GARP Updated 2016-FRR Exam Questions and Answers by maisy

The most convenient approach for a credit analyst to quantify the credit risk exposure for the bank would be to analyze the distribution of the bank's credit losses and map credit risks at various statistical levels. This method provides a comprehensive view of potential losses and the probabilities associated with different loss levels, which is crucial for effective risk management and regulatory compliance.

To determine the appropriate interest rate to charge, Alpha Bank needs to cover the risk-free rate, the spread, and the expected loss due to default. The formula used is: Risk-free rate + Spread + (Probability of Default x Loss Given Default). Substituting the given values: 6% (risk-free rate) + 3% (spread) + (0.02 x 0.50) = 6% + 3% + 1% = 10%.

Counterparty credit risk refers to the risk that the counterparty to a financial contract will default before the final settlement of the contract's cash flows, resulting in a financial loss. This is correctly stated in option A.

The exposure at default (EAD) is indeed variable due to fluctuations in the underlying valuations, such as swaps, as mentioned in option B.

The EAD can be negatively correlated with the probability of default (PD) because as the credit quality of a counterparty deteriorates, their exposure may also decline, correctly stated in option C.

However, dynamic collateral provisions are typically designed to reduce counterparty risk by adjusting collateral requirements based on changes in exposure and credit quality, not to increase it. Therefore, option D is incorrect.

References:

How Finance Works: "Counterparty credit risk and its management through collateral provisions is a critical aspect of financial risk management."

As of April 2007, the three most widely traded currencies on the global foreign exchange market in decreasing order of market share were the United States dollar (USD), the European euro (EUR), and the Japanese yen (JPY). This ranking reflects the liquidity and trading volume associated with each currency, with the USD being the most traded, followed by the EUR and then the JPY.

References:Information confirming the ranking of the three most widely traded currencies can be found in financial market reports and historical data from financial institutions that track foreign exchange volumes.