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2016-FRR Latest Test Questions | Latest 2016-FRR Exam Fee

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GARP Financial Risk and Regulation (FRR) Series Sample Questions (Q303-Q308):

NEW QUESTION # 303
Which one of the following four statements correctly defines an option's delta?

A. Delta measures the effect of 1 bp in interest rate change on the option price.
B. Delta is the multiplier that best approximates the short-term change in the value of an option.
C. Delta measures the impact of volatility on the price of an option.
D. Delta measures the expected decline in option with time and is usually expressed in years.

Answer: B

Explanation:
Delta is a measure of how much the price of an option is expected to change when the price of the underlying asset changes by one unit. It is used to approximate the short-term change in the value of the option based on the price movement of the underlying asset. Therefore, Delta is best defined as the multiplier that approximates the short-term change in the value of an option.

NEW QUESTION # 304
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 reals at this quoted price. Then the bank immediately buys the real at the market rate and completes foreign exchange matched transaction. What is the financial impact of this transaction for Alpha bank?

A. This transaction leaves the bank a profit of AUD 10,101.
B. This transaction leaves the bank a profit of BRL 10,101.
C. This transaction leaves the bank a loss of BRL 10,101.
D. This transaction leaves the bank a loss of AUD 10,101.

Answer: A

Explanation:
To calculate the financial impact of this transaction for Alpha Bank, follow these steps:
* Customer Transaction:
* Alpha Bank sells BRL 100 million at a quoted rate of 101 to the customer.
* The customer pays in AUD: BRL100,000,000101=AUD990,099.0099rac{BRL 100,000,000}{101} = AUD 990,099.0099101BRL100,000,000=AUD990,099.0099.
* Market Transaction:
* Alpha Bank buys BRL 100 million at the market rate of 100.
* The cost in AUD is: BRL100,000,000100=AUD1,000,000rac{BRL 100,000,000}{100} = AUD
1,000,000100BRL100,000,000=AUD1,000,000.
* Profit Calculation:
* Alpha Bank's profit = Amount received from customer - Cost in the market
* Profit = AUD1,010,000#AUD1,000,000=AUD10,000AUD 1,010,000 - AUD 1,000,000 = AUD
10,000AUD1,010,000#AUD1,000,000=AUD10,000.
Thus, Alpha Bank makes a profit of AUD 10,000 from this transaction.
References
Source: How Finance Works

NEW QUESTION # 305
Which one of the following four statements describes the advantage of using delta-gamma method of mapping options positions over delta-normal method?
Delta-gamma method

A. Overstates the risk of long option positions, but understate the risk of short option positions.
B. Converts options into underlying factor risks according to their deltas and the gammas to those factors.
C. Fully captures option price risk, particularly for extreme price movements.
D. Approximates more accurately the non-linear relationship of option values and risk.

Answer: C

Explanation:
The delta-gamma method improves upon the delta-normal method by incorporating the gamma of the options, which accounts for the curvature in the price relationship of the option to the underlying asset. This method better captures the non-linear aspects of option pricing, especially for extreme price movements. Gamma measures the rate of change of delta with respect to the price of the underlying asset, thus allowing for a more accurate reflection of the option's risk profile. By including gamma, the delta-gamma method can more accurately represent the risks associated with both small and large movements in the underlying asset's price, making it particularly effective for capturing the full spectrum of option price risk.

NEW QUESTION # 306
Under the Standardized Approach in the Basel II Accord, what is the risk weight of a non-performing corporate loan?

A. 200%, if no specific provision has been allocated to the loan, and payments are more than 120 days overdue
B. 150%, if no specific provision has been allocated to the loan, and payments are more than 90 days overdue
C. 125%, if a specific provision is more than 20% of the obligation's outstanding amount and payments are more than 120 days overdue
D. 100%, if a specific provision is less than 75% of the obligation's outstanding amount and payments aremore than 90 days overdue

Answer: B

Explanation:
Comprehensive and Detailed In-Depth Explanation:
Under Basel II's Standardized Approach, non-performing loans (NPLs) past due >90 days receive higher risk weights. For corporate loans:
* 150% risk weight applies if no specific provision exists and payments are >90 days overdue (Option A).
* If provisions cover <20% of the outstanding amount, it's still 150%; if >20%, it drops to 100%. Option B is incorrect (100% requires provisions). Options C and D misalign with Basel II's criteria (no 200% or 120-day rules).
Exact Extract from Official Source:
* BCBS, "Basel II: International Convergence of Capital Measurement and Capital Standards," June
2006, para. 67: "Claims on corporates that are past due for more than 90 days will be risk-weighted at
150% unless specific provisions have been set aside... If provisions exceed 20% of the outstanding amount, the risk weight is reduced to 100%."
* GARP FRR Study Notes, Credit Risk Section: "Non-performing corporate loans under the Standardized Approach are assigned a 150% risk weight when unprovisioned and overdue by more than 90 days." Reference:BCBS, "Basel II," para.67; GARP FRR Study Notes, Credit Risk Section.

NEW QUESTION # 307
What is the explanation offered by the liquidity preference theory for the upward sloping yield curve shape?

A. The short term rates must rise enough to get some borrowers to borrow short-term and some lenders to lend long-term.
B. The long term rates must rise enough to get some borrowers to borrow short-term and some lenders to lend long-term.
C. The short term rates must fall enough to get some borrowers to borrow long-term and some lenders to lend short-term.
D. The long term rates must rise enough to get some borrowers to borrow long-term and some lenders to lend short-term.

Answer: D

Explanation:
The liquidity preference theory suggests that investors prefer shorter-term bonds due to their lower risk and higher liquidity. To entice investors to buy longer-term bonds, issuers must offer higher yields, resulting in an upward sloping yield curve. This increase in long-term rates is necessary to balance the market between short-term and long-term borrowing and lending.

NEW QUESTION # 308
......

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