100% Pass Guaranteed Accurate 2016-FRR Answers 365 Days Free Updates [Q119-Q137]

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100% Pass Guaranteed Accurate 2016-FRR Answers 365 Days Free Updates

2016-FRR DUMPS Q&As with Explanations Verified & Correct Answers

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QUESTION 119
Bank G has a 1-year VaR of USD 20 million at 99% confidence level while bank H has a 1-year VaR of USD
10 million at 95% confidence level. Which bank is in a more risky position as measured by VaR?

Bank G is taking twice the risk of bank H as measured by VaR.

Bank H is taking twice the risk of bank G as measured by VaR.

Since the confidence levels are not the same we cannot make any conclusions.

Both banks are equally risky since the measurements are with the same confidence level.

QUESTION 120
The value of which one of the following four option types is typically dependent on both the final price of its underlying asset and its own price history?

Stout options

Power options

Chooser options

Basket options

QUESTION 121
Which one of the following four exotic option types has another option as its underlying asset, and as a result
of its construction is generally believed to be very difficult to model?

Spread options

Chooser options

Binary options

Compound options

QUESTION 122
Which one of the following statements regarding collateralized mortgage obligations (CMO) is incorrect?

CMOs have senior tranches which are considered short-term, low-risk instruments by banks

CMOs are asset-backed securities that have pools of collateralized debt obligations (CDOs) as
underlying collateral.

CMOs are generally less risky investment than CDOs.

CMOs are pools of mortgages that are divided according to the timing of cash flows.

QUESTION 123
Which one of the following four statements correctly identifies the Basel II Accord’s definition of operational risk?

Operational risk is all the risk that is not captured by market and credit risks.

Operational risk is the risk of loss resulting from inadequate or failed processes, people and systems or from external events.

Operational risk is a risk arising from execution of a company’s business functions.

Operational risk is a form of risk that summarizes the risks a company or firm undertakes when it attempts to operate within a given field or industry.

QUESTION 124
A credit analyst wants to determine a good pricing strategy to compensate for credit decisions that might have
been made incorrectly. When analyzing her credit portfolio, the analyst focuses on the spreads in each loan to
determine if they are sufficient to compensate the bank for all of the following costs and risks EXCEPT.

The marginal cost of funds provided.

The overhead cost of maintaining the loan and the account.

The inherent risk of lending to this borrower while providing a return on the risk capital used to the
support the loan.

The opportunity cost of risk-adjusted marginal cost of capital.

QUESTION 125
Which one of the following statements correctly identifies risks in foreign exchange forwards?

Short-term forward price fluctuations are driven by changes in the spot exchange rate, since most inter-country interest rates differentials are significant, and the effect of compounding is large for short periods of time.

Short-term forward price fluctuations are driven by changes in the spot exchange rate, since most inter-country interest rates differentials are small, and the effect of compounding is small for short periods of time.

Long-term forward price fluctuations are driven by changes in the spot exchange rate, since most inter-country interest rates differentials are small, and the effect of compounding is large for short periods of time.

Long-term forward price fluctuations are driven by changes in the spot exchange rate, since most inter-country interest rates differentials are significant, and the effect of compounding is small for short periods of time.

QUESTION 126
Which one of the following four statements about the relationship between exchange rates and option values is
correct?

As the dollar appreciates relative to the pound, the right to buy dollars at a fixed pound exchange rate
decreases.

As the dollar appreciates relative to the pound, the right to buy dollars at a fixed pound exchange rate
increases.

As the dollar depreciates relative to the pound, the right to buy dollars at a fixed pound exchange rate
increases.

As the dollar appreciates relative to the pound, the right to sell dollars at a fixed pound exchange rate
increases.

QUESTION 127
A credit analyst wants to determine if her bank is taking too much credit risk. Which one of the following four
strategies will typically provide the most convenient approach to quantify the credit risk exposure for the
bank?

Assessing aggregate exposure at default at various time points and at various confidence levels

Simplifying individual credit exposures so that they can be combined into a simplified expression of
portfolio risk for the bank

Using stress testing techniques to forecast underlying macroeconomic factors and bank’s idiosyncratic
risks

Analyzing distribution of bank’s credit losses and mapping credit risks at various statistical levels

QUESTION 128
Which one of the following four features is NOT a typical characteristic of futures contracts?

Fixed notional amount per contract

Fixed dates for delivery

Traded Over-the-counter only

Daily margin calls

QUESTION 129
As an example of the balance sheet effect, if rates rise, Delta Bank can expect:

Its fixed rate assets to increase in value, although that effect will be offset by a reduction in the value of
its fixed rate liabilities.

Its fixed rate assets to drop in value, although that effect will be offset by a reduction in the value of its
fixed rate liabilities.

Its fixed rate assets to increase in value, while that effect will be amplified by a reduction in the value of
its fixed rate liabilities.

Its fixed rate assets to drop in value, while that effect will be amplified by a reduction in the value of its
fixed rate liabilities.

QUESTION 130
Gamma Bank provides a $100,000 loan to Big Bath retail stores at 5% interest rate (paid annually). The loan is
collateralized with $55,000. 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 exposure at default (EAD) be?

$25,000

$50,000

$75,000

$105,000

QUESTION 131
Suppose Delta Bank enters into a number of long-term commercial and retail loans at fixed rate prevailing at
the time the loans are originated. If the interest rates rise:

The bank will have to pay higher interest rates to its depositors and would have to pay higher rates on its
debt to the extent the debt interest rate was linked to floating indices, or to the extent the debt used to
fund the loans was of a shorter maturity than the loans.

The bank will have to pay higher interest rates to its depositors and would have to pay lower rates on its
debt to the extent the debt interest rate was linked to floating indices, or to the extent the debt used to
fund the loans was of a shorter maturity than the loans.

The bank will have to pay lower interest rates to its depositors and would have to pay higher rates on its
debt to the extent the debt interest rate was linked to floating indices, or to the extent the debt used to
fund the loans was of a shorter maturity than the loans.

The bank will have to pay lower interest rates to its depositors and would have to pay lower rates on its
debt to the extent the debt interest rate was linked to floating indices, or to the extent the debt used to
fund the loans was of a shorter maturity than the loans.

QUESTION 132
Which one of the following four statements correctly defines chooser options?

The owner of these options decides if the option is a call or put option only when a predetermined date
is reached.

These options represent a variation of the plain vanilla option where the underlying asset is a basket of
currencies.

These options pay an amount equal to the power of the value of the underlying asset above the strike
price.

These options give the holder the right to exchange one asset for another.

QUESTION 133
Alpha Bank determined that Delta Industrial Machinery Corporation has 2% change of default on a one-year
no-payment of USD $1 million, including interest and principal repayment. The bank charges 3% interest rate
spread to firms in the machinery industry, and the risk-free interest rate is 6%. Alpha Bank receives both
interest and principal payments once at the end the year. Delta can only default at the end of the year. If Delta
defaults, the bank expects to lose 50% of its promised payment.
What may happen to the Delta’s initial credit parameter and the value of its loan if the machinery industry
experiences adverse structural changes?

Probability of default and loss at default may decrease simultaneously, while duration rises causing the
loan value to decrease.

Probability of default and loss at default may decrease simultaneously, while duration falls causing the
loan value to decrease.

Probability of default and loss at default may increase simultaneously, while duration rises causing the
loan value to decrease.

Probability of default and loss at default may increase simultaneously, while duration falls causing the
loan value to decrease.

QUESTION 134
According to a Moody’s study, the most important drivers of the loss given default historically have been all of the following EXCEPT:
I. Debt type and seniority
II. Macroeconomic environment
III. Obligor asset type
IV. Recourse

I, II

III, IV

QUESTION 135
Alpha Bank, a small bank,has a long position with larger BetaBank and has an identical short position with
another larger bank GammaBank. Each large bank requires a 20% initial collateral to support the trade. As
prices fluctuate in either direction, one large bank will require additional collateral from the small bank, while
the risk of loss to the other large bank will increase. By running the trades through a clearinghouse, the small
bank can achieve all of the following objectives EXCEPT:

Eliminating the collateral requirement

Protecting itself against increases in future collateral demands

Protecting against the risk of the failure of one of the large banks

Mitigating option hedging risks and altering margin requirement

QUESTION 136
Which one of the following four mathematical option pricing models is used most widely for pricing European
options?

The Black model

The Black-Scholes model

The Garman-Kohlhagen model

The Heston model

QUESTION 137
To protect the oranges harvest price level, a farmer needs to take a hedge position. Provided that he produces the amount he hedged, which one of the following four strategies will allow the farmer to accomplish his goal?

Going short on oranges futures contracts

Going long on oranges futures contacts

Entering into a customized forward contract with the bank

Negotiating a credit line facility