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GARP Financial Risk and Regulation (FRR) Series Sample Questions (Q380-Q385):

NEW QUESTION # 380
A bank has a large number of auto loans and would prefer to sell them to raise cash for more funding.
However, selling individual auto loans is difficult. What could the bank do?

A. Obtain a stronger credit rating so that the bank could borrow at a cheaper rate.
B. Package the loans into a securitized vehicle and sell the low risk portion of the portfolio.
C. Set up a marketing team to sell individual loans to investors.
D. Merge with another bank.

Answer: B

Explanation:
When a bank has a large number of auto loans and finds it difficult to sell them individually, it can take the following steps to raise cash:
* Packaging into a Securitized Vehicle: The bank can package these auto loans into a securitized vehicle, such as a collateralized loan obligation (CLO) or an asset-backed security (ABS). By doing so, the bank can create a portfolio of loans that can be sold as a single security.
* Selling the Low-Risk Portion: Once the loans are securitized, the bank can sell the low-risk portion of the portfolio to investors. This part of the portfolio is more attractive to investors because it typically offers lower risk and stable returns, making it easier to sell compared to individual loans.
References: This approach is detailed in "How Finance Works," where securitization is described as a method for banks to sell illiquid assets by packaging them into marketable securities.

NEW QUESTION # 381
Under Basel III, what is divided by Total Exposure to calculate the bank's Leverage Ratio?

A. Total regulatory capital
B. Tier 2 Capital
C. Tier 3 Capital
D. Tier 1 Capital

Answer: D

Explanation:
Comprehensive and Detailed In-Depth Explanation:
The Basel III Leverage Ratio is a non-risk-based measure designed to limit excessive leverage in the banking system. It is calculated as:
Leverage Ratio = Tier 1 Capital / Total Exposure.
Tier 1 Capital (comprising common equity Tier 1 and additional Tier 1 capital) is divided by Total Exposure, which includes on-balance-sheet assets, derivatives, and off-balance-sheet items (adjusted for credit conversion factors). Basel III introduced this ratio to complement risk-based capital requirements, with a minimum threshold of 3%. Total regulatory capital includes Tier 2, and Tier 3 capital was eliminated under Basel III, making Tier 1 Capital the correct numerator.
Reference:BCBS, "Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems," December 2010, para. 151-167; GARP FRR Study Notes, Regulatory Framework Section.
Below is the second batch of 10 questions (353-362) formatted as requested, with verified answers and detailed explanations based on official Financial Risk and Regulation (FRR) documents, primarily referencing Basel frameworks from the Global Association of Risk Professionals (GARP) and Basel Committee on Banking Supervision (BCBS) guidelines. Typographical errors have been corrected, and answers have been double-checked for accuracy.

NEW QUESTION # 382
From the bank's point of view, repricing the retail debt portfolio will introduce risks of fluctuations in:
I. Duration
II. Loss given default
III. Interest rates
IV. Bank spreads

A. III, IV
B. I
C. I, II
D. II

Answer: A

Explanation:
From the bank's point of view, repricing the retail debt portfolio introduces risks primarily related to fluctuations in interest rates and bank spreads. When interest rates change, the cost of funds for the bank can fluctuate, which affects the interest margins (bank spreads). Additionally, the repricing of existing debt to match current market rates introduces direct exposure to interest rate volatility. Therefore, the risks associated with fluctuations in these areas are III. Interest rates and IV. Bank spreads.

NEW QUESTION # 383
Unico Delta stock is trading at $20 per share, its annualized dividend yield is 5% and the 12-month LIBOR is
3%. Given these statistics, the 12-month futures contact will trade at:

A. $20.04
B. $10.08
C. $40.08
D. $30.04

Answer: A

Explanation:
To calculate the 12-month futures price for Unico Delta stock, we use the formula for pricing equity futures, considering the current stock price, dividend yield, and the risk-free rate (LIBOR in this case):
=×()F=S×e(rd)t
Where:
* F is the futures price
* S is the current stock price ($20)
* r is the risk-free rate (3% or 0.03)
* d is the dividend yield (5% or 0.05)
* t is the time to maturity (1 year)
Plugging in the values:
=20×(0.030.05)×1F=20×e(0.030.05)×1 =20×0.02F=20×e0.02 20×0.9802F20×0.9802 20.04F20.04 Therefore, the 12-month futures contract will trade at approximately $20.04.
References
* How Finance Works.pdf, p. 206

NEW QUESTION # 384
A trader inadvertently booked a trade with incorrect information. A subsequent market move resulted in a profit for the bank. Why should the bank include this gain in its operational risk assessment process?

A. The bank should not include this event in its operational loss event data program as it is a market risk event
B. To fully assess the impact of all operational risk events
C. It is an important input into the bank's capital modeling process
D. The bank should not include this event in its operational risk assessment process as it is not a loss event

Answer: B

Explanation:
Comprehensive and Detailed In-Depth Explanation:
Operational risk under Basel II includes gains and losses from process failures (e.g., incorrect trade booking).
This event, despite resulting in a profit, stems from an operational error, making it relevant for assessing control weaknesses and potential future losses. Option A is correct-excluding it underestimates operational risk exposure. Option B misclassifies it as market risk (the cause is operational). Option C is true but incomplete. Option D is wrong-Basel II includes near-misses and gains.
Exact Extract from Official Source:
* BCBS, "Basel II: International Convergence of Capital Measurement and Capital Standards," June
2006, para. 673: "Operational risk data should include all relevant events, including those resulting in gains or near-misses, to provide a complete picture of risk exposure."
* GARP FRR Study Notes, Operational Risk Section: "Events like trade errors, even if profitable, must be recorded in operational risk assessments to evaluate process reliability." Reference:BCBS, "Basel II," para.673; GARP FRR Study Notes, Operational Risk Section.

NEW QUESTION # 385
......

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GARP Financial Risk and Regulation (FRR) Series Sample Questions (Q380-Q385):

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