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2016-FRR Online Exam | 2016-FRR Valid Test Book

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GARP Financial Risk and Regulation (FRR) Series Sample Questions (Q138-Q143):

NEW QUESTION # 138
According to Basel II what constitutes Tier 2 capital?

A. Debt that is not subordinated to equity and innovative capital products that would count as Tier 1 capital and excluding perpetual non-cumulative preference shares.
B. Equity capital and debt together.
C. Debt that is subordinate to equity.
D. Core capital excluding undisclosed reserves and general reserves that the bank may make against its expected loan losses.

Answer: C

Explanation:
Under Basel II, Tier 2 capital, also known as supplementary capital, includes:
* Subordinated Debt: This type of debt ranks below other debts with respect to claims on assets or earnings. It is considered Tier 2 capital because it can absorb losses in the event of a winding-up of the bank.
* Other Instruments: This category can also include hybrid instruments, undisclosed reserves, revaluation reserves, and general provisions/general loan-loss reserves.
These components enhance the bank's ability to absorb losses beyond the protection provided by Tier 1 capital.
How Finance Works, sections explaining the structure and components of Tier 2 capital under Basel II.

NEW QUESTION # 139
A bank customer can use either a plain vanilla option or an option contract with volumetric flexibility to reduce the following risks:
I. Market Risk
II. Basis Risk
III. Operational Risk

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

Answer: A

Explanation:
A bank customer can use either a plain vanilla option or an option contract with volumetric flexibility to reduce market risk and basis risk. Market risk involves the risk of changes in market prices, and basis risk involves the risk that the derivative's price does not move perfectly with the underlying asset. Operational risk, on the other hand, involves risks related to internal processes, systems, or external events, which are not typically managed through financial derivatives like options.
ReferencesVerified from the discussion on managing market and basis risks with options in the book "How Finance Works".

NEW QUESTION # 140
Which one of the following four statements about equity indices is INCORRECT?

A. Capitalization-weighted equity indices are not generally considered better to track the performance of an overall market.
B. Equity indices are numerical calculations that reflect the performance of hypothetical equity portfolios.
C. Equity indices do not trade in cash form, rather, they are meant to track the overall performance of an equity market.
D. Price-weighted equity indices give greater weight to shares trading at high prices.

Answer: A

Explanation:
* Equity indices are numerical calculations that reflect the performance of hypothetical equity portfolios.
* They are designed to track the overall performance of an equity market and do not trade in cash form.
* Capitalization-weighted indices, which weight stocks by their market capitalization, are generally considered effective in tracking the performance of the overall market. Therefore, the statement that they are not generally considered better is incorrect.
* Price-weighted indices give greater weight to shares trading at high prices, reflecting their price
* movements more heavily in the index.

NEW QUESTION # 141
According to the Basel I Accord, which of the following could be used as Tier 1 capital?

A. Subordinated debt
B. Common stock or equity
C. Short-term capital
D. Undisclosed reserves

Answer: B

Explanation:
Comprehensive and Detailed In-Depth Explanation:
Basel I (1988) defined Tier 1 capital as the core capital to absorb losses, primarily comprising common stock (equity) and disclosed reserves (retained earnings). Option A is correct. Subordinated debt (B) is Tier 2 capital, undisclosed reserves (C) were allowed in Tier 2 under certain conditions but not Tier 1, and short- term capital (D) isn't a Basel I category. Tier 1's focus on equity ensures loss absorption capacity, a principle retained in later frameworks.
Exact Extract from Official Source:
* BCBS, "International Convergence of Capital Measurement and Capital Standards" (Basel I), July
1988, para. 14: "Tier 1 capital consists predominantly of common stock and disclosed reserves (retained earnings), representing the highest quality capital available to cover losses."
* GARP FRR Study Notes, Regulatory Framework Section: "Under Basel I, Tier 1 capital is limited to common equity and disclosed reserves, excluding subordinated debt and undisclosed reserves, which fall under Tier 2." Reference:BCBS, "Basel I," para.14; GARP FRR Study Notes, Regulatory Framework Section.

NEW QUESTION # 142
What do option deltas measure?

A. The sensitivity of the option value to changes risk free interest rate.
B. The rate of change of the option value with respect to changes in volatility of the underlying instrument.
C. The sensitivity of the option value to the passage of time.
D. The rate of change of the option value with respect to changes in the price of the underlying instrument.

Answer: D

Explanation:
Option delta () is a measure used in finance to indicate the sensitivity of an option's price to the price of the underlying asset. Specifically, it represents the rate of change of the option's value with respect to changes in the price of the underlying instrument. It is a fundamental concept in options trading and risk management.
References:
* Standard definition from options theory.

NEW QUESTION # 143
......

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Alan King Alan King

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