GARP GARP Certifications 2016-FRR Questions & Answers

• Question 71:

  Which of the following are conclusions that could be drawn from the shape of the statistical distribution of losses that a bank might incur over a future time period?

  I. In most years a bank would look more profitable than it will be on average.

  II. Most of the time a sufficiently well capitalized bank will appear over-capitalized.

  III.

  Bad years do not come along very often, but when they do they lead to enormous losses.

  A.

  I, II

  B.

  I, III

  C.

  II, III

  D.

  I, II, III

  Correct Answer: D

• Question 72:

  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 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 and sells the reals at this quoted price. Then the bank immediately buys the real at the market rate and completes foreign exchange matched transaction. What is the financial impact of this transaction for Alpha bank?

  A. This transaction leaves the bank a profit of AUD 10,101.

  B. This transaction leaves the bank a profit of BRL 10,101.

  C. This transaction leaves the bank a loss of AUD 10,101.

  D. This transaction leaves the bank a loss of BRL 10,101.

  Correct Answer: A

• Question 73:

  Using a forward transaction, Omega Bank buys 100 metric tones of aluminum for delivery in six-months' time. However, after two months, the bank becomes concerned with the potential fluctuations in aluminum prices and wants to hedge its potential exposure against a possible decline in aluminum prices. Which one of the following four strategies could the bank use to offset the risk from its current exposure to aluminum as it sets the price for selling the commodity in four-months' time?

  A. Sell an aluminum futures contract

  B. Buy an aluminum futures contract

  C. Sell an aluminum forward contract

  D. Buy an aluminum forward contract

  Correct Answer: A

• Question 74:

  Which of the following statements presents an advantage of using risk and control self-assessments (RCSA) in the operational risk framework?

  I. RCSA provides very accurate scoring of risks and controls due to its subjective nature.

  II. RCSA program provides insight into risks that exist in a firm, but that may or may not have occurred before.

  III. RCSA program can produce biased but transparent operational risk reporting.

  IV.

  RCSA program allows each department to take ownership of its own risks and controls.

  A.

  I and III

  B.

  II and IV

  C.

  I, II and III

  D.

  II, III, and IV

  Correct Answer: B

• Question 75:

  Bank Milo 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 what days does the bank face negative cumulative liquidity?

  A. Day 3 only.

  B. Days 2 and 3.

  C. Day 2 only.

  D. Days 1, 2 and 3.

  Correct Answer: B

• Question 76:

  Alpha Bank, a small bank,has a long position with larger BetaBank and has an identical short position with another larger bank GammaBank. Each large bank requires a 20% initial collateral to support the trade. As prices fluctuate in either direction, one large bank will require additional collateral from the small bank, while the risk of loss to the other large bank will increase. By running the trades through a clearinghouse, the small bank can achieve all of the following objectives EXCEPT:

  A. Eliminating the collateral requirement

  B. Protecting itself against increases in future collateral demands

  C. Protecting against the risk of the failure of one of the large banks

  D. Mitigating option hedging risks and altering margin requirement

  Correct Answer: D

• Question 77:

  Asset and liability management is typically concerned with all of the following activities:

  I. Maintaining the desired liquidity structure of the bank.

  II. Managing the factors affecting the structure and composition of a bank's balance sheet.

  III. Effectively transferring the interest rate risk in the banking book to the investment bank at a fair transfer price.

  IV.

  Focusing on the circumstances impacting the stability of income the bank generates over time.

  A.

  I

  B.

  II, III

  C.

  III, IV

  D.

  I, II, IV

  Correct Answer: D

• Question 78:

  What is the role of market risk management function within a bank?

  I. Control and minimize the risks the bank should take.

  II. Establish a comprehensive market risk policy framework.

  III. Define, approve and monitor risk limits.

  IV.

  Perform stress tests and other qualitative risk assessments.

  A.

  I and III

  B.

  II and IV

  C.

  I, II and III

  D.

  II, III, and IV

  Correct Answer: D

• Question 79:

  Which one of the following four statements about the "market-maker" trading strategy is INCORRECT?

  A. A market maker that attracts buy and sell orders can make a profit from the spread quoted between the buy and sell price.

  B. A market maker can benefit from the market information she gets from the trades she is asked to execute.

  C. This strategy is independent of market liquidity and number of other market makers.

  D. This risk in this strategy is that traders have to take positions that may quickly incur a loss.

  Correct Answer: C

• Question 80:

  Which one of the following four statements about market risk is correct? Market risk is

  A. The exposure to an adverse change in the credit quality in portfolios or of financial instruments.

  B. The maximum likely loss in the market value of portfolios and financial instruments over a given period of time.

  C. The maximum likely loss in the market value of portfolios and financial instruments caused by the failure of the counterparty to meet its obligations.

  D. The exposure to an adverse change in the market value of portfolios and financial instruments caused by a change in market prices or rates.

  Correct Answer: D