GARP Financial Risk and Regulation 2016-FRR Questions & Answers

• Question 11:

  Which one of the following four examples would not be considered a typical source of market risk?

  A. Unexpected changes in the term structure of interest rates.

  B. The JPY depreciating against the USD.

  C. Increased default rate on commercial mortgages due to higher interest rates.

  D. Changes in the oil price due to the discovery of new oil fields.

  Correct Answer: C

• Question 12:

  A trader for EtaBank wants to take a leveraged position in Collateralized Debt Obligations. If these CDOs can be used in a repo transaction at a 20% haircut, what is the maximum leverage factor for a transaction with the CDOs?

  A. 0.8

  B. 1.5

  C. 3

  D. 5

  Correct Answer: D

• Question 13:

  The risk management department of VegaBank wants to set guidelines on commodity carry trades. Which of the following strategies should she pursue to achieve a profitable commodity carry?

  I. Buy short-term commodity futures and sell longer-dated position when the curve is in contango.

  II. Buy short-term commodity futures and sell longer-dated position when the curve is in backwardation.

  III. Buy long-term commodity futures and sell shorter-dated positions when the curve is in contango.

  IV.

  Buy long-term commodity futures and sell shorter-dated positions when the curve is in backwardation.

  A.

  I, II

  B.

  I, III

  C.

  II, IV

  D.

  I, IV

  Correct Answer: D

• Question 14:

  The Sarbanes-Oxley Act includes one of the following four requirements for financial institutions in the United States:

  A. Risk and control requirements

  B. Market discipline requirements

  C. Capital allocation requirements

  D. Regulatory response to systemic risk requirements

  Correct Answer: A

• Question 15:

  In hedging transactions, derivatives typically have the following advantages over cash instruments:

  I. Lower credit risk

  II. Lower funding requirements

  III. Lower dealing costs

  IV.

  Lower capital charges

  A.

  I, II

  B.

  I, III

  C.

  II, IV

  D.

  I, II, III, IV

  Correct Answer: D

• Question 16:

  Gamma Bank has a significant number of retail customers and finds its balance sheet shape and structure difficult to manage. Which one of the following characteristics of a bank with wide retail operations is INCORRECT?

  A. Banks with a wide retail base are typically driven by contractual obligations and not simply relationship considerations.

  B. Attracting and retaining customers often involves offering retail products whose features are different from wholesale market products.

  C. Pricing of retail products often has more to do with marketing considerations rather than prevailing market price.

  D. The way retail customers behave in relation to the retail banking products they hold often results in the apparent contractual obligation of the parties providing a poor description of the actual nature of the obligations.

  Correct Answer: A

• Question 17:

  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, what is the net interest income of Mega Bank?

  A. $2 million per year

  B. $5 million per year

  C. $9 million per year

  D. $12 million per year

  Correct Answer: C

• Question 18:

  Which one of the following four statements about hedging is INCORRECT?

  A. Traders can hedge their risks by taking an appropriate position in the underlying instrument.

  B. Traders can hedge their portfolio risks by taking a position in a different instrument.

  C. For a fully hedged portfolio, any changes in markets prices will typically produce significant changes in the market value of the portfolio.

  D. A large number of hedge positions is generally required to match the underlying transaction completely.

  Correct Answer: C

• Question 19:

  Which of the activities represent examples of market manipulation?

  A. Market gap

  B. Crowded trades

  C. Short squeeze

  D. Stop-loss order

  Correct Answer: C

• Question 20:

  A risk associate evaluating his current portfolio of assets and liabilities wants to determine how sensitive this portfolio is to changes in interest rates. Which one of the following four metrics is typically used for this purpose?

  A. Modified duration

  B. Duration of default

  C. Effective duration

  D. Macaulay duration

  Correct Answer: A