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GARP Financial Risk and Regulation (FRR) Series Sample Questions (Q291-Q296):

NEW QUESTION # 291
Which one of the four following statements regarding foreign exchange (FX) swap transactions is INCORRECT?

* A. FX swap generates more exchange rate risk than simple forward transactions.
* B. FX swap is generally used to for funding foreign currency balances and currency speculation.
* C. FX swap is normally used for hedging various currency positions.
* D. FX swap is a common short-term transaction.
Answer: A

Explanation:
An FX swap transaction involves exchanging principal and interest payments in different currencies, typically combining a spot transaction with a forward contract. However, contrary to statement C, FX swaps are generally used to hedge against exchange rate risk rather than generating more of it. Thus, the incorrect statement is that FX swaps generate more exchange rate risk than simple forward transactions.
References:The characteristics and purposes of FX swaps are detailed in the "How Finance Works" document, which explains their common uses and associated risks.

NEW QUESTION # 292
In the United States, foreign exchange derivative transactions typically occur between

* A. Thrifts and large commercial banks, where the risks become isolated.
* B. A few large internationally active banks, where the risks become concentrated.
* C. All banks with international branches, where the risks become widely distributed based on trading exposures.
* D. Regional banks with international operations, where the risks depend on the specific derivative transactions.
Answer: B

Explanation:
In the United States, foreign exchange derivative transactions typically occur between a few large internationally active banks. These banks are major players in the foreign exchange markets and often act as intermediaries, providing liquidity and managing risks for themselves and their clients. The concentration of these transactions among a few large banks leads to a concentration of risks within these institutions.

NEW QUESTION # 293
Which of the following risk measures are based on the underlying assumption that interest rates across all maturities change by exactly the same amount?
I. Present value of a basis point.
II. Yield volatility.
III. Macaulay's duration.
IV. Modified duration.

* A. I, II, III, and IV
* B. I, II, and III
* C. I, III, and IV
* D. I and II
Answer: C

Explanation:
Risk measures such as the present value of a basis point (I), Macaulay's duration (III), and modified duration (IV) are based on the underlying assumption that interest rates across all maturities change by exactly the same amount. These measures rely on the concept of a parallel shift in the yield curve, where all interest rates move together in a uniform manner. Yield volatility (II), on the other hand, is not predicated on this assumption as it measures the variability in yields over time and does not assume uniform changes across all maturities.

NEW QUESTION # 294
A bank has a Var estimate of $100 million. It is considering a new transaction which has a correlation of 0.35 with the current portfolio and a standalone VaR estimate of $5 million. What would be the new VaR for the bank if it carried out the transaction?

* A. $100.22 million
* B. $ 213.67 million
* C. $105 million
* D. $101.86 million
Answer: D

Explanation:
* Current VaR: The bank has an existing VaR estimate of $100 million.
* Standalone VaR for New Transaction: The standalone VaR of the new transaction is $5 million.
* Correlation with Current Portfolio: The correlation of the new transaction with the current portfolio is
0.35.
* Formula for Combined VaR:
New VaR=(Current VaR2)+(Standalone VaR2)+2×Correlation×Current VaR×Standalone VaR\text{New VaR} = \sqrt{(\text{Current VaR}