GARP GARP Certifications 2016-FRR Questions & Answers

• Question 171:

  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?

  A. Modified duration.

  B. Yield curve

  C. Convexity.

  D. Credit spread.

  Correct Answer: C

• Question 172:

  In analyzing the historical performance of a financial product, you are concerned about "fat tails", the probability of extreme returns compared to realized returns. Which of the following measures should you use to determine if the product return distribution of the product has "fat tails"?

  A. Mean

  B. Standard deviation

  C. Skewness

  D. Kurtosis

  Correct Answer: D

• Question 173:

  Which one of the following four statements represents a possible disadvantage of using total return swap to manage equity portfolio risks?

  A. Similar to the formal portfolio rebalancing strategy, the total return receiver needs to modify the size of the trading position.

  B. The total return receiver needs to incur the transaction costs of establishing an equity position.

  C. Similar to an equity forward position, the total return receiver does not get paid the dividend.

  D. The total return receiver does not have any voting rights.

  Correct Answer: D

• Question 174:

  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?

  A. Oil

  B. Natural Gas

  C. Grain

  D. Gold

  Correct Answer: D

• Question 175:

  Which of the following statements about the option gamma is correct? Gamma is the: I. Second derivative of the option value with respect to the volatility.

  II. Percentage change in option value per percentage change in the price of the underlying instrument.

  III. Second derivative of the value function with respect to the price of the underlying instrument.

  IV.

  Rate of change of the option delta with respect to changes in the underlying price.

  A.

  I only

  B.

  II and III

  C.

  III and IV

  D.

  II, III, and IV

  Correct Answer: C

• Question 176:

  Which one of the four following statements about back testing the VaR models is correct? Back testing requires

  A. Plotting VaR forecasts against the proportion of daily losses exceeding the average loss.

  B. Comparing the predictive ability of VaR on a daily basis to the realized daily profits and losses.

  C. Plotting the daily profit and losses along with the ranges predicted by VaR models

  D. Determining the proportion of daily profits exceeding those predicted by VaR.

  Correct Answer: B

• Question 177:

  On January 1, 2010 the TED (treasury-euro dollar) spread was 0.9%, and on January 31, 2010 the TED spread is 0.4%. As a risk manager, how would you interpret this change?

  A. The decrease in the TED spread indicates a decrease in credit risk on interbank loans.

  B. The decrease in the TED spread indicates an increase in credit risk on interbank loans.

  C. Increase in interest rates on both interbank loans and T-bills.

  D. Increase in credit risk on T-bills.

  Correct Answer: A

• Question 178:

  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

  A.

  I, II

  B.

  II, III

  C.

  III, IV

  D.

  I, II, III, IV

  Correct Answer: D

• Question 179:

  Banks duration match their assets and liabilities to manage their interest risk in their banking book. Currently, the bank's assets and liabilities both have a duration of 10. To hedge against the risk of decreasing interest rates, the bank should:

  I. Increase the duration of the liabilities

  II. Increase the duration of the assets

  III. Decrease the duration of the liabilities

  IV.

  Decrease the duration of the assets

  A.

  I only.

  B.

  I and II.

  C.

  II and III.

  D.

  I and IV

  Correct Answer: D

• Question 180:

  The probability of default on a bond is 3%, and in the case of default, investors expect to lose 70% of their investment. The bond's risk premium is 1.9%. The expected loss and the credit spread of the bond are, respectively:

  A. 1.6% and 2.5%.

  B. 2.1% and 3%.

  C. 1.6% and 3.5%.

  D. 2.1% and 4%.

  Correct Answer: D