GARP GARP Certifications 2016-FRR Questions & Answers

• Question 51:

  A trader for EtaBank wants to take a leveraged position in Collateralized Debt Obligations. These CDOs can be used in a repurchase transaction at a 20% haircut. Starting with $100 worth of CDOs, which one of the following four positions would completely utilize the available leverage?

  A. The trader can buy $100 in CDO's, and repo the CDO's to get back $100, less interest.

  B. The trader can buy $100 in CDO's, and repo the CDO's to get back $80, less interest.

  C. The trader can buy $100 in CDO's, and repo the CDO's to get back $60, plus interest.

  D. The trader can buy $100 in CDO's, and repo the CDO's to get back $20, plus interest.

  Correct Answer: B

• Question 52:

  As an example of the balance sheet effect, if rates rise, Delta Bank can expect:

  A. Its fixed rate assets to increase in value, although that effect will be offset by a reduction in the value of its fixed rate liabilities.

  B. Its fixed rate assets to drop in value, although that effect will be offset by a reduction in the value of its fixed rate liabilities.

  C. Its fixed rate assets to increase in value, while that effect will be amplified by a reduction in the value of its fixed rate liabilities.

  D. Its fixed rate assets to drop in value, while that effect will be amplified by a reduction in the value of its fixed rate liabilities.

  Correct Answer: B

• Question 53:

  Bank Sigma has an opportunity to do a securitization deal for a credit card company, but has to retain a portion of the residual risk of the deal with an estimated VaR of $8 MM. Its fees for the deal are $2 MM, and the short-term financing costs are $600,000. What would be the RAROC for this transaction?

  A. 25%

  B. 17.5%

  C. 33%

  D. 12%

  Correct Answer: B

• Question 54:

  SigmaBank has many branches that offer the same products and services. Which one of the four following statement presents an advantage of using RCSA questionnaire approach in the SigmaBank's operational risk framework?

  A. The questionnaires are usually sent to specific nominated parties for completion.

  B. This approach ensures that there has been full participation in the scoring, rather than a single view.

  C. It provides a forum for an in-depth discussion of the operational risks in the firm.

  D. The results can be collected electronically and the responses compared to identify themes, trends and areas of potential control weakness or elevated risk.

  Correct Answer: D

• Question 55:

  Which of the following are among the main uses of risk reports?

  I. Identification of exceptional situations that require managerial attention.

  II. Display the relative risk among different trades.

  III. Specify how RAROC will be maximized within the bank.

  IV.

  Estimate the overall risk levels of the bank.

  A.

  I, II and IV

  B.

  II and III

  C.

  II and IV

  D.

  II, III, and IV

  Correct Answer: A

• Question 56:

  According to Basel II what constitutes Tier 1 capital?

  A. Equity capital and core capital

  B. Profits to reserves and innovative Tier 1 capital

  C. Equity capital and accrued profits to reserves

  D. Core capital and innovative Tier 1 capital.

  Correct Answer: D

• Question 57:

  A key function of treasuries in commercial/retail banks is:

  I. To manage the interest margin of the banks.

  II. To focus on underwriting risk.

  III. To ensure strong earnings.

  IV.

  To increase profit margins.

  A.

  I

  B.

  II

  C.

  II, III

  D.

  III, IV

  Correct Answer: A

• Question 58:

  For a bank a 1-year VaR of USD 10 million at 95% confidence level means that:

  A. There is a 5% chance that the bank would lose less than USD 10 million in a year.

  B. There is a 5% chance that the bank would lose more than USD 10 million in a year.

  C. There is a 5% chance that the worst loss would be USD 10 million in a year.

  D. There is a 5% chance that the least loss would be USD 10 million in a year.

  Correct Answer: B

• Question 59:

  A bank customer expecting to pay its Brazilian supplier BRL 100 million asks Alpha Bank to buy Australian dollars and sell Brazilian reals. Alpha bank does not hold Brazilian reals so it asks for a quote to buy Brazilian reals in the market. The market rate is 100. The bank quotes a selling rate of 101 to its customer, sells the reals, and receives AUD 1,010,000. To perform foreign exchange matched position trading, the banks should

  A. Immediately buy the real at the market rate of 100 and pay AUD 1,000,000.

  B. Immediately buy the real above the market rate of 105 and pay AUD 1,050,050.

  C. Immediately sell the real at the market rate of 100 and receive AUD 1,000,000.

  D. Immediately sell the real above the market rate of 105 and receive AUD 1,050,050.

  Correct Answer: A

• Question 60:

  Mega Bank has $100 million in deposits on which it pays 3% interest, and $20 million in equity on which it pays no interest. The loan portfolio of $120 million earns an average rate of 10%. If the rates remain the same and Mega Bank is able to earn the same net interest income in perpetuity at a 5% discount rate, what will the present value of this holding be?

  A. $100 million

  B. $150 million

  C. $180 million

  D. $200 million

  Correct Answer: C