,000,000.

  D. 300,000 options on IBM shares worth $10,000,000.

  Correct Answer: B

• Question 113:

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

  A. Legal risk

  B. Strategic risk

  C. Reputational risk

  D. Geopolitical risk

  Correct Answer: A

• Question 114:

  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. Technical trading

  B. Contrarian trading

  C. Black box trading

  D. Market timing trading

  Correct Answer: D

• Question 115:

  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.

  I and II

  B.

  II and IV

  C.

  I, II and III

  D.

  II, III, and IV

  Correct Answer: A

• Question 116:

  Which one of the following four statements regarding the current value of a transaction and its purposes is INCORRECT?

  A. For cash settled instrument the final market value is used to settle the transaction with the counterparty

  B. Profit and loss calculations are made by comparing the current values to the intrinsic values.

  C. Margin call by futures exchanges are based on the current market value.

  D. Counterparty credit risk calculations are made by analyzing the current values of all deals with the same counterparty.

  Correct Answer: B

• Question 117:

  Which of the following statements describes a bank's reasons to set risk limits?

  I. To control and minimize a bank's current risk exposure.

  II. To predict future risks.

  III. To allocate risks to business units.

  IV.

  To keep risk within tolerance levels.

  A.

  I and II

  B.

  III and IV

  C.

  I, II, and III

  D.

  I, III, and IV

  Correct Answer: D

• Question 118:

  Which one of the four following statements describes a specific characteristic of risk and control self-assessments (RCSA) which distinguishes it from both control assessments and risk and control assessments?

  A. RCSA is conducted by a third party, perhaps audit, compliance or the Sarbanes-Oxley team.

  B. RCSA tests a control's effectiveness against set criteria and issues a pass/fail or level of effectiveness score.

  C. RCSA is subjective by nature.

  D. RCSA includes a risk assessment in addition to a control assessment.

  Correct Answer: C

• Question 119:

  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 credit risk.

  B. This transaction eliminates counterparty risk.

  C. This transaction eliminates market risk.

  D. This transaction eliminates operational risk.

  Correct Answer: C

• Question 120:

  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

  A.

  I, IV

  B.

  II, III

  C.

  II, IV

  D.

  I, II, III

  Correct Answer: D