Quiz 2016-FRR - Financial Risk and Regulation (FRR) Series Accurate Latest Demo
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GARP Financial Risk and Regulation (FRR) Series Sample Questions (Q328-Q333):
NEW QUESTION # 328
Using a forward transaction, Omega Bank buys 100 metric tones of aluminum for delivery in six-months' time. However, after two months, the bank becomes concerned with the potential fluctuations in aluminum prices and wants to hedge its potential exposure against a possible decline in aluminum prices. Which one of the following four strategies could the bank use to offset the risk from its current exposure to aluminum as it sets the price for selling the commodity in four-months' time?
Answer: A
Explanation:
To hedge against potential declines in aluminum prices, Omega Bank should take a position that benefits from a price drop. Here are the steps and strategies:
* Current Position:
* Omega Bank has bought 100 metric tons of aluminum for delivery in six months.
* Hedging Strategy:
* To protect against a decline in aluminum prices, the bank should take a short position in the aluminum futures market. This involves selling aluminum futures contracts.
* Execution:
* By selling an aluminum futures contract, Omega Bank locks in a price for selling aluminum in the future, thus offsetting the risk of price declines.
The correct strategy is to sell an aluminum futures contract, which effectively hedges the bank's exposure to a potential drop in aluminum prices.
References
Source: How Finance Works
NEW QUESTION # 329
Which of the following statements regarding CDO-squared is correct?
I. CDO-squared use other CDOs and CMOs as collateral.
II. Risk assessment of CDO-squared is almost impossible due to their complexity.
III. CDO-squared have lower credit risk than CMOs but higher than CDOs.
Answer: C
NEW QUESTION # 330
Which one of the four following aspects of legal risk is NOT included in the Basel II Accord?
Answer: B
NEW QUESTION # 331
A bank customer expecting to pay its Brazilian supplier BRL 100 million asks Alpha Bank to buy Australian dollars and sell Brazilian reals. Alpha bank does not hold reals so it asks for a quote to buy Brazilian reals in the market. The market rate is 100. The bank quotes a selling rate of 101 to its customer and sells the reals at this quoted price. Then the bank immediately buys the real at the market rate and completes foreign exchange matched transaction. What is the financial impact of this transaction for Alpha bank?
Answer: B
Explanation:
To calculate the financial impact of this transaction for Alpha Bank, follow these steps:
* Customer Transaction:
* Alpha Bank sells BRL 100 million at a quoted rate of 101 to the customer.
* The customer pays in AUD: BRL100,000,000101=AUD990,099.0099rac{BRL 100,000,000}{101} = AUD 990,099.0099101BRL100,000,000=AUD990,099.0099.
* Market Transaction:
* Alpha Bank buys BRL 100 million at the market rate of 100.
* The cost in AUD is: BRL100,000,000100=AUD1,000,000rac{BRL 100,000,000}{100} = AUD
1,000,000100BRL100,000,000=AUD1,000,000.
* Profit Calculation:
* Alpha Bank's profit = Amount received from customer - Cost in the market
* Profit = AUD1,010,000#AUD1,000,000=AUD10,000AUD 1,010,000 - AUD 1,000,000 = AUD
10,000AUD1,010,000#AUD1,000,000=AUD10,000.
Thus, Alpha Bank makes a profit of AUD 10,000 from this transaction.
References
Source: How Finance Works
NEW QUESTION # 332
What is generally true of the relationship between a bond's yield and it's time to maturity when the yield curve
is upward sloping?
Answer: A
NEW QUESTION # 333
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