GARP 2016-FRR Exam (page: 1)
GARP Financial Risk and Regulation (FRR) Series
Updated on: 28-Jul-2025

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ThetaBank has extended substantial financing to two mortgage companies, which these mortgage lenders use to finance their own lending. Individually, each of the mortgage companies have an exposure at default (EAD) of $20 million, with a loss given default (LGD) of 100%, and a probability of default of 10%. ThetaBank's risk department predicts the joint probability of default at 5%. If the default risk of these mortgage companies were modeled as independent risks, the actual probability would be underestimated by:

  1. 1%
  2. 2%
  3. 3%
  4. 4%

Answer(s): D



For which one of the following four reasons do corporate customers use foreign exchange derivatives?
I) To lock in the current value of foreign-denominated receivables
II) To lock in the current value of foreign-denominated payables
III) To lock in the value of expected future foreign-denominated receivables
IV) To lock in the value of expected future foreign-denominated payables

  1. II
  2. I and IV
  3. II and III
  4. I, II, III, IV

Answer(s): D



Gamma Bank provides a $100,000 loan to Big Bath retail stores at 5% interest rate (paid annually). The loan is collateralized with $55,000. 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 exposure at default (EAD) be?

  1. $25,000
  2. $50,000
  3. $75,000
  4. $105,000

Answer(s): B



When looking at the distribution of portfolio credit losses, the shape of the loss distribution is ___ , as the likelihood of total losses, the sum of expected and unexpected credit losses, is ___ than the likelihood of no credit losses.

  1. Symmetric; less
  2. Symmetric; greater
  3. Asymmetric; less
  4. Asymmetric; greater

Answer(s): D



Which one of the following four statements correctly defines chooser options?

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

Answer(s): A



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