Free GARP FRM-Part-2 Exam Questions

A significant challenge in estimating the legal loss module of an operational risk stress test is that:

A bank treasurer is seeking to identify the most appropriate investment maturitystrategy to apply considering the status of its balance sheet and the economicconditions it is currently facing. The treasurer gathers the following information:• The bank faces a high interest rate environment with a flat yield curve.• The bank’s asset mix includes a high proportion of US Treasury bondspurchased years ago when interest rates were significantly lower.• The bank has a high proportion of revenues from loans and anticipates arecord high level of profitability this year.Which of the following strategies would be the most appropriate for the bank to takein order to maintain its current level of total income?

The board of directors at a large bank wants to improve the bank’s practices for managing money laundering and financial terrorism (ML/FT) risk. The risk committee of the bank meets to discuss ways to achieve this objective that conform to best practices. Which of the following actions would be most appropriate for the bank to recommend?

An option pricing analyst at an investment bank has been asked to write a reportexamining the relationship between option prices and implied volatility curves. Theanalyst notes that the implied volatility curves of different underlying assets oftenhave different shapes and explains the reasons why this occurs. Which of thefollowing statements can correctly be included in the report?

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?