GARP GARP Certifications 2016-FRR Questions & Answers

• Question 181:

  Which type of risk does a bank incur on loans that are in the "pipeline", i.e loans that are in the process of origination but not yet originated?

  A. Interest rate risk and credit risk

  B. Interest rate risk only

  C. Credit Risk only

  D. The bank does not incur any risk since the loan is not yet originated

  Correct Answer: B

• Question 182:

  Which of the following statements describes correctly the objectives of position mapping?

  I. For VaR calculations, mapping converts positions based on their deltas to underlying factor risks.

  II. Position mapping models risk factors affecting the value of a position as combination of core risk factors used in the VaR calculations.

  III. Position mapping groups similar positions into one group based on the closeness of their respective VaR.

  IV.

  Position mapping reduces the possible number of risk factors to a computationally manageable level.

  A.

  I and II

  B.

  II and IV

  C.

  I, II and III

  D.

  II, III, and IV

  Correct Answer: B

• Question 183:

  Which one of the following statements is an advantage of using implied volatility as an input when calculating VaR?

  A. Implied volatility assumes volatilities are constant which makes it easy to implement in models.

  B. Current market data is used to determine implied volatilities, which makes them forward looking measures

  C. Implied volatilities are better at predicting actual volatilities

  D. Loss probabilities from the standard normal distribution are used to compute implied volatilities, which makes it easy to compute the.

  Correct Answer: B

• Question 184:

  Which one of the following four statements represents the advantages of the historical sim-ulation method when calculating VaR?

  A. Solve the problem caused by incorrectly assuming that asset returns are normally distributed.

  B. Rely on current market data to describe the distribution of returns and determine volatilities.

  C. Are believed to be superior in accuracy predicting future levels of realized volatility.

  D. Are only using loss probabilities that can be found in tables of the standard normal distribution.

  Correct Answer: A

• Question 185:

  Which of the following statements represents a methodological difference between variance-covariance and full revaluation methods?

  A. Variance-covariance approach provides computational advantages over the full revaluation approach.

  B. Variance-covariance approach computes the VAR for each position separately, while the full revaluation method computes the VAR on a portfolio basis.

  C. Variance-covariance approach prices positions more accurately than the full revaluation approach.

  D. Variance-covariance approach uses only historic data to compute the covariance matrix.

  Correct Answer: A

• Question 186:

  Returns on two assets show very strong positive linear relationship. Their correlation should be closest to which of the following choices?

  A. 15%

  B. 45%

  C. 60%

  D. 100%

  Correct Answer: D

• Question 187:

  A multinational bank just bought two bonds each worth $10,000. One of the bonds pays a fixed interest of 5% semi-annually and the other pays LIBOR semi-annually. The six month LIBOR is at 5% currently. The risk manager of the bank is concerned about the sensitivity to interest rates. Which of the following statements are true?

  A. The price of the bond paying floating interest is more sensitive to interest rates than the bond paying fixed interest.

  B. The price of the bond paying fixed interest is more sensitive to interest rates than the bond paying floating interest.

  C. Both bond prices are equally sensitive to interest rates.

  D. The given information is not enough to determine the sensitivity of the bond prices.

  Correct Answer: B

• Question 188:

  What is a common implicit assumption that is made when computing VaR using parametric methods?

  A. The expected returns are constant, but the standard deviation changes over time.

  B. The standard deviations of returns are constant, but the mean changes over time.

  C. The mean of and the standard deviations of returns are both constant.

  D. The mean and standard deviation of returns change periodically in response to crises.

  Correct Answer: C

• Question 189:

  The exercise for an American type option prior to expiration day is virtually certain in the following case:

  A. In the event of a high dividend for an in-the-money call option

  B. In the event of a high dividend for an in-the-money put option

  C. In the event of a low dividend for an in-the-money call option

  D. In the event of a low dividend for an in-the-money put option

  Correct Answer: A

• Question 190:

  Interest rate swaps are:

  A. Exchange traded derivative contracts that allow banks to take positions in future interest rates.

  B. OTC derivative contracts that allow banks and customers to obtain the risk/reward profile of long-term interest rates without relying on long-term funding.

  C. Exchange traded derivative contracts that allow banks and customers to obtain the risk/reward profile of long-term interest rates without having to use long-term funding.

  D. OTC derivative contracts that allow banks to take positions in series of future exchange rates.

  Correct Answer: B