Free Practice Questions for GARP 2016-FRR Exam

The Sarbanes-Oxley Act includes requirements for financial institutions in the United States regarding risk and control. It aims to enhance corporate governance and strengthen the internal controls and financial reporting processes. The other options such as market discipline requirements, capital allocation requirements, and regulatory response to systemic risk requirements are not specifically covered by the Sarbanes-Oxley Act.

Option A:Reports should only include the actual loss date.

Inadequate as it misses critical information like the amount of loss and recoveries.

Option B:Reports should capture both the date of the event and the amount of loss.

Partial but not comprehensive.

Option C:Reports should capture the date of the event, the amount of loss, and recoveries of gross loss amounts.

Verified and correct. Capturing these details ensures that all critical aspects of the loss event are documented, which is essential for accurate loss data collection and analysis.

Option D:Reports should be designed to be shared with external data loss consortia recipients.

This is not a minimum standard but more of an additional feature.

Comprehensive and Detailed In-Depth Explanation:

Scenario analysis assesses rare, high-severity operational loss events (e.g., major fraud, natural disasters) to estimate potential capital needs under Basel II’s AMA. Option A is correct. Option B is false—scenario analysis targets severe events, unlike RCSA, which identifies frequent risks. Option C is incorrect—external data is often used (Basel II, para. 671). Option D is wrong—scenarios include hypothetical events beyond current experience.

Exact Extract from Official Source:

BCBS, "Basel II: International Convergence of Capital Measurement and Capital Standards," June 2006, para. 672: "Scenario analysis is used to evaluate exposure to high-severity events… It complements historical loss data by considering rare but plausible loss scenarios."

GARP FRR Study Notes, Operational Risk Section: "Scenario analysis focuses on tail events—high-impact, low-frequency losses—distinguishing it from RCSA’s focus on routine risks."

Covariance is a measure of the degree to which two variables move together. It is calculated as the average product of the deviations of each pair of observations from their respective means. If the covariance is positive, the variables tend to move in the same direction. If it is negative, they move in opposite directions.

Identify the strategies for achieving leverage in long positions:

I. Securities may be purchased with borrowed funds using a bank loan from the broker.

This is a common method known as margin trading, where an investor borrows money from a broker to purchase securities.

II. Securities may be borrowed on margin by taking a loan from a broker.

This is another form of margin trading where the securities themselves are used as collateral for the loan.

III. Securities may be purchased and used in a repo transaction to generate cash for further security purchases.

In a repurchase agreement (repo), securities are sold with an agreement to buy them back at a later date, providing immediate liquidity for further investments.

IV. The bank may enter into a derivative transaction, such as a total return swap, that requires little to no collateral but mimics the performance of a long or short position in the underlying instrument.

Derivatives like total return swaps allow for exposure to the performance of an asset without owning it, often with minimal collateral requirements.

Explanation:

All the listed strategies (I, II, III, IV) are valid methods for a bank to achieve leverage in long positions. They involve different mechanisms of borrowing funds or utilizing existing assets to increase the potential return on investment.

I. The static model gives a liquidity estimate only after the bank faces the liquidity problem:

This statement is true because the static liquidity ladder model does not predict future liquidity needs, it only assesses current liquidity status.

II. The static model can only make projections over a few days:

This statement is true as static models are typically used for short-term liquidity assessment.

III. The static model does not incorporate uncertainty in the analysis:

This statement is true because the static model does not consider the variability or uncertainty in future cash flows or obligations.

Therefore, all the statements I, II, and III are correct about the shortfalls of the static liquidity ladder model.

Comprehensive and Detailed In-Depth Explanation:

Core deposits are stable, low-cost funds (e.g., savings, checking accounts) that depositors tend to leave with the bank over time, despite contractual flexibility to withdraw them. This stability is due to customer behavior and inertia, making them a reliable funding source under Basel III’s Net Stable Funding Ratio (NSFR). Credible deposits (A) and permanent deposits (C) are not standard terms, andtangible equity (D) is a capital measure, not a deposit type.

An operational risk coordinator (ORC) needs to provide the main communication contact with the operational risk department (I), coordinate the collection of key risk indicators in her area (III), and coordinate training and awareness activities in her area (IV). The main reporting contact with the audit department (II) is not typically an ORC responsibility.

Statement I:Subscription databases provide central data repositories and benchmarking services to their members.

Verified and correct. These databases aggregate data from multiple sources to provide valuable benchmarking information.

Statement II:Subscription databases can provide insight into whether the losses in a firm reflect the usual losses in their industry.

Verified and correct. By comparing a firm's losses with industry data, firms can identify trends and anomalies.

Statement III:Subscription databases assist with mapping the events to the appropriate business lines, risk categories, and causes.

Verified and correct. Proper mapping helps in accurate risk assessment and management.

Statement IV:Subscription databases reflect only events that are interesting to the press and are reported in the press.

Incorrect. These databases aim to capture a wide range of operational loss events, not just those reported in the press.

When Alpha Bank completes a foreign exchange matched transaction, it buys Brazilian reals in the market immediately after selling them to the customer, thus matching the position. This process eliminates market risk as the bank is no longer exposed to fluctuations in the exchange rate between the Australian dollar and the Brazilian real.

Customer Transaction:

Alpha Bank sells BRL 100 million to the customer and receives AUD 1,010,000.

Market Transaction:

Alpha Bank immediately buys BRL 100 million in the market at the rate of 100, paying AUD 1,000,000.

By matching its position, the bank ensures that it is not exposed to changes in the exchange rate, thereby eliminating market risk.

References

Source: How Finance Works​