GARP 2016-FRR Exam Practice Test Instant Access

Question 1

Which one of the following four statements regarding commodity derivative risks is INCORRECT?

ABecause of the different demand/supply balance in each region and the cost of transporting the oil between regions, a tanker of Brent crude oil in the UK will have a different value to a UK buyer than a tanker of Arab light crude oil in Singapore, which results in the basis risk.

BCalendar spreads represent a special case of basis risk and occur when the relative prices of commodity futures do not come in alignment and the trader becomes exposed to the absolute price movements.

CIn most commodities, the longest term contracts are the most volatile, while the shortest term forward contract are the least volatile.

DSome commodities can be both in backwardation and a have a strong seasonal element.

Answer : C

Question 2

Which one of the following four regulatory drivers for operational risk management includes risk and control requirements for financial statements in the United States?

ABasel II Accord

BSolvency II

CThe Markets in Financial Instruments Directive

DThe Sarbanes-Oxley Act

Answer : D

Question 3

A risk manager has a long forward position of USD 1 million but the option portfolio decreases JPY 0.50 for every JPY 1 increase in his forward position. At first approximation, what is the overall result of the options positions?

AThe options positions hedge the forward position by 25%.

BThe option positions hedge the forward position by 50%.

CThe option positions hedge the forward position by 75%.

DThe option positions hedge the forward position by 100%.

Answer : B

Question 4

A risk manager analyzes a long position with a USD 10 million value. To hedge the portfolio, it seeks to use options that decrease JPY 0.50 in value for every JPY 1 increase in the long position. At first approximation, what is the overall exposure to USD depreciation?

AHis overall portfolio has the same exposure to USD as a portfolio that is long USD 5 million.

BHis overall portfolio has the same exposure to USD as a portfolio that is long USD 10 million.

CHis overall portfolio has the same exposure to USD as a portfolio that is short USD 5 million.

DHis overall portfolio has the same exposure to USD as a portfolio that is short USD 10 million.

Answer : D

Question 5

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?

A31%

B36%

C41%

D46%

Answer : C

Question 6

Which one of the following four variables of the Black-Scholes model is typically NOT known at a point in time?

AThe underlying relevant exchange rates

BThe underlying interest rates

CThe future volatility of the exchange rates

DThe time to maturity

Answer : C

Question 7

Which one of the following four parameters is NOT a required input in the Black-Scholes model to price a foreign exchange option?

AUnderlying exchange rates

BUnderlying interest rates

CDiscrete future stock prices

DOption exercise price

Answer : C

GARP 2016-FRR Financial Risk and Regulation (FRR) Series Exam Practice Test