GARP 2016-FRR Exam With Confidence Using Practice Dumps

Non-statistical risk measures typically used to quantify market risk include:

Option Sensitivities:

Measures such as delta, gamma, vega, and theta which indicate how option prices are affected by various factors.

Convexity:

This measures the sensitivity of the duration of a bond to changes in interest rates, an important factor in bond risk management.

Basis Point Values (BPV):

This measures the change in the value of a financial instrument or portfolio for a one basis point change in yield, used to assess interest rate risk.

Net Closed Positions:

This is not typically used to quantify market risk. It simply represents the net value of positions that have been offset or closed out and does not provide a measure of risk exposure.

Thus, net closed positions are not typically used to quantify market risk.

References

Source: How Finance Works​

Kurtosis measures the "tailedness" of the return distribution. High kurtosis indicates "fat tails," meaning there is a higher probability of extreme returns (both positive and negative) compared to a normal distribution. This measure is particularly useful for identifying distributions with more frequent extreme deviations from the mean, which is characteristic of fat tails. Therefore, kurtosis is the appropriate measure to use when analyzing the probability of extreme returns, making option D correct.

Model Definition:Historical frequency models are used to assign an obligor to a class based on risk characteristics at the time of loan origination and estimate default probability based on the past default rates of that class.

Application:These models use historical data to determine the probability of default by analyzing past defaults within the same risk class, providing a statistical basis for risk assessment.