GARP 2016-FRR Exam With Confidence Using Practice Dumps

An operational risk policy should include:

The firm's definition of risk: Clearly defining what constitutes operational risk for the organization.

The governance of operational risk including who owns it, what it owns, and how issues should be escalated: Establishing roles and responsibilities for managing operational risk.

The main activities and elements that are managed by the operational risk function: Outlining the key processes and controls that are in place to manage operational risks.

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.

To minimize the variability of net interest income, Gamma Bank should aim to have a duration gap of zero. This means that the weighted average duration of assets matches the weighted average duration of liabilities, thus immunizing the bank’s net interest income against changes in interest rates.