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The FRR Series exam is available to individuals who have a minimum of two years of professional experience in risk management, regulation, or a related field. 2016-FRR exam is divided into two parts, with the first part covering foundations of risk management and the second part focusing on regulatory compliance. 2016-FRR exam is computer-based and consists of multiple-choice questions. Candidates are given four hours to complete each part of the exam. Upon successful completion of the exam, candidates are awarded the FRR Series Certification, which is recognized globally as a mark of excellence in financial risk management and regulatory compliance.
NEW QUESTION # 43
Which one of the following four statements on the seniority of corporate bonds is incorrect?
- A. Seniority refers to the priority of a bond in bankruptcy.
- B. Senior bonds typically have lower credit spreads than junior bonds with the same maturity and payment
characteristics. - C. Junior bonds always pay higher coupons than subordinated bonds.
- D. In bankruptcy, holders of senior bonds are paid in full before any holders of subordinated bonds receive
payment.
Answer: C
NEW QUESTION # 44
A bank has a large number of auto loans and would prefer to sell them to raise cash for more funding.
However, selling individual auto loans is difficult. What could the bank do?
- A. Set up a marketing team to sell individual loans to investors.
- B. Merge with another bank.
- C. Obtain a stronger credit rating so that the bank could borrow at a cheaper rate.
- D. Package the loans into a securitized vehicle and sell the low risk portion of the portfolio.
Answer: D
Explanation:
When a bank has a large number of auto loans and finds it difficult to sell them individually, it can take the following steps to raise cash:
* Packaging into a Securitized Vehicle: The bank can package these auto loans into a securitized vehicle, such as a collateralized loan obligation (CLO) or an asset-backed security (ABS). By doing so, the bank can create a portfolio of loans that can be sold as a single security.
* Selling the Low-Risk Portion: Once the loans are securitized, the bank can sell the low-risk portion of the portfolio to investors. This part of the portfolio is more attractive to investors because it typically offers lower risk and stable returns, making it easier to sell compared to individual loans.
References: This approach is detailed in "How Finance Works," where securitization is described as a method for banks to sell illiquid assets by packaging them into marketable securities.
NEW QUESTION # 45
Bank Sigma takes a long position in the oil futures market that requires a 2% margin, i.e., the bank has to deposit 2% of the value of the contract with the broker. The futures contracts were priced at $50 per barrel (bbl) at inception, and rose by $5 to $55. The VaR on the position is estimated to be $10. What is the return on this transaction on a risk adjusted basis?
- A. 500%
- B. 10%
- C. 20%
- D. 50%
Answer: D
Explanation:
* Initial Margin Calculation: The bank takes a long position requiring a 2% margin. For futures contracts priced at $50 per barrel, the margin required per barrel is 0.02×50=10.02 \times 50 =
10.02×50=1 dollar.
* Profit Calculation: The price rises from $50 to $55 per barrel, making a profit of 5550=555 - 50 =
55550=5 dollars per barrel.
* Return Calculation:
* Return on Investment (ROI) without considering risk: 51=5\frac{5}{1} = 515=5 or 500%.
* Risk-Adjusted Return:
* VaR (Value at Risk) on the position is estimated to be $10.
* Risk-adjusted return formula: ProfitVaR=510=0.5\frac{Profit}{VaR} = \frac{5}{10} =
0.5VaRProfit=105=0.5 or 50%.
ReferencesSource: How Finance Works
NEW QUESTION # 46
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?
- A. Going long on oranges futures contacts
- B. Going short on oranges futures contracts
- C. Entering into a customized forward contract with the bank
- D. Negotiating a credit line facility
Answer: B
Explanation:
* To hedge against the price risk of a future harvest, a farmer would take a position opposite to their exposure.
* By going short on futures contracts, the farmer locks in a selling price for the oranges, protecting against a potential decline in market prices at the time of harvest.
* This strategy effectively sets a future selling price, ensuring revenue stability regardless of market fluctuations.
NEW QUESTION # 47
The main building blocks of an operational risk framework include all of the following options EXCEPT:
- A. Scenario analysis
- B. Loss data collection
- C. Risk and control self-assessment
- D. Compliance document preparation
Answer: D
Explanation:
The main building blocks of an operational risk framework typically include:
* Loss data collection: Gathering historical loss data to understand past incidents and their impact.
* Risk and control self-assessment (RCSA): Assessing and documenting the risks and controls within the organization.
* Scenario analysis: Developing and analyzing potential future risk scenarios to understand their impact.
Compliance document preparation, while important for regulatory compliance, is not considered a core building block of an operational risk framework.
NEW QUESTION # 48
From a risk point of view, which of the following factors will generally lead to the fluctuation of equity values with industry P/E levels and a company's individual earnings?
I. Sales
II. Cost management
III. Commercial success of the company
IV. Market sentiment
- A. I, II, III
- B. III, IV
- C. II, IV
- D. I, II
Answer: A
Explanation:
* Sales and cost management are fundamental factors affecting a company's earnings, directly influencing equity values.
* The commercial success of the company significantly impacts its earnings, thus affecting the industry P/E levels.
* Market sentiment also plays a crucial role in the fluctuation of equity values as it influences investor perceptions and market dynamics.
* Therefore, sales, cost management, and commercial success are factors that will generally lead to the fluctuation of equity values with industry P/E levels and a company's individual earnings.
NEW QUESTION # 49
Which one of the following four statements about regulatory capital for a bank is accurate?
- A. Regulatory capital is less than the regulatory capital requirement.
- B. Regulatory capital is determined by rules imposed by an outside authority, such as a supervisor or central bank.
- C. Regulatory capital is the lowest level of economic capital the bank should have to meet regulatory requirement.
- D. Regulatory capital reflects the economic tradeoffs of the bank as accurately as the bank can represent them.
Answer: B
Explanation:
Regulatory capital is the minimum amount of capital that a bank is required to hold by financial regulators.
These rules are imposed by outside authorities such as central banks or financial supervisory bodies to ensure the stability and solvency of financial institutions. This differs from economic capital, which is determined internally by the bank to cover its own estimated risk exposures.
NEW QUESTION # 50
According to Basel II what constitutes Tier 3 capital?
- A. Subordinated debt issues that pay interest.
- B. Debt capital that can only be used to support market risk in the trading book of the bank.
- C. Hybrid debt capital instruments that are similar to equity.
- D. Preference shares that confer on issuers the right to defer payment of a fixed dividend.
Answer: B
Explanation:
Tier 3 capital under Basel II refers specifically to subordinated debt that is intended to cover market risk in the trading book. It is not as widely recognized or used as Tier 1 and Tier 2 capital and has more restrictive requirements. This capital can only be used to support market risk, not credit risk. Its purpose is to provide an additional layer of capital to absorb losses specifically arising from market risks.
NEW QUESTION # 51
The Sarbanes-Oxley Act includes one of the following four requirements for financial institutions in the United States:
- A. Capital allocation requirements
- B. Regulatory response to systemic risk requirements
- C. Risk and control requirements
- D. Market discipline requirements
Answer: C
Explanation:
The Sarbanes-Oxley Act includes requirements for financial institutions in the United States regarding risk and control. It aims to enhance corporate governance and strengthen the internal controls and financial reporting processes. The other options such as market discipline requirements, capital allocation requirements, and regulatory response to systemic risk requirements are not specifically covered by the Sarbanes-Oxley Act.References:Sarbanes-Oxley Act requirements as outlined in Financial Risk and Regulation documents.
NEW QUESTION # 52
A risk associate responsible for the operational risk function wants to evaluate the upward reporting
governance structure and to assess its critical features. Which one of the four attributes does not represent a
critical feature of the upward reporting governance structure?
- A. Relevance
- B. Importance
- C. Independence
- D. Security
Answer: D
NEW QUESTION # 53
Which of the following statements describes a bank's reasons to set risk limits?
I. To control and minimize a bank's current risk exposure.
II. To predict future risks.
III. To allocate risks to business units.
IV. To keep risk within tolerance levels.
- A. I and II
- B. III and IV
- C. I, II, and III
- D. I, III, and IV
Answer: D
NEW QUESTION # 54
Which one of the following four models is typically used to grade the obligations of small- and medium-size
enterprises?
- A. Credit rating models
- B. Causal models
- C. Credit scoring models
- D. Historical frequency models
Answer: C
NEW QUESTION # 55
To hedge a foreign exchange exposure on behalf of a client, a small regional bank seeks to enter into an
offsetting foreign exchange transaction. It cannot access the large and liquid interbank market open primarily
to larger banks. At which one of the following exchanges can the smaller bank trade the currency futures
contracts?
I. The Tokyo Futures Exchange
II. The Euronext-Liffe Exchange
III. The Chicago Mercantile Exchange
- A. I, II, III
- B. I
- C. II, III
- D. III
Answer: A
NEW QUESTION # 56
A proprietary trading desk for a large bank hedges an Arab light OTC forward position with Brent crude oil forwards. The trading desk benefits from using the most liquid OTC market to hedge, the market for the Brent crude, but hedging its using the Brent contract, exposes itself to the following type of risk:
- A. Basis risk
- B. Term risk
- C. Seasonality risk
- D. Correlation risk
Answer: A
Explanation:
When a proprietary trading desk hedges an Arab light OTC forward position with Brent crude oil forwards, they face basis risk. This is because the underlying commodities (Arab light and Brent crude oil) are different and may not move perfectly in sync, leading to a potential mismatch in the hedge.
References
Verified based on the discussion of basis risk in commodity trading provided in the book "How Finance Works".
NEW QUESTION # 57
Most loans and deposits in the interbank market have a maturity of:
- A. More than 5 years but less than 10 years
- B. More than 3 years but less than 5 years
- C. More than 10 years
- D. Less than one year
Answer: D
NEW QUESTION # 58
Which one of the following four statements about market risk is correct? Market risk is
- A. The maximum likely loss in the market value of portfolios and financial instruments caused by the failure of the counterparty to meet its obligations.
- B. The maximum likely loss in the market value of portfolios and financial instruments over a given period of time.
- C. The exposure to an adverse change in the credit quality in portfolios or of financial instruments.
- D. The exposure to an adverse change in the market value of portfolios and financial instruments caused by a change in market prices or rates.
Answer: D
Explanation:
Market risk is the exposure to an adverse change in the market value of portfolios and financial instruments caused by a change in market prices or rates. This definition encompasses the variability in market prices, such as interest rates, foreign exchange rates, and equity prices, which can impact the value of financial instruments and portfolios.
NEW QUESTION # 59
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