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GARP Financial Risk and Regulation (FRR) Series Sample Questions (Q159-Q164):

NEW QUESTION # 159
To estimate a partial change in option price, a risk manager will use the following formula:

A. Partial change in option price = Delta x Gamma x Change in underlying price
B. Partial change in option price = Delta x Change in underlying price
C. Partial change in option price = Delta x Gamma x (1+ Change in underlying price)
D. Partial change in option price = Delta x (1+ Change in underlying price)

Answer: B

Explanation:
The formula to estimate a partial change in an option's price based on the change in the underlying asset's price is primarily dependent on the option's Delta. Delta represents the sensitivity of the option's price to changes in the price of the underlying asset. Therefore, the most straightforward and widely used formula to estimate this partial change is:
Partial change in option price=#×Change in underlying pricePartial change in option price=#×Change in underly This formula directly utilizes Delta to measure the immediate rate of change in the option's price relative to a small change in the underlying asset's price. The other options involving Gamma are more complex and not typically used for simple partial changes.

NEW QUESTION # 160
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 has 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, what would be the probability of a cumulative $40 million loss from these two
mortgage borrowers?

A. 1%
B. 10%
C. 0.1%
D. 0.01%

Answer: A

NEW QUESTION # 161
Which of the following statements are reasons for mathematical valuation and risk assessment models to be misleading or inaccurate?
I. There could be missing factors in models.
II. The data used as input for the model could be bad or wrong.
III. Model results could be misinterpreted.
IV. There could be errors in the derivation of the model.

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

Answer: D

Explanation:
Mathematical valuation and risk assessment models can be misleading or inaccurate for several reasons:
* Missing factors in models: Important variables or conditions might be overlooked.
* Bad or wrong data: Incorrect or poor-quality data input can lead to faulty outcomes.
* Misinterpretation of results: Users might not correctly understand or use the results.
* Errors in the derivation of the model: Mistakes in the mathematical formulation or assumptions can lead to errors.
All these factors contribute to the potential inaccuracy or misleading nature of such models.

NEW QUESTION # 162
Which one of the following four statements regarding floating rate bonds is incorrect?

A. Floating rate bonds only have a small degree of interest rate risk.
B. Floating rate bonds have coupon payments tied to floating interest rates or floating interest rate indexes.
C. Floating rate bonds typically have less price risk than fixed rate bonds.
D. Floating rate bonds are very sensitive to changes in interest rates.

Answer: D

Explanation:
Floating rate bonds have coupon payments that are tied to a floating interest rate or index, such as LIBOR.
This means their coupon payments adjust periodically with changes in the underlying interest rates. Due to this mechanism, floating rate bonds typically have less price risk compared to fixed-rate bonds because their coupon payments reset in line with current market rates. Hence, floating rate bonds are generally not very sensitive to changes in interest rates since the adjustments in coupon payments help maintain their value.
Therefore, the statement that floating rate bonds are very sensitive to changes in interest rates is incorrect.

NEW QUESTION # 163
A large number of traders decide to follow the same trading strategy and sell a substantial portion of their physical gold holdings on the markets. The positions held by the traders are an example of what?

A. Crowded trades
B. Basis trades
C. Disappearance trades
D. Break trades

Answer: A

Explanation:
Comprehensive and Detailed In-Depth Explanation:
Crowded trades occur when many market participants adopt the same trading strategy, leading to concentrated positions in a specific asset (e.g., selling physical gold). This increases systemic risk, as a sudden reversal or liquidity crunch can amplify losses. GARP's FRR materials discuss crowded trades in the context of market risk and systemic vulnerabilities, noting their potential to destabilize markets. Basis trades involve exploiting price differences between related instruments, disappearance trades and break trades are not standard terms in this context, making "crowded trades" the correct answer.
Reference:GARP FRR Study Notes, Market Risk Section; BCBS, "Basel III: A Global Regulatory Framework," para. 701.

NEW QUESTION # 164
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