GARP GARP Certifications 2016-FRR Questions & Answers

• Question 251:

  Which one of the following four statements on factors affecting the value of options is correct?

  A. As volatility rises, options increase in value.

  B. As time passes, options will increase in value.

  C. As interest rates rise and option's rho is positive, option prices will decrease.

  D. As the value of underlying security increases, the value of the put option increases.

  Correct Answer: A

• Question 252:

  When a credit risk manager analyzes default patterns in a specific neighborhood, she finds that defaults are increasing as the stigma of default evaporates, and more borrowers default. This phenomenon constitutes

  A. Moral hazard

  B. Speculative bias

  C. Herd behavior

  D. Adverse selection

  Correct Answer: C

• Question 253:

  A risk manager is analyzing a call option on the GBP with a vega of 0.02. When the perceived future volatility increases by 1%, the call option

  A. Increases in value by 0.02.

  B. Increases in value by 2.

  C. Decreases in value by 0.02.

  D. Decreases in value by 2.

  Correct Answer: A

• Question 254:

  A credit analyst wants to determine a good pricing strategy to compensate for credit decisions that might have been made incorrectly. When analyzing her credit portfolio, the analyst focuses on the spreads in each loan to determine if they are sufficient to compensate the bank for all of the following costs and risks EXCEPT.

  A. The marginal cost of funds provided.

  B. The overhead cost of maintaining the loan and the account.

  C. The inherent risk of lending to this borrower while providing a return on the risk capital used to the support the loan.

  D. The opportunity cost of risk-adjusted marginal cost of capital.

  Correct Answer: D

• Question 255:

  When trading exotic options, one needs to consider the following risks:

  I. Spot foreign exchange risks

  II. Forward foreign exchange risks

  III. Plain vanilla options risks

  IV.

  Option-specific risks

  A.

  I, III

  B.

  II, III, IV

  C.

  I, II, IV

  D.

  I, II, III, IV

  Correct Answer: D

• Question 256:

  From the bank's point of view, repricing the retail debt portfolio will introduce risks of fluctuations in:

  I. Duration

  II. Loss given default

  III. Interest rates

  IV.

  Bank spreads

  A.

  I

  B.

  II

  C.

  I, II

  D.

  III, IV

  Correct Answer: D

• Question 257:

  Foreign exchange rates are determined by various factors. Considering the drivers of exchange rates, which one of the following changes would most likely strengthen the value of the USD against other foreign currencies?

  A. The expected US inflation rate increases

  B. The global demand for US products decreases

  C. The economic performance in the US weakens

  D. The US current account surplus increases

  Correct Answer: D

• Question 258:

  ThetaBank has extended substantial financing to two mortgage companies, which these mortgage lenders use to finance their own lending. Individually, each of the mortgage companies has an exposure at default (EAD) of $20 million, with a loss given default (LGD) of 100%, and a probability of default of 10%. ThetaBank's risk department predicts the joint probability of default at 5%. If the default risk of these mortgage companies were modeled as independent risks, what would be the probability of a cumulative $40 million loss from these two mortgage borrowers?

  A. 0.01%

  B. 0.1%

  C. 1%

  D. 10%

  Correct Answer: C

• Question 259:

  Beta Insurance Company is only allowed to invest in investment grade bonds. To maximize the interest income, Beta Insurance Company should invest in bonds with which of the following ratings?

  A. AAA

  B. AA

  C. A

  D. B

  Correct Answer: C

• Question 260:

  Which of the following attributes are typical for early models of statistical credit analysis?

  A. These models assumed the default of any obligor was independent of the default of any other.

  B. The underlying default assumptions were analytically inconvenient.

  C. The underlying default assumptions failed to develop relatively simple formulas for the determination of portfolio credit risk.

  D. These models effectively incorporated herd behavior.

  Correct Answer: A