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2016-FRR Reliable Test Objectives - New 2016-FRR Exam Book
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Free PDF Quiz 2025 Fantastic 2016-FRR: Financial Risk and Regulation (FRR) Series Reliable Test Objectives
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GARP Financial Risk and Regulation (FRR) Series Sample Questions (Q353-Q358):
NEW QUESTION # 353
A credit rating analyst wants to determine the expected duration of the default time for a new three-year loan,
which has a 2% likelihood of defaulting in the first year, a 3% likelihood of defaulting in the second year, and
a 5% likelihood of defaulting the third year. What is the expected duration for this three-year loan?
- A. 2.3 years
- B. 2.1 years
- C. 3.7 years
- D. 1.5 years
Answer: A
NEW QUESTION # 354
Which one of the following four statements presents a challenge of using external loss databases in the
operational risk framework?
- A. If the external data is gathered from news sources, it may only reflect events that are interesting to the
press.
- B. External events are usually not of interest to senior management.
- C. Use of benchmarked data reflects similar data collection standards.
- D. They provide a source of data on what operational loss events will occur.
Answer: A
NEW QUESTION # 355
After one year and spending USD 1.0 million, a bank finally succeeds in recovering USD 10 million on an exposure that, at the time of its default, was valued at USD 20 million. If the recovery discount rate is 10%, what is the estimate of the recovery rate?
- A. 31%
- B. 36%
- C. 46%
- D. 41%
Answer: D
Explanation:
Comprehensive and Detailed In-Depth Explanation:
The recovery rate is the percentage of the original exposure recovered, adjusted for the time value of money and recovery costs. Here, the exposure at default (EAD) is USD 20 million, the gross recovery after one year is USD 10 million, and the recovery cost is USD 1 million. The recovery discount rate is 10%, reflecting the time value of money over one year.
Step-by-step calculation:
* Net Recovery Amount:Gross recovery - Recovery costs = USD 10 million - USD 1 million = USD 9 million.
* Present Value of Recovery:Since the recovery occurs after one year, discount the net recovery at 10%:
PV = USD 9 million / (1 + 0.10) = USD 9 million / 1.1 # USD 8.1818 million.
* Recovery Rate:Divide the present value of the recovery by the original exposure:Recovery Rate = (USD 8.1818 million / USD 20 million) ร 100 # 40.91%, which rounds to 41%.
This aligns with Basel II/III definitions of Loss Given Default (LGD = 1 - Recovery Rate) and the discounting approach for recovery cash flows in credit risk models.
Reference:BCBS, "Basel II: International Convergence of Capital Measurement and Capital Standards," June
2006, para. 286-287; GARP FRR Study Notes, Credit Risk Section.
NEW QUESTION # 356
Which one of the following financial instruments is subject to implied volatility price risk?
- A. Bonds
- B. Options
- C. Swaps
- D. Forwards
Answer: B
Explanation:
Comprehensive and Detailed In-Depth Explanation:
Implied volatility price risk arises from changes in the market's expectation of future volatility, directly affecting the pricing of options via models like Black-Scholes, where implied volatility is a key input. Options prices are highly sensitive to volatility shifts, unlike:
* Swaps:Sensitive to interest rate changes, not implied volatility.
* Bonds:Affected by yield changes, not volatility.
Reference:GARP FRR Study Notes, Market Risk Section; BCBS, "Basel III: A Global Regulatory Framework," para. 689-690.
NEW QUESTION # 357
Which of the following statements about a bank's behavior regarding Risk Adjusted Return on Capital (RAROC) is correct?
I. A bank should always seek to maximize their overall RAROC.
II. A bank should consider investing in a business even with negative RAROC if it increases the RAROC of the bank as a whole.
III. A bank should minimize its overall RAROC by controlling the absolute and relative amount of risk of its businesses.
IV. A bank should maximize its RAROC by always investing in a new business that maximizes the RAROC for that business unit.
- A. II and IV
- B. I, II and III
- C. II, III, and IV
- D. I and II
Answer: D
Explanation:
A bank's behavior regarding RAROC should consider:
* Maximizing overall RAROC: This ensures that the bank is efficiently managing its capital and generating the highest possible returns relative to the risks taken.
* Investing in a business even with negative RAROC if it increases the RAROC of the bank as a whole: This can be beneficial if the investment contributes to the diversification or other strategic goals that enhance the bank's overall risk-return profile.
These principles guide banks in optimizing their capital allocation and improving their financial performance.
NEW QUESTION # 358
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