GARP Financial Risk and Regulation 2016-FRR Questions & Answers

• Question 21:

  Which of the following statements about implementation of a successful RCSA program is correct?

  A. An RCSA is only complete after all possible mitigating actions have been identified and analyzed as a result of the assessment process.

  B. Internal loss data help to identify the risks and control weaknesses that need to be addressed in the RCSA; external events are not helpful in informing the discussions around potential risks.

  C. The RCSA scoring methodology should include only financial impacts and not include reputational, legal, regulatory, client and life safety impacts.

  D. To ensure that the RCSA is well designed, it is important to interview participants, stakeholders and support functions prior to the launching the RCSA.

  Correct Answer: D

• Question 22:

  When considering the advantages of operational risk function owned by the Chief Compliance Officer in a financial institution, an operational risk manager consultant suggests that this governance approach will have all of the following advantages except:

  A. This governance structure maintains an independent operational risk function.

  B. The operational risk function is closely linked in a partnership with the compliance function to leverage data and assessment activities.

  C. The operational risk function quickly inherits an existing reporting structure, established meeting schedules and functional reporting cycles from the compliance function.

  D. In accordance with Basel II Accord, the operational risk function should report directly into the audit function and strengthen that function.

  Correct Answer: D

• Question 23:

  Which one of the following four statements about regulatory capital for a bank is accurate?

  A. Regulatory capital is determined by rules imposed by an outside authority, such as a supervisor or central bank.

  B. Regulatory capital is the lowest level of economic capital the bank should have to meet regulatory requirement.

  C. Regulatory capital reflects the economic tradeoffs of the bank as accurately as the bank can represent them.

  D. Regulatory capital is less than the regulatory capital requirement.

  Correct Answer: A

• Question 24:

  Which one of the following four statements correctly identifies disadvantages of using the economic capital?

  A. The economic capital models used by banks may be subject to significant model risk.

  B. Economic capital may do not take into consideration the regulatory requirements.

  C. Since banks are putting their money at risk they have an incentive to increase economic capital.

  D. Economic capital estimates the level of expected losses.

  Correct Answer: A

• Question 25:

  An asset and liability manager for a large financial institution has to recognize that retail products ___ include embedded options, which are often not rationally exercised, while wholesale products ___ carry penalties for repayment or include rights to terminate wholesale contracts on very different terms than are common in retail products.

  A. Frequently; typically

  B. Hardly ever; typically

  C. Frequently; rarely

  D. Hardly ever; rarely

  Correct Answer: A

• Question 26:

  A bank has a Var estimate of $100 million. It is considering a new transaction which has a correlation of

  0.35 with the current portfolio and a standalone VaR estimate of $5 million. What would be the new VaR for the bank if it carried out the transaction?

  A. $105 million

  B. $101.86 million

  C. $100.22 million

  D. $ 213.67 million

  Correct Answer: B

• Question 27:

  Bank Muri has $4 million in cash and $5 million in loans coming due tomorrow with an expected default rate of 1%. The proceeds will be deposited overnight. The bank owes $ 9 million on a securities purchase that settles in two days and pays off $8 million in commercial paper in three days that is not expected to renew. On day 2, $1 million in loans is coming in with an expected default rate of 1% and on day 3, $2 million in loans is coming in with expected default rate of 2%. How much should the bank plan to raise in order to avoid liquidity problems?

  A. $500 million

  B. $510 million

  C. $508 million

  D. $550 million

  Correct Answer: B

• Question 28:

  Which of the following statements are reasons for mathematical valuation and risk assessment models to be misleading or inaccurate?

  I. There could be missing factors in models.

  II. The data used as input for the model could be bad or wrong.

  III. Model results could be misinterpreted.

  IV.

  There could be errors in the derivation of the model.

  A.

  I, II, III IV

  B.

  III and IV

  C.

  I, II, and III

  D.

  I, III, and IV

  Correct Answer: A

• Question 29:

  Which one of the four following statements about a minimal loss threshold in operational loss data collection is incorrect?

  A. A company can have differing operational loss data collection and reporting thresholds for different departments.

  B. The operational loss data collection program has to capture all losses regardless of their size.

  C. Setting an operational loss data collection threshold depends on the risk appetite of the firm and regulatory requirements it needs to meet.

  D. The operational loss data collection program must include all material losses that are above minimal gross loss threshold.

  Correct Answer: B

• Question 30:

  US-based BetaBank have accumulated Japanese yen, Japanese government bonds, options on Japanese yen, and positions in commodities that have a positive correlation with yen. Which one of the four following non-statistical risk measures could be used to evaluate the BetaBank's exposure to the Japanese economy?

  A. Position turnover

  B. Position concentrations

  C. Position volatility

  D. Position sensitivities

  Correct Answer: B