Free Access GARP.2016-FRR.v2022-08-09.q102 Practice Test (Page 18)

Question 81

Which one of the following statements correctly identifies risks in foreign exchange forwards?

A.Long-term forward price fluctuations are driven by changes in the spot exchange rate, since most
inter-country interest rates differentials are small, and the effect of compounding is large for short
periods of time.

B.Short-term forward price fluctuations are driven by changes in the spot exchange rate, since most
inter-country interest rates differentials are significant, and the effect of compounding is large for short
periods of time.

C.Long-term forward price fluctuations are driven by changes in the spot exchange rate, since most
inter-country interest rates differentials are significant, and the effect of compounding is small for short
periods of time.

D.Short-term forward price fluctuations are driven by changes in the spot exchange rate, since most
inter-country interest rates differentials are small, and the effect of compounding is small for short
periods of time.

Question 82

What are the add-on losses faced by a bank that is going bankrupt?
I. The discount accepted by the bank for selling its assets in a fire sale.
II. The increased cost of funding liabilities in a financially distressed situation.
III. The reduction in the present value of future growth opportunities.
IV. Loss of goodwill and intangible assets.

A.I, II

B.I, II, III, IV.

C.II, III, IV

D.III, IV

Question 83

What is the explanation offered by the liquidity preference theory for the upward sloping yield curve shape?

A.The long term rates must rise enough to get some borrowers to borrow short-term and some lenders to
lend long-term.

B.The short term rates must fall enough to get some borrowers to borrow long-term and some lenders to
lend short-term.

C.The long term rates must rise enough to get some borrowers to borrow long-term and some lenders to
lend short-term.

D.The short term rates must rise enough to get some borrowers to borrow short-term and some lenders to
lend long-term.

Question 84

Which one of the following four statements about economic capital of a bank is correct?

A.Economic capital is determined by rules imposed by an external authority.

B.Economic capital reflects the possible losses that could occur based on the bank's own estimates of the
risks it is taking.

C.Economic capital is the present value of the earnings generated by the bank in the future.

D.Economic capital measures how the economy is doing compared to the bank.

Question 85

According to Basel II what constitutes Tier 2 capital?

A.Debt that is subordinate to equity.

B.Debt that is not subordinated to equity and innovative capital products that would count as Tier 1 capital
and excluding perpetual non-cumulative preference shares.

C.Equity capital and debt together.

D.Core capital excluding undisclosed reserves and general reserves that the bank may make against its
expected loan losses.

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