GARP 2016-FRR Certification All-in-One Exam Guide Sep-2025
Get Real 2016-FRR Exam Dumps [Sep-2025] Practice Tests
NEW QUESTION # 50
To hedge a foreign exchange exposure on behalf of a client, a small regional bank seeks to enter into an offsetting foreign exchange transaction. It cannot access the large and liquid interbank market open primarily to larger banks. At which one of the following exchanges can the smaller bank trade the currency futures contracts?
I. The Tokyo Futures Exchange
II. The Euronext-Liffe Exchange
III. The Chicago Mercantile Exchange
- A. I, II, III
- B. I
- C. III
- D. II, III
Answer: A
Explanation:
A small regional bank seeking to hedge foreign exchange exposure can access currency futures contracts on several exchanges, including the Tokyo Futures Exchange, the Euronext-Liffe Exchange, and the Chicago Mercantile Exchange. These exchanges provide platforms for trading currency futures, which are useful for hedging purposes.
References:Information about the accessibility of currency futures contracts on these exchanges is available in financial market resources and the "How Finance Works" document.
NEW QUESTION # 51
Which of the following attributes of duration gap model typically cause criticism?
I. Basis risk
II. Errors in the linear model
III. Costs of immunization
IV. Constant nature of calculation
- A. I, II, III
- B. I, II
- C. II, III, IV
- D. I, III, IV
Answer: A
NEW QUESTION # 52
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?
- A. $25,000
- B. $50,000
- C. $75,000
- D. $105,000
Answer: B
NEW QUESTION # 53
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. Sell an aluminum futures contract
- B. Sell an aluminum forward contract
- C. Buy an aluminum futures contract
- D. Buy an aluminum forward contract
Answer: A
Explanation:
To hedge against potential declines in aluminum prices, Omega Bank should take a position that benefits from a price drop. Here are the steps and strategies:
* Current Position:
* Omega Bank has bought 100 metric tons of aluminum for delivery in six months.
* Hedging Strategy:
* To protect against a decline in aluminum prices, the bank should take a short position in the aluminum futures market. This involves selling aluminum futures contracts.
* Execution:
* By selling an aluminum futures contract, Omega Bank locks in a price for selling aluminum in the future, thus offsetting the risk of price declines.
The correct strategy is to sell an aluminum futures contract, which effectively hedges the bank's exposure to a potential drop in aluminum prices.
ReferencesSource: How Finance Works
NEW QUESTION # 54
In the United States, during the second quarter of 2009, transactions in foreign exchange derivative contracts
comprised approximately what proportion of all types of derivative transactions between financial institutions?
- A. 43%
- B. 25%
- C. 7%
- D. 2%
Answer: C
NEW QUESTION # 55
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. JPY, EUR, USD
- B. EUR, USD, JPY
- C. USD, EUR, JPY
- D. USD, JPY, EUR
Answer: C
Explanation:
As of April 2007, the three most widely traded currencies on the global foreign exchange market in decreasing order of market share were the United States dollar (USD), the European euro (EUR), and the Japanese yen (JPY). This ranking reflects the liquidity and trading volume associated with each currency, with the USD being the most traded, followed by the EUR and then the JPY.
References:Information confirming the ranking of the three most widely traded currencies can be found in financial market reports and historical data from financial institutions that track foreign exchange volumes.
NEW QUESTION # 56
Oliver McCarthy owns a portfolio of bonds. Which of the following choices equals the modified duration of
Oliver's portfolio?
- A. Maximum of the modified durations of component bonds
- B. Coupon-weighted average modified duration of the component bonds
- C. Value-weighted average modified duration of the component bonds
- D. Minimum of the modified durations of the component bonds
Answer: C
NEW QUESTION # 57
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. Sell an aluminum futures contract
- B. Sell an aluminum forward contract
- C. Buy an aluminum futures contract
- D. Buy an aluminum forward contract
Answer: A
NEW QUESTION # 58
Which one of the following four statements presents a challenge of using external loss databases in the
operational risk framework?
- A. Use of benchmarked data reflects similar data collection standards.
- B. They provide a source of data on what operational loss events will occur.
- C. If the external data is gathered from news sources, it may only reflect events that are interesting to the
press. - D. External events are usually not of interest to senior management.
Answer: C
NEW QUESTION # 59
Which of the following statements presents an advantage of using risk and control self-assessments (RCSA) in
the operational risk framework?
I. RCSA provides very accurate scoring of risks and controls due to its subjective nature.
II. RCSA program provides insight into risks that exist in a firm, but that may or may not have occurred
before.
III. RCSA program can produce biased but transparent operational risk reporting.
IV. RCSA program allows each department to take ownership of its own risks and controls.
- A. I, II and III
- B. I and III
- C. II and IV
- D. II, III, and IV
Answer: C
NEW QUESTION # 60
A multinational bank just bought two bonds each worth $10,000. One of the bonds pays a fixed interest of 5% semi-annually and the other pays LIBOR semi-annually. The six month LIBOR is at 5% currently. The risk manager of the bank is concerned about the sensitivity to interest rates. Which of the following statements are true?
- A. The price of the bond paying floating interest is more sensitive to interest rates than the bond paying fixed interest.
- B. The price of the bond paying fixed interest is more sensitive to interest rates than the bond paying floating interest.
- C. Both bond prices are equally sensitive to interest rates.
- D. The given information is not enough to determine the sensitivity of the bond prices.
Answer: B
Explanation:
A bond that pays fixed interest is more sensitive to changes in interest rates than a bond that pays floating interest. This is because the fixed interest bond's coupon payments are constant, and its price will fluctuate more as interest rates change. In contrast, the floating interest bond adjusts its coupon payments according to the current interest rates, making its price less sensitive to changes in the market interest rates.
NEW QUESTION # 61
Which one of the following four interest rate related yield curves is used to revalue loan and deposit positions in banks?
- A. Cash
- B. Bond
- C. Basis
- D. Derivative
Answer: A
Explanation:
Cash yield curves are used to revalue loan and deposit positions in banks. The cash yield curve reflects the relationship between the yield on short-term cash instruments and their maturity. This curve is crucial for banks as it helps in determining the value of their loan and deposit portfolios, which are often sensitive to changes in short-term interest rates.
NEW QUESTION # 62
Which of the following attributes are typical for early models of statistical credit analysis?
- A. These models effectively incorporated herd behavior.
- B. These models assumed the default of any obligor was independent of the default of any other.
- C. The underlying default assumptions were analytically inconvenient.
- D. The underlying default assumptions failed to develop relatively simple formulas for the determination of
portfolio credit risk.
Answer: B
NEW QUESTION # 63
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 expected loss be?
- A. $1,300
- B. $750
- C. $500
- D. $1,000
Answer: C
NEW QUESTION # 64
To estimate a partial change in option price, a risk manager will use the following formula:
- A. Partial change in option price = Delta x Gamma x Change in underlying price
- B. Partial change in option price = Delta x (1+ Change in underlying price)
- C. Partial change in option price = Delta x Change in underlying price
- D. Partial change in option price = Delta x Gamma x (1+ Change in underlying price)
Answer: C
NEW QUESTION # 65
Which one of the following four statements about planning for the operational risk framework is INCORRECT?
- A. 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.
- B. Planning for the operational risk framework involves setting clear goals, realistic milestones and achievable deliverables that add value.
- C. 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.
- 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 # 66
Over a long period of time DeltaBank has amassed a large equity option position. Which of the following risks should be considered in this transaction?
I. Counterparty risk on long OTC option positions
II. Counterparty risk on short OTC option positions
III. Counterparty risk on long exchange-traded option positions
IV. Counterparty risk on short exchange-traded option positions
- A. II, III, IV
- B. I, II
- C. I
- D. II, III
Answer: B
Explanation:
DeltaBank should consider counterparty risk on both long and short OTC option positions. OTC options do not go through a centralized exchange, making them subject to counterparty risk. Exchange-traded options have significantly lower counterparty risk because the exchange acts as the counterparty to all trades.
NEW QUESTION # 67
For non-retail exposures, which one of the following factors must be determined by a bank when using the Foundation Internal Ratings-Based Approach?
- A. PD (Probability of Default)
- B. LGD (Loss Given Default)
- C. M (Maturity)
- D. EAD (Exposure at Default)
Answer: A
Explanation:
Comprehensive and Detailed In-Depth Explanation:
Under Basel II's Foundation Internal Ratings-Based (FIRB) Approach for non-retail exposures (e.g., corporate loans), banks are required to estimate the Probability of Default (PD) internally, while the Basel framework provides supervisory estimates for Loss Given Default (LGD), Exposure at Default (EAD), and Maturity (M). PD represents the likelihood of an obligor defaulting within a year and is a key input into the risk-weighted asset (RWA) calculation. The FIRB approach balances bank-specific inputs with standardized parameters, distinguishing it from the Advanced IRB approach, where banks also estimate LGD and EAD.
Reference:BCBS, "Basel II: International Convergence of Capital Measurement and Capital Standards," June
2006, para. 245-250; GARP FRR Study Notes, Credit Risk Section.
NEW QUESTION # 68
Samuel Teng owns a portfolio of bonds and is trying to compute the convexity of his portfolio. Which of the following choices equals the convexity of Samuel's portfolio?
- A. Maximum of the convexities of the component bonds
- B. Minimum of the convexities of the component bonds
- C. Coupon-weighted average convexity of the component bonds
- D. Value-weighted average convexity of the component bonds
Answer: D
Explanation:
* Explanation:
* The convexity of a portfolio of bonds is calculated as the value-weighted average convexity of the individual bonds. This considers the proportion of each bond's value in relation to the total portfolio value.
References Explanation based on portfolio management principles.
NEW QUESTION # 69
Mega Bank has $100 million in deposits on which it pays 3% interest, and $20 million in equity on which it pays no interest. The loan portfolio of $120 million earns an average rate of 10%. If the rates remain the same and Mega Bank is able to earn the same net interest income in perpetuity at a 5% discount rate, what will the present value of this holding be?
- A. $200 million
- B. $180 million
- C. $150 million
- D. $100 million
Answer: A
Explanation:
* Net Interest Income Calculation:
* As previously calculated, the net interest income is $9 million per year.
* Present Value of Perpetuity Formula:
* Present Value (PV) = Net Interest Income / Discount Rate
* PV = $9 million / 0.05 = $180 million
Correction:
* The net interest income was stated as $9 million earlier, but here, let's verify this calculation:
* Interest income from $120 million at 10% = $12 million
* Interest expense on $100 million at 3% = $3 million
* Net interest income = $12 million - $3 million = $9 million
* Correct Present Value Calculation:
* PV = $9 million / 0.05 = $180 million
Final Verification:
* The previous net interest income used is correct and the final PV calculation should stand corrected as per the perpetual formula:
* PV = $9 million / 0.05 = $180 million, confirming the right choice should be $180 million.
References
Source: How Finance Works
NEW QUESTION # 70
Which one of the following activities is carried out by the back office?
- A. Confirmations
- B. Marketing
- C. Risk management
- D. Trading
Answer: A
Explanation:
Comprehensive and Detailed In-Depth Explanation:
The back office in a bank handles post-trade activities, including trade confirmations, settlement, clearing, and record-keeping, ensuring transactions are accurately processed and reconciled. Risk management (A) is typically a middle office function, trading (C) is front office, and marketing (D) is a business development role. Basel II and GARP's FRR emphasize the segregation of duties, with confirmations as a core back-office responsibility to mitigate operational risk.
Reference:GARP FRR Study Notes, Operational Risk Section; BCBS, "Basel II," June 2006, para. 665.
NEW QUESTION # 71
Rising TED spread is typically a sign of increase in what type of risk among large banks?
I. Credit risk
II. Market risk
III. Liquidity risk
IV. Operational risk
- A. I and IV
- B. I, II, and III
- C. I only
- D. II only
Answer: C
NEW QUESTION # 72
Which one of the four following statements describes a specific characteristic of risk and control
self-assessments (RCSA) which distinguishes it from both control assessments and risk and control
assessments?
- A. RCSA includes a risk assessment in addition to a control assessment.
- B. RCSA is subjective by nature.
- C. RCSA tests a control's effectiveness against set criteria and issues a pass/fail or level of effectiveness
score. - D. RCSA is conducted by a third party, perhaps audit, compliance or the Sarbanes-Oxley team.
Answer: B
NEW QUESTION # 73
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