GARP 2016-FRR Exam With Confidence Using Practice Dumps

Market risk typically involves risks that affect the entire market or market segment. These include:

Unexpected changes in the term structure of interest rates:

This affects the prices of bonds and other interest-rate-sensitive securities.

The JPY depreciating against the USD:

This is an example of foreign exchange risk, which is a type of market risk.

Changes in the oil price due to the discovery of new oil fields:

This affects commodities markets and can have broader economic implications.

Increased default rate on commercial mortgages due to higher interest rates:

This is more of a credit risk than market risk. It specifically relates to the creditworthiness of borrowers rather than the overall market movements.

Thus, the increased default rate on commercial mortgages due to higher interest rates is not a typical source of market risk.

References

Source: How Finance Works​​

When Delta Bank sells off the lower-risk portions of its credit portfolio, it retains the higher-risk residual pieces. This process inherently increases the risk associated with the remaining portfolio because the lower-risk assets, which provided a cushion, are no longer part of the portfolio. As the risk increases, the potential return on these higher-risk assets also increases to compensate for the additional risk taken on by the bank. Consequently, this higher risk and potential return increase the bank's return on equity (ROE), as the bank is now leveraging more volatile assets that have higher potential returns.

References

Verified information on risk and return from the document ​

Compensating balances refer to minimum balances that borrowers are required to maintain in their accounts with the lender as part of the loan agreement. These balances benefit the bank by providing a stable source of funding and increasing the bank's interest rate margin and profitability. However, they do not directly influence the expected loss rate of the bank or improve capital structure by controlling obligor type and avoiding payment delays. These functions are not typically associated with compensating balances, which is why option C does not represent a benefit of compensating balances.