GARP GARP Certifications 2016-FRR Questions & Answers

• Question 211:

  Which of the following statements defines Value-at-risk (VaR)?

  A. VaR is the worst possible loss on a financial instrument or a portfolio of financial instruments over a given time period.

  B. VaR is the minimum likely loss on a financial instrument or a portfolio of financial instruments with a given degree of probabilistic confidence.

  C. VaR is the maximum of past losses over a given period of time.

  D. VaR is the maximum likely loss on a financial instrument or a portfolio of financial instruments over a given time period with a given degree of probabilistic confidence.

  Correct Answer: D

• Question 212:

  James Johnson bought a 3-year plain vanilla bond that has yield of 4.7% and 4% coupon paid annually, for $87,139. Macauley's duration of the bond is 2.94 years. Rate volatility is 20% of the yield. The bond's annualized volatility is therefore:

  A. 3.15%.

  B. 2.90%.

  C. 2.81%.

  D. 2.64%.

  Correct Answer: D

• Question 213:

  Which one of the following four statements best describes challenges of delta-normal method of mapping options positions?

  Delta-normal method understates

  A. Risks of long and short positions for both calls and puts.

  B. Risks of long option positions for puts and overstates risks of short option positions for calls.

  C. Risks of long option positions for calls and overstates risks of short option positions for puts.

  D. Risks of short option positions and overstates risks of long option positions for both calls and puts.

  Correct Answer: D

• Question 214:

  James Arthur is a customer of a bank who has taken a floating rate loan from the bank. He is concerned that the rates may rise in the future increasing his payment amount. Which of the following instruments should he buy to hedge against the rise in interest rates?

  A. Interest rate floor

  B. Interest rate cap

  C. Index amortizing swap

  D. Interest rate swap that receives fixed and pays floating

  Correct Answer: B

• Question 215:

  Which of the following statements about parametric and nonparametric methods for calculating Value-atrisk is correct?

  A. Parametric methods generally assume returns are normally distributed, and non-parametric methods make no assumptions about return distributions.

  B. Parametric methods make no assumptions about return distributions, and non-parametric methods assume returns are normally distributed.

  C. Both parametric and nonparametric methods assume returns are normally distributed.

  D. Both parametric and nonparametric methods make no assumptions about return distributions.

  Correct Answer: A

• Question 216:

  Over a long period of time DeltaBank has amassed a large equity option position. Which of the following risks should be considered in this transaction?

  I. Counterparty risk on long OTC option positions ICounterparty risk on short OTC option positions

  III. Counterparty risk on long exchange-traded option positions

  IV.

  Counterparty risk on short exchange-traded option positions

  A.

  I

  B.

  I, II

  C.

  II, III

  D.

  II, III, IV

  Correct Answer: A

• Question 217:

  Gamma Bank estimates its monthly portfolio volatility at 5%.The portfolio's annual volatility is closest to which of the following?

  A. 8%

  B. 17%

  C. 30%

  D. 35%

  Correct Answer: B

• Question 218:

  Floating rate bonds typically have ________ duration which means they have ________ sensitivity to interest rate changes.

  A. long, small

  B. long, high

  C. short, high

  D. short, small

  Correct Answer: D

• Question 219:

  What do option deltas measure?

  A. The rate of change of the option value with respect to changes in volatility of the underlying instrument.

  B. The sensitivity of the option value to changes risk free interest rate.

  C. The rate of change of the option value with respect to changes in the price of the underlying instrument.

  D. The sensitivity of the option value to the passage of time.

  Correct Answer: C

• Question 220:

  A risk associate is trying to determine the required risk-adjusted rate of return on a stock using the Capital Asset Pricing Model. Which of the following equations should she use to calculate the required return?

  A. Required return = risk-free return + beta x market risk

  B. Required return = (1-risk free return) + beta x market risk

  C. Required return = risk-free return + beta x (1 ?market risk)

  D. Required return = risk-free return + 1/beta x market risk

  Correct Answer: A