GARP 2016-FRR Exam With Confidence Using Practice Dumps

Option A:The loss data entry must include the actual loss amount.

Correct as it ensures accurate financial impact recording.

Option B:The loss data program must comprehensively capture all material activities.

Correct, necessary for a thorough risk management program.

Option C:The loss data entry should only include the date when the event was reported.

Incorrect, as it is essential to capture both the event date and the report date to understand the timeline of the incident.

Option D:The loss data entry may include descriptive information about the drivers or causes of the loss event.

Correct, as it provides context and insights into the root causes, aiding in risk analysis and prevention.

Probability of Default (PD) Increase:If the machinery industry experiences adverse structural changes, the economic conditions worsen for Delta Industrial Machinery Corporation. This results in a higher likelihood of financial distress and potential default. Therefore, the probability of default increases.

Loss Given Default (LGD) Increase:In the event of adverse structural changes, the recovery rates on the loan may diminish due to potential decreases in the value of the company’s assets. Hence, the bank might face higher losses if Delta defaults, leading to an increase in the loss given default.

Duration and Loan Value:An increase in both PD and LGD generally signifies greater risk. To compensate for this increased risk, the loan might be extended or restructured, leading to a longer duration. Higher risk and longer duration typically decrease the present value of the loan, as the expected cash flows are discounted more heavily due to the increased risk.

Comprehensive and Detailed In-Depth Explanation:

In a single-name Credit Default Swap (CDS), the protection seller (who assumes the credit risk) often posts collateral to the buyer to mitigate counterparty risk. The amount of collateral is typically determined by:

Credit standing of the protection seller:If the seller’s creditworthiness declines (e.g., lower credit rating), more collateral is required to secure the buyer against the seller’s potential default.