GARP 2016-FRR Exam With Confidence Using Practice Dumps

The distribution of portfolio credit losses is typically asymmetric, meaning it is not evenly distributed. This asymmetry arises because the likelihood of small losses is much higher than the likelihood of very large losses.

The likelihood of total losses, which includes both expected and unexpected losses, is greater than the likelihood of no credit losses. This is because while small losses happen more frequently, large losses, although less frequent, can occur and can be significant.

To determine the appropriate interest rate to charge, Alpha Bank needs to cover the risk-free rate, the spread, and the expected loss due to default. The formula used is: Risk-free rate + Spread + (Probability of Default x Loss Given Default). Substituting the given values: 6% (risk-free rate) + 3% (spread) + (0.02 x 0.50) = 6% + 3% + 1% = 10%.

Back testing VaR models involves comparing the predicted losses (VaR estimates) with the actual daily profits and losses to assess the accuracy and reliability of the VaR model. This process helps in validating whether the model is effective in predicting risk and in identifying any discrepancies between predicted and actual outcomes. Therefore, the correct statement about back testing the VaR models is option B.