Free GARP FRM-Part-2 Exam Questions

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?

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 CRO of a hedge fund asks the risk team to develop a term-structure model forfitting interest rates that is appropriate to use in the fund’s options pricing practice.The risk team is evaluating a Ho-Lee model with time-dependent drift, and a Cox-Ingersoll-Ross model with time-dependent volatility. Which of the following is acorrect description of the specified model?

A UK-based retail brokerage firm has recently experienced rapid growth through aseries of acquisitions and plans to improve its operational resilience in order tocomply with new requirements issued by national regulators. The CRO asks anoperational risk manager to assess best practices in this area and to suggestpotential actions that the firm should take to meet this objective. Which of thefollowing actions would be most appropriate for the manager to recommend in orderto comply with the regulatory guidelines concerning operational resilience forimportant business services?

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.