2016-FRR Exam Dumps Pass with Updated 2025 Certified Exam Questions
2016-FRR Exam Questions - Real & Updated Questions PDF
GARP 2016-FRR Certification Exam is divided into two parts: Part I and Part II. Part I covers foundational knowledge in risk management, while Part II focuses on more advanced topics such as risk measurement, modeling, and regulatory frameworks. Candidates are required to pass both parts of the exam to earn the certification.
NEW QUESTION # 173
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 real at
this quoted price. Then the bank immediately buys the real at the market rate and completes foreign exchange
matched transaction. What is the impact of this transaction on the bank's risk profile?
- A. This transaction eliminates market risk.
- B. This transaction eliminates operational risk.
- C. This transaction eliminates credit risk.
- D. This transaction eliminates counterparty risk.
Answer: A
NEW QUESTION # 174
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. Mitigating option hedging risks and altering margin requirement
- B. Protecting against the risk of the failure of one of the large banks
- C. Eliminating the collateral requirement
- D. Protecting itself against increases in future collateral demands
Answer: A
NEW QUESTION # 175
In analyzing market option pricing dynamics, a risk manager evaluates option value changes throughout the entire trading day. Which of the following factors would most likely affect foreign exchange option values?
I. Change in the value of the underlying
II. Change in the perception of future volatility
III. Change in interest rates
IV. Passage of time
- A. I, II
- B. I, II, III
- C. I, II, III, IV
- D. II, III
Answer: C
Explanation:
The value of foreign exchange options is influenced by several factors, including:
* Change in the value of the underlying (I): This directly affects the option's intrinsic value.
* Change in the perception of future volatility (II): Higher expected volatility increases the option's potential payoff.
* Change in interest rates (III): This affects the cost of carrying positions in the underlying asset.
* Passage of time (IV): This influences the time value of the option. All these factors collectively impact the pricing dynamics of options throughout the trading day.
NEW QUESTION # 176
Bank Sigma has an opportunity to do a securitization deal for a credit card company, but has to retain a portion
of the residual risk of the deal with an estimated VaR of $8 MM. Its fees for the deal are $2 MM, and the
short-term financing costs are $600,000. What would be the RAROC for this transaction?
- A. 12%
- B. 17.5%
- C. 33%
- D. 25%
Answer: B
NEW QUESTION # 177
Which one of the following four parameters is NOT a required input in the Black-Scholes model to price a
foreign exchange option?
- A. Discrete future stock prices
- B. Option exercise price
- C. Underlying interest rates
- D. Underlying exchange rates
Answer: A
NEW QUESTION # 178
By lowering the spread on lower credit quality borrowers, the bank will typically achieve all of the following outcomes EXCEPT:
- A. Lower probability of default
- B. Rapid growth
- C. Aggressively courting of new business
- D. Higher losses in case of default
Answer: A
Explanation:
* Impact of Lowering Spread: By lowering the spread on lower credit quality borrowers, the bank can achieve aggressive courting of new business, rapid growth, and higher losses in case of default due to the increased risk.
* Exception: Lowering the spread will not lead to a lower probability of default. On the contrary, it typically attracts higher-risk borrowers, increasing the likelihood of default.
NEW QUESTION # 179
As an example of the balance sheet effect, if rates rise, Delta Bank can expect:
- A. Its fixed rate assets to increase in value, while that effect will be amplified by a reduction in the value of
its fixed rate liabilities. - B. Its fixed rate assets to increase in value, although that effect will be offset by a reduction in the value of
its fixed rate liabilities. - C. Its fixed rate assets to drop in value, while that effect will be amplified by a reduction in the value of its
fixed rate liabilities. - D. Its fixed rate assets to drop in value, although that effect will be offset by a reduction in the value of its
fixed rate liabilities.
Answer: D
NEW QUESTION # 180
Which one of the following four global markets for financial assets or instruments is widely believed to be the most liquid?
- A. Equity market.
- B. Commodities market
- C. Fixed income market
- D. Foreign exchange market.
Answer: D
Explanation:
The foreign exchange market (forex or FX) is widely believed to be the most liquid financial market in the world. This market operates 24 hours a day and involves the highest volume of trading compared to other financial markets. The high liquidity is due to the significant volume of transactions conducted by various participants, including governments, financial institutions, corporations, and individual traders. The vast number of buyers and sellers ensures that trades can be executed quickly and at stable prices.
NEW QUESTION # 181
In additional to the commodity-specific risks, which of the following risks represent the main commodity derivative risks?
I. Basis
II. Term
III. Correlation
IV. Seasonality
- A. I, II
- B. I, II, III, IV
- C. I, IV
- D. II, III
Answer: B
Explanation:
Commodity derivative risks encompass a variety of factors, and among the main risks are:
* Basis Risk: This arises from the difference between the spot price of the commodity and the futures price of the commodity.
* Term Risk: This refers to the risk associated with the time to maturity of the derivative contract.
* Correlation Risk: This involves the risk that the price of the commodity does not move in correlation with the derivative being used to hedge.
* Seasonality Risk: This arises from the predictable fluctuations in commodity prices due to seasonal patterns.
All these risks are essential in understanding the complete risk profile associated with commodity derivatives.
ReferencesInformation verified based on the financial risk and regulation context provided in the book "How Finance Works".
NEW QUESTION # 182
Which one of the following four physical commodities markets has the right combination of characteristics
that generally allows short selling in the market, without making the short-selling transaction prohibitively
expensive?
- A. Gold
- B. Oil
- C. Grain
- D. Natural Gas
Answer: A
NEW QUESTION # 183
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.
- A. I, II, and III
- B. I and II
- C. I, III, and IV
- D. III and IV
Answer: C
Explanation:
Banks set risk limits for several reasons:
* To control and minimize a bank's current risk exposure: This helps in managing and mitigating existing risks.
* To allocate risks to business units: This ensures that risks are managed at appropriate levels within the organization.
* To keep risk within tolerance levels: This ensures that the bank's overall risk exposure does not exceed its risk appetite.
Setting these limits is a proactive measure to ensure that the bank operates within its risk capacity and is prepared for potential future risks.
NEW QUESTION # 184
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. Decreased by 880 basis points
- C. Increased by 1120 basis points
- D. Increased by 1000 basis points
Answer: C
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 # 185
According to the largest global poll of foreign exchange market participants, which one of the following four
global financial institutions was the most active participant in the global foreign exchange market?
- A. UBS AG
- B. Barclays Capital
- C. Citibank
- D. Deutsche Bank
Answer: D
NEW QUESTION # 186
Present value of a basis point (PVBP) is one of the ways to quantify the risk of a bond, and it measures:
- A. The percentage change in bond price when yields change by 1 basis point.
- B. The present value of the future cash flows of a bond calculated at a yield equal to 1%.
- C. The percentage change in bond price when the yields change by 1%.
- D. The change in value of a bond when yields increase by 0.01%.
Answer: D
NEW QUESTION # 187
Which one of the following four statements about regulatory capital for a bank is accurate?
- A. Regulatory capital is determined by rules imposed by an outside authority, such as a supervisor or central bank.
- B. Regulatory capital is the lowest level of economic capital the bank should have to meet regulatory requirement.
- C. Regulatory capital reflects the economic tradeoffs of the bank as accurately as the bank can represent them.
- D. Regulatory capital is less than the regulatory capital requirement.
Answer: A
Explanation:
Regulatory capital is the minimum amount of capital that a bank is required to hold by financial regulators.
These rules are imposed by outside authorities such as central banks or financial supervisory bodies to ensure the stability and solvency of financial institutions. This differs from economic capital, which is determined internally by the bank to cover its own estimated risk exposures.
NEW QUESTION # 188
In the United States, Which one of the following four options represents the largest component of securitized debt?
- A. Lines of credit
- B. Credit card loans
- C. Real estate loans
- D. Education loans
Answer: C
Explanation:
In the United States, the largest component of securitized debt is represented by real estate loans.
Securitization involves pooling various types of debt instruments, including mortgages, auto loans, credit card debt, and others, and selling them as bonds to investors. The largest portion of this market is dominated by mortgage-backed securities (MBS), which are based on real estate loans. These securities were especially prominent leading up to the 2008 financial crisis and continue to represent a significant share of the securitization market.
NEW QUESTION # 189
As Japan ___ its budget deficits and ___ its dependence on debt, the Japanese currency, JPY, would ___ in
value against other currencies.
- A. Reduces, reduces, depreciate
- B. Reduces, reduces, appreciate
- C. Reduces, increases, depreciate
- D. Increases, reduces, appreciate
Answer: B
NEW QUESTION # 190
Which of the following statements about the interest rates and option prices is correct?
- A. As interest rates rise, all options will rise in value.
- B. As interest rates fall, all options will rise in value.
- C. If rho is positive, rising interest rates decrease option prices.
- D. If rho is positive, rising interest rates increase option prices.
Answer: D
NEW QUESTION # 191
Which one of the following four regulatory drivers for operational risk management includes risk and control
requirements for financial statements in the United States?
- A. Basel II Accord
- B. The Markets in Financial Instruments Directive
- C. Solvency II
- D. The Sarbanes-Oxley Act
Answer: D
NEW QUESTION # 192
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, II, III
- C. I, III, IV
- D. II, III, IV
Answer: C
NEW QUESTION # 193
Which one of the following four alternatives lists the three most widely traded currencies on the global foreign
exchange market, as of April 2007, in the decreasing order of market share? EUR is the abbreviation of the
European euro, JPY is for the Japanese yen, and USD is for the United States dollar, respectively.
- A. USD, JPY, EUR
- B. USD, EUR, JPY
- C. JPY, EUR, USD
- D. EUR, USD, JPY
Answer: B
NEW QUESTION # 194
A risk associate evaluating his current portfolio of assets and liabilities wants to determine how sensitive this
portfolio is to changes in interest rates. Which one of the following four metrics is typically used for this
purpose?
- A. Macaulay duration
- B. Effective duration
- C. Modified duration
- D. Duration of default
Answer: C
NEW QUESTION # 195
From the bank's point of view, repricing the retail debt portfolio will introduce risks of fluctuations in:
I. Duration
II. Loss given default
III. Interest rates
IV. Bank spreads
- A. I, II
- B. II
- C. III, IV
- D. I
Answer: C
NEW QUESTION # 196
Which one of the following four statements about regulatory capital for a bank is accurate?
- A. Regulatory capital reflects the economic tradeoffs of the bank as accurately as the bank can represent
them. - B. Regulatory capital is the lowest level of economic capital the bank should have to meet regulatory
requirement. - C. Regulatory capital is determined by rules imposed by an outside authority, such as a supervisor or
central bank. - D. Regulatory capital is less than the regulatory capital requirement.
Answer: C
NEW QUESTION # 197
Which one of the following four model types would assign an obligor to an obligor class based on the risk
characteristics of the borrower at the time the loan was originated and estimate the default probability based on
the past default rate of the members of that particular class?
- A. Credit rating models
- B. Dynamic models
- C. Causal models
- D. Historical frequency models
Answer: D
NEW QUESTION # 198
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