Free GARP FRM-Part-2 Exam Questions

A model validation team at a bank is backtesting the bank’s VaR model. Inpreparation for the backtest, one of the team members expresses a concern that thevalidation process could result in the team committing a Type I error or a Type IIerror and discusses the characteristics of these errors with the team. Which of thefollowing is correct regarding Type I and Type II errors?

A portfolio manager at a US-based hedge fund has been searching for potentialreturn opportunities in the environment of declining global interest rates experiencedafter the global financial crisis (GFC) of 2007-2009. The manager identifies theexistence of a positive cross-currency basis between two currencies and notes thatthis positive basis has persisted since the GFC. What is the most appropriateexplanation for this persistence?

Two financial institutions are facing different funding issues. Bank A, a mid-size regional bank is concerned that it has a shortfall in legal reserves for the day and is seeking an alternative to address this shortfall. Bank B, a small community bank, on the other hand, has recently experienced a much greater than anticipated shortfall in long term certificates of deposit (CD) renewals due to fierce local competition for retail deposits. Bank B has traditionally used stable CDs to fund its home mortgage portfolio. What is the most appropriate funding response of each of these two institutions considering timing and the availability of non-deposit funds?

The board of directors of a fast-growing US-based bank is discussing a report offindings and recommendations issued after a recent regulatory review of the bank’srisk management framework. A board member notes that the regulators haveidentified deficiencies in the bank’s model validation process, and recommends thatthe CRO develop a plan for improvement in this area. The CRO consults theFederal Reserve guidelines for examples of best practices, and identifies ways thatthe bank can improve its validation approaches to conform with the guidelines.Which of the following recommendations is appropriate for the CRO to make?

Sovereign Bank has an internal audit department, but the bank CEO hires an external auditor to review their financial statements and assess their internal control system. The audit firm is most likely considered to be which line of defense?