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GARP Financial Risk and Regulation (FRR) Series Sample Questions (Q63-Q68):
NEW QUESTION # 63
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
Answer: B
Explanation:
To perform foreign exchange matched position trading, Alpha Bank should match the customer's transaction to eliminate currency risk. Here's the breakdown:
* Customer transaction: The customer buys AUD 1,010,000 at a rate of 101 for BRL 100 million.
* Market transaction: To cover this, Alpha Bank should buy BRL at the market rate of 100, paying AUD 1,000,000 (BRL 100 million / 100 = AUD 1,000,000).
This ensures that the bank is not exposed to fluctuations in the BRL/AUD exchange rate.
References
Source: How Finance Works
NEW QUESTION # 64
Floating rate bonds typically have ________ duration which means they have ________ sensitivity to interest
rate changes.
Answer: A
NEW QUESTION # 65
To estimate a partial change in option price, a risk manager will use the following formula:
Answer: A
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 # 66
A risk analyst at EtaBank wants to estimate the risk exposure in a leveraged position in Collateralized Debt Obligations. These particular CDOs can be used in a repurchase transaction at a 20% haircut. If the VaR on a
$100 unleveraged position is estimated to be $30, what is the VaR for the final, fully leveraged position?
Answer: C
Explanation:
To determine the VaR for the fully leveraged position, we need to understand how leverage affects VaR.
Leverage magnifies both returns and risks, which means that the VaR for a leveraged position is greater than that of an unleveraged position.
* Calculate the leverage ratio:
* In a repurchase transaction with a 20% haircut, 20% of the asset's value must be provided as collateral, meaning 80% can be borrowed.
* Leverage ratio LLL = 1Haircutrac{1}{ ext{Haircut}}Haircut1 = 10.2rac{1}{0.2}0.21 = 5.
* Calculate the leveraged position:
* If the initial unleveraged position is $100, then the leveraged position is $100 imes 5 = $500.
* Calculate the VaR for the leveraged position:
* The unleveraged VaR is $30 on $100.
* Therefore, the leveraged VaR will be magnified by the leverage ratio:
Leveraged VaR=Unleveraged VaR×Leverage Ratio ext{Leveraged VaR} = ext{Unleveraged VaR} imes ext{Leverage Ratio}Leveraged VaR=Unleveraged VaR×Leverage Ratio = $30
imes 5 = $150.
ReferencesSource: How Finance Works
NEW QUESTION # 67
US-based BetaBank have accumulated Japanese yen, Japanese government bonds, options on Japanese yen, and positions in commodities that have a positive correlation with yen. Which one of the four following non- statistical risk measures could be used to evaluate the BetaBank's exposure to the Japanese economy?
Answer: B
Explanation:
To evaluate BetaBank's exposure to the Japanese economy, we should consider measures that reflect the bank' s positions and their potential sensitivity to economic changes in Japan:
* Position Turnover:
* This measures how frequently positions are changed or traded, which does not directly indicate exposure to economic conditions.
* Position Concentrations:
* This indicates how concentrated the bank's positions are in certain assets or markets. High concentration in Japanese assets (yen, Japanese government bonds, etc.) would indicate high exposure to the Japanese economy.
* Position Volatility:
* This measures how much the value of positions fluctuates, which can indicate risk but does not specifically measure economic exposure.
* Position Sensitivities:
* This measures how sensitive positions are to changes in underlying factors, such as interest rates or exchange rates. This could also be relevant but does not directly indicate exposure to the economy as a whole.
Thus, position concentrations are a key measure to evaluate BetaBank's exposure to the Japanese economy.
References
Source: How Finance Works
NEW QUESTION # 68
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