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  3. 2016-FRR

GARP 2016-FRR Exam (page: 14)
GARP Financial Risk and Regulation (FRR) Series
Updated on: 09-Feb-2026

Viewing Page 14 of 70
2016-FRR PDF 387 Questions

A risk manager has a long forward position of USD 1 million but the option portfolio decreases JPY 0.50 for every JPY 1 increase in his forward position. At first approximation, what is the overall result of the options positions?

  1. The options positions hedge the forward position by 25%.
  2. The option positions hedge the forward position by 50%.
  3. The option positions hedge the forward position by 75%.
  4. The option positions hedge the forward position by 100%.

Answer(s): B



Which one of the following four options does NOT represent a benefit of compensating balances to the bank?

  1. Compensating balances allow the bank to net some of the exposure they may have in case of default, by taking funds from these specific deposit account one the borrower defaults.
  2. Since the compensating balances cannot be withdrawn at short notice, if at all, they are not considered transaction accounts and are able to provide a stable funding to the bank, reducing its reliance on more volatile external inter-bank based funding sources.
  3. Compensation balances influence the expected loss rate of the bank given the default obligor and improve capital structure by controlling obligor type and avoiding payment delays.
  4. Since the compensating balances reduce the next amount lent to the borrower, the earned return on the loan is increased, further widening the bank's interest rate margin and profitability.

Answer(s): C



In the United States, foreign exchange derivative transactions typically occur between

  1. A few large internationally active banks, where the risks become concentrated.
  2. All banks with international branches, where the risks become widely distributed based on trading exposures.
  3. Regional banks with international operations, where the risks depend on the specific derivative transactions.
  4. Thrifts and large commercial banks, where the risks become isolated.

Answer(s): A



Which of the following risk types are historically associated with credit derivatives?
I) Documentation risk
II) Definition of credit events
III) Occurrence of credit events
IV) Enterprise risk

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

Answer(s): C



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.

What may happen to the Delta's initial credit parameter and the value of its loan if the machinery industry experiences adverse structural changes?

  1. Probability of default and loss at default may decrease simultaneously, while duration rises causing the loan value to decrease.
  2. Probability of default and loss at default may decrease simultaneously, while duration falls causing the loan value to decrease.
  3. Probability of default and loss at default may increase simultaneously, while duration rises causing the loan value to decrease.
  4. Probability of default and loss at default may increase simultaneously, while duration falls causing the loan value to decrease.

Answer(s): D



Viewing Page 14 of 70



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