GARP GARP Certifications 2016-FRR Questions & Answers

• Question 291:

  To estimate a partial change in option price, a risk manager will use the following formula:

  A. Partial change in option price = Delta x Change in underlying price

  B. Partial change in option price = Delta x (1+ Change in underlying price)

  C. Partial change in option price = Delta x Gamma x Change in underlying price

  D. Partial change in option price = Delta x Gamma x (1+ Change in underlying price)

  Correct Answer: A

• Question 292:

  Which of the following factors can cause obligors to default at the same time?

  I. Obligors may be harmed by exposures to similar risk factors simultaneously.

  II. Obligors may exhibit herd behavior.

  III. Obligors may be subject to the sampling bias.

  IV.

  Obligors may exhibit speculative bias.

  A.

  I

  B.

  II, III

  C.

  I, II

  D.

  III, IV

  Correct Answer: C

• Question 293:

  After entering the securitization business, Delta Bank increases its cash efficiency by selling off the lower risk portions of the portfolio credit risk. This process ___ risk on the residual pieces of the credit portfolio, and as a result it ___ return on equity for the bank.

  A. Decreases; increases;

  B. Increases; increases;

  C. Increases; decreases;

  D. Decreases; increases;

  Correct Answer: B

• Question 294:

  Alpha Bank determined that Delta Industrial Machinery Corporation has 2% change of default on a one-year no-payment of USD $1 million, including interest and principal repayment. The bank charges 3% interest rate spread to firms in the machinery industry, and the risk-free interest rate is 6%. Alpha Bank receives both interest and principal payments once at the end the year. Delta can only default at the end of the year. If Delta defaults, the bank expects to lose 50% of its promised payment. Six months after Alpha Bank provides USD $1 million loan to the Delta Industrial Machinery Corporation, a new competitor enters the machinery industry, causing Delta to adjust its prices and mark down the value of its inventory. Hence, the probability of default increases from 2% to 10% and the loss given default increases from 50% to 75%. If Alpha Bank can reprice the loan, what should the new rate be?

  A. 10%

  B. 13%

  C. 16.5%

  D. 20.5%

  Correct Answer: D

• Question 295:

  Which one of the following four alternatives lists the three most widely traded currencies on the global foreign exchange market, as of April 2007, in the decreasing order of market share? EUR is the abbreviation of the European euro, JPY is for the Japanese yen, and USD is for the United States dollar, respectively.

  A. JPY, EUR, USD

  B. USD, EUR, JPY

  C. USD, JPY, EUR

  D. EUR, USD, JPY

  Correct Answer: B

• Question 296:

  By foreign exchange market convention, spot foreign exchange transactions are to be exchanged at the spot date based on the following settlement rule:

  A. One-day rule

  B. Two-day rule

  C. Three-day rule

  D. Four-day rule

  Correct Answer: B

• Question 297:

  Which one of the following four statements correctly defines credit risk?

  A. Credit risk is the risk that complements market and liquidity risks.

  B. Credit risk is a form of performance risk in contractual relationship.

  C. Credit risk is the risk arising from execution of a company's strategy.

  D. Credit risk is the risk that summarizes the exposures a company or firm assumes when it attempts to operate within a given field or industry.

  Correct Answer: B

• Question 298:

  Gamma Bank is active in loan underwriting and securitization business, and given its collective credit exposure, it will be typically most interested in the following types of portfolio credit risk:

  I. Expected loss

  II. Duration

  III. Unexpected loss

  IV.

  Factor sensitivities

  A.

  I

  B.

  II

  C.

  I, III

  D.

  I, III, IV

  Correct Answer: D

• Question 299:

  Which one of the following four statements on the seniority of corporate bonds is incorrect?

  A. Senior bonds typically have lower credit spreads than junior bonds with the same maturity and payment characteristics.

  B. Seniority refers to the priority of a bond in bankruptcy.

  C. Junior bonds always pay higher coupons than subordinated bonds.

  D. In bankruptcy, holders of senior bonds are paid in full before any holders of subordinated bonds receive payment.

  Correct Answer: C

• Question 300:

  A credit portfolio manager analyzes a large retail credit portfolio. Which of the following factors will represent typical disadvantages of market-linked credit risk drivers?

  I. Need to supply a large number of input parameters to the model

  II. Slow computation speed due to higher simulation complexity

  III. Non-linear nature of the model applicable to a specific type of credit portfolios

  IV.

  Need to estimate a large number of unknown variable and use approximations

  A.

  I

  B.

  I, II

  C.

  II, III

  D.

  III, IV

  Correct Answer: B