GARP Updated 2016-FRR Exam Questions and Answers by huda

Option delta (Δ) is a measure used in finance to indicate the sensitivity of an option's price to the price of the underlying asset. Specifically, it represents the rate of change of the option's value with respect to changes in the price of the underlying instrument. It is a fundamental concept in options trading and risk management.

References:

Standard definition from options theory.

Equity indices are numerical calculations that reflect the performance of hypothetical equity portfolios.

They are designed to track the overall performance of an equity market and do not trade in cash form.

Capitalization-weighted indices, which weight stocks by their market capitalization, are generally considered effective in tracking the performance of the overall market. Therefore, the statement that they are not generally considered better is incorrect.

Price-weighted indices give greater weight to shares trading at high prices, reflecting their price movements more heavily in the index.

To match the durations of assets and liabilities, the bank needs to adjust the durations so that they are equal. Currently, the assets have a duration of 5 and the liabilities have a duration of 2.

One way to match the durations is to increase the duration of liabilities by 2 (making it 4) and decrease the duration of assets by 1 (making it 4). This results in both the assets and liabilities having the same duration, thereby matching them.

From the statistical distribution of bank losses over a future period, several conclusions can be drawn:

I. In most years a bank would look more profitable than it will be on average: This indicates that most years will show better-than-average profitability because the distribution of losses includes infrequent but severe loss events.

II. Most of the time a sufficiently well-capitalized bank will appear over-capitalized: Because banks prepare for rare but significant losses, in normal years, their capital reserves may seem excessive.

III. Bad years do not come along very often, but when they do they lead to enormous losses: This reflects the heavy-tailed nature of the loss distribution, where extreme losses are rare but severe.

All three statements correctly reflect the characteristics of the loss distribution for banks.References: How Finance Works, sections covering statistical analysis of losses and capital adequacy​​.