GARP GARP Certifications 2016-FRR Questions & Answers

• Question 141:

  A bank considers issuing new capital to increase its Tier 1 capital levels. Which of the following financial instruments would most likely to be considered?

  A. Long-term and callable debt convertible to equity

  B. Convertible preferred shares

  C. Short-term callable debt

  D. Short-term debt convertible to non-cumulative preferred shares

  Correct Answer: B

• Question 142:

  To estimate the required risk-adjusted rate of return on a highly volatile energy stock, a risk associate

  compiled the following statistics:

  Risk-free rate = 5%

  Beta = 2.5

  Market Risk = 8%

  Using the Capital Asset Pricing Model, she estimates the rate of return to be equal:

  A. 10%

  B. 15%

  C. 25%

  D. 40%

  Correct Answer: C

• Question 143:

  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. Obtain a stronger credit rating so that the bank could borrow at a cheaper rate.

  C. Set up a marketing team to sell individual loans to investors.

  D. Merge with another bank.

  Correct Answer: A

• Question 144:

  Which one of the following four statements describes the advantage of using delta-gamma method of mapping options positions over delta-normal method?

  Delta-gamma method

  A. Converts options into underlying factor risks according to their deltas and the gammas to those factors.

  B. Fully captures option price risk, particularly for extreme price movements.

  C. Overstates the risk of long option positions, but understate the risk of short option positions.

  D. Approximates more accurately the non-linear relationship of option values and risk.

  Correct Answer: D

• Question 145:

  Bank customers traditionally trade commodity futures with banks in order to achieve which of the following goals?

  I. To express their own price views

  II. To reverse undesired short-term exposure created from fixed commodity sales

  III.

  To reach short- term budgetary targets

  A.

  I

  B.

  II

  C.

  I, III

  D.

  I, II, III

  Correct Answer: D

• Question 146:

  10 basis points are equal to:

  A. 10%

  B. 1%

  C. 0.1%

  D. 0.01%

  Correct Answer: C

• Question 147:

  James Johnson manages a bond portfolio with all investment grade bonds. Adding which of the following bonds would minimize the credit risk of his portfolio?

  A. A

  B. B

  C. C

  D. D

  Correct Answer: A

• Question 148:

  Which one of the following is a reason for a bank to keep a commercial loan in its portfolio until maturity?

  I. Commercial loans usually have attractive risk-return profile.

  II. Commercial loans are difficult to sell due to non standard features.

  III. Commercial loans could be used to maintain good relations with important customers.

  IV.

  The credit risk in commercial loans is low.

  A.

  I, II and III

  B.

  III and IV

  C.

  II and IV

  D.

  IV only

  Correct Answer: A

• Question 149:

  In additional to the commodity-specific risks, which of the following risks represent the main commodity derivative risks?

  I. Basis

  II. Term

  III. Correlation

  IV.

  Seasonality

  A.

  I, II

  B.

  II, III

  C.

  I, IV

  D.

  I, II, III, IV

  Correct Answer: D

• Question 150:

  The skewness of ABC company's stock returns equal -1.5. What is the correct interpretation of this?

  A. It indicates higher relative probability of negative returns compared to estimates derived from a normal distribution.

  B. It indicates that the returns are indeed normally distributed.

  C. It indicates lower probability of extreme negative events compared to the normal distribution.

  D. It indicates higher relative probability of extreme events than non-extreme events compared to estimates from a normal distribution.

  Correct Answer: A