The Best Practice Test Preparation for the 2016-FRR Certification Exam
2016-FRR Exam Dumps, Practice Test Questions BUNDLE PACK
The FRR series exam is essential for professionals who seek to advance their careers in risk management or compliance. 2016-FRR exam covers a wide range of topics, including financial markets, risk management frameworks, risk governance, and regulatory compliance. It also covers important regulatory requirements, such as Basel III, MiFID II, and Dodd-Frank. Passing the FRR exam demonstrates a candidate's knowledge and expertise in these areas, making them highly valuable to employers in the financial industry.
GARP 2016-FRR Certification Exam covers a wide range of topics, including financial risk management, regulatory compliance, financial markets and institutions, quantitative analysis, and ethical and professional standards. It is designed to assess the candidate's ability to apply theoretical concepts to real-world situations, making it an ideal credential for professionals working in the financial industry, such as risk managers, compliance officers, auditors, and regulators. 2016-FRR exam is recognized globally, and passing the exam demonstrates a high level of expertise and commitment to the risk profession.
NEW QUESTION # 186
A corporate bond was trading with 2%probability of default and 60% loss given default. Due to the credit crisis the probability of default increased to 10% and the loss given default increased to 100%. Assuming that the risk premium remained the same how did the credit spread change?
- A. Increased by 880 basis points
- B. Increased by 1000 basis points
- C. Decreased by 880 basis points
- D. Increased by 1120 basis points
Answer: D
Explanation:
The credit spread change can be calculated using the formula: Credit Spread = Probability of Default * Loss Given Default. Initially, the credit spread = 2% * 60% = 1.2%. After the crisis, the credit spread = 10% *
100% = 10%. The change in the credit spread is 10% - 1.2% = 8.8%, which is 880 basis points. However, it seems the correct answer in the context of options given should be based on different terms. Given standard basis points calculation from the initial 120 basis points to new 1000 basis points, the increase is 880 basis points which is significant due to risk premium. This problem can be tricky due to how the increase reflects fundamentally, considering premiums; the potential discrepancy found in various financial documents ensures choice A.
NEW QUESTION # 187
Gamma Bank estimates its monthly portfolio volatility at 5%.The portfolio's annual volatility is closest to
which of the following?
- A. 17%
- B. 30%
- C. 35%
- D. 8%
Answer: A
NEW QUESTION # 188
Which one of the following four statements best describes challenges of delta-normal method of mapping
options positions?
Delta-normal method understates
- A. Risks of long option positions for puts and overstates risks of short option positions for calls.
- B. Risks of short option positions and overstates risks of long option positions for both calls and puts.
- C. Risks of long and short positions for both calls and puts.
- D. Risks of long option positions for calls and overstates risks of short option positions for puts.
Answer: B
NEW QUESTION # 189
Gamma Bank provides a $100,000 loan to Big Bath retail stores at 5% interest rate (paid annually). The loan
also has an annual expected default rate of 2%, and loss given default at 50%. In this case, what will the bank's
expected loss be? What is the expected loss of this loan?
- A. $1,050
- B. $550
- C. $750
- D. $300
Answer: A
NEW QUESTION # 190
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.
- A. II, III, and IV
- B. I and II
- C. I and III
- D. III and IV
Answer: C
NEW QUESTION # 191
Mega Bank holds a $250 million mortgage loan portfolio, which reprices every 5 years at LIBOR + 10%. The bank also has $150 million in deposits that reprices every month at LIBOR + 3%. What is the amount of Mega Bank's rate sensitive assets?
- A. $200 million
- B. $100 million
- C. $150 million
- D. $250 million
Answer: D
Explanation:
The amount of Mega Bank's rate-sensitive assets includes the $250 million mortgage loan portfolio, which reprices every 5 years at LIBOR + 10%. Since this portfolio is subject to repricing based on LIBOR, it is considered a rate-sensitive asset.
NEW QUESTION # 192
Which of the following statements about the option gamma is correct? Gamma is the
I. Second derivative of the option value with respect to the volatility.
II. Percentage change in option value per percentage change in the price of the underlying instrument.
III. Second derivative of the value function with respect to the price of the underlying instrument.
IV. Rate of change of the option delta with respect to changes in the underlying price.
- A. II, III, and IV
- B. II and III
- C. III and IV
- D. I only
Answer: C
Explanation:
Gamma is an important measure in options trading, representing the sensitivity of the delta of the option to changes in the price of the underlying asset. The correct statements about gamma are:
III. Gamma is the second derivative of the value function with respect to the price of the underlying instrument. This means that gamma measures the rate of change of delta (the first derivative) as the price of the underlying asset changes. IV. Gamma is the rate of change of the option delta with respect to changes in the underlying price. This highlights that gamma captures the curvature in the relationship between the option price and the underlying asset price, making it crucial for understanding how the delta will change as the underlying asset price changes.
NEW QUESTION # 193
Beta Insurance Company is only allowed to invest in investment grade bonds. To maximize the interest income, Beta Insurance Company should invest in bonds with which of the following ratings?
- A. B
- B. A
- C. AAA
- D. AA
Answer: B
Explanation:
Beta Insurance Company, which can only invest in investment-grade bonds, should invest in bonds with an
"A" rating to maximize interest income. Investment-grade bonds are rated from AAA to BBB. While AAA bonds offer the highest credit quality, they also offer the lowest yield. Bonds rated A offer a good balance between credit quality and higher interest income compared to AAA and AA bonds.
NEW QUESTION # 194
Which one of the following four exercise features is typical for the most exchange-traded equity options?
- A. American exercise feature
- B. Asian exercise feature
- C. European exercise feature
- D. A shout option exercise feature
Answer: A
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 # 195
All of the following performance statistics typically benefit country's creditworthiness EXCEPT:
- A. High degrees of investment
- B. Low degrees of savings
- C. Low unemployment
- D. Low inflation
Answer: B
Explanation:
A country's creditworthiness is typically influenced by various performance statistics that indicate the overall health of its economy. Here's a detailed analysis of each option:
* A. Low unemployment: Low unemployment indicates a healthy labor market, suggesting economic stability and growth, which positively impacts creditworthiness.
* B. Low inflation: Low inflation reflects price stability, which helps maintain the purchasing power of the currency and economic stability, thus benefiting creditworthiness.
* C. High degrees of investment: High levels of investment indicate confidence in the economy and potential for future growth, positively affecting creditworthiness.
* D. Low degrees of savings: Low savings rates can indicate potential issues with financial stability, as it suggests that households and the economy might lack a financial buffer against economic shocks. This can negatively impact creditworthiness, making it the exception in this list.
NEW QUESTION # 196
Which of the following factors would typically increase the credit spread?
I. Increase in the probability of default of the issuer.
II. Decrease in risk premium.
III. Decrease in loss given default of the issuer.
IV. Increase in expected loss.
- A. I
- B. I and IV
- C. II and III
- D. I, II, and IV
Answer: B
NEW QUESTION # 197
After entering the securitization business, Delta Bank increases its cash efficiency by selling off the lower risk portions of the portfolio credit risk. This process ___ risk on the residual pieces of the credit portfolio, and as a result it ___ return on equity for the bank.
- A. Decreases; increases;
- B. Decreases; increases;
- C. Increases; increases;
- D. Increases; decreases;
Answer: C
Explanation:
When Delta Bank sells off the lower-risk portions of its credit portfolio, it retains the higher-risk residual pieces. This process inherently increases the risk associated with the remaining portfolio because the lower-risk assets, which provided a cushion, are no longer part of the portfolio. As the risk increases, the potential return on these higher-risk assets also increases to compensate for the additional risk taken on by the bank. Consequently, this higher risk and potential return increase the bank's return on equity (ROE), as the bank is now leveraging more volatile assets that have higher potential returns.
References
* Verified information on risk and return from the document
NEW QUESTION # 198
A trader inadvertently booked a trade with incorrect information. A subsequent market move resulted in a gain to the bank. Should the bank include this amount of gain into its operational loss event data program?
I. The bank should include this gain in its operational loss event data program as a gain realized due to operational risk events.
II. The bank should include this gain in its operational loss event data program as it indicates that a control failed or a process is flawed.
III. The bank should include this event in its operational loss event data program and record the gain as a loss resulting from operational risk.The bank should not include this event in its operational loss event data program as it is not a loss event, but a market risk event.
- A. I, II and III
- B. I and II
- C. I and III
- D. II and III
Answer: D
Explanation:
When a trader inadvertently books a trade with incorrect information and a subsequent market move results in a gain for the bank, the event should be included in the operational loss event data program because:
* Indication of Control Failure (II): The gain indicates that a control failed or a process is flawed. Even if the outcome was a gain, the underlying issue was a mistake, pointing to a weakness in the bank's operational controls that needs to be addressed.
* Recording the Event as a Loss (III): Although the event resulted in a gain, it should be included in the operational loss event data program and recorded as a loss. The principle behind this is to ensure that all operational risk events are tracked, irrespective of their financial outcome, to provide a complete picture of operational risk exposures and to improve risk management practices.
Including such events helps in identifying and correcting process flaws to prevent future incidents that could result in actual losses.
References
* How Finance Works.pdf, Index section
NEW QUESTION # 199
Why do regulatory standards impose formulaic capital calculations for all of the banks activities?
I. If the banks use different models it is difficult for a regulator to compare results across banks.
II. By imposing standardized calculations regulators can make sure that banks are not missing key risks in their calculations.
III. By imposing standardized calculations regulators can make sure that banks do not use capital calculations to game the banking regulation system.
- A. I
- B. II, III
- C. I,II, III
- D. I,II
Answer: C
Explanation:
Regulatory standards impose formulaic capital calculations for all of the bank's activities to ensure:
* Comparability Across Banks: Different models used by banks would make it difficult for regulators to compare results across banks.
* Comprehensive Risk Assessment: Standardized calculations help ensure that banks are not missing key risks in their calculations.
* Avoiding Gaming of the System: Standardized calculations prevent banks from using capital calculations to game the banking regulation system, ensuring consistency and fairness.
ReferencesSource: How Finance Works
NEW QUESTION # 200
Which one of the following four statements does identify correctly the relationship between the value of an option and perceived exchange rate volatility?
- A. As the perceived future foreign exchange volatility decreases, the value of all options increases.
- B. As the perceived future foreign exchange volatility increases, the value of all options increases.
- C. With increases in perceived future foreign exchange volatility, the value of all foreign exchange
- D. Option values can only change due to the factors related to the demand for specific options
Answer: B
Explanation:
The value of an option is influenced by several factors, including the perceived volatility of the underlying asset, in this case, foreign exchange rates. As the perceived future volatility of foreign exchange rates increases, the value of all options (both calls and puts) also increases. This is because higher volatility increases the likelihood that the option will end up in-the-money, thereby increasing its potential payoff. This relationship is fundamental to option pricing models, such as the Black-Scholes model, which incorporate volatility as a key input.
References:This explanation aligns with the principles of option valuation discussed in "How Finance Works" document, which details the effects of volatility on option pricing.
NEW QUESTION # 201
Which one of the four following statements about consortium databases is correct?
Consortium databases
- A. Contain anonymous information.
- B. Provide data to map risk categories with causes.
- C. Gather information from news articles.
- D. Use data from the top 5% of the industry.
Answer: A
NEW QUESTION # 202
According to Basel II what constitutes Tier 3 capital?
- A. Subordinated debt issues that pay interest.
- B. Preference shares that confer on issuers the right to defer payment of a fixed dividend.
- C. Debt capital that can only be used to support market risk in the trading book of the bank.
- D. Hybrid debt capital instruments that are similar to equity.
Answer: C
NEW QUESTION # 203
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. 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. - B. 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. - C. Market, credit and operational risks are perfectly correlated which justifies adding up their associated
economic capital. - D. Regulators require banks to add up economic capital across market, credit and operational risks.
Answer: B
NEW QUESTION # 204
Which of the following statements represents a methodological difference between variance-covariance and
full revaluation methods?
- A. Variance-covariance approach prices positions more accurately than the full revaluation approach.
- B. Variance-covariance approach uses only historic data to compute the covariance matrix.
- C. Variance-covariance approach computes the VAR for each position separately, while the full revaluation
method computes the VAR on a portfolio basis. - D. Variance-covariance approach provides computational advantages over the full revaluation approach.
Answer: D
NEW QUESTION # 205
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. Extend different types of credit
- B. Provide trust, asset management, and trading services to customers
- C. Originate more floating interest rate loans
- D. Charge bank fees for underwriting loans
Answer: C
Explanation:
* Stabilizing Net Income in Volatile Interest Environments:
* Shifting from interest rate-sensitive sources to less sensitive sources is the key strategy to stabilize income.
* Strategies:
* Charging bank fees for underwriting loans: Generates fee income, which is less sensitive to interest rates.
* Providing trust, asset management, and trading services: Fee-based services and trading revenue are less sensitive to interest rates.
* Extending different types of credit: This strategy can diversify risk but does not directly reduce interest rate sensitivity.
* Incorrect Strategy:
* Originate more floating interest rate loans: This increases sensitivity to interest rate changes, opposite of the desired stabilization goal.
ReferencesSource: How Finance Works
NEW QUESTION # 206
Which one of the four following statements about consortium databases is correct?
Consortium databases
- A. Contain anonymous information.
- B. Provide data to map risk categories with causes.
- C. Gather information from news articles.
- D. Use data from the top 5% of the industry.
Answer: A
Explanation:
Consortium databases in the context of operational risk management:
* Gather loss data from multiple firms to provide a comprehensive view of industry-wide risk events.
* Contain anonymous information to protect the identities of the contributing firms while still providing valuable risk data. They do not gather information from news articles, use data only from the top 5% of the industry, or specifically map risk categories with causes.
NEW QUESTION # 207
To hedge equity exposure without buying or selling shares of stock or otherwise rebalancing the portfolio, a
risk manager could initiate
- A. A long debt-for-equity swap.
- B. A short debt-for-equity swap.
- C. A long total return swap position.
- D. A short total return swap position.
Answer: D
NEW QUESTION # 208
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?
- A. The longer the time to maturity of the bond, the lower its yield.
- B. The shorter the time to maturity of the bond, the higher its yield.
- C. The longer the time to maturity of the bond, the higher its yield.
- D. There is no relationship between the two
Answer: C
Explanation:
When the yield curve is upward sloping, it typically indicates that longer-term bonds have higher yields compared to shorter-term bonds. This is due to the risks associated with longer time horizons, including inflation and interest rate risks, which require higher yields to compensate investors.
NEW QUESTION # 209
Which one of the following four statements presents a challenge of using external loss databases in the
operational risk framework?
- A. Use of benchmarked data reflects similar data collection standards.
- B. External events are usually not of interest to senior management.
- C. They provide a source of data on what operational loss events will occur.
- D. If the external data is gathered from news sources, it may only reflect events that are interesting to the
press.
Answer: D
NEW QUESTION # 210
......
Prepare for the Actual Financial Risk and Regulation 2016-FRR Exam Practice Materials Collection: https://www.test4sure.com/2016-FRR-pass4sure-vce.html
Financial Risk and Regulation Certification 2016-FRR Sample Questions Reliable: https://drive.google.com/open?id=1r-DlQZAMRlXOEpwR9lMDqAJxZ0Oxpk8-