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Free GARP 2016-FRR Practice Exam with Questions & Answers | Set: 5

Questions 41

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

Options:
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.

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Questions 42

BetaFin has decided to use the hybrid RCSA approach because it believes that it fits its operational framework. Which of the following could be reasons to use the hybrid RCSA method?

I. BetaFin has previously created series of RCSA workshops, and the results of these workshops can be used to design the questionnaires.

II. BetaFin believes that using the questionnaire approach should be more useful.

III. BetaFin had used the questionnaire approach successfully for certain businesses and the workshop approach for others.

IV. BetaFin had already implemented a sophisticated RCSA IT-system.

Options:
A.

I and II

B.

I and III

C.

III and IV

D.

II, III, and IV

Questions 43

Which of the following statements describes a bank's reasons to set risk limits?

I. To control and minimize a bank's current risk exposure.

II. To predict future risks.

III. To allocate risks to business units.

IV. To keep risk within tolerance levels.

Options:
A.

I and II

B.

III and IV

C.

I, II, and III

D.

I, III, and IV

Questions 44

Which one of the four following statements about the Risk Adjusted Return on Capital (RAROC) is correct?

RAROC is the ratio of:

Options:
A.

Risk to the profitability of a trading portfolio or a business unit within the bank.

B.

Value-at-risk to the profitability of a trading portfolio or a business unit.

C.

Profitability to the expected return of a trading portfolio or bank business unit.

D.

Profitability to the risk of a trading portfolio or bank business unit.

Questions 45

Which one of the following four statements regarding the basic Net Interest Income model is INCORRECT?

Options:
A.

Assets and liabilities have the same interest rate sensitivities.

B.

Effective repricing date can be different than contractual repricing.

C.

The amount of intermediated funds can be a function of interest rate levels.

D.

Net interest income risk does not address the impact of changing interest rates on bank equity value.

Questions 46

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.

Options:
A.

Never, unlimited

B.

Sometimes, unlimited

C.

Never, limited

D.

Sometimes, limited

Questions 47

Alpha Bank determined that Delta Industrial Machinery Corporation has 2% change of default on a one-year no-payment of USD $1 million, including interest and principal repayment. The bank charges 3% interest rate spread to firms in the machinery industry, and the risk-free interest rate is 6%. Alpha Bank receives both interest and principal payments once at the end the year. Delta can only default at the end of the year. If Delta defaults, the bank expects to lose 50% of its promised payment. Six months after Alpha Bank provides USD $1 million loan to the Delta Industrial Machinery Corporation, a new competitor enters the machinery industry, causing Delta to adjust its prices and mark down the value of its inventory. Hence, the probability of defaultincreases from 2% to 10% and the loss given default increases from 50% to 75%. If Alpha Bank can reprice the loan, what should the new rate be?

Options:
A.

10%

B.

13%

C.

16.5%

D.

20.5%

Questions 48

Which of the following factors can cause obligors to default at the same time?

I. Obligors may be harmed by exposures to similar risk factors simultaneously.

II. Obligors may exhibit herd behavior.

III. Obligors may be subject to the sampling bias.

IV. Obligors may exhibit speculative bias.

Options:
A.

I

B.

II, III

C.

I, II

D.

III, IV

Questions 49

Foreign exchange rates are determined by various factors. Considering the drivers of exchange rates, which one of the following changes would most likely strengthen the value of the USD against other foreign currencies?

Options:
A.

The expected US inflation rate increases

B.

The global demand for US products decreases

C.

The economic performance in the US weakens

D.

The US current account surplus increases

Questions 50

What is generally true of the relationship between a bond's yield and it's time to maturity when the yield curve is upward sloping?

Options:
A.

The longer the time to maturity of the bond, the lower its yield.

B.

The longer the time to maturity of the bond, the higher its yield.

C.

The shorter the time to maturity of the bond, the higher its yield.

D.

There is no relationship between the two