GARP 2016-FRR Exam With Confidence Using Practice Dumps

According to JPMorgan Chase's definitions in their annual report, the following are considered non-trading risk exposures:

Loans held to maturity: These are not traded and are held until they are repaid.

Mortgage servicing rights: These involve servicing mortgages rather than trading them.

Derivatives used to manage asset/liability exposure: These derivatives are used for hedging purposes rather than trading.

Short term equity investments are typically considered trading exposures.

The PVBP (Present Value of a Basis Point) can be calculated by taking the change in the bond's price and dividing it by the change in yield (expressed in basis points). Here, the bond's price drops from $1,000 to $976 when the yield increases from 4.7% to 4.71%, which is a 1 basis point increase. The change in price is $1,000 - $976 = $24. Therefore, the PVBP is $24 / 1 = $24.

In practice, financial institutions often sum the economic capital required for market, credit, and operational risks to arrive at an aggregate economic capital estimate. This is done because:

Difficulty in Estimating Correlations: Estimating the correlations between different types of risks is complex and data-intensive. These correlations can change over time and under different market conditions, making it challenging to arrive at accurate estimates.

Conservatism: To avoid underestimating the total risk, a conservative approach is often taken by adding up the individual risk capitals. This ensures that the institution holds sufficient capital to cover potential losses from all types of risks, even if they were to occur simultaneously.

Regulatory Guidance: Although regulations encourage a more integrated approach, the lack of precise data often leads banks to use simpler, more conservative methods in practice.

Thus, option B correctly reflects the practical approach taken due to the difficulty in estimating correlations between different risk categories.