GARP 2016-FRR Exam With Confidence Using Practice Dumps

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.

Counterparty credit risk refers to the risk that the counterparty to a financial contract will default before the final settlement of the contract's cash flows, resulting in a financial loss. This is correctly stated in option A.

The exposure at default (EAD) is indeed variable due to fluctuations in the underlying valuations, such as swaps, as mentioned in option B.

The EAD can be negatively correlated with the probability of default (PD) because as the credit quality of a counterparty deteriorates, their exposure may also decline, correctly stated in option C.

However, dynamic collateral provisions are typically designed to reduce counterparty risk by adjusting collateral requirements based on changes in exposure and credit quality, not to increase it. Therefore, option D is incorrect.

Comprehensive and Detailed In-Depth Explanation:

Core deposits are stable, low-cost funds (e.g., savings, checking accounts) that depositors tend to leave with the bank over time, despite contractual flexibility to withdraw them. This stability is due to customer behavior and inertia, making them a reliable funding source under Basel III’s Net Stable Funding Ratio (NSFR). Credible deposits (A) and permanent deposits (C) are not standard terms, andtangible equity (D) is a capital measure, not a deposit type.