Free GARP FRM-Part-2 Exam Questions

Unconditional testing does not reflect the:

A senior risk analyst at VLT Bank (VLTB), a Singapore-based bank, is analyzing therisks arising from a significant appreciation of the SGD against all other major worldcurrencies. VLTB has the following balance sheet structure:▪ Assets:• Germany government bonds denominated in EUR• Singapore government bonds denominated in SGD• Corporate bonds denominated in EUR• Commercial loans denominated in SGD▪ Liabilities:• Long-term senior bonds denominated in EUR• Long-term senior bonds denominated in SGD• Retail deposits denominated in SGD• Corporate term deposits denominated in SGDThe analyst considers other recent market developments, including a decline inglobal equity prices, which resulted in many of VLTB’s larger retail depositorsexperiencing margin calls and drawing down deposits to meet them. The analystnotes that the bank took advantage of the demand for fixed-income securities andissued additional long-term senior SGD bonds and the proceed was used topurchase additional Germany government bonds. The overall impact of thesetransactions on VLTB is that the bank’s net cash outflows during the month, itsoverall net liabilities flow, and the required amount of stable funding, remainunchanged. The following additional information is provided:• The available stable funding (ASF) factor for retail deposits is 95%.• The ASF factor for long-term senior SGD bonds is 100%.The analyst also assesses the bank’s exposure to ConSol Corp, a publicly tradedSingapore manufacturer that is heavily dependent on locally produced raw materialsand generates its revenues primarily in EUR. VLTB is a major holder of ConSolCorp’s EUR-denominated bonds and has taken a long CDS position on the bonds.A German bank is the counterparty to that CDS contract.In analyzing the impact of the reported developments in the currency, equity, andbond markets on VLTB, which of the following is correct?

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?

Imagine you are a risk manager at a mid-sized commercial bank that has experienced rapid growth over the past three years. Your bank, similar to Silicon Valley Bank (SVB), has asignificant reliance on uninsured deposits and a concentrated customer base. Given the recentfailure of SVB, primarily attributed to liquidity risk management deficiencies, your CEO hastasked you with reviewing and strengthening the bank’s liquidity risk management framework.Your review reveals several areas that mirror SVB’s situation, particularly concerning internalliquidity stress testing (ILST), the modeling of a 30-day liquidity buffer, and management'sresponsiveness to liquidity challenges. Based on the lessons learned from SVB's failure, which ofthe following actions should you prioritize to improve your bank’s liquidity risk management?

Which of the following statements about portfolio losses and default correlation are most likely correct?I. Increasing default correlation decreases senior tranche values but increases equity tranche values.II. At high default rates, increasing default correlation decreases mezzanine bond prices.