2016-FRR Exam Dumps - GARP Financial Risk and Regulation Questions and Answers

The modified duration of a bond can be estimated using the following formula: Modified Duration=Δ????/????Δ????Modified Duration=ΔyΔP/P​ where Δ????ΔP is the change in the bond's price, ????P is the initial price, and Δ????Δy is the change in yield.

Given:

Initial price (P) = $87,000

New price after yield change (P') = $84,500

Change in price (ΔP) = $87,000 - $84,500 = $2,500

Change in yield (Δy) = 5.7% - 4.7% = 1% = 0.01

Modified Duration = 2,500/87,0000.01=0.0287350.01=2.8735≈2.880.012,500/87,000​=0.010.028735​=2.8735≈2.88

The Basel II Accord's operational risk definition specifically includes legal risk. Operational risk under Basel II is defined as the risk of loss resulting from inadequate or failed internal processes, people, and systems, or from external events. This definition explicitly includes legal risk but excludes strategic and reputational risks.

Position mapping is used in risk management to simplify the assessment of risks associated with various positions. The objectives of position mapping are:

For VaR (Value at Risk) calculations, it converts positions based on their deltas to underlying factor risks. This means mapping the positions to their underlying risk factors to make the complex position simpler to manage and evaluate.

Position mapping models risk factors affecting the value of a position as a combination of core risk factors used in the VaR calculations. This involves breaking down the complex risk factors into more manageable and fundamental risk components that can be easily analyzed.

By focusing on these two objectives, position mapping helps in both simplifying the risk assessment process and in ensuring that the primary risk factors are correctly identified and managed.

Entering into interest rate swaps can help a risk analyst reduce the bank's exposure to rising interest rates. Interest rate swaps can be used to convert variable-rate liabilities into fixed-rate liabilities, thereby reducing the risk associated with rising interest rates.

Value at Risk (VaR) at a 95% confidence level indicates that there is a 95% probability that the loss will not exceed the specified amount (30 million EUR) over a given period (1 month in this case). Conversely, there is a 5% chance that the loss could exceed this amount.

References:

Explanation from standard VaR concepts and financial risk management practices.

Covariance is a measure of the degree to which two variables move together. It is calculated as the average product of the deviations of each pair of observations from their respective means. If the covariance is positive, the variables tend to move in the same direction. If it is negative, they move in opposite directions.

The amount of Mega Bank's rate-sensitive liabilities includes the $150 million in deposits that reprice every month at LIBOR + 3%. These deposits are considered rate-sensitive liabilities because their interest rates are adjusted monthly based on LIBOR.

I. Selling or securitizing assets:

This is a common method to quickly generate liquidity during stressed conditions by converting non-liquid assets into cash.

II. Obtaining additional credit lines:

This method provides immediate access to additional funds when required, enhancing liquidity.

III. Securing a better credit rating:

While important for long-term financial health, this is not a direct method to increase liquidity in stressed conditions.

Thus, the most common methods to increase liquidity in stressed conditions are selling or securitizing assets and obtaining additional credit lines.

References:These methods are standard practices as detailed in the financial risk and regulation documentation, and they are widely recognized strategies for managing liquidity under stress.

Please refer to the provided financial documentation for further verification and detailed explanations .

Market timing trading involves making buy or sell decisions of financial assets by attempting to predict future market price movements. This strategy:

Long positions when markets are rising: The trader buys securities expecting their prices to increase.

Short positions when markets are falling: The trader sells securities expecting their prices to decrease.

This behavior aligns with market timing, which is an active trading strategy based on the anticipated direction of market prices.

ReferencesSource: How Finance Works​

Interest rates can vary based on the term of the debt instrument. Generally, short-term interest rates are more sensitive to changes in monetary policy and economic conditions, leading to higher variability compared to long-term interest rates. This is because short-term rates are directly influenced by central bank policies, such as changes in the federal funds rate, which can lead to frequent fluctuations. Long-term rates, on the other hand, are influenced more by long-term economic expectations and inflation forecasts, which tend to be more stable over time.