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The PRMIA 8011 exam covers a wide range of topics, including credit analysis and credit risk assessment, credit risk models, credit derivatives, counterparty risk management, and legal and regulatory aspects of credit risk management. It is designed to equip participants with the knowledge and skills required to identify, measure, and manage credit and counterparty risks in a systematic and effective manner.
PRMIA 8011 (Credit and Counterparty Manager (CCRM) Certificate) Certification Exam is designed to test an individual's knowledge and understanding of credit and counterparty risk management. 8011 exam is particularly relevant for professionals working in the financial industry, including banks, insurance companies, investment firms, and regulatory agencies.
PRMIA 8011 Credit and Counterparty Manager (CCRM) Certificate Exam is a globally recognized certification that validates a candidate's knowledge and skills in credit and counterparty risk management. 8011 exam focuses on concepts such as credit risk analysis, credit derivatives, and counterparty risk management, including stress testing, collateral management, and default management. The credit and counterparty risk management function has become increasingly important given the growing complexity of financial markets and the need for effective risk management programs.
NEW QUESTION # 153
Which of the following is additive, ie equal to the sum of its components
- A. Specific VaR
- B. Component VaR
- C. Incremental VaR
- D. Conditional VaR
Answer: B
Explanation:
Component VaR measures the proportion of total VaR that can be allocated to each asset in the portfolio. It is based upon the covariance matrix multiplied by the weights, and each row represents the component VaR for the asset in question. Since the total of such a matrix is the total VaR, component VaR is additive. Component VaR is used to assess the contribution of each asset in the portfolio to total risk and has the useful property of being additive so some sense can be made of the contribution of each asset to total risk.
Incremental VaR, conditional VaR and VaR are sub-additive by definition, and therefore not the correct answer.
NEW QUESTION # 154
Which of the following statements are true:
I. Stress tests should consider simultaneous pressures in funding and asset markets, and the impact of a reduction in liquidity II. Judging the effectiveness of risk mitigation techniques is not a part of stress testing III. A reverse stress test is useful for discovering hidden vulnerabilities and inconsistencies in hedging strategies IV. Reputational risk, which is explicitly excluded from the definition of operational risk under Basel II, should still be considered as part of stress tests.
- A. I, III and IV
- B. All of the above
- C. I and III
- D. II and IV
Answer: A
Explanation:
All the statements in this question are directly based on the principles for effective stress testing as laid down in the BCBS document on stress testing issued in May 2009. Statement 1 is correct and is an almost verbatim reproduction of principle 10 as laid down in that document. Statement II is incorrect as it is contrary to principle 11 laid down in the same document. Statement III is correct as discovering hidden vulnerabilities and inconsistencies in hedging strategies is one of the objectives of reverse stress tests. Similarly, even though reputational risk is not really covered under any risk category under Basel II (as it is not a part of either market, credit or operational risk), principle 14of this paper requires the mitigation of spill-over effects on market confidence of reputational risk when thinking about stress tests.
Thus statements I, III and IV are correct and statement II is incorrect.
NEW QUESTION # 155
Company A issues bonds with a face value of $100m, sold at issuance at $98. Bank B holds $10m in face of these bonds acquired at a price of $70. What is Bank B's exposure to the debt issued by Company A?
- A. $6.86m
- B. $10m
- C. $7m
- D. $9.8m
Answer: C
Explanation:
Bank B's exposure is measured by the price it paid for the bonds, which in this case is $7m ($10m x 70/100).
Hence Choice 'c' represents the correct answer.
(Note that the question is asking for 'exposure' and not the legal claim in the event of default. The legal claim in the event of default would be the full notional of $10m. ) The initial issue price and issue size are irrelevant.
NEW QUESTION # 156
Which of the following can be used to reduce credit exposures to a counterparty:
I. Netting arrangements
II. Collateral requirements
III. Offsetting trades with other counterparties
IV. Credit default swaps
- A. I and II
- B. I, II and IV
- C. III and IV
- D. I, II, III and IV
Answer: B
Explanation:
Offsetting trades with other counterparties will not reduce credit exposure to a given counterparty. All other choices represent means of reducing credit risk. Therefore Choice 'c' is the correct answer.
NEW QUESTION # 157
CreditRisk+, the actuarial model for calculating portfolio credit risk, is based upon:
- A. the log-normal distribution
- B. the exponential distribution
- C. the normal distribution
- D. the Poisson distribution
Answer: D
Explanation:
CreditRisk+ treats default as a binary event, ignoring downgrade risk, capital structures of individual firms in the portfolio or the causes of default. It uses a single parameter,#or the mean default rate, and derives credit risk based upon the Poisson distribution. Therefore Choice 'c' is the correct answer.
NEW QUESTION # 158
Which of the following credit risk models considers debt as including a put option on the firm's assets to assess credit risk?
- A. The contingent claims approach
- B. The actuarial approach
- C. CreditPortfolio View
- D. The CreditMetrics approach
Answer: A
Explanation:
The correct answer is Choice 'c'. The following is a brief description of the major approaches available to model credit risk, and the analysis that underlies them:
1. CreditMetrics: based on the credit migration framework. Considers the probability of migration to other credit ratings and the impact of such migrations on portfolio value.
2. CreditPortfolio View: similar to CreditMetrics, but adds the impact of the business cycle to the evaluation.
3. The contingent claims approach: uses option theory by considering a debt as a put option on the assets of the firm.
4. KMV's EDF (expected default frequency) based approach: relies on EDFs and distance to default as a measure of credit risk.
5. CreditRisk+: Also called the 'actuarial approach', considers default as a binary event that either happens or does not happen. This approach does not consider the loss of value from deterioration in credit quality (unless the deterioration implies default).
NEW QUESTION # 159
Which of the following techniques is used to generate multivariate normal random numbers that are correlated?
- A. Simulation
- B. Markov process
- C. Pseudo random number generator
- D. Cholesky decomposition of the correlation matrix
Answer: D
Explanation:
A PRNG (pseudo random number generators of the kind included in statistical packages and Excel) is used to generate random numbers that are not correlated with each other, ie they are random. A Markov process is a stochastic model that depends only upon its current state. Simulation underlies many financial calculations.
None of these directly relate to generating correlated multivariate normal random numbers. That job is done utilizing a Cholesky decomposition of the correlation matrix.
Specifically, a Cholesky decomposition involves the factorization of the correlation matrix into a lower triangular matrix (a square matrix all of whose entries above the diagonal are zero) and its transpose. This can then be combined with random numbers to generate a set of correlated normal random numbers. This technique is used for calculating Monte Carlo VaR.
NEW QUESTION # 160
If a borrower has a default probability of 12% over one year, what is the probability of default over a month?
- A. 1.00%
- B. 12.00%
- C. 1.06%
- D. 2.00%
Answer: C
Explanation:
Let the probability of default over a month be p. Therefore the probability of survival at the end of 12 months would be (1 - p)^12. Since the one year probability of default is 12%, we know that the probability of survival is 88%. Putting (1 - p)^12 = 88% and solving for p, we get p = 1.06%. Therefore Choice 'd' is the correct answer.
NEW QUESTION # 161
The estimate of historical VaR at 99% confidence based on a set of data with 100 observations will end up being:
- A. the extrapolated returns of the last 1.64 observations
- B. the worst single observation in the data set
- C. the weighted average of the top 2.33 observations
- D. None of the above
Answer: B
Explanation:
The VaR in this case will be the top quintile of observations. In this case, since there are exactly 100 observations, this would mean the worst return would become the VaR. Therefore Choice 'b' is the correct answer. Choice 'a' and Choice 'c' make no sense. This highlights that at higher confidence levels, fewer and fewer observations impact the VaR if we are using historical simulation based VaR.
NEW QUESTION # 162
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
- A. I and III
- B. I, II and III
- C. IV
- D. II and IV
Answer: A
Explanation:
A CFP is indeed a disaster recovery plan to deal with a liquidity crisis. Therefore statement I is correct.
A CFP should consider market stress conditions, including wide scale failures of payment and settlement systems. Statement II is not correct.
It is true that reputational damage may result if a firm has to activate its CFP - therefore the plan should consider internal and external communications, the timing of information release and the groups within the firm who need to know about the implementation of the plan. Reputational damage can only make any existing liquidity problems worse. Statement III is correct.
Sources of emergency funding should not include funding from the central bank - unless as part of a regular lending facility. Its role as a lender of last resort can not be considered in a CFP. Statement IV is incorrect.
Therefore only statements I and III are correct.
NEW QUESTION # 163
Which of the following are valid approaches for extreme value analysis given a dataset:
I. The Block Maxima approach
II. Least squares approach
III. Maximum likelihood approach
IV. Peak-over-thresholds approach
- A. II and III
- B. I and IV
- C. All of the above
- D. I, III and IV
Answer: B
Explanation:
For EVT, we use the block maxima or the peaks-over-threshold methods. These provide us the data points that can be fitted to a GEV distribution.
Least squares and maximum likelihood are methods that are used for curve fitting, and they have a variety of applications across risk management.
NEW QUESTION # 164
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
- A. I and II
- B. II and III
- C. I and IV
- D. III and IV
Answer: A
Explanation:
In December 2009 the BIS came out with a new consultative document on liquidity risk. Given the events of
2007 - 2009, it has been clear that a key characteristic of the financial crisis was the inaccurate and ineffective management of liquidity risk The paper two separate but complementary objectives in respect of liquidity risk management: The first objective relates to the short-term liquidity risk profile of institution, and the second objective is to promote resiliency over longer-term time horizons. The paper identifies the following two ratios - you should be aware of these - though I am not sure if these will show up in the PRMIA exam:
1. Liquidity Coverage Ratio addresses the ability of an institution to survive an acute liquidity risk stress scenario lasting one month. It is calculated as follows:
Liquidity Coverage Ratio = Stock of high quality liquid assets/Net cash outflows over a 30-day time period
2. Net Stable Funding Ratio has been developed to capture structural issues related to funding choices.
Net Stable Funding Ratio = Available amount of stable funding/Required amount of stable funding Both ratios should be equal to or greater than 1. The statement contains detailed definitions of what is included or excluded from each of the terms used in the calculations for each of the ratios. In addition, the standard also describes the what the 'acute' scenario should include (things such as a 3 notch credit downgrade, reduction in retail deposits etc) Therefore Choice 'b' is the correct answer. Book Value to Share Price and Earnings Per Share are accounting measures unrelated to liquidity.
NEW QUESTION # 165
Under the actuarial (or CreditRisk+) based modeling of defaults, what is the probability of 4 defaults in a retail portfolio where the number of expected defaults is 2?
- A. 4%
- B. 18%
- C. 9%
- D. 2%
Answer: C
Explanation:
The actuarial or CreditRisk+ model considers default as an 'end of game' event modeled by a Poisson distribution. The annual number of defaults is a stochastic variable with a mean of#and standard deviation equal to ##.
The probability of n defaults is given by (#^n e^-#) /n!, and therefore in this case is equal to (=2^4 * exp(-2))
/FACT(4)) = 0.0902.
Note that CreditRisk+ is the same methodology as the actuarial approach, and requires using the Poisson distribution.
NEW QUESTION # 166
Which of the following are valid techniques used when performing stress testing based on hypothetical test scenarios:
I. Modifying the covariance matrix by changing asset correlations
II. Specifying hypothetical shocks
III. Sensitivity analysis based on changes in selected risk factors
IV. Evaluating systemic liquidity risks
- A. I and II
- B. II, III and IV
- C. I, II and III
- D. I, II, III and IV
Answer: A
Explanation:
Each of these represent valid techniques for performing stress testing and building stress scenarios. Therefore d is the correct answer. In practice, elements of each of these techniques is used depending upon the portfolio and the exact situation.
NEW QUESTION # 167
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?
- A. The notional value of the derivatives contract should be used for loan equivalence calculations.
- B. Since the derivatives contract has a negative current replacement value, exposure will be zero.
- C. The credit exposure will be a given quintile of the expected distribution of the value of the derivatives contract in the future.
- D. The current exposure can be used for loan equivalence calculations as that is an unbiased proxy for the future value.
Answer: C
Explanation:
The current exposure is negative, so there is no immediate credit exposure. However, since the price of the derivative is volatile, we can reasonably expect the value to be greater than zero sometime in the future. This is a stochastic variable which will have a distribution, and not just a unique value, in the future that will represent the credit exposure. Since there is no unique value, a conservative approach is to pick a quintile of the distribution, and use that as the future value of the derivative contract, with the assurance that the probability of the credit exposure exceeding that quintile is known and has been consciously selected. This number can then be converted to a loan equivalent amount for credit risk purposes. Therefore Choice 'b' is the correct answer. Choice 'a', Choice 'd' and Choice 'c' are incorrect for these reasons.
NEW QUESTION # 168
Which of the following statements are correct:
I. A training set is a set of data used to create a model, while a control set is a set of data is used to prove that the model actually works II. Cleansing, aggregating or ensuring data integrity is a task for the IT department, and is not a risk manager's responsibility III. Lack of information on the quality of underlying securities and assets was a major cause of the collapse in the CDO markets during the credit crisis that started in 2007 IV. The problem of lack of historical data can be addressed reasonably satisfactorily by using analytical approaches
- A. I and III
- B. All of the above
- C. I, III and IV
- D. II and IV
Answer: A
Explanation:
Statement I is correct. Data is often divided into two sets - a 'training set' that is used to create and fine-tune the model while the 'control set' is used to prove that the model works on sample data. Back testing is then perfomed using actual data that becomes available over time, or may already be available as historical data.
Statement II is incorrect. A risk manager often spends a great deal of time in managing data, and ensuring that the data being used is accurate enough for the purpose it is being used for. A risk manager can expect to spend a good part of his or her team's time in cleansing data. While he or she can try to get the IT processes and systems to produce correct data in the first place so it requires minimal subsequent cleansing or validation, this task is likely to remain a key part of a risk manager's role for quite some time in the future given the challenges nearly all organizations face in managing risk data.
Statement III is correct. There was not enough granular data available on the underlying components of some of the derivative debt securities whose markets dried up during the crisis that began in 2007. This was because investors became increasingly unsure of what the value of these securities, such as CDOs was, leading to market seizure and firesale prices.
Statement IV is not correct. There is no easy solution to the lack of enough historical data, which is used to create as well as test models, and construct stress scenarios. Analytical approaches are not a good enough substitute for real market data. During the recent crisis, many instruments had rather short histories and there was not enough data available, and risk managers and portfolio managers relied upon analytical approaches to value and price them. Many of the assumptions that underpinned these approaches were untested in the real world and turned out to be incorrect.
Therefore Choice 'c' is the correct answer and the rest are incorrect.
NEW QUESTION # 169
As part of designing a reverse stress test, at what point should a bank's business plan be considered unviable (ie the point where it can be considered to have failed)?
- A. Where EBITDA for the year is forecast to be negative
- B. Where large known losses have been incurred on the bank's positions
- C. When the regulatory capital of the bank has been exhausted
- D. When the realization of risks leads market participants to lose confidence in the bank as a counterparty or a business worthy of funding
Answer: D
Explanation:
As part of a reverse stress test, a firm has to identify and assess the scenarios most likely to cause it to fail, or in other words using the language used by the FSA in the UK, for its current business plan to become unviable. A firm's business plan should be considered to become unviable at the point that crystallizing risks cause the market to lose confidence it it, with the consequence that counterparties and other stakeholders are unwilling to transact with it or provide capital to the firm and, where releant, that existing counterparties may seek to terminate their contracts. Recent experience suggests that this point is reached well before a firm's regulatory capital is exhausted.
Large known losses, or negative EBITDA (earnings before interest , tax, depreciation and amortization) may be indicators or contribute to the loss of confidence, but do not of themselves make the current business plan unviable. Therefore Choice 'd' is the correct answer.
NEW QUESTION # 170
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