GARP Updated 2016-FRR Exam Questions and Answers by jeremiah

The formula to estimate a partial change in an option's price based on the change in the underlying asset's price is primarily dependent on the option's Delta. Delta represents the sensitivity of the option's price to changes in the price of the underlying asset. Therefore, the most straightforward and widely used formula to estimate this partial change is:

Partial change in option price=Δ×Change in underlying pricePartial change in option price=Δ×Change in underlying price

This formula directly utilizes Delta to measure the immediate rate of change in the option's price relative to a small change in the underlying asset's price. The other options involving Gamma are more complex and not typically used for simple partial changes.

Gamma Bank would typically accept the following as financial collateral:

Equities and Convertible Bonds:Included in a main market index due to their liquidity and value recognition.

Commercial Debts (Receivables):Owed to a company, which can be factored or used as collateral.

Mutual Fund Shares and Similar Investment Vehicles:Subject to daily quotes ensuring transparency and liquidity.

Unrated bonds, even if traded on a recognized exchange, carry higher uncertainty and lack the creditworthiness validation that rated bonds possess, making them less preferable as collateral.

References

Verified information on acceptable financial collateral from the document ​

The Black-Scholes model does not require discrete future stock prices as an input. Instead, it uses the current price of the underlying asset, the option’s strike price, time to maturity, risk-free interest rate, and the volatility of the underlying asset. The model assumes that the price of the underlying asset follows a continuous stochastic process and not discrete intervals.

The same approach as question 29 is applied here but focuses on the straightforward default calculation without collateral consideration:

Loan Amount (EAD):$100,000

Loss Given Default (LGD):50% of EAD????????????=50%×$100,000=$50,000LGD=50%×$100,000=$50,000

Annual Expected Default Rate:2%

Expected Loss:Annual Expected Default Rate × LGDExpected Loss=2%×$50,000=0.02×50,000=$1,000Expected Loss=2%×$50,000=0.02×50,000=$1,000

Hence, the expected loss due to default is $1,000 without considering the collateral. If considering the collateral explicitly, it would be slightly different as the collateral reduces the direct exposure.