Free GARP FRM-Part-2 Exam Questions

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

A portfolio manager is revising an equity portfolio with the goal of attaining theoptimal portfolio on the portfolio’s efficient frontier. The manager believes this goalcan be achieved by replacing a stock in the portfolio with a new stock that is not partof the existing portfolio and keeping the portfolio value constant. The managerconsiders the following alternative actions:• Action 1: Sell the stock with the highest marginal VaR and purchase anequivalent value of a new stock that would have the lowest marginal VaR in the portfolio.• Action 2: Sell a particular stock and purchase an equivalent value of a newstock, which would cause the ratio of expected excess returns to portfoliobeta for all stocks in the portfolio to be equal.• Action 3: Sell a particular stock and purchase an equivalent value of a newstock, which would cause the portfolio betas of all stocks in the portfolio to be equal.• Action 4: Sell a particular stock and purchase an equivalent value of a newstock, which would significantly decrease the portfolio standard deviationwithout changing the average excess portfolio return.Which of the actions above would create an optimal portfolio?

A group of newly hired investment analysts at a large wealth management firm isundergoing training on the company’s investment practices. Part of the trainingfocuses on hedge fund investments and addresses how the firm evaluates the riskmanagement processes and procedures of a hedge fund being considered forinvestment. The analysts learn that the firm performs comprehensive due diligenceon the hedge fund’s investment environment, as well as on its operationalenvironment and business practices. Which of the following is correct about a hedgefund investor’s due diligence on the operational environment of a hedge fund?

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?