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

Question # 74

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?

Options:

A.

Probability of default and loss at default may decrease simultaneously, while duration rises causing the loan value to decrease.

B.

Probability of default and loss at default may decrease simultaneously, while duration falls causing the loan value to decrease.

C.

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

D.

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

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Question # 75

An asset manager for a large mutual fund is considering forward exchange positions traded in a clearinghouse system and needs to mitigate the risks created as a result of this operation. Which of the following risks will be created as a result of the forward exchange transaction?

Options:

A.

Exchange rate risk

B.

Exchange rate and interest rate risk

C.

Credit risk

D.

Exchange rate and credit risk

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Question # 76

Which one of the following four statements correctly defines an option's delta?

Options:

A.

Delta measures the expected decline in option with time and is usually expressed in years.

B.

Delta measures the effect of 1 bp in interest rate change on the option price.

C.

Delta is the multiplier that best approximates the short-term change in the value of an option.

D.

Delta measures the impact of volatility on the price of an option.

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Question # 77

The potential failure of a manufacturer to honor a warranty might be called ____, whereas the potential failure of a borrower to fulfill its payment requirements, which include both the repayment of the amount borrowed, the principal and the contractual interest payments, would be called ___.

Options:

A.

Credit risk; market risk

B.

Market risk; credit risk

C.

Credit risk; performance risk

D.

Performance risk; credit risk

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Question # 78

Which one of the following four option types has two strike prices?

Options:

A.

Asian options

B.

American options

C.

Range options

D.

Shout options

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Question # 79

Which one of the following four exotic option types has another option as its underlying asset, and as a result of its construction is generally believed to be very difficult to model?

Options:

A.

Spread options

B.

Chooser options

C.

Binary options

D.

Compound options

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Question # 80

To quantify the aggregate average loss for the credi t subportfolios, a credit portfolio manager should use the following metric:

Options:

A.

Credit VaR

B.

Expected loss

C.

Unexpected loss

D.

Factor sensitivity

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Question # 81

Which one of the following four models is typically used to grade the obligations of small- and medium-size enterprises?

Options:

A.

Causal models

B.

Historical frequency models

C.

Credit scoring models

D.

Credit rating models

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Question # 82

Typically, which one of the following four option risk measures will be used to determine the number of options to use to hedge the underlying position?

Options:

A.

Vega

B.

Rho

C.

Delta

D.

Theta

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Question # 83

Which of the following factors would typically increase the credit spread?

I. Increase in the probability of default of the issuer.

II. Decrease in risk premium.

III. Decrease in loss given default of the issuer.

IV. Increase in expected loss.

Options:

A.

I

B.

II and III

C.

I and IV

D.

I, II, and IV

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Exam Code: 2016-FRR
Exam Name: Financial Risk and Regulation (FRR) Series
Last Update: Apr 2, 2025
Questions: 387
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