GARP GARP Certifications 2016-FRR Questions & Answers

• Question 61:

  Which one of the following statements accurately describes market risk tolerance?

  A. Market risk tolerance is the maximum likely gain in the market value of portfolios over a given period of time.

  B. Market risk tolerance is the maximum loss in the market value of financial instruments caused by the failure of the counterparty to meet its obligations.

  C. Market risk tolerance is the maximum loss the bank is willing to bear due to fluctuations in market prices and rates.

  D. Market risk tolerance is the minimum loss the bank is willing to bear due to fluctuations in market prices and rates.

  Correct Answer: C

• Question 62:

  Using the definitions used by JPMorgan Chase in their annual report, which of the following exposure types would be considered as a non-trading risk exposure?

  I. Short term equity investments

  II. Loans held to maturity

  III. Mortgage servicing rights

  IV.

  Derivatives used to manage asset/liability exposure.

  A.

  I and II

  B.

  II and III

  C.

  III and IV

  D.

  II, III, and IV

  Correct Answer: D

• Question 63:

  Which one of the following four regulatory drivers for operational risk management includes risk and control requirements for financial statements in the United States?

  A. Basel II Accord

  B. Solvency II

  C. The Markets in Financial Instruments Directive

  D. The Sarbanes-Oxley Act

  Correct Answer: D

• Question 64:

  Which among the following are shortfalls of the static liquidity ladder model?

  I. The static model gives a liquidity estimate only after the bank faces the liquidity problem.

  II. The static model can only make projections over a few days.

  III.

  The static model does not incorporate uncertainty in the analysis.

  A.

  I, II

  B.

  I, III

  C.

  I, II, III

  D.

  III

  Correct Answer: D

• Question 65:

  Bank Sigma takes a long position in the oil futures market that requires a 2% margin, i.e., the bank has to deposit 2% of the value of the contract with the broker. The futures contracts were priced at $50 per barrel (bbl) at inception, and rose by $5 to $55. The VaR on the position is estimated to be $10. What is the return on this transaction on a risk adjusted basis?

  A. 50%

  B. 10%

  C. 500%

  D. 20%

  Correct Answer: A

• Question 66:

  Financial regulators in a European country are considering banning trading in highly complex derivative instruments that are not settled through a centralized clearinghouse. This ban can result in:

  I. The value of the country's currency dropping

  II. Counterparties involved in trading of these derivative instruments failing to fulfill their obligations III.The business model relying on these instruments failing

  IV.

  Certain activities becoming illegal

  A.

  I, II

  B.

  II, III

  C.

  I, IV

  D.

  II, III, IV

  Correct Answer: D

• Question 67:

  Gamma Bank is operating in a highly volatile interest rate environment and wants to stabilize its net income by shifting the sources of its earnings from interest rate sensitive sources to less interest rate sensitive sources. All of the following strategies can help achieve this objective EXCEPT:

  A. Charge bank fees for underwriting loans

  B. Provide trust, asset management, and trading services to customers

  C. Extend different types of credit

  D. Originate more floating interest rate loans

  Correct Answer: D

• Question 68:

  Bank Zilo has $2 million in cash and $10 million in loans coming due tomorrow with an expected default rate of 1%. The proceeds will be deposited overnight. The bank owes $ 10 million on a securities purchase that settles in two days and pays off $9 million in commercial paper in three days that is not expected to renew. How much money should the bank plan to raise so as to avoid a liquidity problem?

  A. $710 million

  B. $712 million

  C. $700 million

  D. $650 million

  Correct Answer: A

• Question 69:

  Which one of the four following aspects of legal risk is NOT included in the Basel II Accord?

  A. Exposure to fines

  B. Private settlements

  C. Punitive damages resulting from supervisory actions

  D. Negative publicity resulting from reputational damages

  Correct Answer: D

• Question 70:

  Which of the following correctly identifies reasons for collecting internal operational risk event and loss information?

  I. Assessing the risk of specific areas of concern.

  II. Evaluating risk events and outcomes.

  III. Collecting data for capital modeling.

  IV.

  Getting insight into risk events in other firms in the industry.

  A.

  I and II

  B.

  II and III

  C.

  I, II and III

  D.

  II, III, and IV

  Correct Answer: C