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8010 Sample Questions Answers

Questions 4

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

Options:

A.

I and IV

B.

II and III

C.

I, II and III

D.

I, II and IV

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Questions 5

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

Options:

A.

Higher

B.

Lower

C.

Zero

D.

Unaffected by differences in frequency or severity

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Questions 6

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

Options:

A.

Cash flows of the firm

B.

Maturity of the debt

C.

Volatility of the firm's asset values

D.

Leverage in the capital structure

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Questions 7

If X represents a matrix with ratings transition probabilities for one year, the transition probabilities for 3 years are given by the matrix:

Options:

A.

P ^ (-3)

B.

P x P x P

C.

3 [P ^ (-1)]

D.

3 [P]

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Questions 8

If the full notional value of a debt portfolio is $100m, its expected value in a year is $85m, and the worst value of the portfolio in one year's time at 99% confidence level is $60m, then what is the credit VaR?

Options:

A.

$40m

B.

$25m

C.

$60m

D.

$15m

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Questions 9

Under the CreditPortfolio View model of credit risk, the conditional probability of default will be:

Options:

A.

lower than the unconditional probability of default in an economic expansion

B.

higherthan the unconditional probability of default in an economic expansion

C.

lower than the unconditional probability of default in an economic contraction

D.

the same as the unconditional probability of default in an economic expansion

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Questions 10

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

Options:

A.

Closeout netting

B.

Chapter 11

C.

Payment netting

D.

Multilateral netting

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Questions 11

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%. Theprobability of both loans defaulting together is 1%. Calculate the expected loss on the portfolio.

Options:

A.

500000

B.

250000

C.

1000000

D.

240000

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Questions 12

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 onthe 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

Options:

A.

None of the above

B.

III and IV

C.

I and II

D.

All of the above

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Questions 13

Which of the following statements is true:

I. Expected credit losses are charged to the unit's P&L while unexpected losses hit risk capital reserves.

II. Credit portfolio loss distributions are symmetrical

III. For a bank holding $10m in face of a defaulted debt that it acquired for $2m, the bank's legal claim in the bankruptcy court will be $10m.

IV. Thelegal claim in bankruptcy court for an over the counter derivatives contract will be the notional value of the contract.

Options:

A.

I and III

B.

I, II and IV

C.

III and IV

D.

II and IV

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Questions 14

Which of the following statements are true:

I. The set of UoMs used for frequency and severity modeling should be identical

II. UoMs can be grouped together into larger combined UoMs using judgment based on the knowledge of the business

III. UoMs can be grouped together into combined UoMs using statistical techniques

IV. One may use separate sets of UoMs for frequency and severity modeling

Options:

A.

I, II and III

B.

IV only

C.

II, III and IV

D.

All of the above

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Questions 15

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

Options:

A.

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

B.

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

C.

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

D.

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

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Questions 16

Which of the following are valid methods for selecting an appropriate model from the model space for severity estimation:

I. Cross-validation method

II. Bootstrap method

III. Complexity penalty method

IV. Maximum likelihood estimation method

Options:

A.

II and III

B.

I, II and III

C.

I and IV

D.

All of the above

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Questions 17

Which of the following does not affect the credit risk facing a lender institution?

Options:

A.

The state of the economy

B.

The applicability or otherwise of mark tomarket accounting to the institution

C.

Credit ratings of individual borrowers

D.

The degree of geographical or sectoral concentration in the loan book

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Questions 18

If P be the transition matrix for 1 year, how can we find the transition matrix for 4 months?

Options:

A.

By calculating the cube root of P

B.

By numerically calculating a matrix M such that M x M x M is equal toP

C.

By dividing P by 3

D.

By calculating the matrix P x P x P

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Questions 19

When building a operational loss distribution by combining a loss frequency distribution and a loss severity distribution, it is assumed that:

I. The severity of losses is conditional upon the numberof loss events

II. The frequency of losses is independent from the severity of the losses

III. Both the frequency and severity of loss events are dependent upon the state of internal controls in the bank

Options:

A.

I, II and III

B.

II

C.

II and III

D.

I and II

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Questions 20

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

Options:

A.

I

B.

I & II

C.

II

D.

Neither statement is true

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Questions 21

The standalone economic capital estimates for the three business units of a bank are $100, $200 and $150 respectively. What is the combined economic capital for the bank, assuming the risks of the three business units are perfectly correlated?

Options:

A.

450

B.

269

C.

21

D.

72500

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Questions 22

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?

Options:

A.

98.49%

B.

3.00%

C.

1.51%

D.

17.32%

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Questions 23

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

Options:

A.

I, II and IV

B.

I and IV

C.

II and III

D.

All of the above

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Questions 24

Under the credit migration approach to assessing portfolio credit risk, which of the following are needed to generate adistribution of future portfolio values?

Options:

A.

The forward yield curve

B.

A specified risk horizon

C.

A rating migration matrix

D.

All of the above

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Questions 25

Which of the following statements is true:

I. Recovery rate assumptions can be easily made fairly accurately given past data available from credit rating agencies.

II. Recovery rate assumptions are difficult to make given the effect of the business cycle, nature of the industry and multiple other factors difficult to model.

III. The standard deviation of observed recovery rates is generally very high, making any estimate likely to differ significantly from realized recovery rates.

IV. Estimation errors for recovery rates are not a concern as they are not directionally biased and will cancel each other out over time.

Options:

A.

II and IV

B.

I, II and IV

C.

III and IV

D.

II and III

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Questions 26

In respect of operational risk capital calculations, the Basel II accord recommends a confidence leveland time horizon of:

Options:

A.

99.9% confidence level over a 10 day time horizon

B.

99% confidence level over a 10 year time horizon

C.

99% confidence level over a 1 year time horizon

D.

99.9% confidence level over a 1 year time horizon

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Questions 27

Which of the following formulae correctly describes Component VaR. (p refers to the portfolio, and i is the i-th constituent of the portfolio. MVaR means Marginal VaR, and other symbols have their usual meanings.)

Options:

A.

III

B.

II

C.

I

D.

I and II

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Questions 28

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

Options:

A.

I and III

B.

II and IV

C.

I, III and IV

D.

All of the above

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Questions 29

If the annual default hazard rate for a borrower is 10%, what is the probability that there is no default at the end of 5 years?

Options:

A.

39.35%

B.

50.00%

C.

59.05%

D.

60.65%

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Questions 30

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?

Options:

A.

Data completeness

B.

Data integrity

C.

Auditability

D.

Data extensibility

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Questions 31

Economic capital under the Earnings Volatility approach is calculated as:

Options:

A.

Expected earnings/Specific risk premium for the firm

B.

[Expected earningsless Earnings under the worst case scenario at a given confidence level]/Required rate of return for the firm

C.

Earnings under the worst case scenario at a given confidence level/Required rate of return for the firm

D.

Expected earnings/Required rate of return for the firm

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Questions 32

Which of the following data sources are expected to influence operational risk capital under the AMA:

I. Internal Loss Data (ILD)

II. External Loss Data (ELD)

III. Scenario Data (SD)

IV. Business Environment and Internal Control Factors (BEICF)

Options:

A.

I and II

B.

I, II and III only

C.

III only

D.

All of the above

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Questions 33

If the marginal probabilities of default for a corporate bond for years 1, 2 and 3 are 2%, 3% and 4% respectively, what is the cumulative probability of default at the end of year 3?

Options:

A.

8.74%

B.

9.58%

C.

9.00%

D.

91.26%

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Questions 34

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 atthe 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.

Options:

A.

I and III

B.

I, III and IV

C.

II andIV

D.

I and IV

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Questions 35

Which of the following statements is true in respect of a non financial manufacturing firm?

I. Market risk is not relevant to the manufacturing firm as it does not take proprietary positions

II. The firm faces market risks as an externality which it must bear and has no control over

III. Market risks can make a comparative assessment of profitability over time difficult

IV. Market risks for a manufacturing firm are not directionally biased and do not increase the overall risk of the firm as they net to zero over a long term time horizon

Options:

A.

III only

B.

IV only

C.

I and II

D.

III and IV

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Questions 36

There are three bonds in a diversified bond portfolio, whose default probabilities are independent of each other and equal to 1%, 2% and 3% respectively over a 1 year time horizon. Calculate the probability that none of the three bonds will default.

Options:

A.

94%

B.

0.11%

C.

0.0006%

D.

2%

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Exam Code: 8010
Exam Name: Operational Risk Manager (ORM) Exam
Last Update: Jun 30, 2022
Questions: 240
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