2016-FRR Exam Dumps - Financial Risk and Regulation (FRR) Series

To achieve a profitable commodity carry trade, the strategy should align with the market conditions represented by the shape of the futures curve. The key concepts are contango and backwardation:

Contango:

Contango occurs when the futures prices are higher than the spot prices.

To profit from contango, one should buy short-term futures contracts (which are cheaper) and sell long-term futures contracts (which are more expensive).

Backwardation:

Backwardation occurs when the futures prices are lower than the spot prices.

To profit from backwardation, one should buy long-term futures contracts (which are cheaper) and sell short-term futures contracts (which are more expensive).

Given the statements:

I. Buy short-term commodity futures and sell longer-dated position when the curve is in contango.

IV. Buy long-term commodity futures and sell shorter-dated positions when the curve is in backwardation.

Both these strategies align with the correct market conditions for profitable trades.

ReferencesSource: How Finance Works​

When evaluating a diversified equity portfolio, an endowment asset manager should consider:

Company-specific projected earnings and earnings risk to understand the performance potential and variability of individual assets.

Aggregate earnings expectations to gauge the overall market outlook and economic conditions affecting the portfolio.

Individual asset volatility to assess the risk and potential fluctuations in the value of specific investments within the portfolio.

Market liquidity, while important, is not typically a primary concern for long/short equity strategies focused on diversified portfolios.

Given that BetaFin does not have retail branches and operates in fixed income, equity, and asset management divisions, the RCSA workshop approach is the best fit. This approach allows for interactive discussions among experts from different divisions, facilitating a deeper understanding of the operational risks specific to each division.

To determine the frequency score for an event likely to happen once in 2 years:

Frequency score can be calculated as the reciprocal of the event frequency.

For an event likely to happen once in 2 years: Frequency=12Frequency=21​ per year.

Thus, the frequency score = 1.

Forward rate agreements (FRAs) are over-the-counter (OTC) derivative contracts that allow banks and other parties to hedge or speculate on future movements in interest rates. They provide a means to lock in an interest rate for a future period, thus allowing parties to manage their interest rate exposure.

Option A: Use of benchmarked data reflects similar data collection standards.

Incorrect. Benchmarking ensures that data is collected using similar standards, enhancing comparability and reliability.

Option B: External events are usually not of interest to senior management.

Incorrect. External events provide valuable insights and lessons that are often of significant interest to senior management.

Option C: If the external data is gathered from news sources, it may only reflect events that are interesting to the press.

Verified and correct. Data sourced from news can be biased towards more sensational events, potentially missing out on less newsworthy but equally important incidents.

Option D: They provide a source of data on what operational loss events will occur.

Incorrect. External databases provide historical data that can inform risk assessments but do not predict future events directly.

Planning for the operational risk framework generally involves setting clear goals, realistic milestones, and achievable deliverables that add value. Strong project management skills are applied to the design and implementation of each new element to manage the complexity and evolution of the framework. Once the elements are operational, they need to be monitored to ensure their integrity over time. Short-term planning and immediate benefits are not preferred over long-term planning in this context.References:Financial Risk and Regulation documents on operational risk framework planning.

The daily VaR (Value at Risk) computing process typically involves several key steps, including updating individual risk factor models, computing portfolio risk (often using methods like delta-normal or delta-gamma), and producing the VaR report. Updating factor interrelationships, which involves recalibrating how different risk factors correlate or interact with each other, is not necessarily a daily requirement and is usually performed less frequently as part of broader risk model adjustments. Therefore, updating factor interrelationships is not a core component of the daily VaR computation process.