GARP GARP Certifications 2016-FRR Questions & Answers

• Question 221:

  To estimate the forward price of oil, a commodity trader would most likely use the following pricing relationship:

  A. Oil forward price = Expected future oil price ?Oil market risk premium

  B. Oil forward price = Expected future oil price ?storage cost + Oil market risk premium

  C. Oil forward price = Expected future oil price ?Oil storage cost + (1 + Oil market risk premium)

  D. Oil forward price = Expected future oil price ?Oil storage cost + (1 - Oil market risk premium)

  Correct Answer: A

• Question 222:

  Which one of the four following activities is NOT a component of the daily VaR computing process?

  A. Updating individual risk factor models.

  B. Computing portfolio risk by delta-normal or delta-gamma method.

  C. Updating factor interrelationships.

  D. Producing the VaR report.

  Correct Answer: B

• Question 223:

  A bank customer can use either a plain vanilla option or an option contract with volumetric flexibility to reduce the following risks:

  I. Market Risk

  II. Basis Risk

  III.

  Operational Risk

  A.

  I

  B.

  II

  C.

  I, II

  D.

  II, III

  Correct Answer: C

• Question 224:

  Which of the following risk measures are based on the underlying assumption that interest rates across all maturities change by exactly the same amount?

  I. Present value of a basis point.

  II. Yield volatility.

  III. Macaulay's duration.

  IV.

  Modified duration.

  A.

  I and II

  B.

  I, II, and III

  C.

  I, III, and IV

  D.

  I, II, III, and IV

  Correct Answer: C

• Question 225:

  Forward rate agreements (FRA) are:

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

  B. OTC derivative contracts that allow banks and customers to obtain the risk/reward profile of long-term interest rates by relying on long-term funding.

  C. Exchange traded derivative contracts that allow banks to take positions in future exchange rates.

  D. OTC derivative contracts that allow banks to take positions in forward interest rates.

  Correct Answer: D

• Question 226:

  James manages a loans portfolio. He has to evaluate a large number of loans to choose which of them he will keep in the bank's books. Which one of the following four loans would he be most likely to sell to another bank?

  A. Loan to a major customer who is also a director and a large owner.

  B. Loan made to a highly risky borrower that is fully collateralized by the customer's deposits.

  C. Loan to a commercial customer with a good payment history and collateral.

  D. Loan to a borrower who has been delinquent previously, but now is performing as agreed.

  Correct Answer: C

• Question 227:

  A corporate bond was trading with 2%probability of default and 60% loss given default. Due to the credit crisis the probability of default increased to 10% and the loss given default increased to 100%. Assuming that the risk premium remained the same how did the credit spread change?

  A. Increased by 1120 basis points

  B. Increased by 880 basis points

  C. Increased by 1000 basis points

  D. Decreased by 880 basis points

  Correct Answer: B

• Question 228:

  An endowment asset manager with a focus on long/short equity strategies is evaluating the risks of an equity portfolio. Which of the following risk types does the asset manager need to consider when evaluating her diversified equity portfolio?

  I. Company-specific projected earnings and earnings risk

  II. Aggregate earnings expectations

  III. Market liquidity

  IV.

  Individual asset volatility

  A.

  I

  B.

  I, IV

  C.

  II, III

  D.

  I, II, IV

  Correct Answer: C

• Question 229:

  Which one of the following four statements regarding commodity derivative risks is INCORRECT?

  A. Because of the different demand/supply balance in each region and the cost of transporting the oil between regions, a tanker of Brent crude oil in the UK will have a different value to a UK buyer than a tanker of Arab light crude oil in Singapore, which results in the basis risk.

  B. Calendar spreads represent a special case of basis risk and occur when the relative prices of commodity futures do not come in alignment and the trader becomes exposed to the absolute price movements.

  C. In most commodities, the longest term contracts are the most volatile, while the shortest term forward contract are the least volatile.

  D. Some commodities can be both in backwardation and a have a strong seasonal element.

  Correct Answer: C

• Question 230:

  To hedge equity exposure without buying or selling shares of stock or otherwise rebalancing the portfolio, a risk manager could initiate

  A. A short total return swap position.

  B. A long total return swap position.

  C. A short debt-for-equity swap.

  D. A long debt-for-equity swap.

  Correct Answer: A