2016-FRR Test Tutorials & 2016-FRR Online Lab Simulation

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GARP Financial Risk and Regulation (FRR) Series Sample Questions (Q94-Q99):

NEW QUESTION # 94
Using a forward transaction, Omega Bank buys 100 metric tones of aluminum for delivery in six-months' time. However, after two months, the bank becomes concerned with the potential fluctuations in aluminum prices and wants to hedge its potential exposure against a possible decline in aluminum prices. Which one of the following four strategies could the bank use to offset the risk from its current exposure to aluminum as it sets the price for selling the commodity in four-months' time?

A. Buy an aluminum futures contract
B. Sell an aluminum futures contract
C. Sell an aluminum forward contract
D. Buy an aluminum forward contract

Answer: B

Explanation:
To hedge against potential declines in aluminum prices, Omega Bank should take a position that benefits from a price drop. Here are the steps and strategies:
* Current Position:
* Omega Bank has bought 100 metric tons of aluminum for delivery in six months.
* Hedging Strategy:
* To protect against a decline in aluminum prices, the bank should take a short position in the aluminum futures market. This involves selling aluminum futures contracts.
* Execution:
* By selling an aluminum futures contract, Omega Bank locks in a price for selling aluminum in the future, thus offsetting the risk of price declines.
The correct strategy is to sell an aluminum futures contract, which effectively hedges the bank's exposure to a potential drop in aluminum prices.
References
Source: How Finance Works

NEW QUESTION # 95
Which of the following about the ratios between various Tiers of capital is not a requirement of the Basel Committee?

A. Tier 2 capital cannot exceed 50% of the bank's total regulatory capital.
B. Upper Tier 2 capital may only equal 30% of core capital.
C. Lower Tier 2 capital may only equal 50% of core capital.
D. Innovative instruments in Tier 1 are limited to a maximum of 15% of Tier 1 capital.

Answer: B

Explanation:
Basel Committee regulations stipulate certain limitations on the ratios between different tiers of capital.
Specifically, Tier 2 capital cannot exceed 100% of Tier 1 capital, innovative instruments in Tier 1 are limited to a maximum of 15% of Tier 1 capital, and Lower Tier 2 capital can only equal up to 50% of core capital.
However, the requirement stating that Upper Tier 2 capital may only equal 30% of core capital is not a requirement under the Basel Committee regulations, making option D the correct answer as it is the statement that is not a requirement.

NEW QUESTION # 96
What are some of the drawbacks of correlation estimates? Which of the following statements identifies major
problems with correlation calculations?
I. Correlation estimates are not able to capture increases in factor co-movements in extreme market scenarios.
II. Correlation estimates tend to be unstable.
III. Historical correlations may not forecast future correlations correctly.
IV. Correlation estimates assume normally distributed returns.

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

Answer: C

NEW QUESTION # 97
Which one of the following four variables of the Black-Scholes model is typically NOT known at a point in time?

A. The underlying interest rates
B. The underlying relevant exchange rates
C. The future volatility of the exchange rates
D. The time to maturity

Answer: C

Explanation:
Among the variables used in the Black-Scholes model, the future volatility of the exchange rates is typically not known at a point in time. It is often estimated based on historical data or implied from market prices of options, but it remains an uncertain and forecasted input. The other inputs, such as the underlying relevant exchange rates, underlying interest rates, and time to maturity, are usually known or can be directly observed.
References:The inherent uncertainty in predicting future volatility is discussed in the context of option pricing in the "How Finance Works" document.

NEW QUESTION # 98
Which one of the following four alternatives lists the three most widely traded currencies on the global foreign
exchange market, as of April 2007, in the decreasing order of market share? EUR is the abbreviation of the
European euro, JPY is for the Japanese yen, and USD is for the United States dollar, respectively.

A. USD, JPY, EUR
B. JPY, EUR, USD
C. USD, EUR, JPY
D. EUR, USD, JPY

Answer: C

NEW QUESTION # 99
......

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2016-FRR Test Tutorials & 2016-FRR Online Lab Simulation

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GARP Financial Risk and Regulation (FRR) Series Sample Questions (Q94-Q99):

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