2016-FRR GARP Exam Lab Questions

Risk and Control Self-Assessments (RCSA) distinguish themselves from other types of assessments because they include both a risk assessment and a control assessment. This combined approach allows for a comprehensive view of both the potential risks and the effectiveness of the controls in place to mitigate those risks.

To determine the pound exposure in the aggregated risk reports, we sum the net positions:

Long £500 million:

The bank holds a long position of £500 million.

Short £300 million in delta-equivalent pound options:

This position reduces the exposure by £300 million.

Long £100 million in pound-denominated stocks:

This adds £100 million to the exposure.

Net exposure: 500−300+100=300 million pounds500 - 300 + 100 = 300 \, \text{million pounds}500−300+100=300million pounds

Thus, the pound exposure shown in the aggregated risk reports is £300 million.

ReferencesSource: How Finance Works​

Entering into interest rate swaps can help a risk analyst reduce the bank's exposure to rising interest rates. Interest rate swaps can be used to convert variable-rate liabilities into fixed-rate liabilities, thereby reducing the risk associated with rising interest rates.

The historical simulation method does not assume a normal distribution of asset returns. Instead, it uses actual historical returns to simulate future returns, thereby addressing the problem of incorrect assumptions about the normal distribution of asset returns. This approach can better capture the empirical distribution of returns, including skewness and kurtosis.