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GARP Financial Risk and Regulation (FRR) Series Sample Questions (Q349-Q354):

NEW QUESTION # 349
Bank Omega is using futures contracts on a well capitalized exchange to hedge its market risk exposure.
Which of the following could be reasons that expose the bank to liquidity risk?
I. The bank may not be able to unwind the futures contracts before expiration.
II. Prices may move such that a loss results on the hedge.
III. Since futures require margins which are settled every day, the bank could find itself scrambling for funds.
IV. Exchange margin requirements could change unexpectedly.

A. I, III, IV
B. III, IV
C. I, IV
D. I, II, III, IV

Answer: B

NEW QUESTION # 350
Which one of the following statements is an advantage of using implied volatility as an input when calculating
VaR?

A. Implied volatility assumes volatilities are constant which makes it easy to implement in models.
B. Current market data is used to determine implied volatilities, which makes them forward looking
measures
C. Implied volatilities are better at predicting actual volatilities
D. Loss probabilities from the standard normal distribution are used to compute implied volatilities, which
makes it easy to compute the.

Answer: B

NEW QUESTION # 351
An endowment asset manager with a focus on long/short equity strategies is evaluating the risks of an equity
portfolio. Which of the following risk types does the asset manager need to consider when evaluating her
diversified equity portfolio?
I. Company-specific projected earnings and earnings risk
II. Aggregate earnings expectations
III. Market liquidity
IV. Individual asset volatility

A. II, III
B. I
C. I, II, IV
D. I, IV

Answer: A

NEW QUESTION # 352
Why is stress testing a valuable part of credit risk assessment?

A. Because it produces probabilistic expectations of the credit market and its future conditions
B. Because it optimizes the impact of default rates and asset values on credit migration
C. Because it quantifies adverse and unexpected outcomes on the credit portfolio and capital levels
D. Because it models common situations and prepares banks for routine credit conditions

Answer: C

Explanation:
Comprehensive and Detailed In-Depth Explanation:
Stress testing evaluates a credit portfolio's resilience under adverse scenarios (e.g., economic downturns), quantifying impacts on defaults, losses, and capital adequacy. Option D is correct-Basel II's Pillar 2 mandates stress testing for unexpected outcomes. Option A (common situations) describes standard modeling, not stress testing. Option B (probabilistic expectations) aligns with VaR, not stress testing's focus on extremes. Option C (optimizing migration) is unrelated to stress testing's purpose.
Exact Extract from Official Source:
* BCBS, "Basel II: International Convergence of Capital Measurement and Capital Standards," June
2006, para. 434: "Stress testing is a critical tool for credit risk assessment, enabling banks to quantify the impact of adverse and unexpected scenarios on their credit portfolios and capital levels."
* GARP FRR Study Notes, Credit Risk Section: "Stress testing assesses the effect of severe, unexpected events on credit losses and capital, distinguishing it from routine risk modeling." Reference:BCBS, "Basel II," para.434; GARP FRR Study Notes, Credit Risk Section.

NEW QUESTION # 353
Changes to which one of the following four factors would typically not increase the cost of credit?

A. Increase in consumption of goods and services.
B. Higher risk premium on a fixed income instrument.
C. Increasing inflation rates in a country.
D. Higher return earned on alternative investments.

Answer: A

Explanation:
The cost of credit is typically influenced by factors that increase the risk or the expected return required by lenders. Increasing inflation rates (A) raise the cost of credit because lenders demand higher returns to compensate for the loss of purchasing power. A higher risk premium on a fixed income instrument (C) directly increases the cost of credit as lenders require more return for taking on additional risk. Similarly, a higher return on alternative investments (D) increases the cost of credit because lenders will demand higher returns to justify lending over these alternatives. However, an increase in the consumption of goods and services (B) does not typically increase the cost of credit. Instead, it often signals a healthy economy, which can lower the perceived risk and cost of borrowing.

NEW QUESTION # 354
......

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