GARP GARP Certifications 2016-FRR Questions & Answers

• Question 301:

  Which one of the following four statements correctly defines a non-exotic call option?

  A. A call option gives the call option buyer the obligation, but not the right, to buy the underlying instrument at a known price in the future.

  B. A call option gives the call option buyer the obligation, but not the right, to sell the underlying instrument at a known price in the future

  C. A call option gives the call option buyer the right, but not the obligation, to buy the underlying instrument at a known price in the future

  D. A call option gives the call option buyer the right, but not the obligation, to sell the underlying instrument at a known price in the future

  Correct Answer: C

• Question 302:

  A credit risk analyst is evaluating factors that quantify credit risk exposures. The risk that the borrower would fail to make full and timely repayments of its financial obligations over a given time horizon typically refers to:

  A. Duration of default.

  B. Exposure at default.

  C. Loss given default.

  D. Probability of default.

  Correct Answer: D

• Question 303:

  Counterparty credit risk assessment differs from traditional credit risk assessment in all of the following features EXCEPT:

  A. Exposures can often be netted

  B. Exposure at default may be negatively correlated to the probability of default

  C. Counterparty risk creates a two-way credit exposure

  D. Collateral arrangements are typically static in nature

  Correct Answer: D

• Question 304:

  A bank customer chooses a mortgage with low initial payments and payments that increase over time because the customer knows that she will have trouble making payments in the early years of the loan. The bank makes this type of mortgage with the same default assumptions uses for ordinary mortgages, thus underestimating the risk of default and becoming exposed to:

  A. Moral hazard

  B. Adverse selection

  C. Banking speculation

  D. Sampling bias

  Correct Answer: B

• Question 305:

  Most loans and deposits in the interbank market have a maturity of:

  A. More than 10 years

  B. More than 5 years but less than 10 years

  C. More than 3 years but less than 5 years

  D. Less than one year

  Correct Answer: D

• Question 306:

  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 ___ return on equity for the bank, because the cash generated by the risk-transfer and the overall ___ of the bank's exposure to the risk.

  A. Increases; increase;

  B. Increases; reduction;

  C. Decreases; increase;

  D. Decreases; reduction;

  Correct Answer: B

• Question 307:

  As DeltaBank explores the securitization business, it is most likely to embrace securitization to:

  I. Bring transparency to the bank's balance sheet

  II. Create a new profit center for the bank

  III. Strategically release risk capital and regulatory capital for redeployment

  IV.

  Generate cash for additional debt origination

  A.

  I, III

  B.

  II, IV

  C.

  I, II, III

  D.

  II, III, IV

  Correct Answer: D

• Question 308:

  Which one of the following four variables of the Black-Scholes model is typically NOT known at a point in time?

  A. The underlying relevant exchange rates

  B. The underlying interest rates

  C. The future volatility of the exchange rates

  D. The time to maturity

  Correct Answer: C

• Question 309:

  The value of which one of the following four option types is typically dependent on both the final price of its underlying asset and its own price history?

  A. Stout options

  B. Power options

  C. Chooser options

  D. Basket options

  Correct Answer: A

• Question 310:

  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. Hence, the loss rate in this case will be

  A. 1%

  B. 3%

  C. 5%

  D. 10%

  Correct Answer: A