Free Access GARP.2016-FRR.v2022-02-19.q125 Practice Test (Page 12)

Question 51

Modified duration of a bond measures:

A.The percentage change in a bond price when yields increase by 1 basis point.

B.The change in value of a bond when yields increase by 1 basis point.

C.The present value of the future cash flows of a bond calculated at a yield equal to 1%.

D.The percentage change in a bond price when the yields change by 1%.

Question 52

A proprietary trading desk for a large bank hedges an Arab light OTC forward position with Brent crude oil
forwards. The trading desk benefits from using the most liquid OTC market to hedge, the market for the Brent
crude, but hedging its using the Brent contract, exposes itself to the following type of risk:

A.Term risk

B.Seasonality risk

C.Correlation risk

D.Basis risk

Question 53

Which one of the following four statements correctly identifies disadvantages of using the economic capital?

A.Economic capital estimates the level of expected losses.

B.Economic capital may do not take into consideration the regulatory requirements.

C.The economic capital models used by banks may be subject to significant model risk.

D.Since banks are putting their money at risk they have an incentive to increase economic capital.

Question 54

How could a bank's hedging activities with futures contracts expose it to liquidity risk?

A.Since futures require margins which are settled every day, the bank could find itself scrambling for
funds.

B.The futures hedge may not work due to the widening of basis which could result in a loss for the bank.

C.Prices may move such that a loss results on the hedge.

D.The bank could get exposed to liquidity risk since futures trade on an exchange.

Question 55

To protect the oranges harvest price level, a farmer needs to take a hedge position. Provided that he produces
the amount he hedged, which one of the following four strategies will allow the farmer to accomplish his goal?

A.Going short on oranges futures contracts

B.Entering into a customized forward contract with the bank

C.Going long on oranges futures contacts

D.Negotiating a credit line facility

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Question 51

Question 52

Question 53

Question 54

Question 55

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