GARP Updated 2016-FRR Exam Questions and Answers by kira

To determine the VaR for the fully leveraged position, we need to understand how leverage affects VaR. Leverage magnifies both returns and risks, which means that the VaR for a leveraged position is greater than that of an unleveraged position.

Calculate the leverage ratio:

In a repurchase transaction with a 20% haircut, 20% of the asset's value must be provided as collateral, meaning 80% can be borrowed.

Leverage ratio LLL = 1Haircut\frac{1}{\text{Haircut}}Haircut1​ = 10.2\frac{1}{0.2}0.21​ = 5.

Calculate the leveraged position:

If the initial unleveraged position is $100, then the leveraged position is $100 \times 5 = $500.

Calculate the VaR for the leveraged position:

The unleveraged VaR is $30 on $100.

Therefore, the leveraged VaR will be magnified by the leverage ratio: Leveraged VaR=Unleveraged VaR×Leverage Ratio\text{Leveraged VaR} = \text{Unleveraged VaR} \times \text{Leverage Ratio}Leveraged VaR=Unleveraged VaR×Leverage Ratio = $30 \times 5 = $150.

References

Source: How Finance Works​

Comprehensive and Detailed In-Depth Explanation:

A Governance, Risk, and Compliance (GRC) strategy integrates risk management, regulatory compliance, and governance to enhance decision-making and operational efficiency. It helps a bank avoid:

I:Incomplete risk analysis by ensuring comprehensive risk identification processes.

II:Misperception of exposures by providing consistent risk assessment frameworks.

III:Duplication of effort by streamlining risk and compliance activities across units.

Major problems with correlation calculations include:

I. Correlation estimates are not able to capture increases in factor co-movements in extreme market scenarios, as correlations can change significantly during periods of market stress.

II. Correlation estimates tend to be unstable, meaning they can vary widely over time and in different market conditions.

III. Historical correlations may not forecast future correlations correctly, as past data may not always be indicative of future relationships.

IV is incorrect because correlation estimates do not inherently assume normally distributed returns, though the assumption of normality is often used in conjunction with correlation calculations.

Standard operational risk definitions typically include human errors (I), process failure (II), and systems failure (III). Unexpected events (IV) are generally considered in broader risk categories but are not standard elements of operational risk definitions.