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The Global Association of Risk Professionals (GARP) is a non-profit organization that was established in 1996 to promote sound risk management practices in the financial industry. One of the ways GARP achieves its mission is by offering certification programs to financial professionals who want to demonstrate their expertise in risk management. The Financial Risk and Regulation (FRR) Series is one such program, which covers topics such as financial risk management, regulation, and compliance.
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GARP Financial Risk and Regulation (FRR) Series Sample Questions (Q48-Q53):
NEW QUESTION # 48
A credit rating analyst wants to determine the expected duration of the default time for a new three-year loan,
which has a 2% likelihood of defaulting in the first year, a 3% likelihood of defaulting in the second year, and
a 5% likelihood of defaulting the third year. What is the expected duration for this three-year loan?
Answer: C
NEW QUESTION # 49
Which of the following measure describes the symmetry of a statistical distribution?
Answer: D
Explanation:
Skewness measures the asymmetry of the return distribution. Positive skewness indicates a distribution with a longer or fatter right tail, while negative skewness indicates a distribution with a longer or fatter left tail. It is the correct measure for describing the symmetry of a statistical distribution.
NEW QUESTION # 50
Which one of the following changes would typically increase the price of a fixed income instrument, such as a
bond?
Answer: A
NEW QUESTION # 51
Which of the following statements presents an advantage of using risk and control self-assessments (RCSA) in
the operational risk framework?
I. RCSA provides very accurate scoring of risks and controls due to its subjective nature.
II. RCSA program provides insight into risks that exist in a firm, but that may or may not have occurred
before.
III. RCSA program can produce biased but transparent operational risk reporting.
IV. RCSA program allows each department to take ownership of its own risks and controls.
Answer: B
NEW QUESTION # 52
To achieve leverage in long positions, a bank can use the following strategy:
I. Securities may be purchased with borrowed funds using a bank loan from the broker.
II. Securities may be borrowed on margin by taking a loan from a broker.
III. Securities may be purchased and used in a repo transaction to generate cash for further security purchases.
IV. The bank may enter into a derivative transaction, such as a total return swap, that requires little to no collateral but mimics the performance of a long or short position in the underlying instrument.
Answer: A
Explanation:
* Identify the strategies for achieving leverage in long positions:
* I. Securities may be purchased with borrowed funds using a bank loan from the broker.
* This is a common method known as margin trading, where an investor borrows money from a broker to purchase securities.
* II. Securities may be borrowed on margin by taking a loan from a broker.
* This is another form of margin trading where the securities themselves are used as collateral for the loan.
* III. Securities may be purchased and used in a repo transaction to generate cash for further security purchases.
* In a repurchase agreement (repo), securities are sold with an agreement to buy them back at a later date, providing immediate liquidity for further investments.
* IV. The bank may enter into a derivative transaction, such as a total return swap, that requires little to no collateral but mimics the performance of a long or short position in the underlying instrument.
* Derivatives like total return swaps allow for exposure to the performance of an asset without owning it, often with minimal collateral requirements.
* Explanation:
* All the listed strategies (I, II, III, IV) are valid methods for a bank to achieve leverage in long positions. They involve different mechanisms of borrowing funds or utilizing existing assets to increase the potential return on investment.
References:
* From the search results, this information is consistent with standard financial practices outlined in the
"How Finance Works" document and general financial knowledge on leverage and margin trading.
NEW QUESTION # 53
......
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