GARP 2016-FRR Exam With Confidence Using Practice Dumps

During the second quarter of 2009, transactions in foreign exchange derivative contracts comprised approximately 7% of all types of derivative transactions between financial institutions in the United States. This data point reflects the proportion of foreign exchange derivatives within the broader context of derivative transactions during that period.

The potential failure of a manufacturer to honor a warranty is a type of performance risk because it relates to the manufacturer's performance under the terms of the warranty contract. Conversely, the potential failure of a borrower to fulfill its payment requirements, including both the repayment of the amount borrowed (principal) and the contractual interest payments, is known as credit risk. Credit risk specifically deals with the likelihood of a borrower defaulting on their debt obligations.

Identify the variables:

Haircut in a repo transaction: 20%

This implies that the lender will provide cash equivalent to 80% of the value of the collateral (CDOs in this case).

Calculate the maximum leverage factor:

The leverage factor can be calculated as the reciprocal of the proportion of the value after the haircut.

Leverage factor=1Haircut percentageLeverage factor=Haircut percentage1​

Given a 20% haircut, the calculation is:

Leverage factor=10.20=5Leverage factor=0.201​=5

However, in practice, leverage is often cited with respect to the additional amount borrowed relative to the initial equity. Thus, the effective leverage factor here is:

Leverage factor=10.20−1=4Leverage factor=0.201​−1=4