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Information About the GARP 2016-FRR Certification Exam

The FRR Series certification is highly respected in the financial industry, and is a valuable asset for professionals who want to advance their careers in risk management. 2016-FRR exam covers a wide range of topics, including market risk, credit risk, operational risk, liquidity risk, and regulatory compliance. It also covers the latest regulatory requirements, such as Basel III, Solvency II, and Dodd-Frank. The FRR Series certification is recognized by leading financial institutions around the world, including banks, insurance companies, and asset managers.

To prepare for the GARP 2016-FRR exam, candidates are encouraged to study a wide range of materials, including textbooks, online resources, and practice exams. GARP also offers a variety of study materials and courses for candidates who want extra support. Candidates who pass the exam will earn the prestigious FRR certification, which is recognized by financial institutions around the world as a mark of expertise in risk management.

 

NEW QUESTION # 85
An associate from the finance group has been identified as an operational risk coordinator (ORC) for her department. To fulfill her ORC responsibilities the associate will need to:
I. Provide main communication contact with operational risk department
II. Provide main reporting contact with audit department
III. Coordinate collection of key risk indicators in her area
IV. Coordinate training and awareness activities in her area

• A. I, II
• B. I, III, IV
• C. II, III, IV
• D. I, II, III

Answer: B

Explanation:
An operational risk coordinator (ORC) needs to provide the main communication contact with the operational risk department (I), coordinate the collection of key risk indicators in her area (III), and coordinate training and awareness activities in her area (IV). The main reporting contact with the audit department (II) is not typically an ORC responsibility.References:Operational risk coordinator responsibilities as outlined in Financial Risk and Regulation documents.

NEW QUESTION # 86
Which one of the following four statements regarding commodity exchanges is INCORRECT?

• A. Commodity markets are mot liquid than debt markets.
• B. Banks have no natural direct exposure to commodities.
• C. Banks trade in OTC contracts primarily to serve clients and facilitate client hedging and lending.
• D. Customers rarely trade physical commodities with banks.

Answer: A

Explanation:
The statement that "commodity markets are more liquid than debt markets" is incorrect. Commodity markets can be less liquid compared to the highly developed and widely traded debt markets. Banks typically do not have direct exposure to commodities but engage in OTC contracts to serve clients and facilitate hedging.

NEW QUESTION # 87
Which one of the following four statements correctly defines chooser options?

• A. These options pay an amount equal to the power of the value of the underlying asset above the strike price.
• B. These options give the holder the right to exchange one asset for another.
• C. The owner of these options decides if the option is a call or put option only when a predetermined date is reached.
• D. These options represent a variation of the plain vanilla option where the underlying asset is a basket of currencies.

Answer: C

Explanation:
Chooser options give the holder the flexibility to decide whether the option will be a call or a put at a specific future date. This feature makes chooser options valuable in uncertain market conditions, as the holder can choose the type of option that will be more beneficial depending on the market scenario at the decision point.

NEW QUESTION # 88
A bank has a Var estimate of $100 million. It is considering a new transaction which has a correlation of 0.35
with the current portfolio and a standalone VaR estimate of $5 million. What would be the new VaR for the
bank if it carried out the transaction?

• A. $ 213.67 million
• B. $101.86 million
• C. $105 million
• D. $100.22 million

Answer: B

NEW QUESTION # 89
The risk management department of VegaBank wants to set guidelines on commodity carry trades. Which of the following strategies should she pursue to achieve a profitable commodity carry?
I. Buy short-term commodity futures and sell longer-dated position when the curve is in contango.
II. Buy short-term commodity futures and sell longer-dated position when the curve is in backwardation.
III. Buy long-term commodity futures and sell shorter-dated positions when the curve is in contango.
IV. Buy long-term commodity futures and sell shorter-dated positions when the curve is in backwardation.

• A. II, IV
• B. I, II
• C. I, III
• D. I, IV

Answer: D

Explanation:
To achieve a profitable commodity carry trade, the strategy should align with the market conditions represented by the shape of the futures curve. The key concepts are contango and backwardation:
* Contango:
* Contango occurs when the futures prices are higher than the spot prices.
* To profit from contango, one should buy short-term futures contracts (which are cheaper) and sell long-term futures contracts (which are more expensive).
* Backwardation:
* Backwardation occurs when the futures prices are lower than the spot prices.
* To profit from backwardation, one should buy long-term futures contracts (which are cheaper) and sell short-term futures contracts (which are more expensive).
Given the statements:
* I. Buy short-term commodity futures and sell longer-dated position when the curve is in contango.
* IV. Buy long-term commodity futures and sell shorter-dated positions when the curve is in backwardation.
Both these strategies align with the correct market conditions for profitable trades.
References
Source: How Finance Works

NEW QUESTION # 90
Bank Alpha is making a decision about lending 10-year loans in a sector that is fairly illiquid and is looking at various options to fund the loans. Which of the following options to fund the loans exhibits the most exogenous liquidity risk?

• A. The 6-month LIBOR markets
• B. Foreign exchange markets
• C. Overnight interbank markets
• D. The 1-year treasury markets

Answer: C

Explanation:
Bank Alpha is making a decision about lending 10-year loans in a sector that is fairly illiquid. This type of lending requires stable and long-term funding sources to match the loan duration and illiquidity. Among the options provided:
* Overnight interbank markets: This option involves very short-term borrowing which needs to be rolled over frequently. The liquidity risk is high because the market conditions can change daily, making it the most exogenous liquidity risk as the availability and cost of funds can vary widely and unpredictably.
* The 6-month LIBOR markets: This is a short to medium-term funding option, still involving some liquidity risk due to the need for periodic refinancing, but less frequent than overnight markets.
* The 1-year treasury markets: Treasury markets are generally more stable and have lower liquidity risk compared to interbank markets. However, they still require annual refinancing.
* Foreign exchange markets: These markets add the complexity of currency risk along with liquidity risk.
Thus, overnight interbank markets exhibit the most exogenous liquidity risk due to the need for daily refinancing.References: How Finance Works, relevant pages discussing liquidity risks associated with different funding options.

NEW QUESTION # 91
Why is economic capital across market, credit and operational risks simply added up to arrive at an estimate of aggregate economic capital in practice?

• A. In practice, it is very difficult to estimate the correlations between the risk categories and as a result a conservative estimate is obtained by adding up the risks.
• B. Market, credit and operational risks are perfectly correlated which justifies adding up their associated economic capital.
• C. Regulators require banks to add up economic capital across market, credit and operational risks.
• D. Since market, credit and operational risks are significantly different measures of risk, there is no diversification benefit to computing economic capital to banks across types of risks.

Answer: A

Explanation:
In practice, financial institutions often sum the economic capital required for market, credit, and operational risks to arrive at an aggregate economic capital estimate. This is done because:
* Difficulty in Estimating Correlations: Estimating the correlations between different types of risks is complex and data-intensive. These correlations can change over time and under different market conditions, making it challenging to arrive at accurate estimates.
* Conservatism: To avoid underestimating the total risk, a conservative approach is often taken by adding up the individual risk capitals. This ensures that the institution holds sufficient capital to cover potential losses from all types of risks, even if they were to occur simultaneously.
* Regulatory Guidance: Although regulations encourage a more integrated approach, the lack of precise data often leads banks to use simpler, more conservative methods in practice.
Thus, option B correctly reflects the practical approach taken due to the difficulty in estimating correlations between different risk categories.References: How Finance Works, discussions on risk aggregation and challenges in estimating correlations between risk types.

NEW QUESTION # 92
Which one of the following four exercise features is typical for the most exchange-traded equity options?

• A. European exercise feature
• B. A shout option exercise feature
• C. American exercise feature
• D. Asian exercise feature

Answer: C

Explanation:
Most exchange-traded equity options in the U.S. typically have the American exercise feature. This feature allows the holder to exercise the option at any time before and including the expiration date, providing greater flexibility compared to the European exercise feature, which only allows exercise at expiration. The Asian and shout option features are less common and not typically associated with exchange-traded equity options.

NEW QUESTION # 93
US-based BetaBank have accumulated Japanese yen, Japanese government bonds, options on Japanese yen, and positions in commodities that have a positive correlation with yen. Which one of the four following non-statistical risk measures could be used to evaluate the BetaBank's exposure to the Japanese economy?

• A. Position sensitivities
• B. Position volatility
• C. Position turnover
• D. Position concentrations

Answer: D

Explanation:
To evaluate BetaBank's exposure to the Japanese economy, we should consider measures that reflect the bank's positions and their potential sensitivity to economic changes in Japan:
* Position Turnover:
* This measures how frequently positions are changed or traded, which does not directly indicate exposure to economic conditions.
* Position Concentrations:
* This indicates how concentrated the bank's positions are in certain assets or markets. High concentration in Japanese assets (yen, Japanese government bonds, etc.) would indicate high exposure to the Japanese economy.
* Position Volatility:
* This measures how much the value of positions fluctuates, which can indicate risk but does not specifically measure economic exposure.
* Position Sensitivities:
* This measures how sensitive positions are to changes in underlying factors, such as interest rates or exchange rates. This could also be relevant but does not directly indicate exposure to the economy as a whole.
Thus, position concentrations are a key measure to evaluate BetaBank's exposure to the Japanese economy.
ReferencesSource: How Finance Works

NEW QUESTION # 94
From a risk point of view, which of the following factors will generally lead to the fluctuation of equity values
with industry P/E levels and a company's individual earnings?
I. Sales
II. Cost management
III. Commercial success of the company
IV. Market sentiment

• A. I, II, III
• B. II, IV
• C. III, IV
• D. I, II

Answer: A

NEW QUESTION # 95
Which of the following statements depicts a difference between funding liquidity risks and trading liquidity risks?

• A. Funding liquidity risks are short term risks while trading liquidity risks are longer term risks.
• B. Funding liquidity risks are associated with how fast prices move in the market while trading liquidity risks originate out of bank trades.
• C. Funding liquidity risks are associated only with the bank assets while trading liquidity risks are associated with both assets and liabilities of the bank.
• D. Funding liquidity risks are concerned with the ability of the bank to fund deposits withdrawals while trading liquidity risks are concerned with the change in bid-offer spreads of asset values.

Answer: D

Explanation:
Funding liquidity risk and trading liquidity risk are two distinct types of liquidity risks faced by financial institutions, particularly banks.
* Funding Liquidity Risk: This type of risk pertains to a bank's ability to meet its financial obligations as they come due without incurring unacceptable losses. It primarily concerns the bank's ability to fund withdrawals, meet depositor demands, and other liabilities when they come due. If a bank cannot manage its funding liquidity, it may be forced to sell assets at fire sale prices, which can further deteriorate its financial condition.
* Trading Liquidity Risk: This risk, on the other hand, deals with the market liquidity of the bank's assets.
It involves the risk of being unable to buy or sell assets at or near their market value due to inadequate market depth or market disruptions. It is more concerned with the bid-offer spreads and the ability to execute trades without significantly impacting the market price of the asset.
References: Based on the information provided in "How Finance Works" document, funding liquidity risks are concerned with the ability of the bank to fund deposit withdrawals while trading liquidity risks are concerned with the change in bid-offer spreads of asset values.

NEW QUESTION # 96
An options trader is assessing the aggregate risk of her currency options exposures. As an options buyer, she can potentially ___ lose more than the premium originally paid. As an option seller, however, she has a ___ risk on the contract and always receives a premium.

• A. Never, unlimited
• B. Sometimes, unlimited
• C. Sometimes, limited
• D. Never, limited

Answer: A

Explanation:
As an options buyer, the maximum loss is limited to the premium paid for the option. Therefore, the buyer can never lose more than the premium. As an option seller, the risk is theoretically unlimited because the seller is obligated to fulfill the contract regardless of how unfavorable the terms might become due to market movements.

NEW QUESTION # 97
A risk manager is considering how to best quantify option price dynamics using mathematical option pricing models. Which of the following variables would most likely serve as an input in these models?
I. Implicit parameter estimate based on observed market prices
II. Estimates of sensitivity of option prices to parameter changes
III. Theoretical option determination based on assumptions

• A. I, II, III
• B. II, III
• C. I, III
• D. II

Answer: A

Explanation:
Mathematical option pricing models typically use the following variables as inputs:
* I. Implicit parameter estimate based on observed market prices: These are derived from market data to infer parameters such as volatility.
* II. Estimates of sensitivity of option prices to parameter changes: These include Greeks like Delta, Gamma, Theta, etc., which measure the sensitivity of the option's price to various factors.
* III. Theoretical option determination based on assumptions: This involves theoretical calculations based on models like Black-Scholes, which use assumptions about market behavior and asset dynamics.
References:The inputs and methodologies for option pricing models are well-documented in financial literature and can be referenced in the "How Finance Works" document.

NEW QUESTION # 98
If a bank is long £500 million pounds, short £300 million in delta-equivalent pound options, and long £100 million in pound-denominated stocks, what is the amount of pound exposure that would be shown in the aggregated risk reports?

• A. £800 million pounds
• B. £300 million pounds
• C. £900 million pounds
• D. £500 million pounds

Answer: B

NEW QUESTION # 99
Operational risk team for a large international bank is implementing business continuity planning (BCP).
Which of the following BCP activities fall within the definition of operational risk and represent Basel II
Accord's operational risk categories:
I. Damage to Physical Assets
II. Business Disruption and System Failures
III. Social Distancing Requirements
IV. Potential for Extreme Losses

• A. III and IV
• B. I and II
• C. I and IV
• D. III

Answer: B

NEW QUESTION # 100
Gamma Bank is active in loan underwriting and securitization business, and given its collective credit exposure, it will be typically most interested in the following types of portfolio credit risk:
I. Expected loss
II. Duration
III. Unexpected loss
IV. Factor sensitivities

• A. I, III, IV
• B. II
• C. I, III
• D. I

Answer: C

Explanation:
Gamma Bank, active in loan underwriting and securitization, would typically be most interested in:
* Expected Loss: The anticipated average loss from defaults in the credit portfolio.
* Unexpected Loss: The potential variability or deviation from the expected loss, critical for understanding the risk beyond average expectations.
Duration and factor sensitivities are more relevant to market risk rather than direct credit risk.
References
* Verified information from the document

NEW QUESTION # 101
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