GARP Updated 2016-FRR Exam Questions and Answers by diego

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.

References

Source: How Finance Works​

Statement I:Subscription databases provide central data repositories and benchmarking services to their members.

Verified and correct. These databases aggregate data from multiple sources to provide valuable benchmarking information.

Statement II:Subscription databases can provide insight into whether the losses in a firm reflect the usual losses in their industry.

Verified and correct. By comparing a firm's losses with industry data, firms can identify trends and anomalies.

Statement III:Subscription databases assist with mapping the events to the appropriate business lines, risk categories, and causes.

Verified and correct. Proper mapping helps in accurate risk assessment and management.

Statement IV:Subscription databases reflect only events that are interesting to the press and are reported in the press.

Incorrect. These databases aim to capture a wide range of operational loss events, not just those reported in the press.

Comprehensive and Detailed In-Depth Explanation:

A daily decay factor (e.g., in EWMA models) weights recent data more heavily, but gradually reduces the influence of extreme returns over time, smoothing forecasts. Option B is correct—it mitigates the lasting impact of outliers. Option A is incorrect (recent volatility retains influence). Option C reverses the effect, and Option D is unrelated (decay doesn’t target low volatility). GARP’s FRR discusses this in VaR forecasting.

Exact Extract from Official Source:

GARP FRR Study Notes, Market Risk Section: "A decay factor in P&L forecasting, such as in EWMA, reduces the weight of extreme past returns over time, providing a balanced view of volatility."

BCBS, "Basel III: A Global Regulatory Framework," December 2010, para. 718: "Models using decay factors lessen the persistent effect of extreme events on risk estimates."

Comprehensive and Detailed In-Depth Explanation:

Immunization is a risk management strategy used by banks to protect their net interest income or portfolio value from interest rate fluctuations. It involves structuring assets and liabilities (often using interest rate swaps) so that the duration of assets matches the duration of liabilities, thereby neutralizing the impact of rate changes. In the context of interest rate swaps, a bank might enter into a swap to convert floating-rate exposures to fixed rates (or vice versa) to stabilize net interest income. The term "immunization" is well-established in financial risk management and is referenced in GARP’s FRR materials under interest rate risk management. Inoculation, vaccination, and insulation are not standard terms for this technique.