Pass the GARP Financial Risk and Regulation 2016-FRR Questions and answers with ValidTests

The portfolio VaR when the returns of two assets are uncorrelated can be calculated using the formula:

Portfolio VaR=(VaR of ThetaGroup)2+(VaR of VolgaCorp)2Portfolio VaR=(VaR of ThetaGroup)2+(VaR of VolgaCorp)2​

Plugging in the values:

Portfolio VaR=(0.3)2+(0.4)2=0.09+0.16=0.25=0.5Portfolio VaR=(0.3)2+(0.4)2​=0.09+0.16​=0.25​=0.5

So, the portfolio VaR is $0.5 million.

Option A:Use of benchmarked data reflects similar data collection standards.

Incorrect. Benchmarking ensures that data is collected using similar standards, enhancing comparability and reliability.

Option B:External events are usually not of interest to senior management.

Incorrect. External events provide valuable insights and lessons that are often of significant interest to senior management.

Option C:If the external data is gathered from news sources, it may only reflect events that are interesting to the press.

Verified and correct. Data sourced from news can be biased towards more sensational events, potentially missing out on less newsworthy but equally important incidents.

Option D:They provide a source of data on what operational loss events will occur.

Incorrect. External databases provide historical data that can inform risk assessments but do not predict future events directly.

To estimate the forward price of gold, the cost of holding physical gold and the cost of shorting it must be considered. The formula to calculate the forward price (F) is:

????=????×(1+????????−????????)F=S×(1+rf​−rl​)

where????Sis the spot price,????????rf​is the risk-free rate, and????????rl​is the lease rate.

Given:

Physical gold spot price (????S) = $1,000

Annual risk-free rate (????????rf​) = 5% or 0.05

Gold lease rate (????????rl​) = 2% or 0.02

Plugging in the values:

????=1000×(1+0.05−0.02)=1000×1.03=1030F=1000×(1+0.05−0.02)=1000×1.03=1030

Therefore, the best estimate of the gold forward price is $1030.

Comprehensive and Detailed In-Depth Explanation:

The Basic Indicator Approach (BIA) under Basel II is a simple method to calculate operational risk capital. It requires banks to hold capital equal to 15% of the average annual gross income over the previous three years, where gross income is defined as net interest income plus net non-interest income (excluding extraordinary items). Only positive gross income years are included in the average. The formula is:

Operational Risk Capital = 15% × (Average Gross Income over 3 years).

This is explicitly stated in the Basel II framework, making C (three years multiplied by 15%) correct. Other options do not align with the BIA requirements.

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.

The Sarbanes-Oxley Act includes risk and control requirements for financial statements in the United States. It mandates strict reforms to improve financial disclosures from corporations and prevent accounting fraud. This Act directly impacts operational risk management by setting standards for all U.S. public company boards, management, and public accounting firms.