GARP GARP Certification ICBRR Questions & Answers

• Question 1:

  Normally, commercial banking can be viewed as a fixed income carry trade since

  A. Short-term floating-rate deposits are used to fund long-term fixed rate loans.

  B. Short-term fixed rate deposits are used to fund long-term floating rate loans.

  C. Short-term fixed-rate deposits are used to fund short-term floating rate loans.

  D. Short-term floating-rate deposits are used to fund short-term floating rate loans.

  Correct Answer: A

• Question 2:

  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 3:

  The Basel II Accord's operational risk definition excludes all of the following items EXCEPT:

  A. Legal risk

  B. Strategic risk

  C. Reputational risk

  D. Geopolitical risk

  Correct Answer: A

• Question 4:

  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 5:

  A risk analyst is considering how to reduce the bank's exposure to rising interest rates. Which of the following strategies will help her achieve this objective?

  A. Reducing the average repricing time of its loans II. Increasing the average repricing time of its deposits

  III. Entering into interest rate swaps

  IV. Improving earnings capacity and increasing intermediated funds

  B. I, II

  C. III

  D. IV

  E. I, II, IV

  Correct Answer: D

• Question 6:

  The Sarbanes-Oxley Act includes one of the following four requirements for financial institutions in the United States:

  A. Risk and control requirements

  B. Market discipline requirements

  C. Capital allocation requirements

  D. Regulatory response to systemic risk requirements

  Correct Answer: A

• Question 7:

  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 8:

  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 9:

  Gamma Bank has $300 million in loans and $200 million in deposits. If the modified duration of the loans is estimated to be 2, and the modified duration of the deposits is estimated to be 1, then the change in Gamma Bank's equity value per 1% change in yield will be:

  A. -$1 million

  B. -$2 million

  C. -$3 million

  D. -$4 million

  Correct Answer: D

• Question 10:

  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