Risk Management Practices 8008 Valid Questions

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PRM Certification – Exam III: Risk Management Frameworks, Operational Risk, Credit Risk, Counterparty Risk, Market Risk, ALM, FTP-2015 Edition 8008 exam is one related test for PRM certification. We have cracked the latest Risk Management Practices 8008 valid questions, which are valuable for you to pass the test. PRM certification 8008 exam tests your knowledge and understanding of the modern risk management theory and practices. 8008 exam tests the following 6 parts:

Risk Management Frameworks
Operational Risk
Credit Risk
Counterparty Credit Risk
Market Risk
Asset Liability Management and Funds Transfer Pricing

The new cracked Risk Management Practices 8008 valid questions are the best study guides. Share some free Risk Management Practices 8008 valid questions below.

Page 1 of 15

1. Which of the following statements is true:

Both total expected losses and total unexpected losses are less than the sum of expected and unexpected losses on underlying exposures respectively

Total expected losses are equal to the sum of individual underlying exposures while total unexpected losses are greater than the sum of unexpected losses on underlying exposures

Total expected losses are equal to the sum of expected losses in the individual underlying exposures while total unexpected losses are less than the sum of unexpected losses on underlying exposures

Total expected losses are greater than the sum of individual underlying exposures while total unexpected losses are less than the sum of unexpected losses on underlying exposures

2. Which of the following is the best description of the spread premium puzzle:

The spread premium puzzle refers to observed default rates being much less than implied default rates, leading to lower credit bonds being relatively cheap when compared to their actual default probabilities

The spread premium puzzle refers to dollar denominated non-US sovereign bonds being priced a at significant discount to other similar USD denominated assets

The spread premium puzzle refers to AAA corporate bonds being priced at almost the same prices as equivalent treasury bonds without offering the same liquidity or guarantee as treasury bonds

The spread premium puzzle refers to the moral hazard implicit in the monoline insurance market

3. Which of the following are true:

I. The total of the component VaRs for all components of a portfolio equals the portfolio VaR.

II. The total of the incremental VaRs for each position in a portfolio equals the portfolio VaR.

III. Marginal VaR and incremental VaR are identical for a $1 change in the portfolio.

IV. The VaR for individual components of a portfolio is sub-additive, ie the portfolio VaR is less than (or in extreme cases equal to) the sum of the individual VaRs.

V. The component VaR for individual components of a portfolio is sub-additive, ie the portfolio VaR is less than the sum of the individual component VaRs.

II and V

II and IV

I and II

I, III and IV

4. A risk analyst analyzing the positions for a proprietary trading desk determines that the combined annual variance of the desk's positions is 0.16. The value of the portfolio is $240m.

What is the 10-day stand alone VaR in dollars for the desk at a confidence level of 95%? Assume 250 trading days in a year.

12595200

157440000

6297600

31488000

5. Which of the following contributed to the systemic failure during the credit crisis that began in 2007?

Stress tests that did not stress enough

Moral hazard from the strategy of 'originate and distribute'

Inadequate attention paid to liquidity risk

All of the above

6. As the persistence parameter under GARCH is lowered, which of the following would be true:

The model will give lower weight to recent returns

High variance from the recent past will persist for longer

The model will react faster to market shocks

The model will react slower to market shocks

7. Which of the following formulae describes CVA (Credit Valuation Adjustment)? All acronyms have their usual meanings (LGD=Loss Given Default, ENE=Expected Negative Exposure, EE=Expected Exposure, PD=Probability of Default, EPE=Expected Positive Exposure, PFE=Potential Future Exposure)

LGD * ENE * PD

LGD * EPE * PD

LGD * EE * PD

LGD * PFE * PD

8. The risk that a counterparty fails to deliver its obligation upon settlement while having received the leg owed to it is called:

Pre-settlement risk

Credit risk

Replacement risk

Settlement risk

9. The returns for a stock have a monthly volatilty of 5%. Calculate the volatility of the stock over a two month period, assuming returns between months have an autocorrelation of 0.3.

8.062%

7.071%

10%

10. An error by a third party service provider results in a loss to a client that the bank has to make up. Such as loss would be categorized per Basel II operational risk categories as:

Execution delivery and process management

Outsourcing loss

Business disruption and process failure

Abnormal loss

Page 2 of 15

11. The Altman credit risk score considers:

A historical database of the firms that have defaulted

A quadratic approximation of the credit risk based on underlying risk factors

A combination of accounting measures and market values

A historical database of the firms that have survived

12. Which of the formulae below describes incremental VaR where a new position 'm' is added to the portfolio? (where p is the portfolio, and V_i is the value of the i-th asset in the portfolio. All other notation and symbols have their usual meaning.)

A)

Option A

Option B

Option C

Option D

13. What does a middle office do for a trading desk?

Operations

Transaction data entry

Reconciliations

Risk analysis

14. Once the frequency and severity distributions for loss events have been determined, which of the following is an accurate description of the process to determine a full loss distribution for operational risk?

A firm wide operational risk distribution is generated by adding together the frequency and severity distributions

A firm wide operational risk distribution is generated using Monte Carlo simulations

A firm wide operational risk distribution is set to be equal to the product of the frequency and severity distributions

The frequency distribution alone forms the basis for the loss distribution for operational risk

15. Which of the following statements are true:

I. Capital adequacy implies the ability of a firm to remain a going concern

II. Regulatory capital and economic capital are identical as they target the same objectives

III. The role of economic capital is to provide a buffer against expected losses

IV. Conservative estimates of economic capital are based upon a confidence level of 100%

I and III

I, III and IV

III

16. For the purposes of calculating VaR, an interest rate swap can be modeled as a combination of:

two zero coupon bonds

a fixed coupon bond and a floating rate note

a fixed rate bond and a zero coupon bond

a zero coupon bond and an interest rate swap

17. Under the standardized approach to determining operational risk capital, operations risk capital is equal to:

a fixed percentage of the latest gross income of the bank

a varying percentage, determined by the national regulator, of the gross revenue of each of the bank's business lines

15% of the average gross income (considering only the positive years) of the past three years

a fixed percentage (different for each business line) of the gross income of the eight specified business lines, averaged over three years

18. Which of the following statements is correct in relation to liquidity risk management?

I. Pricing for products that do not impact the balance sheet need not reflect the cost of maintaining liquidity

II. Time horizons for liquidity risk management are impacted by both regulatory requirements and the speed at which new sources of liquidity can be tapped

III. Collateral management is an important aspect of liquidity risk management

IV. The maturity period of various instruments in the capital structure has a significant impact on liquidity needs

III and IV

II, III and IV

I and II

II and III

19. According to the Basel framework, reserves resulting from the upward revaluation of assets are considered a part of:

Tier 3 capital

Tier 2 capital

Tier 1 capital

All of the above

20. Which of the following is not one of the 'three pillars' specified in the Basel accord:

Market discipline

Supervisory review

National regulation

Minimum capital requirements

Page 3 of 15

21. Which of the following statements is true:

I. Basel II requires banks to conduct stress testing in respect of their credit exposures in addition to stress testing for market risk exposures

II. Basel II requires pooled probabilities of default (and not individual PDs for each exposure) to be used for credit risk capital calculations

I & II

Neither statement is true

22. Under the KMV Moody's approach to credit risk measurement, which of the following expressions describes the expected 'default point' value of assets at which the firm may be expected to default?

Short term debt + Long term debt

2* Short term debt + Long term debt

Short term debt + 0.5* Long term debt

Long term debt + 0.5* Short term debt

23. Which of the following attributes of an investment are affected by changes in leverage:

Information ratio

risk and return

Sharpe ratio

All of the above

24. The estimate of historical VaR at 99% confidence based on a set of data with 100 observations will end up being:

the extrapolated returns of the last 1.64 observations

the worst single observation in the data set

the weighted average of the top 2.33 observations

None of the above

25. Which of the following is not a tool available to financial institutions for managing credit risk:

Collateral

Cumulative accuracy plot

Third party guarantees

Credit derivatives

26. Which of the following statements is true?

Only the drawn portions of credit facilities extended to clients by a bank count towards its liquidity exposure

Under times of liquidity stress, both prepayments of loans extended and expected withdrawals from on-demand deposits will decrease

Deterioration in the balance sheets of key counterparties is a concern for a liquidity manager even though it may not immediately affect a firm

For an issuer of life insurance policies, longevity risk can lead to reserves falling short of payments due

27. A bank expects the error rate in transaction data entry for a particular business process to be 0.005%.

What is the range of expected errors in a day within +/- 2 standard deviations if there are 2,000,000 such transactions each day?

80 to 120 errors in a day

60 to 80 errors in a day

0 to 200 errors in a day

90 to 110 errors in a day

28. For a hypotherical UoM, the number of losses in two non-overlapping datasets is 24 and 32 respectively. The Pareto tail parameters for the two datasets calculated using the maximum likelihood estimation method are 2 and 3.

What is an estimate of the tail parameter of the combined dataset?

2.57

2.23

Cannot be determined

29. Company A issues bonds with a face value of $100m, sold at $98. Bank B holds $10m in face of these bonds acquired at a price of $70. Company A then defaults, and the recovery rate is expected to be 30%.

What is Bank B's loss?

$7m

$4m

$2.1m

$4.9m

30. A financial institution is considering shedding a business unit to reduce its economic capital requirements.

Which of the following is an appropriate measure of the resulting reduction in capital requirements?

Incremental capital for the business unit in consideration

Proportionate capital for the business unit in consideration

Percentage of total gross income contributed by the business unit in question

Marginal capital for the business unit in consideration

Page 4 of 15

31. Which of the following statements are correct?

I. A reliance upon conditional probabilities and a-priori views of probabilities is called the 'frequentist' view

II. Knightian uncertainty refers to things that might happen but for which probabilities cannot be evaluated

III. Risk mitigation and risk elimination are approaches to reacting to identified risks

IV. Confidence accounting is a reference to the accounting frauds that were seen in the past decade as a reflection of failed governance processes

II, III and IV

II and III

I and IV

All of the above

32. The degree distribution of the nodes of the financial network is:

non-linear

best approximated by a beta distribution

normally distributed

long tailed

33. A bank's detailed portfolio data on positions held in a particular security across the bank does not agree with the aggregate total position for that security for the bank.

What data quality attribute is missing in this situation?

Data completeness

Data integrity

Auditability

Data extensibility

34. An assumption regarding the absence of ratings momentum is referred to as:

Ratings stability

Time invariance

Markov property

Herstatt risk

35. A loan portfolio's full notional value is $100, and its value in a worst case scenario at the 99% level of confidence is $65. Expected losses on the portfolio are estimated at 10%.

What is the level of economic capital required to cushion unexpected losses?

36. A derivative contract has a negative current replacement value.

Which of the following statements is true about its loan equivalent value for credit risk calculations over a 2-year horizon?

Since the derivatives contract has a negative current replacement value, exposure will be zero.

The credit exposure will be a given quintile of the expected distribution of the value of the derivatives contract in the future.

The notional value of the derivatives contract should be used for loan equivalence calculations.

The current exposure can be used for loan equivalence calculations as that is an unbiased proxy for the future value.

37. For a corporate bond, which of the following statements is true:

I. The credit spread is equal to the default rate times the recovery rate

II. The spread widens when the ratings of the corporate experience an upgrade

III. Both recovery rates and probabilities of default are related to the business cycle and move in opposite directions to each other

IV. Corporate bond spreads are affected by both the risk of default and the liquidity of the particular issue

I, II and IV

III and IV

III only

IV only

38. Which of the following statements is true:

I. If the sum of its parameters is less than one, GARCH is a mean reverting model of volatility, while EWMA is never mean reverting

II. Standardized returns under both EWMA and GARCH show less non-normality than non standardized returns

III. Steady state variance under GARCH is affected only by the persistence coefficient

IV. Good risk measures are always sub-additive

II, III and IV

I & II

I, II and IV

I, II and III

39. A portfolio's 1-day VaR at the 99% confidence level is $250m.

What is the annual volatility of the portfolio? (assuming 250 days in the year)

$2,410.3m

$1,699.4m

$107.5m

$3,952.8m

40. A risk management function is best organized as:

integrated with the risk taking functions as risk management should be a pervasive activity carried out at all levels of the organization.

report independently of the risk taking functions

reporting directly to the traders, as to be closest to the point at which risks are being taken

a part of the trading desks and other risk taking teams

Page 5 of 15

41. A stock that follows the Weiner process has its future price determined by:

its current price, expected return and standard deviation

its standard deviation and past technical movements

its expected return and standard deviation

its expected return alone

42. A corporate bond has a cumulative probability of default equal to 20% in the first year, and 45% in the second year.

What is the monthly marginal probability of default for the bond in the second year, conditional on there being no default in the first year?

3.07%

2.60%

15.00%

31.25%

43. If the 99% VaR of a portfolio is $82,000, what is the value of a single standard deviation move in the portfolio?

50000

35248

134480

82000

44. An operational loss severity distribution is estimated using 4 data points from a scenario. The management institutes additional controls to reduce the severity of the loss if the risk is realized, and as a result the estimated losses from a 1-in-10-year losses are halved. The 1-in-100 loss estimate however remains the same.

What would be the impact on the 99.9th percentile capital required for this risk as a result of the improvement in controls?

The capital required will decrease

The capital required will stay the same

The capital required will increase

Can't say based on the information provided

45. The probability of default of a security during the first year after issuance is 3%, that during the second and third years is 4%, and during the fourth year is 5%.

What is the probability that it would not have defaulted at the end of four years from now?

12.00%

88.53%

88.00%

84.93%

46. Which of the following objectives are targeted by rating agencies when assigning ratings:

I. Ratings accuracy

II. Ratings stability

III. High accuracy ratio (AR)

IV. Ranked ratings

II and III

III and IV

I and II

I, II and III

47. A zero coupon corporate bond maturing in an year has a probability of default of 5% and yields 12%. The recovery rate is zero.

What is the risk free rate?

5.26%

7.00%

5.00%

6.40%

48. The sensitivity (delta) of a portfolio to a single point move in the value of the S&P500 is $100. If the current level of the S&P500 is 2000, and has a one day volatility of 1%, what is the value-at-risk for this portfolio at the 99% confidence and a horizon of 10 days?

What is this method of calculating VaR called?

$14,736, parametric VaR

$4,660, Monte Carlo simulation VaR

$14,736, historical simulation VaR

$4,660, parametric VaR

49. Which of the following distributions is generally not used for frequency modeling for operational risk

Binomial

Poisson

Gamma

Negative binomial

50. Which of the following statements are true in relation to Principal Component Analysis (PCA) as applied to a system of term structures?

I. The factor weights on the first principal component will show whether there is common trend in the system

II. The factors to be applied to principal components are obtained from eigenvectors of the correlation matrix

III. PCA is a standard method for reducing dimensionality in data when considering a large number of correlated variables

IV. The smallest absolute eigenvalues and their associated eigenvectors are the most useful for explaining most of the variation

I and IV

I, II and III

I and III

II and IV

Page 6 of 15

51. Under the internal ratings based approach for risk weighted assets, for which of the following parameters must each institution make internal estimates (as opposed to relying upon values determined by a national supervisor):

Probability of default

Effective maturity

Loss given default

Exposure at default

52. In setting confidence levels for VaR estimates for internal limit setting, it is generally desirable:

that actual losses exceed the VaR estimates on only the rarest of occasions

that actual losses very frequently exceed the VaR estimates

that actual losses never exceed the VaR estimates

that actual losses exceed the VaR estimates with some reasonably observable frequency that is neither too high nor too low

53. A bank holds a portfolio of corporate bonds. Corporate bond spreads widen, resulting in a loss of value for the portfolio. This loss arises due to:

Liquidity risk

Credit risk

Market risk

Counterparty risk

54. As opposed to traditional accounting based measures, risk adjusted performance measures use which of the following approaches to measure performance:

adjust both return and the capital employed to account for the risk undertaken

adjust capital employed to reflect the risk undertaken

adjust returns based on the level of risk undertaken to earn that return

Any or all of the above

55. Which of the following should be included when calculating the Gross Income indicator used to calculate operational risk capital under the basic indicator and standardized approaches under Basel II?

Insurance income

Operating expenses

Fees paid to outsourcing service proviers

Net non-interest income

56. Which of the following are a CRO's responsibilities:

I. Statutory financial reporting

II. Reporting to the audit committee

III. Compliance with risk regulatory standards

IV. Operational risk

I and II

II and IV

III and IV

All of the above

57. Which of the following belong to the family of generalized extreme value distributions:

I. Frechet

II. Gumbel

III. Weibull

IV. Exponential

I, II and III

II and III

All of the above

58. When modeling severity of operational risk losses using extreme value theory (EVT), practitioners often use which of the following distributions to model loss severity:

I. The 'Peaks-over-threshold' (POT) model

II. Generalized Pareto distributions

III. Lognormal mixtures

IV. Generalized hyperbolic distributions

I, II, III and IV

II and III

I, II and III

I and II

59. When compared to a high severity low frequency risk, the operational risk capital requirement for a low severity high frequency risk is likely to be:

Higher

Zero

Lower

Unaffected by differences in frequency or severity

60. Which of the following statements are true:

I. Shocks to risk factors should be relative rather than absolute if we wish to avoid a change in the sign of the risk factor.

II. Interest rate shocks are generally modeled as absolute shocks.

III. Shocks to volatility are generally modeled as absolute shocks.

IV. Shocks to market spreads are generally modeled as relative shocks.

II and IV

II only

I, II and III

I and II

Page 7 of 15

61. Which of the following statements are true:

I. It is usual to set a very high confidence level when estimating VaR for capital requirements.

II. For model validation, very high VaR confidence levels are used to minimize excess losses.

III. For limit setting for managing day to day positions, it is usual to set VaR confidence levels that are neither too low to be exceeded too often, nor too high as to be never exceeded.

IV. The Basel accord requirements for market risk capital require the use of a time horizon of 1 year.

I and IV

I and III

III and IV

II and III

62. A portfolio has two loans, A and B, each worth $1m. The probability of default of loan A is 10% and that of loan B is 15%. The probability of both loans defaulting together is 1%. Calculate the expected loss on the portfolio.

500000

250000

1000000

240000

63. When performing portfolio stress tests using hypothetical scenarios, which of the following is not generally a challenge for the risk manager?

Building a consistent set of hypothetical shocks to individual risk factors

Building a positive semi-definite covariance matrix

Considering back office capacity to deal with increased transaction volumes

Evaluating interrelationships between counterparties when considering liquidity risks

64. CreditRisk+, the actuarial model for calculating portfolio credit risk, is based upon:

the exponential distribution

the normal distribution

the Poisson distribution

the log-normal distribution

65. Which of the following statements are true ?

I. Risk governance structures distribute rights and responsibilities among stakeholders in the corporation

II. Cybernetics is the multidisciplinary study of cyber risk and control systems underlying information systems in an organization

III. Corporate governance is a subset of the larger subject of risk governance

IV. The Cadbury report was issued in the early 90s and was one of the early frameworks for corporate governance

I, II and IV

I and IV

II and III

All of the above

66. Which of the following assumptions underlie the 'square root of time' rule used for computing VaR estimates over different time horizons?

I. the portfolio is static from day to day

II. asset returns are independent and identically distributed (i.i.d.)

III. volatility is constant over time

IV. no serial correlation in the forward projection of volatility

V. negative serial correlations exist in the time series of returns VI. returns data display volatility clustering

III, IV, V and VI

I, II, V and VI

I, II, III and IV

I and II

67. Which of the following statements are true?

I. Retail Risk Based Pricing involves using borrower specific data to arrive at both credit adjudication and pricing decisions

II. An integrated 'Risk Information Management Environment' includes two elements - people and processes

III. A Logical Data Model (LDM) lays down the relationships between data elements that an organization stores

IV. Reference Data and Metadata refer to the same thing

II and IV

I and III

I, II and III

All of the above

68. Which of the following is the most important problem to solve for fitting a severity distribution for operational risk capital:

The risk functional's minimization should lead to a good estimate of the 0.999 quantile

Determine plausible scenarios to fill the data gaps in the internal and external loss data

Empirical loss data needs to be extended to the ranges below the reporting threshold and above large value losses

The fit obtained should reduce the combination of the fitting and approximation errors to a minimum

69. Which of the following statements are true:

I. A transition matrix is the probability of a security migrating from one rating class to another during its lifetime.

II. Marginal default probabilities refer to probabilities of default in a particular period, given survival at the beginning of that period.

III. Marginal default probabilities will always be greater than the corresponding cumulative default probability.

IV. Loss given default is generally greater when recovery rates are low.

I and III

I, III and IV

II and IV

I and IV

70. For a group of assets known to be positively correlated, what is the impact on economic capital calculations if we assume the assets to be independent (or uncorrelated)?

Economic capital estimates remain the same

Estimates of economic capital go down

Estimates of economic capital go up

The impact on economic capital cannot be determined in the absence of volatility information

Page 8 of 15

71. For credit risk calculations, correlation between the asset values of two issuers is often proxied with:

Credit migration matrices

Transition probabilities

Equity correlations

Default correlations

72. Which of the following cannot be used to address the issue of heavy tails when modeling market returns

EVT

EWMA

Normal mixtures

Student's t-distribution

73. Which of the following are attributes of a robust stress testing programme at a bank?

Data of appropriate quality and granularity

Written policies and procedures

Robust systems infrastructure

All of the above

74. For the purposes of calculating VaR, an FRA can be modeled as a combination of:

a zero coupon bond and an interest rate swap

a fixed rate bond and a zero coupon bond

two zero coupon bonds

a zero coupon bond and a floating rate note

75. For a given notional amount, which of the following carries the greatest counterparty exposure (assuming the same counterparty credit rating for each):

A futures contract on an equity index

A one year certificate of deposit

A one year forward foreign exchange contract

A one year interest rate swap

76. The 99% 10-day VaR for a bank is $200mm. The average VaR for the past 60 days is $250mm, and the bank specific regulatory multiplier is 3.

What is the bank's basic VaR based market risk capital charge?

$250mm

$200mm

$750mm

$600mm

77. Which of the following statements is true in relation to a normal mixture distribution:

I. Normal mixtures represent one possible solution to the problem of volatility clustering

II. A normal mixture VaR will always be greater than that under the assumption of normally distributed returns

III. Normal mixtures can be applied to situations where a number of different market scenarios with different probabilities can be expected

II and III

III

I and II

I, II and III

78. Which of the following statements are true in relation to Monte Carlo based VaR calculations:

I. Monte Carlo VaR relies upon a full revalution of the portfolio for each simulation

II. Monte Carlo VaR relies upon the delta or delta-gamma approximation for valuation

III. Monte Carlo VaR can capture a wide range of distributional assumptions for asset returns

IV. Monte Carlo VaR is less compute intensive than Historical VaR

I and III

II and IV

I, III and IV

All of the above

79. The systemic manifestation of the liquidity crisis during the current credit crisis took many forms.

Which of the following is not one of those forms?

Drying up of liquidity in the cash market for treasury bonds

Drying up of liquidity in the wholesale money markets

Drying up of liquidity in the corporate bond markets

Stress and large withdrawals from the money markets

80. Calculate the 1-year 99% credit VaR of a portfolio of two bonds, each with a value of $1m, and the probability of default of 1% each over the next year. Assume the recovery rate to be zero, and the defaults of the two bonds to be uncorrelated to each other.

1980000

980000

20000

Page 9 of 15

81. Which of the following statements is correct?

Funding liquidity risks present themselves in the form of an adverse market impact on prices from a trade

Dynamic simulations of liquidity needs require an assumption of counterparty risk remaining constant

Market liquidity risk is idiosyncratic while funding liquidity risk is not

Market liquidity risks present themselves in the form of higher bid offer spreads

82. When estimating the risk of a portfolio of equities using the portfolio's beta, which of the following is NOT true:

relies upon the single factor CAPM model

use of the beta assumes that the portfolio is diversified enough so that the specific risks of the individual stocks offset each other

explicitly considers specific risk inherent in the portfolio for risk calculations

using the beta significantly eases the computational burden of calculating risk

83. Which of the following is additive, ie equal to the sum of its components

Incremental VaR

Conditional VaR

Specific VaR

Component VaR

84. If the loss given default is denoted by L, and the recovery rate by R, then which of the following represents the relationship between loss given default and the recovery rate?

L = 1 + R

R = 1 + L

R = 1 / L

R = 1 - L

85. Conditional default probabilities modeled under CreditPortfolio view use a:

Power function

Altman's z-score

Probit function

Logit function

86. CORRECT TEXT

Which of the below are a way to classify risk governance structures:

A Reactive, Preventative and Active

B. Committee based, regulation based and board mandated

C. Top-down and Bottom-up

D. Active and Passive

87. Under the ISDA MA, which of the following terms best describes the netting applied upon the bankruptcy of a party?

Closeout netting

Chapter 11

Payment netting

Multilateral netting

88. Which of the following steps are required for computing the total loss distribution for a bank for operational risk once individual UoM level loss distributions have been computed from the underlhying frequency and severity curves:

I. Simulate number of losses based on the frequency distribution

II. Simulate the dollar value of the losses from the severity distribution

III. Simulate random number from the copula used to model dependence between the UoMs

IV. Compute dependent losses from aggregate distribution curves

None of the above

III and IV

I and II

All of the above

89. Concentration risk in a credit portfolio arises due to:

A high degree of correlation between the default probabilities of the credit securities in the portfolio

A low degree of correlation between the default probabilities of the credit securities in the portfolio

Issuers of the securities in the portfolio being located in the same country

Independence of individual default losses for the assets in the portfolio

90. The key difference between 'top down models' and 'bottom up models' for operational risk assessment is:

Top down approaches to operational risk are based upon an analysis of key risk drivers, while bottom up approaches consider causality in risk scenarios.

Bottom up approaches to operational risk are based upon an analysis of key risk drivers, while top down approaches consider causality in risk scenarios.

Bottom up approaches to operational risk calculate the implied operational risk using available data such as income volatility, capital etc; while top down approaches use causal factors, risk drivers and other factors to get an aggregated estimate of risk.

Top down approaches to operational risk calculate the implied operational risk using available data such as income volatility, capital etc; while bottom up approaches use causal factors, risk drivers and other factors to get an aggregated estimate of risk.

Page 10 of 15

91. Fill in the blank in the following sentence:

Principal component analysis (PCA) is a statistical tool to decompose a ____________ matrix into its principal components and is useful in risk management to reduce dimensions.

Covariance

Correlation

Volatility

Positive semi-definite

92. Which of the following best describes the concept of marginal VaR of an asset in a portfolio:

Marginal VaR is the value of the expected losses on occasions where the VaR estimate is exceeded.

Marginal VaR is the contribution of the asset to portfolio VaR in a way that the sum of such calculations for all the assets in the portfolio adds up to the portfolio Va

Marginal VaR is the change in the VaR estimate for the portfolio as a result of including the asset in the portfolio.

Marginal VaR describes the change in total VaR resulting from a $1 change in the value of the asset in question.

93. CORRECT TEXT

Which of the following statements are true in relation to Historical Simulation VaR?

I. Historical Simulation VaR assumes returns are normally distributed but have fat tails

II. It uses full revaluation, as opposed to delta or delta-gamma approximations

III. A correlation matrix is constructed using historical scenarios

IV. It particularly suits new products that may not have a long time series of historical data available

II and III

I and IV

All of the above

94. All else remaining the same, an increase in the joint probability of default between two obligors causes the default correlation between the two to:

Increase

Decrease

Stay the same

Cannot be determined from the given information

95. For a loan portfolio, expected losses are charged against:

Economic capital

Regulatory capital

Credit reserves

Economic credit capital

96. Under the contingent claims approach to measuring credit risk, which of the following factors does NOT affect credit risk:

Cash flows of the firm

Maturity of the debt

Volatility of the firm's asset values

Leverage in the capital structure

97. Which of the following are likely to be useful to a risk manager analyzing liquidity risk for an international bank?

I. Information on liquidity mismatches

II. Funding concentration

III. Lending concentration

IV. A report on illiquid assets

I and II

III and IV

I, II, III and IV

I, II and IV

98. If A and B be two debt securities, which of the following is true?

The probability of simultaneous default of A and B is greatest when their default correlation is +1

The probability of simultaneous default of A and B is not dependent upon their default correlations, but on their marginal probabilities of default

The probability of simultaneous default of A and B is greatest when their default correlation is negative

The probability of simultaneous default of A and B is greatest when their default correlation is 0

99. Which of the following is true in relation to a Contingency Funding Plan (CFP)?

I. A CFP is like a disaster recovery plan to deal with a liquidity crisis

II. A CFP should consider market stress conditions, but failures of payment systems are not relevant as they fall under the remit of operational risk

III. Reputational damage may result if the market finds out that a firm has had to execute its

CFP

IV. Sources of emergency funding considered in the CFP should include the role of the central bank as the lender of last resort

I and III

I, II and III

II and IV

100. Stress testing is useful for which of the following purposes:

I. For providing the risk manager with an intuitive check on his risk estimates

II. Providing a means of communicating risk implications using plausible scenarios that can be easily explained to a non-technical audience

III. Guarding against major errors in the form of model risk

IV. Complying with the requirements of Basel II.

I, II, III and IV

I, II and IV

II and IV

IV only

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101. Which of the following would not be a part of the principal component structure of the term structure of futures prices?

Curvature component

Trend component

Parallel component

Tilt component

102. Loss provisioning is intended to cover:

Unexpected losses

Losses in excess of unexpected losses

Both expected and unexpected losses

Expected losses

103. For a security with a daily standard deviation of 2%, calculate the 10-day VaR at the 95% confidence level. Assume expected daily returns to be nil.

0.02

0.104

0.1471

None of the above.

104. If and are the expected rate of return and volatility of an asset whose prices are log-normally distributed, and a random drawing from a standard normal distribution, we can simulate the asset's returns using the expressions:

- + .

+ .

/ .

- .

105. Which of the following statements is true?

I. It is sufficient to ensure that a parent entity has sufficient excess liquidity to cover a liquidity shortfall for a subsidiary.

II. If a parent entity has a shortfall of liquidity, it can always rely upon any excess liquidity that its foreign subsidiaries might have.

III. Wholesale funding sources for a bank refer to stable sources of funding provided by the central bank.

IV. Funding diversification refers to diversification of both funding sources and funding tenors.

III and IV

I and III

I and IV

106. The loss severity distribution for operational risk loss events is generally modeled by which of the following distributions:

I. the lognormal distribution

II. The gamma density function

III. Generalized hyperbolic distributions

IV. Lognormal mixtures

II and III

I, II and III

I, II, III and IV

I and III

107. Which of the following cannot be used as an internal credit rating model to assess an individual borrower:

Distance to default model

Probit model

Logit model

Altman's Z-score

108. If the 1-day VaR of a portfolio is $25m, what is the 10-day VaR for the portfolio?

$7.906m $79.06m

$250m

Cannot be determined without the confidence level being specified

109. Which of the following statements are true:

I. Top down approaches help focus management attention on the frequency and severity of loss events, while bottom up approaches do not.

II. Top down approaches rely upon high level data while bottom up approaches need firm specific risk data to estimate risk.

III. Scenario analysis can help capture both qualitative and quantitative dimensions of operational risk.

III only

II and III

I only

II only

110. The results of 'desk-level' stress tests cannot be added together to arrive at institution wide estimates because:

Desk-level stress tests tend to ignore higher level risks that are relevant to the institution but completely outside the control of the individual desks.

Desk-level stress tests focus on desk specific risks that may be minor or irrelevant in the larger scheme at the institution level.

Desk-level stress tests tend to focus on extreme movements in risk parameters (such as volatility) without considering economy wide scenarios that may represent more realistic and consistent situations for the institution.

All of the above

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111. Regulatory arbitrage refers to:

the practice of transferring business and profits to jurisdictions (such as those in other countries) to avoid or reduce capital adequacy requirements

the practice of structuring a financial institution's business as a bank holding company to arbitrage the differing capital and credit rating requirements for different business lines

the practice of investing and financing decisions being driven by associated regulatory capital requirements as opposed to the true underlying economics of these decisions

All of the above

112. According to the Basel II standard, which of the following conditions must be satisfied before a bank can use 'mark-to-model' for securities in its trading book?

I. Marking-to-market is not possible

II. Market inputs for the model should be sourced in line with market prices

III. The model should have been created by the front office

IV. The model should be subject to periodic review to determine the accuracy of its performance

I, II and IV

II and III

I, II, III and IV

III and IV

113. For identical mean and variance, which of the following distribution assumptions will provide a higher estimate of VaR at a high level of confidence?

A distribution with kurtosis = 8

A distribution with kurtosis = 0

A distribution with kurtosis = 2

A distribution with kurtosis = 3

114. A stock's volatility under EWMA is estimated at 3.5% on a day its price is $10. The next day, the price moves to $11.

What is the EWMA estimate of the volatility the next day? Assume the persistence parameter = 0.93.

0.0421

0.0224

0.0429

0.0018

115. CORRECT TEXT

A Monte Carlo simulation based VaR can be effectively used in which of the following cases:

When returns data cannot be analytically modeled

When returns are discontinuous or display large jumps

Where analytical methods are too complex to effectively use

All of the above

116. Which of the following statements are true:

I. The three pillars under Basel II are market risk, credit risk and operational risk.

II. Basel II is an improvement over Basel I by increasing the risk sensitivity of the minimum capital requirements.

III. Basel II encourages disclosure of capital levels and risks

III only

I only

I and II

II and III

117. Which of the following are measures of liquidity risk

I. Liquidity Coverage Ratio

II. Net Stable Funding Ratio

III. Book Value to Share Price

IV. Earnings Per Share

III and IV

I and II

II and III

I and IV

118. Which of the following is not a credit event under ISDA definitions?

Restructuring

Obligation accelerations

Rating downgrade

Failure to pay

119. An equity manager holds a portfolio valued at $10m which has a beta of 1.1. He believes the market may see a dip in the coming weeks and wishes to eliminate his market exposure temporarily. Market index futures are available and the current futures notional on these is $50,000 per contract.

Which of the following represents the best strategy for the manager to hedge his risk according to his views?

Sell 200 futures contracts

Buy 220 futures contracts

Sell 220 futures contracts

Liquidate his portfolio as soon as possible

120. Which of the following best describes Altman's Z-score

A calculation of default probabilities

A regression of probability of survival against a given set of factors

A numerical computation based upon accounting ratios

A standardized z based upon the normal distribution

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121. Which of the following are considered asset based credit enhancements?

I. Collateral

II. Credit default swaps

III. Close out netting arrangements

IV. Cash reserves

II and IV

I, II and IV

I and IV

I and III

122. When considering a request for a loan from a retail customer, which of the following factors is relevant for a bank to consider:

The other retail loans in its portfolio

The credit worthiness of the retail customer

The contribution this new loan would bring to total portfolio risk

All of the above

123. Which of the following statements is true:

I. When averaging quantiles of two Pareto distributions, the quantiles of the averaged models are equal to the geometric average of the quantiles of the original models based upon the number of data items in each original model.

II. When modeling severity distributions, we can only use distributions which have fewer parameters than the number of datapoints we are modeling from.

III. If an internal loss data based model covers the same risks as a scenario based model, they can can be combined using the weighted average of their parameters.

IV If an internal loss model and a scenario based model address different risks, the models can be combined by taking their sums.

II and III

III and IV

I and II

All statements are true

124. The largest 10 losses over a 250 day observation period are as follows. Calculate the expected shortfall at a 98% confidence level:

20m

19m

19m

17m

16m

13m

11m

10m

9m

9m

19.5

14.3

18.2

125. Which of the following describes rating transition matrices published by credit rating firms:

Expected ex-ante frequencies of migration from one credit rating to another over a one year period

Probabilities of default for each credit rating class

Probabilities of ratings transition from one rating to another for a given set of issuers

Realized frequencies of migration from one credit rating to another over a one year period

126. Under the KMV Moody's approach to calculating expecting default frequencies (EDF), firms' default on obligations is likely when:

expected asset values one year hence are below total liabilities

asset values reach a level below short term debt

asset values reach a level below total liabilities

asset values reach a level between short term debt and total liabilities

127. If the default hazard rate for a company is 10%, and the spread on its bonds over the risk free rate is 800 bps, what is the expected recovery rate?

40.00%

20.00%

8.00%

0.00%

128. Which of the following are considered counterparty based credit enhancements?

I. Collateral

II. Credit default swaps

III. Close out netting arrangements

IV. Guarantees

I and III

II and IV

I, II and IV

I and IV

129. The probability of default of a security over a 1 year period is 3%.

What is the probability that it would have defaulted within 6 months?

98.49%

3.00%

1.51%

17.32%

130. Which of the following best describes economic capital?

Economic capital is the amount of regulatory capital mandated for financial institutions in the OECD countries

Economic capital is the amount of regulatory capital that minimizes the cost of capital for firm

Economic capital reflects the amount of capital required to maintain a firm's target credit rating

Economic capital is a form of provision for market risk losses should adverse conditions arise

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131. Which of the following will be a loss not covered by operational risk as defined under Basel II?

Earthquakes

Fat finger losses

Systems failure

Strategic planning

132. In respect of operational risk capital calculations, the Basel II accord recommends a confidence level and time horizon of:

99.9% confidence level over a 10 day time horizon

99% confidence level over a 10 year time horizon

99% confidence level over a 1 year time horizon

99.9% confidence level over a 1 year time horizon

133. Which of the following statements are true:

I. Stress testing, if exhaustive, can replace traditional risk management tools such as value-at-risk (VaR)

II. Stress tests can be particularly useful in identifying risks with new products

III. Stress testing is distinct from a bank's ICAAP carried out periodically

IV. Stress testing is a powerful communication tool that can convey risks to decisionmakers in an organization

I, II and III

I and III

II and IV

All of the above

134. CORRECT TEXT

The standard error of a Monte Carlo simulation is:

Zero

The same as that for a lognormal distribution

Proportional to the inverse of the square root of the sample size

None of the above

135. Which of the following is not a consideration in determining the liquidity needs of a firm (as opposed to determining the time horizon for liquidity risk)?

Speed with which new equity can be issued to the owners

Collateral

Off balance sheet items

The firm's business model

136. Changes in which of the following do not affect the expected default frequencies (EDF) under the KMV Moody's approach to credit risk?

Changes in the debt level

Changes in the risk free rate

Changes in asset volatility

Changes in the firm's market capitalization

137. Which of the following is NOT an approach used to allocate economic capital to underlying business units:

Stand alone economic capital contributions

Marginal economic capital contributions

Fixed ratio economic capital contributions

Incremental economic capital contributions

138. Which of the following is closest to the description of a 'risk functional'?

A risk functional is the distribution that models the severity of a risk

A risk functional is a model distribution that is an approximation of the true loss distribution of a risk

Risk functional refers to the Kolmogorov-Smirnov distance

A risk functional assigns a penalty value for the difference between a model distribution and a risk's severity distribution

139. The Basel framework does not permit which of the following Units of Measure (UoM) for operational risk modeling:

I. UoM based on legal entity

II. UoM based on event type

III. UoM based on geography

IV. UoM based on line of business

I and IV

III only

II only

None of the above

140. Which of the following is not an approach proposed by the Basel II framework to compute

operational risk capital?

Basic indicator approach

Factor based approach

Standardized approach

Advanced measurement approach

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141. Which of the following steps are required for computing the aggregate distribution for a UoM for operational risk once loss frequency and severity curves have been estimated:

I. Simulate number of losses based on the frequency distribution

II. Simulate the dollar value of the losses from the severity distribution

III. Simulate random number from the copula used to model dependence between the UoMs

IV. Compute dependent losses from aggregate distribution curves

I and II

III and IV

None of the above

All of the above

142. Which of the following are valid approaches to leveraging external loss data for modeling operational risks:

I. Both internal and external losses can be fitted with distributions, and a weighted average approach using these distributions is relied upon for capital calculations.

II. External loss data is used to inform scenario modeling.

III. External loss data is combined with internal loss data points, and distributions fitted to the combined data set.

IV. External loss data is used to replace internal loss data points to create a higher quality data set to fit distributions.

I, II and III

I and III

II and IV

All of the above

143. If the duration of a bond yielding 10% is 6 years, the volatility of the underlying interest rates 5% per annum, what is the 10-day VaR at 99% confidence of a bond position comprising just this bond with a value of $10m? Assume there are 250 days in a year.

233000

139800

984000

279600

144. Which of the following is a valid approach to determining the magnitude of a shock for a given risk factor as part of a historical stress testing exercise?

I. Determine the maximum peak-to-trough change in the risk factor over the defined period of the historical event

II. Determine the minimum peak-to-trough change in the risk factor over the defined period of the historical event

III. Determine the total change in the risk factor between the start date and the finish date of the event regardless of peaks and troughs in between

IV. Determine the maximum single day change in the risk factor and multiply by the number of days covered by the stress event

II and IV

I and III

IV only

I, II and IV

Risk Management Practices 8008 Valid Questions

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