Nov-2023 Pass PRMIA 8010 Exam in First Attempt Easily
Free 8010 Exam Files Downloaded Instantly 100% Dumps & Practice Exam
NEW QUESTION # 86
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:
- A. Lower
- B. Unaffected by differences in frequency or severity
- C. Higher
- D. Zero
Answer: A
Explanation:
Explanation
High frequency and low severity risks, for example the risks of fraud losses for a credit card issuer, may have high expected losses, but low unexpected losses. In other words, we can generally expect these losses to stay within a small expected and known range. The capital requirement will be the worst case losses at a given confidence level less expected losses, and in such cases this can be expected to be low.
On the other hand, medium severity medium frequency risks, such as the risks of unexpectedlegal claims,
'fat-finger' trading errors, will have low expected losses but a high level of unexpected losses. Thus the capital requirement for such risks will be high.
It is also worthwhile mentioning high severity and low frequency risks - for examplea rogue trader circumventing all controls and bringing the bank down, or a terrorist strike or natural disaster creating other losses - will probably have zero expected losses & high unexpected losses but only at very high levels of confidence. In other words, operational risk capital is unlikely to provide for such events and these would lie in the part of the tail that is not covered by most levels of confidence when calculating operational risk capital.
Note that risk capital is required for only unexpected losses as expected losses are to be borne by P&L reserves. Therefore the operational risk capital requirements for a low severity high frequency risk is likely to be low when compared to other risks that are lower frequency but higher severity.
Thus Choice 'c' is the correct answer.
NEW QUESTION # 87
If A and B be two debt securities, which of the following is true?
- A. The probability of simultaneous default of A and B is greatest when their default correlation is negative
- B. The probability of simultaneous default of A and B is greatest when their default correlation is +1
- C. The probability of simultaneous default of A and B is greatest when their default correlation is 0
- D. The probability of simultaneous default of Aand B is not dependent upon their default correlations, but on their marginal probabilities of default
Answer: B
Explanation:
Explanation
If the marginal probability of default of two securities A and B is P(A) and P(B), then the probability of both of them defaulting together is affected by the default correlation between them. Marginal probability of default means the probability of default of each security on a standalone basis, ie, the probability of default of one security without considering the other security.
The relationship that expresses the probability of joint default of the two is given by the following expression:
It is easy to see that in a situation where the Default Correlation of A & B = 0, ie, the defaults are independent, the combined probability of default is P(A)*P(B), exactly what we would intuitively expect. Also in the other extreme case where the default correlation is equal to 1 and P(A) = P(B) = p, ie the securities behave in an identical way, the expression resolves to just p, which is what we would expect.
From the above relationship, it is clear that the probability of joint default of A and B is the greatest when default correlation between the two is equal to 1, ie the securities behave in an identical way. Therefore Choice
'a' is the correct answer.
NEW QUESTION # 88
Conditional default probabilities modeled under CreditPortfolio view use a:
- A. Power function
- B. Altman's z-score
- C. Probit function
- D. Logit function
Answer: D
Explanation:
Explanation
Conditional default probabilitiesare modeled as a logit function under CreditPortfolio view. That ensures the resulting probabilities are 'well behaved', ie take a value between 0 and 1. The probability may be expressed as
= 1/ (1 + exp(I)), where I is a country specific index taking various macro economic factors into account.
NEW QUESTION # 89
The generalized Pareto distribution, when used in the context of operational risk, is used to model:
- A. Average losses
- B. Expected losses
- C. Unexpected losses
- D. Tail events
Answer: D
Explanation:
Explanation
Some risk experts have suggested the use of extreme value theory to model tail risk or extreme events for operational risk. The generalized Pareto model or the Peaks-over-Threshold (POT) model are often used to model extreme value distributions, and therefore Choice 'a' is the correct answer.
NEW QUESTION # 90
For a FX forward contract, what would be the worst time for a counterparty to default (in terms of the maximum likely credit exposure)
- A. Indeterminate from the given information
- B. Right after inception
- C. At maturity
- D. Roughlythree-quarters of the way towards maturity
Answer: C
Explanation:
Explanation
With the passage of time, the range of possible values the FX contract can take increases. Therefore the maximumvalue of the contract, which is when the credit risk would be maximum, would be at maturity. (Note that this is different than an interest rate swap whose value at maturity approaches zero.) Therefore Choice 'a' is the correct answer and the others are incorrect.
NEW QUESTION # 91
According to the Basel framework, shareholders' equity and reserves are considered a part of:
- A. Tier 1 capital
- B. All of the above
- C. Tier 2 capital
- D. Tier 3 capital
Answer: A
Explanation:
Explanation
According to the Basel II framework, Tier 1 capital, also called core capital or basic equity, includes equity capital and disclosed reserves.
Tier 2 capital, also called supplementary capital, includes undisclosed reserves, revaluation reserves, general provisions/general loan-loss reserves, hybrid debt capital instruments and subordinated term debt.
Tier 3 capital, or short term subordinated debt, is intended only to cover market risk but only at the discretion of their national authority.
NEW QUESTION # 92
Under the KMV Moody's approach to calculating expectingdefault frequencies (EDF), firms' default on obligations is likely when:
- A. asset values reach a level between short term debt and total liabilities
- B. expected asset values one year hence are below total liabilities
- C. asset values reach a level below short term debt
- D. asset values reach a level below totalliabilities
Answer: A
Explanation:
Explanation
An observed fact that the KMV approach relies upon is that firms do not default when their liabilities exceed assets, but when asset values are somewhere between short term liabilities and the total liabilities. In fact, the
'default point' in the KMV methodology is defined as the short term debt plus half of the long term debt. The difference between expected value of the assets in one year and this 'default point', when expressed in terms of standard deviation of the asset values, is called the 'distance-to-default'.
Therefore Choice 'd' is the correct answer. The other choices are incorrect.
NEW QUESTION # 93
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?
- A. $750mm
- B. $200mm
- C. $600mm
- D. $250mm
Answer: A
Explanation:
Explanation
The current Basel rules for the basic VaR based charge formarket risk capital set market risk capital requirements as the maximum of the following two amounts:
1. 99%/10-day VaR,
2. Regulatory Multiplier x Average 99%/10-day VaR of the past 60 days
The 'regulatory multiplier' is a number between 3 and 4 (inclusive) calculated based on the number of 1% VaR exceedances in the previous 250 days, as determined by backtesting.
- If the number of exceedances is <= 4, then the regulatory multiplier is 3.
- If the number of exceedances is between 5 and 9, then the multiplier = 3 + 0.2*(N-4), where N is the number of exceedances.
- If the number of exceedances is >=10, then the multiplier is 4.
So you can see that in most normal situations the risk capital requirement will be dictated by the multiplier and the prior 60-dayaverage VaR, because the product of these two will almost often be greater than the current
99% VaR.
The correct answer therefore is = max(200mm, 3*250mm) = $750mm.
Interestingly, also note that a 99% VaR should statistically be exceeded 1%*250 days = 2.5times, which means if the bank's VaR model is performing as it should, it will still need to use a reg multiplier of 3.
NEW QUESTION # 94
In estimating credit exposure for a line of credit, it is usual to consider:
- A. the present value of the line of credit at the agreed rate of lending.
- B. only the value of credit exposure currently existing against the credit line as the exposure at default.
- C. the full value of the credit line to be the exposure at default as the borrower has an informational advantage that will lead them to borrow fully against the credit line at the time of default.
- D. a fixed fraction of the line of credit to be the exposure at default even though the currently drawn amount is quite different from such a fraction.
Answer: D
Explanation:
Explanation
Choice'a' is the correct answer. Exposures such as those to a line of credit of which only a part (or none) may be drawn at the time of assessment present a difficulty when attempting to quantify credit risk. It is not correct to take the entire amount of the line as the exposure at default, and likewise the current exposure is likely to be too aggressively low a number to consider.
While the borrower has an information advantage in that he would be aware of the deterioration in credit standing before the bank and would probably draw cash prior to default, it is unlikely that the entire amount of the line of credit would be drawn in all cases. In some cases, none may be drawn. In other cases, the bank would become aware of the situation and curtail or cancel access to the credit line in a timely fashion.
Therefore a fixed proportion of existing credit lines is considered a reasonable approximation of the exposure at default against credit lines.
NEW QUESTION # 95
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 theportfolio 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
- A. I and III
- B. All of the above
- C. I, III and IV
- D. II and IV
Answer: A
Explanation:
Explanation
Monte Carlo VaR computations generally include the following steps:
1. Generate multivariate normal random numbers, based upon thecorrelation matrix of the risk factors
2. Based upon these correlated random numbers, calculate the new level of the risk factor (eg, an index value, or interest rate)
3. Use the new level of the risk factor to revalue each of the underlying assets, and calculate the difference from the initial valuation of the portfolio. This is the portfolio P&L.
4. Use the portfolio P&L to estimate the desired percentile (eg, 99th percentile) to get and estimate of the VaR.
Monte Carlo based VaR calculations rely upon full portfolio revaluations, as opposed to delta/delta-gamma approximations. As a result, they are also computationally more intensive. Because they are not limited by the range of instruments and the properties they can cover, they can capture a wide rangeof distributional assumptions for asset returns. They also tend to provide more robust estimates for the tail, including portions of the tail that lie beyond the VaR cutoff.
Therefore I and III are true, and the other two are not.
NEW QUESTION # 96
Whichof 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. Acorrelation matrix is constructed using historical scenarios IV. It particularly suits new products that may not have a long time series of historical data available
- A. II and III
- B. A
- C. All of the above
- D. II
- E. I and IV
Answer: B
Explanation:
Explanation
Historical Simulation VaR is conceptually very straightforward: actual prices as seen during the observation period (1 year, 2 years, or other) become the 'scenarios' forming the basis of the valuation of the portfolio. For each scenario, full revaluationis performed, and a P&L data set becomes available from which the desired loss quantile can be extracted.
Historical simulation is based upon actually seen prices over a selected historical period, therefore no distributional assumptions are required. Thedata is what the data is, and is the distribution. Statement I is therefore not correct.
It uses full revaluation for each historical scenario, therefore statement II is correct.
Since the prices are taken from actual historical observations, a correlationmatrix is not required at all.
Statement III is therefore incorrect (it would be true for Monte Carlo and parametric Var).
Historical simulation VaR suffers from the limitation that if enough representative data points are no available during the historical observation period from which the scenarios are drawn, the results would be inaccurate.
This is likely to be the case for new products. Therefore Statement IV is incorrect.
NEW QUESTION # 97
Which of the following is a cause ofmodel risk in risk management?
- A. All of the above
- B. Programming errors
- C. Incorrect parameter estimation
- D. Misspecification of the model
Answer: A
Explanation:
Explanation
Model risk is the risk that a model built for estimating a variable will produce erroneous estimates. Model risk is caused by a number of factors, including:
a) Misspecifying the model: For example, using a normal distribution when it is not justified.
b) Model misuse: For example, using a model built to estimate bond prices to estimate equity prices c) Parameter estimation errors: In particular, parameters that are subjectively determined can be subject to significant parameter estimation errors d) Programming errors: Errors in coding the model as part of computer implementation may not be detected by end users e) Data errors: Errors in data used for building the model may also introduce model risk Therefore the correct answer is d, as all the choices are a source of model risk.
NEW QUESTION # 98
Changes in which of the following do not affect the expected default frequencies (EDF) under the KMV Moody's approach to credit risk?
- A. Changes in the firm's market capitalization
- B. Changes in the risk free rate
- C. Changes in asset volatility
- D. Changes in the debt level
Answer: B
Explanation:
Explanation
EDFs are derived from the distance to default. The distance to default isthe number of standard deviations that expected asset values are away from the default point, which itself is defined as short term debt plus half of the long term debt. Therefore debt levels affect the EDF. Similarly, asset values are estimated using equity prices.
Therefore market capitalization affects EDF calculations. Asset volatilities are the standard deviation that form a place in the denominator in the distance to default calculations. Therefore asset volatility affects EDF too.
The risk free rateis not directly factored in any of these calculations (except of course, one could argue that the level of interest rates may impact equity values or the discounted values of future cash flows, but that is a second order effect). Therefore Choice 'b' is the correct answer.
NEW QUESTION # 99
Which of the following techniques is used to generate multivariate normal random numbers that are correlated?
- A. Markov process
- B. Pseudo random number generator
- C. Cholesky decomposition of the correlation matrix
- D. Simulation
Answer: C
Explanation:
Explanation
A PRNG (pseudorandom 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 # 100
Which of the following is true in relation to the application of Extreme Value Theory when applied to operational risk measurement?
I. EVT focuses on extreme losses that are generally not covered by standard distribution assumptions II. EVT considers the distribution of losses in the tails III. The Peaks-over-thresholds (POT) and the generalized Pareto distributions are used to model extreme value distributions IV. EVT is concerned with average losses beyond a given level of confidence
- A. II and III
- B. I, II and IV
- C. I, II and III
- D. I and IV
Answer: C
Explanation:
Explanation
EVT, when used in the context of operational risk measurement, focuses on tail events and attempts to build a distribution of losses beyond what is covered by VaR. Statements I, II and II are correct. Statement IV describes conditional VaR (CVAR) andnot EVT.
Choice 'c' is the correct answer.
NEW QUESTION # 101
......
PRMIA 8010: Operational Risk Manager (ORM) Exam is an instrumental step for those who wish to become experts in operational risk management. 8010 exam is designed to test the knowledge, skills and expertise of individuals in this specialized field. Those who pass 8010 exam are well-equipped to foresee potential operational risks and how to identify them before they cause harm to businesses.
Free Exam Updates 8010 dumps with test Engine Practice: https://www.dumpsreview.com/8010-exam-dumps-review.html
Updated Verified 8010 dumps Q&As - 100% Pass Guaranteed: https://drive.google.com/open?id=1Um8Ea5DvX9Ln4fHSkHQlTVVIlVBn7NQZ
