Dec-2025 2016-FRR Study Material, Preparation Guide and PDF Download
Free 2016-FRR Certification Sample Questions with Online Practice Test
The Global Association of Risk Professionals (GARP) is a non-profit organization that aims to promote risk management practices, education, and certification around the world. One of GARP's most popular certification programs is the Financial Risk and Regulation (FRR) series, which is designed for professionals who work in the financial services industry. The FRR series consists of three levels of exams, each of which covers different areas of financial risk management and regulatory compliance.
NEW QUESTION # 150
To estimate the interest charges on the loan, an analyst should use one of the following four formulas:
- A. Loan interest = Risk-free rate - Probability of default x Loss given default - Spread
- B. Loan interest = Risk-free rate + Probability of default x Loss given default - Spread
- C. Loan interest = Risk-free rate + Probability of default x Loss given default + Spread
- D. Loan interest = Risk-free rate - Probability of default x Loss given default + Spread
Answer: C
NEW QUESTION # 151
Except for the credit quality of the Credit Default Swap protection seller, the following relationship correctly
approximates the yield on a risk-free instrument:
- A. Bond + CDS + Market Spread
- B. Bond - CDS
- C. Bond - CDS - Market spread
- D. Bond + CDS
Answer: D
NEW QUESTION # 152
Which one of the following four statements about the relationship between exchange rates and option values is correct?
- A. As the dollar appreciates relative to the pound, the right to buy dollars at a fixed pound exchange rate decreases.
- B. As the dollar depreciates relative to the pound, the right to buy dollars at a fixed pound exchange rate increases.
- C. As the dollar appreciates relative to the pound, the right to sell dollars at a fixed pound exchange rate increases.
- D. As the dollar appreciates relative to the pound, the right to buy dollars at a fixed pound exchange rate increases.
Answer: D
Explanation:
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.
NEW QUESTION # 153
By lowering the spread on lower credit quality borrowers, the bank will typically achieve all of the following
outcomes EXCEPT:
- A. Rapid growth
- B. Higher losses in case of default
- C. Lower probability of default
- D. Aggressively courting of new business
Answer: C
NEW QUESTION # 154
Financial regulators in a European country are considering banning trading in highly complex derivative instruments that are not settled through a centralized clearinghouse. This ban can result in:
I. The value of the country's currency dropping
II. Counterparties involved in trading of these derivative instruments failing to fulfill their obligations III. The business model relying on these instruments failing IV. Certain activities becoming illegal
- A. I, IV
- B. II, III, IV
- C. I, II
- D. II, III
Answer: B
Explanation:
Banning trading in highly complex derivative instruments that are not settled through a centralized clearinghouse can lead to several consequences:
* Counterparties involved in trading these derivatives may fail to fulfill their obligations (II).
* The business models that rely on these instruments may fail (III).
* Certain activities that were previously legal may become illegal (IV).
The potential drop in the country's currency value (I) is not a direct consequence of such a ban.
NEW QUESTION # 155
Which of the following statements represents a methodological difference between variance-covariance and full revaluation methods?
- A. Variance-covariance approach uses only historic data to compute the covariance matrix.
- B. Variance-covariance approach prices positions more accurately than the full revaluation approach.
- C. Variance-covariance approach provides computational advantages over the full revaluation approach.
- D. Variance-covariance approach computes the VAR for each position separately, while the full revaluation method computes the VAR on a portfolio basis.
Answer: C
Explanation:
The variance-covariance approach, also known as the parametric approach, simplifies calculations by assuming that returns are normally distributed and by using the covariance matrix of asset returns to estimate portfolio risk. This approach provides significant computational advantages because it reduces the complexity involved in risk calculations. On the other hand, the full revaluation method (often used in Monte Carlo simulations) involves revaluing the entire portfolio under various simulated scenarios, which is computationally intensive. Thus, option A correctly identifies a key methodological difference.
NEW QUESTION # 156
Which one of the following four statements correctly defines chooser options?
- A. These options represent a variation of the plain vanilla option where the underlying asset is a basket of currencies.
- B. The owner of these options decides if the option is a call or put option only when a predetermined date is reached.
- 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: B
Explanation:
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 market conditions, as the holder can choose the type of option that will be more beneficial depending on the market scenario at the decision point.
NEW QUESTION # 157
Which one of the following four statements represents a possible disadvantage of using total return swap to manage equity portfolio risks?
- A. The total return receiver does not have any voting rights.
- B. Similar to the formal portfolio rebalancing strategy, the total return receiver needs to modify the size of the trading position.
- C. Similar to an equity forward position, the total return receiver does not get paid the dividend.
- D. The total return receiver needs to incur the transaction costs of establishing an equity position.
Answer: C
Explanation:
Total return swaps (TRS) are financial derivatives used to manage risks in equity portfolios. One party agrees to pay the total return of an asset (including dividends and capital gains) while the other party pays a fixed or floating rate. A key disadvantage for the total return receiver in using TRS is:
* No Dividend Payment: The total return receiver does not receive actual dividend payments directly.
Instead, they receive an equivalent payment reflecting the dividend amount, which might not have the same tax advantages as actual dividends. This can be a significant disadvantage compared to holding the underlying equities directly, where dividends are paid out to the shareholder.
* Other Disadvantages: While the TRS allows the receiver to gain exposure to the underlying equity without owning it, it also means they forgo any direct voting rights and must incur costs to establish and manage the position.
NEW QUESTION # 158
Gamma Bank has $300 million in loans and $200 million in deposits. If the modified duration of the loans is
estimated to be 2, and the modified duration of the deposits is estimated to be 1, then the change in Gamma
Bank's equity value per 1% change in yield will be:
- A. -$4 million
- B. -$3 million
- C. -$1 million
- D. -$2 million
Answer: A
NEW QUESTION # 159
A risk manager is considering how to best quantify option price dynamics using mathematical option pricing models. Which of the following variables would most likely serve as an input in these models?
I. Implicit parameter estimate based on observed market prices
II. Estimates of sensitivity of option prices to parameter changes
III. Theoretical option determination based on assumptions
- A. I, II, III
- B. I, III
- C. II
- D. II, III
Answer: A
Explanation:
Mathematical option pricing models typically use the following variables as inputs:
* I. Implicit parameter estimate based on observed market prices: These are derived from market data to infer parameters such as volatility.
* II. Estimates of sensitivity of option prices to parameter changes: These include Greeks like Delta, Gamma, Theta, etc., which measure the sensitivity of the option's price to various factors.
* III. Theoretical option determination based on assumptions: This involves theoretical calculations based on models like Black-Scholes, which use assumptions about market behavior and asset dynamics.
References:The inputs and methodologies for option pricing models are well-documented in financial literature and can be referenced in the "How Finance Works" document.
NEW QUESTION # 160
To improve the culture and awareness of the operational risk, Gamma Bank's CRO decides to promote three
activities within her organization. Which one of the following four activities is NOT typically used to develop
an operational risk framework?
- A. Auditing
- B. Planning
- C. Training
- D. Marketing
Answer: A
NEW QUESTION # 161
It is commonplace for the sellers of a single-name Credit Default Swap to post collateral to the buyer. What determines the amount of collateral posted?
- A. The credit standing of the protection seller and the RR for the underlying credit
- B. The credit standing of the protection buyer and the LGD of the underlying credit
- C. The credit standing of the protection buyer and the EAD of the underlying credit
- D. The credit standing of the protection seller and the PD of the underlying credit
Answer: D
Explanation:
Comprehensive and Detailed In-Depth Explanation:
In a single-name Credit Default Swap (CDS), the protection seller (who assumes the credit risk) often posts collateral to the buyer to mitigate counterparty risk. The amount of collateral is typically determined by:
* Credit standing of the protection seller:If the seller's creditworthiness declines (e.g., lower credit rating), more collateral is required to secure the buyer against the seller's potential default.
Reference:BCBS, "Basel III: A Global Regulatory Framework," December 2010, para. 91-96; GARP FRR Study Notes, Credit Risk Section.
NEW QUESTION # 162
Arnold Wu owns a floating rate bond. He is concerned that the rates may fall in the future decreasing his payment amount. Which of the following instruments should he buy to hedge against the fall in interest rates?
- A. Index amortizing swap
- B. Interest rate swap that receives floating and pays fixed
- C. Interest rate floor
- D. Interest rate cap
Answer: B
Explanation:
Arnold Wu owns a floating rate bond and is concerned about the potential decrease in interest rates, which would reduce his interest payments. To hedge against this risk, he should enter into an interest rate swap where he receives floating and pays fixed. This means he would continue to receive floating rate payments (which would decrease if interest rates fall) while making fixed payments. This swap effectively locks in his interest income, providing protection against falling interest rates.
NEW QUESTION # 163
For which one of the following four reasons do corporate customers use foreign exchange derivatives?
I. To lock in the current value of foreign-denominated receivables
II. To lock in the current value of foreign-denominated payables
III. To lock in the value of expected future foreign-denominated receivables IV. To lock in the value of expected future foreign-denominated payables
- A. I and IV
- B. II and III
- C. I, II, III, IV
- D. II
Answer: C
Explanation:
Corporate customers use foreign exchange derivatives for several reasons:
* To lock in the current value of foreign-denominated receivables (I)
* To lock in the current value of foreign-denominated payables (II)
* To lock in the value of expected future foreign-denominated receivables (III)
* To lock in the value of expected future foreign-denominated payables (IV) These derivatives are used as a hedging mechanism to manage currency risk and provide certainty regarding future cash flows and
* costs.
NEW QUESTION # 164
Returns on two assets show very strong positive linear relationship. Their correlation should be closest to which of the following choices?
- A. 15%
- B. 60%
- C. 100%
- D. 45%
Answer: C
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 # 165
If the LTV (loan-to-value ratio) is 75%, what is the haircut?
- A. 50%
- B. 5%
- C. 75%
- D. 25%
Answer: D
Explanation:
Comprehensive and Detailed In-Depth Explanation:
The loan-to-value (LTV) ratio represents the proportion of an asset's value that is financed through a loan, expressed as a percentage. The haircut, in contrast, is the complement of the LTV-it represents the portion of the asset's value that is not financed and serves as a buffer or margin of safety for the lender. Mathematically, the haircut is calculated as:
Haircut = 100% - LTV.
Given an LTV of 75%, the haircut is:
100% - 75% = 25%.
This concept is critical in Basel III's collateral valuation and liquidity risk management rules, where haircuts are applied to adjust the value of collateral for risk purposes (e.g., in the Liquidity Coverage Ratio or repo transactions). The BCBS guidelines on collateral haircuts confirm this relationship, ensuring that the unfinanced portion protects against potential declines in asset value.
Reference:BCBS, "Basel III: The Liquidity Coverage Ratio and Liquidity Risk Monitoring Tools," January
2013, Annex 2; GARP FRR Study Notes, Market Risk Section.
NEW QUESTION # 166
Gamma Bank provides a $100,000 loan to Big Bath retail stores at 5% interest rate (paid annually). The loan
also has an annual expected default rate of 2%, and loss given default at 50%. In this case, what will the bank's
expected loss be? What is the expected loss of this loan?
- A. $1,050
- B. $300
- C. $750
- D. $550
Answer: A
NEW QUESTION # 167
Foreign exchange rates are determined by various factors. Considering the drivers of exchange rates, which
one of the following changes would most likely strengthen the value of the USD against other foreign
currencies?
- A. The US current account surplus increases
- B. The economic performance in the US weakens
- C. The expected US inflation rate increases
- D. The global demand for US products decreases
Answer: A
NEW QUESTION # 168
Which one of the following four statements correctly identifies disadvantages of using the economic capital?
- A. Economic capital estimates the level of expected losses.
- B. The economic capital models used by banks may be subject to significant model risk.
- C. Since banks are putting their money at risk they have an incentive to increase economic capital.
- D. Economic capital may do not take into consideration the regulatory requirements.
Answer: B
Explanation:
Economic capital models, while useful, have the following disadvantages:
* Model Risk: These models may not accurately capture the complexities of financial systems, leading to significant model risk.
* Estimation Errors: Potential errors in risk estimation can lead to either underestimation or overestimation of required capital.
* Regulatory Differences: These models may not align with regulatory capital requirements, causing discrepancies.
* Complexity: The complexity of these models makes them difficult to understand and manage.
References
Source: How Finance Works
NEW QUESTION # 169
Which one of the following four statements best describes challenges of delta-normal method of mapping
options positions?
Delta-normal method understates
- A. Risks of long option positions for calls and overstates risks of short option positions for puts.
- B. Risks of long and short positions for both calls and puts.
- C. Risks of long option positions for puts and overstates risks of short option positions for calls.
- D. Risks of short option positions and overstates risks of long option positions for both calls and puts.
Answer: D
NEW QUESTION # 170
In analyzing market option pricing dynamics, a risk manager evaluates option value changes throughout the
entire trading day. Which of the following factors would most likely affect foreign exchange option values?
I. Change in the value of the underlying
II. Change in the perception of future volatility
III. Change in interest rates
IV. Passage of time
- A. I, II, III
- B. I, II
- C. I, II, III, IV
- D. II, III
Answer: C
NEW QUESTION # 171
In analyzing market option pricing dynamics, a risk manager evaluates option value changes throughout the entire trading day. Which of the following factors would most likely affect foreign exchange option values?
I. Change in the value of the underlying
II. Change in the perception of future volatility
III. Change in interest rates
IV. Passage of time
- A. I, II, III
- B. I, II
- C. I, II, III, IV
- D. II, III
Answer: C
Explanation:
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.
NEW QUESTION # 172
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