Exam Questions and Answers for 2016-FRR Study Guide Questions and Answers!
Financial Risk and Regulation (FRR) Series Certification Sample Questions and Practice Exam
The Global Association of Risk Professionals (GARP) is a non-profit organization that specializes in developing and promoting best practices in the field of risk management. GARP offers a variety of educational programs and certification exams to help professionals develop their skills and advance their careers in the field of risk management. One of the most popular certification exams offered by GARP is the Financial Risk and Regulation (FRR) Series.
The 2016-FRR exam is the latest version of the FRR Series. 2016-FRR exam was updated to reflect the changing regulatory environment and the evolving nature of financial risks. The 2016-FRR exam is designed to test candidates' knowledge of the latest regulations and best practices in risk management. It is also designed to help candidates develop the skills and knowledge they need to succeed in today's fast-paced financial industry.
NEW QUESTION # 123
Which one of the following four statements correctly defines chooser options?
- A. The owner of these options decides if the option is a call or put option only when a predetermined date is reached.
- B. These options give the holder the right to exchange one asset for another.
- C. These options represent a variation of the plain vanilla option where the underlying asset is a basket of currencies.
- D. These options pay an amount equal to the power of the value of the underlying asset above the strike price.
Answer: A
Explanation:
Chooser options give the holder the flexibility to decide whether the option will be a call or a put at a specific future date. This feature makes chooser options valuable in uncertain market conditions, as the holder can choose the type of option that will be more beneficial depending on the market scenario at the decision point.
NEW QUESTION # 124
Which of the following statements about endogenous and external types of liquidity are accurate?
I. Endogenous liquidity is the liquidity inherent in the bank's assets themselves.
II. External liquidity is the liquidity provided by the bank's liquidity structure to fund its assets and maturing
liabilities.
III. External liquidity is the non-contractual and contingent capital supplied by investors to support the bank in
times of liquidity stress.
IV. Endogenous liquidity is the same as funding liquidity.
- A. I, II
- B. II, III
- C. I, III
- D. I, II, IV
Answer: C
NEW QUESTION # 125
Which one of the following four statements correctly describes an American call option?
- A. An American call option gives the buyer of that call option the right to sell the underlying instrument on the expiry date.
- B. An American call option gives the buyer of that call option the right to sell the underlying instrument on any date up to and including the expiry date.
- C. An American call option gives the buyer of that call option the right to buy the underlying instrument on any date up to and including the expiry date.
- D. An American call option gives the buyer of that call option the right to buy the underlying instrument on the expiry date.
Answer: C
Explanation:
An American call option allows the holder to purchase the underlying asset at any time before the option's expiration. This is in contrast to a European call option, which can only be exercised at the expiry date. The ability to exercise at any time gives the American option greater flexibility and potential value.
NEW QUESTION # 126
A credit portfolio manager analyzes a large retail credit portfolio. Which of the following factors will represent typical disadvantages of market-linked credit risk drivers?
I. Need to supply a large number of input parameters to the model
II. Slow computation speed due to higher simulation complexity
III. Non-linear nature of the model applicable to a specific type of credit portfolios IV. Need to estimate a large number of unknown variable and use approximations
- A. I
- B. II, III
- C. I, II
- D. III, IV
Answer: C
Explanation:
Market-linked credit risk drivers often face specific disadvantages:
* Need to supply a large number of input parameters to the model: Complex models require numerous data inputs, which can be challenging to obtain and maintain.
* Slow computation speed due to higher simulation complexity: The complexity of these models can lead to slower computation times, making them less efficient for real-time analysis.
Non-linear nature of models and the need to estimate unknown variables are also relevant but are not as primary disadvantages as the first two mentioned.
References
* Verified information from the document
NEW QUESTION # 127
AlphaBank's management is evaluating how changes in its business environment could materially impact risk
categories. As a result, bank's management decides to implement the structure, which facilitates the discussion
in an integrative context, spanning market, credit, and operational risk factors, and encourages transparency
and communication between risk disciplines. Which one of the following four approaches should the
management choose to achieve this strategic goal?
- A. Scenario-based risk management approach
- B. Regulatory risk management approach
- C. Taxonomy-based risk management approach
- D. Enterprise risk management approach
Answer: D
NEW QUESTION # 128
An asset and liability manager for a large financial institution has to recognize that retail products ___ include embedded options, which are often not rationally exercised, while wholesale products ___ carry penalties for repayment or include rights to terminate wholesale contracts on very different terms than are common in retail products.
- A. Frequently; typically
- B. Hardly ever; typically
- C. Frequently; rarely
- D. Hardly ever; rarely
Answer: A
NEW QUESTION # 129
A bank has a large number of auto loans and would prefer to sell them to raise cash for more funding.
However, selling individual auto loans is difficult. What could the bank do?
- A. Merge with another bank.
- B. Set up a marketing team to sell individual loans to investors.
- C. Obtain a stronger credit rating so that the bank could borrow at a cheaper rate.
- D. Package the loans into a securitized vehicle and sell the low risk portion of the portfolio.
Answer: D
NEW QUESTION # 130
Which one of the following four features is NOT a typical characteristic of futures contracts?
- A. Daily margin calls
- B. Fixed notional amount per contract
- C. Fixed dates for delivery
- D. Traded Over-the-counter only
Answer: D
Explanation:
Futures contracts have several key characteristics that differentiate them from other types of financial instruments. The features include a fixed notional amount per contract, fixed dates for delivery, and daily margin calls to manage credit risk. Futures are standardized contracts traded on exchanges, not over-the-counter (OTC). OTC trading typically refers to securities or derivatives that are not listed on formal exchanges and are traded directly between parties, which is not a feature of futures contracts.
NEW QUESTION # 131
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. $750
- B. $300
- C. $550
- D. $1,050
Answer: D
NEW QUESTION # 132
Most loans and deposits in the interbank market have a maturity of:
- A. More than 3 years but less than 5 years
- B. Less than one year
- C. More than 10 years
- D. More than 5 years but less than 10 years
Answer: B
Explanation:
Most loans and deposits in the interbank market have a maturity of less than one year. This short-term nature is due to the need for liquidity and flexibility among banks, allowing them to manage their short-term funding requirements and respond to changes in interest rates and market conditions effectively.
NEW QUESTION # 133
Which of the following are conclusions that could be drawn from the shape of the statistical distribution of losses that a bank might incur over a future time period?
I. In most years a bank would look more profitable than it will be on average.
II. Most of the time a sufficiently well capitalized bank will appear over-capitalized.
III. Bad years do not come along very often, but when they do they lead to enormous losses.
- A. I, II
- B. II, III
- C. I, II, III
- D. I, III
Answer: C
Explanation:
From the statistical distribution of bank losses over a future period, several conclusions can be drawn:
* I. In most years a bank would look more profitable than it will be on average: This indicates that most years will show better-than-average profitability because the distribution of losses includes infrequent but severe loss events.
* II. Most of the time a sufficiently well-capitalized bank will appear over-capitalized: Because banks prepare for rare but significant losses, in normal years, their capital reserves may seem excessive.
* III. Bad years do not come along very often, but when they do they lead to enormous losses: This reflects the heavy-tailed nature of the loss distribution, where extreme losses are rare but severe.
All three statements correctly reflect the characteristics of the loss distribution for banks.
How Finance Works, sections covering statistical analysis of losses and capital adequacy.
NEW QUESTION # 134
Bank Omega is using futures contracts on a well capitalized exchange to hedge its market risk exposure.
Which of the following could be reasons that expose the bank to liquidity risk?
I. The bank may not be able to unwind the futures contracts before expiration.
II. Prices may move such that a loss results on the hedge.
III. Since futures require margins which are settled every day, the bank could find itself scrambling for funds.
IV. Exchange margin requirements could change unexpectedly.
- A. I, III, IV
- B. I, II, III, IV
- C. I, IV
- D. III, IV
Answer: D
NEW QUESTION # 135
Which one of the following four statements about planning for the operational risk framework is INCORRECT?
- A. An operational risk framework is a complex and evolving challenge, and to keep its development under control it is important to apply strong project management skills to the design and implementation of each new element.
- B. Planning for the operational risk framework involves setting clear goals, realistic milestones and achievable deliverables that add value.
- C. Once the elements of an operational risk framework are up and running, they need to be monitored to ensure they maintain their integrity and do not deteriorate over time.
- D. Planning for the operational risk framework suggests that short-term planning and focus on immediate benefits is strongly preferred to the long-term planning approach.
Answer: D
Explanation:
Planning for the operational risk framework generally involves setting clear goals, realistic milestones, and achievable deliverables that add value. Strong project management skills are applied to the design and implementation of each new element to manage the complexity and evolution of the framework. Once the elements are operational, they need to be monitored to ensure their integrity over time. Short-term planning and immediate benefits are not preferred over long-term planning in this context.
References:Financial Risk and Regulation documents on operational risk framework planning.
NEW QUESTION # 136
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. Increases; decreases;
- C. Increases; increases;
- D. Decreases; increases;
Answer: C
NEW QUESTION # 137
Which one of the four following statements about technology systems for managing operational risk event
data is incorrect?
- A. The implementation of a new operational risk event loss database has to incorporate an analysis of the
advantages and disadvantages of external systems. - B. Operational risk event databases are always integrated with the other components of the operational risk
management program. - C. Operational risk event databases are independent elements of the operational risk management
framework. - D. Operational risk loss event data collection software can be internally developed.
Answer: B
NEW QUESTION # 138
Which one of the following four statements about planning for the operational risk framework is
INCORRECT?
- A. Planning for the operational risk framework suggests that short-term planning and focus on immediate
benefits is strongly preferred to the long-term planning approach. - B. An operational risk framework is a complex and evolving challenge, and to keep its development under
control it is important to apply strong project management skills to the design and implementation of
each new element. - C. Planning for the operational risk framework involves setting clear goals, realistic milestones and
achievable deliverables that add value. - D. Once the elements of an operational risk framework are up and running, they need to be monitored to
ensure they maintain their integrity and do not deteriorate over time.
Answer: A
NEW QUESTION # 139
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, III, IV
- C. II, III, IV
- D. I, II, III
Answer: B
NEW QUESTION # 140
Using a forward transaction, Omega Bank buys 100 metric tones of aluminum for delivery in six-months' time.
However, after two months, the bank becomes concerned with the potential fluctuations in aluminum prices
and wants to hedge its potential exposure against a possible decline in aluminum prices. Which one of the
following four strategies could the bank use to offset the risk from its current exposure to aluminum as it sets
the price for selling the commodity in four-months' time?
- A. Buy an aluminum futures contract
- B. Sell an aluminum forward contract
- C. Sell an aluminum futures contract
- D. Buy an aluminum forward contract
Answer: C
NEW QUESTION # 141
A customer of EtaBank, Alfred Fall, fell on the marble floors of the bank and sustained substantial injuries.
Subsequently, he won a personal injury claim of $50,000 against EtaBank. How should EtaBank's operational
loss data event information database categorize this event?
- A. This event would qualify as "Employment Practices and Workplace Safety".
- B. This event would qualify as "Business Disruption and System Failures".
- C. This event would not qualify as an operational risk event.
- D. This event would qualify as "Legal Risk".
Answer: A
NEW QUESTION # 142
A key function of treasuries in commercial/retail banks is:
I. To manage the interest margin of the banks.
II. To focus on underwriting risk.
III. To ensure strong earnings.
IV. To increase profit margins.
- A. II, III
- B. III, IV
- C. I
- D. II
Answer: C
NEW QUESTION # 143
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