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

When the dollar strengthens against the pound, the value of an option that allows the purchase of dollars at a predetermined exchange rate increases. This is because the option provides the right to buy the appreciating dollar at a rate that becomes more favorable as the market rate moves higher.

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 marketconditions, as the holder can choose the type of option that will be more beneficial depending on the market scenario at the decision point.

When a credit analyst evaluates spreads in loans, they focus on compensating for costs such as the marginal cost of funds provided, overhead costs of maintaining the loan, and inherent risks of lending to the borrower. However, the opportunity cost of the risk-adjusted marginal cost of capital is not typically considered directly in the spreads. The opportunity cost generally refers to the potential returns from alternative investments, which isn't a direct component of loan spread calculations.

Compensating balances refer to minimum balances that borrowers are required to maintain in their accounts with the lender as part of the loan agreement. These balances benefit the bank by providing a stable source of funding and increasing the bank's interest rate margin and profitability. However, they do not directly influence the expected loss rate of the bank or improve capital structure by controlling obligor type and avoiding payment delays. These functions are not typically associated with compensating balances, which is why option C does not represent a benefit of compensating balances.

As an options buyer, the maximum loss is limited to the premium paid for the option. Therefore, the buyer can never lose more than the premium. As an option seller, the risk is theoretically unlimited because the seller is obligated to fulfill the contract regardless of how unfavorable the terms might become due to market movements.

By selling off the lower risk portions of the portfolio credit risk, Delta Bank can increase its cash efficiency. This process generates cash which can be reinvested or used for other purposes, effectively improving the return on equity (ROE).

The overall risk exposure of the bank is reduced as the lower risk assets are sold off, leaving a more concentrated higher-risk portfolio, which still needs to be managed effectively.

The risk manager is analyzing a long position worth USD 10 million. To hedge this portfolio, the risk manager uses options that decrease in value by JPY 0.50 for every JPY 1 increase in the long position. This effectively means the options are shorting the currency. Therefore, if the long position is fully hedged by these options, the overall exposure of the portfolio will be equivalent to the full value of the long position but in the opposite direction. Thus, the portfolio has the same exposure to USD as a portfolio that is short USD 10 million.

Bonds and loans are fundamentally different in their legal structures and treatment. Bonds are typically issued in the public markets and are subject to securities laws and regulations, while loans are generally private agreements between a borrower and a lender.

Both instruments can be used to estimate credit capital under Basel II provisions, so option C is incorrect.

The pricing drivers for bonds and loans can overlap significantly, such as interest rates and credit risk, so option B is not the core difference.

Both bonds and loans can be subject to credit counterparty regulations, making option D incorrect.

The value of foreign exchange options is influenced by several factors, including:

Change in the value of the underlying (I):This directly affects the option's intrinsic value.

Change in the perception of future volatility (II):Higher expected volatility increases the option's potential payoff.

Change in interest rates (III):This affects the cost of carrying positions in the underlying asset.

Passage of time (IV):This influences the time value of the option. All these factors collectively impact the pricing dynamics of options throughout the trading day.

During the second quarter of 2009, transactions in foreign exchange derivative contracts comprised approximately 7% of all types of derivative transactions between financial institutions in the United States. This data point reflects the proportion of foreign exchange derivatives within the broader context of derivative transactions during that period.