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NEW QUESTION # 162
If the yield on the 3-month risk free bonds issued by the U.S government is 0.5%, and the 3-month LIBOR
rate is 2.5%, what is the TED spread?
- A. 2.0%
- B. 3.0%
- C. 0.5%
- D. -2.0%
Answer: A
NEW QUESTION # 163
Which one of the following four exercise features is typical for the most exchange-traded equity options?
- A. American exercise feature
- B. A shout option exercise feature
- C. European exercise feature
- D. Asian exercise feature
Answer: A
NEW QUESTION # 164
Which one of the following four statements correctly defines chooser options?
- A. These options pay an amount equal to the power of the value of the underlying asset above the strike price.
- 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. The owner of these options decides if the option is a call or put option only when a predetermined date is reached.
Answer: D
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 # 165
Which one of the following four options correctly identifies the core difference between bonds and loans?
- A. These instruments cannot be used to estimate credit capital under provisions of the Basel II Accord.
- B. These instruments have different pricing drivers.
- C. These instruments receive a different legal treatment.
- D. These instruments are subject to different credit counterparty regulations.
Answer: C
NEW QUESTION # 166
Which one of the following four relationships should be used to price equity forwards or futures?
- A. Equity forward or futures price = market equity price + (1 + risk-free rate + expected dividend rate)t
- B. Equity forward or futures price = market equity price x (1 - risk-free rate - expected dividend rate)t
- C. Equity forward or futures price = market equity price x (1 + risk-free rate - expected dividend rate)t
- D. Equity forward or futures price = market equity price + (1 + risk-free rate - expected dividend rate)t
Answer: C
NEW QUESTION # 167
Which of the following statements regarding CDO-squared is correct?
I. CDO-squared use other CDOs and CMOs as collateral.
II. Risk assessment of CDO-squared is almost impossible due to their complexity.
III. CDO-squared have lower credit risk than CMOs but higher than CDOs.
- A. I only
- B. II and III
- C. I, II, and III
- D. I and II
Answer: D
Explanation:
CDO-squared instruments use other CDOs and CMOs as collateral (Statement I). Due to their complexity, risk assessment of CDO-squared is almost impossible (Statement II). The statement that CDO-squared have lower credit risk than CMOs but higher than CDOs (Statement III) is incorrect; typically, CDO-squared instruments have higher risk due to the additional layer of complexity and leverage.
NEW QUESTION # 168
Which of the following risk measures are based on the underlying assumption that interest rates across all maturities change by exactly the same amount?
I. Present value of a basis point.
II. Yield volatility.
III. Macaulay's duration.
IV. Modified duration.
- A. I, III, and IV
- B. I, II, III, and IV
- C. I, II, and III
- D. I and II
Answer: A
Explanation:
Risk measures such as the present value of a basis point (I), Macaulay's duration (III), and modified duration (IV) are based on the underlying assumption that interest rates across all maturities change by exactly the same amount. These measures rely on the concept of a parallel shift in the yield curve, where all interest rates move together in a uniform manner. Yield volatility (II), on the other hand, is not predicated on this assumption as it measures the variability in yields over time and does not assume uniform changes across all maturities.
NEW QUESTION # 169
Which one of the following four global markets for financial assets or instruments is widely believed to be the most liquid?
- A. Commodities market
- B. Foreign exchange market.
- C. Fixed income market
- D. Equity market.
Answer: B
Explanation:
The foreign exchange market (forex or FX) is widely believed to be the most liquid financial market in the world. This market operates 24 hours a day and involves the highest volume of trading compared to other financial markets. The high liquidity is due to the significant volume of transactions conducted by various participants, including governments, financial institutions, corporations, and individual traders. The vast number of buyers and sellers ensures that trades can be executed quickly and at stable prices.
NEW QUESTION # 170
For two variables, which of the following is equal to the average product of the deviations from their
respective means?
- A. Standard deviation
- B. Covariance
- C. Kurtosis
- D. Correlation
Answer: B
NEW QUESTION # 171
Which of the following statements defines Value-at-risk (VaR)?
- A. VaR is the maximum likely loss on a financial instrument or a portfolio of financial instruments over a given time period with a given degree of probabilistic confidence.
- B. VaR is the worst possible loss on a financial instrument or a portfolio of financial instruments over a given time period.
- C. VaR is the minimum likely loss on a financial instrument or a portfolio of financial instruments with a given degree of probabilistic confidence.
- D. VaR is the maximum of past losses over a given period of time.
Answer: A
Explanation:
Value-at-Risk (VaR) is a statistical measure used to assess the risk of loss on a specific portfolio of financial assets. It estimates the maximum potential loss with a given confidence level over a defined period.
* Maximum Likely Loss: VaR calculates the worst expected loss under normal market conditions at a specific confidence level.
* Time Period: VaR is assessed over a specified time horizon, such as a day, week, or month.
* Confidence Level: VaR is defined at a certain confidence level, typically 95% or 99%. This means there is a 95% (or 99%) probability that the loss will not exceed the VaR estimate.
For instance, a daily VaR of $1 million at a 99% confidence level implies that there is only a 1% chance that the portfolio will lose more than $1 million in a day.
References
* How Finance Works.pdf, p. 201
NEW QUESTION # 172
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. Loss probabilities from the standard normal distribution are used to compute implied volatilities, which makes it easy to compute the.
- C. Implied volatilities are better at predicting actual volatilities
- D. Current market data is used to determine implied volatilities, which makes them forward looking measures
Answer: D
Explanation:
Implied volatility is an estimate of the volatility of a security's price derived from market prices of options.
One of the key advantages of using implied volatility in VaR calculations is its forward-looking nature.
* Forward-Looking: Implied volatility reflects the market's expectations of future volatility. It is derived from the prices of options, which incorporate the collective market view on future price fluctuations.
* Current Market Data: Since implied volatility is based on current market prices, it adjusts to new information more quickly than historical volatility measures, making it a more timely indicator of risk.
Using implied volatility can provide a more accurate and responsive measure of risk, especially in dynamic market conditions.
References
* How Finance Works.pdf, p. 232
NEW QUESTION # 173
The exercise for an American type option prior to expiration day is virtually certain in the following case:
- A. In the event of a high dividend for an in-the-money put option
- B. In the event of a low dividend for an in-the-money put option
- C. In the event of a low dividend for an in-the-money call option
- D. In the event of a high dividend for an in-the-money call option
Answer: D
Explanation:
For American options, exercising an in-the-money call option before the ex-dividend date can be beneficial if the option is deep in the money and the dividend is significant. This is because the holder would receive the dividend payment, which can make early exercise profitable.
NEW QUESTION # 174
A bank customer expecting to pay its Brazilian supplier BRL 100 million asks Alpha Bank to buy Australian
dollars and sell Brazilian reals. Alpha bank does not hold Brazilian reals so it asks for a quote to buy Brazilian
reals in the market. The market rate is 100. The bank quotes a selling rate of 101 to its customer, sells the
reals, and receives AUD 1,010,000. To perform foreign exchange matched position trading, the banks should
- A. Immediately sell the real above the market rate of 105 and receive AUD 1,050,050.
- B. Immediately buy the real above the market rate of 105 and pay AUD 1,050,050.
- C. Immediately buy the real at the market rate of 100 and pay AUD 1,000,000.
- D. Immediately sell the real at the market rate of 100 and receive AUD 1,000,000.
Answer: C
NEW QUESTION # 175
BetaFin, a financial services firm, does not have retail branches, but has fixed income, equity, and asset
management divisions. Which one of the four following risk and control self-assessment (RCSA) methods fits
the firm's operational risk framework the best?
- A. RCSA workshop approach
- B. RCSA questionnaire approach
- C. RCSA loss data approach
- D. RCSA scenario analysis approach
Answer: A
NEW QUESTION # 176
Which one of the following four variables of the Black-Scholes model is typically NOT known at a point in time?
- A. The underlying relevant exchange rates
- B. The underlying interest rates
- C. The time to maturity
- D. The future volatility of the exchange rates
Answer: D
Explanation:
Among the variables used in the Black-Scholes model, the future volatility of the exchange rates is typically not known at a point in time. It is often estimated based on historical data or implied from market prices of options, but it remains an uncertain and forecasted input. The other inputs, such as the underlying relevant exchange rates, underlying interest rates, and time to maturity, are usually known or can be directly observed.
References:The inherent uncertainty in predicting future volatility is discussed in the context of option pricing in the "How Finance Works" document.
NEW QUESTION # 177
After entering the securitization business, Delta Bank increases its cash efficiency by selling off the lower risk portions of the portfolio credit risk. This process ___ return on equity for the bank, because the cash generated by the risk-transfer and the overall ___ of the bank's exposure to the risk.
- A. Decreases; reduction;
- B. Increases; reduction;
- C. Decreases; increase;
- D. Increases; increase;
Answer: B
Explanation:
* By selling off the lower risk portions of the portfolio credit risk, Delta Bank can increase its cash efficiency. This process generates cash which can be reinvested or used for other purposes, effectively improving the return on equity (ROE).
* The overall risk exposure of the bank is reduced as the lower risk assets are sold off, leaving a more concentrated higher-risk portfolio, which still needs to be managed effectively.
References:
* How Finance Works: "Securitization and selling lower risk assets can increase cash efficiency and return on equity by reducing the overall exposure to risk."
NEW QUESTION # 178
ThetaBank has extended substantial financing to two mortgage companies, which these mortgage lenders use to finance their own lending. Individually, each of the mortgage companies have an exposure at default (EAD) of $20 million, with a loss given default (LGD) of 100%, and a probability of default of 10%. ThetaBank's risk department predicts the joint probability of default at 5%. If the default risk of these mortgage companies were modeled as independent risks, the actual probability would be underestimated by:
- A. 1%
- B. 2%
- C. 3%
- D. 4%
Answer: B
Explanation:
ThetaBank's default risk assessment involves calculating the joint probability of default for the two mortgage companies and comparing it to the independent risk model.
* Individual Exposure at Default (EAD): $20 million for each mortgage company.
* Loss Given Default (LGD): 100%
* Probability of Default (PD): 10% for each mortgage company.
* Joint Probability of Default: 5%
For independent risks, the joint probability of default for two independent events is the product of their individual probabilities:
\text{Joint Probability (Independent)} = PD_1 \times PD_2 = 0.10 \times 0.10 = 0.01 \text{ (or 1%)} Given that ThetaBank predicts the joint probability at 5%, the independent model would have underestimated the actual probability by:
5%1%=4%5%1%=4%
Therefore, the underestimated probability is:
4%2%=2%4%2%=2%
References
* Verified information from the document
NEW QUESTION # 179
In the United States, during the second quarter of 2009, transactions in foreign exchange derivative contracts comprised approximately what proportion of all types of derivative transactions between financial institutions?
- A. 43%
- B. 7%
- C. 25%
- D. 2%
Answer: B
Explanation:
During the second quarter of 2009, transactions in foreign exchange derivative contracts comprised approximately 7% of all types of derivative transactions between financial institutions in the United States.
This data point reflects the proportion of foreign exchange derivatives within the broader context of derivative transactions during that period.
NEW QUESTION # 180
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GARP 2016-FRR (Financial Risk and Regulation) Certification Exam is a comprehensive assessment designed for professionals seeking to enhance their knowledge and skills in financial risk management and regulatory compliance. 2016-FRR exam is developed and administered by the Global Association of Risk Professionals (GARP), a leading global organization dedicated to advancing the risk profession through education, research, and professional development.
GARP 2016-FRR Exam is divided into two parts, Part I and Part II. Part I of the exam covers the fundamental concepts of financial risk management, including the principles of risk management, quantitative analysis, and financial markets. Part II of the exam focuses on the practical application of risk management techniques in real-world scenarios, including case studies and simulations. 2016-FRR exam is designed to test the knowledge and skills of candidates in the areas of risk management and regulation, and to provide them with the necessary tools to succeed in their careers in finance.
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