GARP Updated 2016-FRR Exam Questions and Answers by macey

VaR calculations depend heavily on the confidence level chosen. Bank G's 1-year VaR of USD 20 million is calculated at a 99% confidence level, while Bank H's 1-year VaR of USD 10 million is calculated at a 95% confidence level. These different confidence levels mean that the probabilities associated with the potential losses are not directly comparable. The 99% confidence level implies a more conservative risk estimate compared to the 95% confidence level, hence no direct risk comparison can be accurately made.

Market risk is the exposure to an adverse change in the market value of portfolios and financial instruments caused by a change in market prices or rates. This definition encompasses the variability in market prices, such as interest rates, foreign exchange rates, and equity prices, which can impact the value of financial instruments and portfolios.

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.

Kurtosis measures the "tailedness" of the return distribution. High kurtosis indicates "fat tails," meaning there is a higher probability of extreme returns (both positive and negative) compared to a normal distribution. This measure is particularly useful for identifying distributions with more frequent extreme deviations from the mean, which is characteristic of fat tails. Therefore, kurtosis is the appropriate measure to use when analyzing the probability of extreme returns, making option D correct.