Free GARP FRM-Part-2 Exam Questions

If one of the entities in the CDX NA IG index defaults, the CDS index would most likely:

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?

In an attempt to understand country risk, an analyst at Global Funds examines multiple sources of information to determine the truest measure of risk. She considers sovereign risk ratings, default risk spreads, and composite measures of risk. Which of the following sources relies on surveys of several hundred economists to measure sovereign risk?

A manager from the structured credit risk desk at a bank is presenting to a group ofnewly hired risk analysts on calculating cash flows in a securitization structure. Themanager illustrates the procedure with the existing collateral pool of loans and thecorresponding liabilities, all with a maturity of 5 years, using the following information:Initial number of loans in the collateral pool 100Principal amount of each loan EUR 1,000,000Total coupon interest to be paid annually on all junior and senior bonds EUR 6,300,000Maximum annual amount flowing from the excess spread into the overcollateralization account EUR 1,500,000Swap rate per year for all maturities 3.5%Recovery rate in the event of a loan default 45%The manager makes additional observations as follows:• The loans in the collateral pool pay a fixed spread of 2.2% over the swap curve.• There were no defaults in year 1.• The value of the overcollateralization account at the end of year 1 was EUR 0.What is the value of the overcollateralization account at the end of year 2 if there are 8 defaults in year 2?

A derivative trading firm sells a European-style call option on stock JKJ with a time to expiration of 9 months, a strike price of EUR 45, an underlying asset price of EUR 67, and implied annual volatility of 27%. The annual risk-free interest rate is 2.5%. What is the trading firm’s counterparty credit exposure from this transaction?