GARP GARP Certifications 2016-FRR Questions & Answers

• Question 201:

  Alpha Bank estimates its 1-month, 95% VaR is 30 million EUR. This means that in the next month, there is a

  A. 95% chance that AlphaBank can lose more than 30 million EUR.

  B. 95% chance that AlphaBank will lose exactly 30 million EUR.

  C. 95% chance that AlphaBank can lose at most 30 million EUR.

  D. 95% chance that AlphaBank will at least lose 30 million EUR.

  Correct Answer: C

• Question 202:

  What are some of the drawbacks of correlation estimates? Which of the following statements identifies major problems with correlation calculations?

  I. Correlation estimates are not able to capture increases in factor co-movements in extreme market scenarios.

  II. Correlation estimates tend to be unstable.

  III. Historical correlations may not forecast future correlations correctly.

  IV.

  Correlation estimates assume normally distributed returns.

  A.

  I and II

  B.

  I and IV

  C.

  I, II and III

  D.

  II, III, and IV

  Correct Answer: C

• Question 203:

  A proprietary trading desk for a large bank hedges an Arab light OTC forward position with Brent crude oil forwards. The trading desk benefits from using the most liquid OTC market to hedge, the market for the Brent crude, but hedging its using the Brent contract, exposes itself to the following type of risk:

  A. Basis risk

  B. Term risk

  C. Correlation risk

  D. Seasonality risk

  Correct Answer: A

• Question 204:

  Jack Richardson wants to compute the 1-month VaR of a portfolio with a market value of USD 10 million, with an average monthly return of 1% and average monthly standard deviation of 1.5%. What is the portfolio VaR at 99% confidence level?

  Probability Cumulative Normal distribution

  0.90 1.282

  0.91 1.341

  0.92 1.405

  0.93 1.476

  0.94 1.555

  0.95 1.645

  0.96 1.751

  0.97 1.881

  0.98 2.054

  0.99 2.326

  A. 164,500

  B. 232,600

  C. 246,750

  D. 348,900

  Correct Answer: D

• Question 205:

  Short-selling is typically associated with the following risks:

  I. Potential for extreme losses

  II. Risk associated with the availability of shares to borrow

  III.

  Market behavior risk IV. Liquidity risk

  A.

  I, II

  B.

  I, III

  C.

  II, IV

  D.

  I, II, III, IV

  Correct Answer: D

• Question 206:

  A corporate bond gives a yield of 6%. A same maturity government bond yields 2%. The probability of the corporate bond defaulting is 2.5%. In case of default, investors expect to lose 60% of their investment. The risk premium in the credit spread is:

  A. 1.5%

  B. 4.5%

  C. 2.5%

  D. 0.5%

  Correct Answer: C

• Question 207:

  To protect the oranges harvest price level, a farmer needs to take a hedge position. Provided that he produces the amount he hedged, which one of the following four strategies will allow the farmer to accomplish his goal?

  A. Going short on oranges futures contracts

  B. Going long on oranges futures contacts

  C. Entering into a customized forward contract with the bank

  D. Negotiating a credit line facility

  Correct Answer: A

• Question 208:

  Unico Delta stock is trading at $20 per share, its annualized dividend yield is 5% and the 12-month LIBOR is 3%. Given these statistics, the 12-month futures contact will trade at:

  A. $10.08

  B. $20.04

  C. $30.04

  D. $40.08

  Correct Answer: B

• Question 209:

  Which one of the following four statements about preferred shares is INCORRECT?

  A. Preferred shares refer to a class of securities that is a cross between equity and debt.

  B. Preferred shares represent residual of a corporation after its other liabilities have been paid.

  C. Preferred shares are subordinated to debt.

  D. Preferred shares can be perpetual or have maturities far exceeding debt maturities.

  Correct Answer: B

• Question 210:

  Since most consumers of natural gas do not have the ability to store it, they contract with gas suppliers to receive a flow of natural gas equal to a specific number of MMBT's per day (MMBT is millions of British Termal Units, the unit in which gas futures are quoted on the U.S. markets). To protect against price increases with a bank, the natural gas consumer, concerned with the average price over the course of the month, will use the following contracts:

  A. American options

  B. Asian options

  C. Compound options

  D. Flexible volume options

  Correct Answer: B