Latest 2016-FRR Actual Free Exam Questions Updated 344 Questions
Free 2016-FRR Exam Braindumps certification guide Q&A
The FRR Series Certification Exam offered by GARP is a comprehensive and rigorous assessment of the skills and knowledge required to effectively manage financial risks. Financial Risk and Regulation (FRR) Series certification is globally recognized and respected in the industry, providing professionals with a valuable asset for career advancement. With the increasing importance of risk management in the financial industry, obtaining the FRR Series Certification is a wise investment in one's career.
NEW QUESTION # 12
Jack Richardson wants to compute the 1-month VaR of a portfolio with a market value of USD 10 million,
with an average monthly return of 1% and average monthly standard deviation of 1.5%. What is the portfolio
VaR at 99% confidence level?
Probability Cumulative Normal distribution
0.90 1.282
0.91 1.341
0.92 1.405
0.93 1.476
0.94 1.555
0.95 1.645
0.96 1.751
0.97 1.881
0.98 2.054
0.99 2.326
- A. 348,900
- B. 164,500
- C. 232,600
- D. 246,750
Answer: A
NEW QUESTION # 13
Returns on two assets show very strong positive linear relationship. Their correlation should be closest to which of the following choices?
- A. 100%
- B. 45%
- C. 60%
- D. 15%
Answer: A
Explanation:
A very strong positive linear relationship between the returns on two assets means that their correlation is close to 1, which is 100%. This indicates that the returns on the two assets move almost perfectly in tandem with each other.
NEW QUESTION # 14
James Johnson bought a coupon bond yielding 4.7% for $1,000. Assuming that the price drops to $976 when
yield increases to 4.71%, what is the PVBP of the bond.
- A. $76.
- B. $870.
- C. $26.
- D. $976.
Answer: C
NEW QUESTION # 15
Which one of the four following activities is NOT a component of the daily VaR computing process?
- A. Updating factor interrelationships.
- B. Updating individual risk factor models.
- C. Computing portfolio risk by delta-normal or delta-gamma method.
- D. Producing the VaR report.
Answer: C
NEW QUESTION # 16
Which of the following risk types are historically associated with credit derivatives?
I. Documentation risk
II. Definition of credit events
III. Occurrence of credit events
IV. Enterprise risk
- A. I, II, III
- B. I, II
- C. I, IV
- D. II, III, IV
Answer: A
Explanation:
Credit derivatives historically carry several specific types of risk:
* Documentation Risk: The risk arising from the complexity and potential ambiguity in the legal documentation of credit derivative contracts.
* Definition of Credit Events: The risk associated with the precise definition of what constitutes a credit event, such as a default, which can be subject to interpretation and affect payouts.
* Occurrence of Credit Events: The actual risk that a credit event will occur, triggering the derivative contract.
Enterprise risk is a broader category that typically includes all risks faced by an enterprise, not just those associated with credit derivatives.
References
* Verified information on credit derivative risks from the document
NEW QUESTION # 17
Which one of the following four formulas correctly identifies the expected loss for all credit instruments?
- A. Expected Loss = Probability of Default x Loss Given Default / Exposure at Default
- B. Expected Loss = Probability of Default x Loss Given Default + Exposure at Default
- C. Expected Loss = Probability of Default x Loss Given Default - Exposure at Default
- D. Expected Loss = Probability of Default x Loss Given Default x Exposure at Default
Answer: D
NEW QUESTION # 18
Which of the following assets on the bank's balance sheet has greatest endogenous liquidity risk?
- A. A 3-year subprime mortgage
- B. A 10-year U.S treasury bond
- C. A 2-year U.S treasury bond
- D. A 1-week corporate loan with a AAA rated company
Answer: A
NEW QUESTION # 19
Which one of the following four statements regarding floating rate bonds is incorrect?
- A. Floating rate bonds typically have less price risk than fixed rate bonds.
- B. Floating rate bonds are very sensitive to changes in interest rates.
- C. Floating rate bonds have coupon payments tied to floating interest rates or floating interest rate indexes.
- D. Floating rate bonds only have a small degree of interest rate risk.
Answer: B
Explanation:
Floating rate bonds have coupon payments that are tied to a floating interest rate or index, such as LIBOR.
This means their coupon payments adjust periodically with changes in the underlying interest rates. Due to this mechanism, floating rate bonds typically have less price risk compared to fixed-rate bonds because their coupon payments reset in line with current market rates. Hence, floating rate bonds are generally not very sensitive to changes in interest rates since the adjustments in coupon payments help maintain their value.
Therefore, the statement that floating rate bonds are very sensitive to changes in interest rates is incorrect.
NEW QUESTION # 20
Which one of the four following statements about drawdowns is correct?
- A. Drawdown measures the aggregate decline in market values of assets and positions due to a shock.
- B. Drawdown calculates significant losses in a particular business or a book.
- C. Drawdown estimates the effect on bank's liabilities when the bank's credit rating is cut.
- D. Drawdown quantifies the peak-to-trough decline of an investment over a known time period.
Answer: D
NEW QUESTION # 21
Alpha Bank estimates that the annualized standard deviation of its portfolio returns equal 30%; The daily volatility of the portfolio is closest to which of the following?
- A. 2.5%
- B. 3.0%
- C. 2.0%
- D. 1.0%
Answer: D
Explanation:
To convert annualized volatility to daily volatility, we can use the formula: daily=annual252daily=252annual Given the annualized standard deviation (volatility) of the portfolio returns is 30%, we calculate the daily volatility as follows: daily=30%25230%15.871.89%daily=25230%15.8730%1.89% This value is closest to 1.0%, making option A the correct answer.
NEW QUESTION # 22
Which one of the following four statements regarding the current value of a transaction and its purposes is INCORRECT?
- A. Counterparty credit risk calculations are made by analyzing the current values of all deals with the same counterparty.
- B. Profit and loss calculations are made by comparing the current values to the intrinsic values.
- C. Margin call by futures exchanges are based on the current market value.
- D. For cash settled instrument the final market value is used to settle the transaction with the counterparty
Answer: B
Explanation:
Profit and loss (P&L) calculations in trading are typically made by comparing the current market value to the purchase price or the previous day's closing price, not the intrinsic value. Here are the correct statements:
* Cash settled instruments: The final market value is used to settle the transaction with the counterparty.
* Margin calls: Futures exchanges base margin calls on the current market value.
* Credit risk calculations: Analyzing the current values of all deals with the same counterparty is crucial for assessing counterparty credit risk.
The incorrect statement is that P&L calculations are made by comparing current values to intrinsic values, which are theoretical and not always reflective of market conditions.
ReferencesSource: How Finance Works
NEW QUESTION # 23
Which one of the following four statements represents the advantages of the historical sim-ulation method when calculating VaR?
- A. Solve the problem caused by incorrectly assuming that asset returns are normally distributed.
- B. Are believed to be superior in accuracy predicting future levels of realized volatility.
- C. Are only using loss probabilities that can be found in tables of the standard normal distribution.
- D. Rely on current market data to describe the distribution of returns and determine volatilities.
Answer: A
Explanation:
The historical simulation method does not assume a normal distribution of asset returns. Instead, it uses actual historical returns to simulate future returns, thereby addressing the problem of incorrect assumptions about the normal distribution of asset returns. This approach can better capture the empirical distribution of returns, including skewness and kurtosis.
NEW QUESTION # 24
BetaFin has decided to use the hybrid RCSA approach because it believes that it fits its operational framework. Which of the following could be reasons to use the hybrid RCSA method?
I. BetaFin has previously created series of RCSA workshops, and the results of these workshops can be used to design the questionnaires.
II. BetaFin believes that using the questionnaire approach should be more useful.
III. BetaFin had used the questionnaire approach successfully for certain businesses and the workshop approach for others.
IV. BetaFin had already implemented a sophisticated RCSA IT-system.
- A. I and II
- B. I and III
- C. III and IV
- D. II, III, and IV
Answer: B
Explanation:
BetaFin decided to use the hybrid RCSA approach because:
* They have previously created a series of RCSA workshops, and the results of these workshops can be used to design the questionnaires (I).
* They have successfully used the questionnaire approach for certain businesses and the workshop approach for others (III).
NEW QUESTION # 25
Which one of the following four statements about market risk is correct? Market risk is
- A. The maximum likely loss in the market value of portfolios and financial instruments caused by the failure of the counterparty to meet its obligations.
- B. The exposure to an adverse change in the market value of portfolios and financial instruments caused by a change in market prices or rates.
- C. The exposure to an adverse change in the credit quality in portfolios or of financial instruments.
- D. The maximum likely loss in the market value of portfolios and financial instruments over a given period of time.
Answer: B
Explanation:
Market risk is the exposure to an adverse change in the market value of portfolios and financial instruments caused by a change in market prices or rates. This definition encompasses the variability in market prices, such as interest rates, foreign exchange rates, and equity prices, which can impact the value of financial instruments and portfolios.
NEW QUESTION # 26
An asset and liability manager for a large financial institution has to recognize that retail products ___ include
embedded options, which are often not rationally exercised, while wholesale products ___ carry penalties for
repayment or include rights to terminate wholesale contracts on very different terms than are common in retail
products.
- A. Frequently; rarely
- B. Hardly ever; rarely
- C. Frequently; typically
- D. Hardly ever; typically
Answer: C
NEW QUESTION # 27
Present value of a basis point (PVBP) is one of the ways to quantify the risk of a bond, and it measures:
- A. The percentage change in bond price when the yields change by 1%.
- B. The percentage change in bond price when yields change by 1 basis point.
- C. The change in value of a bond when yields increase by 0.01%.
- D. The present value of the future cash flows of a bond calculated at a yield equal to 1%.
Answer: C
NEW QUESTION # 28
Which one of the following four statements correctly defines a typical carry trade?
- A. A bank borrows funds in a high-interest currency and places the funds in a long-term low volatility investment vehicle.
- B. A bank borrows funds in a high-interest currency and invests the funds into high-yield emerging market debt.
- C. A bank borrows funds in a low-interest currency and places the funds on deposit in a high-interest currency.
- D. A bank borrows funds in a low-interest currency, accumulates reserves, and lends in another low-interest currency.
Answer: C
Explanation:
A carry trade typically involves borrowing in a currency with low-interest rates and investing in a currency with high-interest rates to profit from the difference in interest rates.
* Identify the currencies:
* Low-interest currency: Typically, these are currencies of countries with low-interest rates, such as Japan (JPY) or Switzerland (CHF).
* High-interest currency: These are currencies of countries with high-interest rates, such as emerging market currencies or certain developed countries during specific periods.
* Mechanics of carry trade:
* The bank borrows in a low-interest currency.
* The bank then converts these funds into a high-interest currency.
* The funds are deposited or invested in high-yield instruments denominated in the high-interest currency.
* The profit arises from the differential between the interest paid on the borrowed currency and the interest earned on the invested currency.
This strategy benefits from interest rate differentials and can yield significant profits if exchange rates remain stable or move favorably.
ReferencesSource: How Finance Works
NEW QUESTION # 29
Which one of the following four statements correctly defines chooser options?
- A. The owner of these options decides if the option is a call or put option only when a predetermined date
is reached. - B. These options represent a variation of the plain vanilla option where the underlying asset is a basket of
currencies. - C. These options give the holder the right to exchange one asset for another.
- D. These options pay an amount equal to the power of the value of the underlying asset above the strike
price.
Answer: A
NEW QUESTION # 30
Which one of the following four option types has two strike prices?
- A. Shout options
- B. American options
- C. Asian options
- D. Range options
Answer: A
NEW QUESTION # 31
Which one of the four following statements about back testing the VaR models is correct?
Back testing requires
- A. Plotting VaR forecasts against the proportion of daily losses exceeding the average loss.
- B. Plotting the daily profit and losses along with the ranges predicted by VaR models
- C. Comparing the predictive ability of VaR on a daily basis to the realized daily profits and losses.
- D. Determining the proportion of daily profits exceeding those predicted by VaR.
Answer: C
NEW QUESTION # 32
Which one of the following four interest rate related yield curves is used to revalue loan and deposit positions
in banks?
- A. Cash
- B. Basis
- C. Derivative
- D. Bond
Answer: A
NEW QUESTION # 33
When a credit risk manager analyzes default patterns in a specific neighborhood, she finds that defaults are increasing as the stigma of default evaporates, and more borrowers default. This phenomenon constitutes
- A. Moral hazard
- B. Speculative bias
- C. Adverse selection
- D. Herd behavior
Answer: D
Explanation:
* Herd behavior in the context of credit defaults refers to a situation where the stigma of default decreases, leading more borrowers to default as they see others doing the same. This creates a pattern of increasing defaults in the neighborhood as more borrowers follow the trend.
References:
* How Finance Works: "Defaults increasing as the stigma evaporates and more borrowers follow suit is indicative of herd behavior."
NEW QUESTION # 34
Which one of the following four statements about hedging is INCORRECT?
- A. Traders can hedge their risks by taking an appropriate position in the underlying instrument.
- B. For a fully hedged portfolio, any changes in markets prices will typically produce significant changes in
the market value of the portfolio. - C. Traders can hedge their portfolio risks by taking a position in a different instrument.
- D. A large number of hedge positions is generally required to match the underlying transaction completely.
Answer: B
NEW QUESTION # 35
Gamma Bank is operating in a highly volatile interest rate environment and wants to stabilize its net income
by shifting the sources of its earnings from interest rate sensitive sources to less interest rate sensitive sources.
All of the following strategies can help achieve this objective EXCEPT:
- A. Originate more floating interest rate loans
- B. Extend different types of credit
- C. Provide trust, asset management, and trading services to customers
- D. Charge bank fees for underwriting loans
Answer: A
NEW QUESTION # 36
Which one of the following four physical commodities markets has the right combination of characteristics that generally allows short selling in the market, without making the short-selling transaction prohibitively expensive?
- A. Grain
- B. Oil
- C. Natural Gas
- D. Gold
Answer: D
Explanation:
Short selling in physical commodities markets involves borrowing the commodity and selling it with the hope of buying it back at a lower price. The right combination of characteristics that generally allows short selling without making the transaction prohibitively expensive includes factors like liquidity, storage costs, and ease of borrowing.
* Oil: While the oil market is highly liquid, storage costs and logistical challenges can make short selling more expensive.
* Natural Gas: Similar to oil, natural gas involves significant storage and transportation costs, making short selling less attractive.
* Grain: Grain markets can have high volatility and storage costs that could complicate short selling.
* Gold: Gold has the ideal combination of characteristics for short selling. It is highly liquid, has relatively low storage costs, and is easy to borrow. These factors make short selling gold less prohibitively expensive compared to other commodities.
NEW QUESTION # 37
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