Free GARP FRM-Part-2 Exam Questions

In the context of arbitrage trades, if the CDS spread is significantly greater than the bond yield spread, what is the most appropriate action by the investor?

Given the following three events, what is the proper order of the CCP loss waterfall?I. Nondefaulting member’s default fund contributions are exhausted.II. Defaulting member’s collateral and default fund contributions are exhausted.III. CCP taps an amount of its equity that enables them to function normally.

A portfolio has an equal amount invested in two positions, X and Y. The expected excess return of X is 9% and that of Y is 12%. Their marginal VaRs are 0.06 and 0.075, respectively. To move toward the optimal portfolio, the manager will probably:

The head of the fixed-income department of a bank asks a risk analyst to review anoutstanding bond issued by Company GRN, a livestock producer. The bondcurrently trades at a spread of 250 bps over the risk-free interest rate and has arecovery rate of 75%. Senior management of the bank has expressed concernabout the slowdown in business activities in the livestock industry, which isexpected to last for the next 3 years. The analyst applies the constant hazard rateprocess in estimating default probability and assumes that, under a stressed marketscenario, the bond would trade at a spread of 480 bps over the risk-free interest ratecurve, and its recovery rate would decrease to 40%. Assuming the stress scenarioprevails, what would be the correct estimate of the probability that Company GRNwould not default on its bond over the next 3 years?

Which of the following statements most accurately describes the effect of selling a loan without recourse?