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8005 Sample Questions Answers

Questions 4

[According to the PRMIA study guide for Exam 1, Simple Exotics and Convertible Bonds have been excluded from the syllabus. You may choose to ignore this question. It appears here solely because the Handbook continues to have these chapters.]

Which of the following describes a 'quanto' instrument:

Options:

A.

options on options

B.

any two asset hybrid instrument

C.

correlation products

D.

any two asset instrument in which one asset is a foreign currency

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Questions 5

Which of the following is true for the actuarial approach to credit risk modeling (CreditRisk+):

Options:

A.

Default correlations between obligors are accounted for using a multivariate normal model

B.

The number of defaults is modeled using a binomial distribution where the number of defaults are considered discrete events

C.

The approach considers only default risk, and ignores the risk to portfolio value from credit downgrades

D.

The approach is based upon historical rating transition matrices

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Questions 6

If F be the face value of a firm's debt, V the value of its assets and E the market value of equity, then according to the option pricing approach a default on debt occurs when:

Options:

A.

F > V

B.

V < E

C.

F < V

D.

F - E < V

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Questions 7

If the CHF/USD spot and 3 month (91 days) forward rates are 1.1763 and 1.1652, what is the annualized forward premium or discount?

Options:

A.

3.73% premium

B.

0.94% premium

C.

0.94% discount

D.

3.785% discount

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Questions 8

What is the indefinite integral of the function f(x) = ln(x), where ln(x) denotes the natural logarithmic function?

Options:

A.

x ln(x) - x

B.

ln(x) - x

C.

1/x

D.

exp(x)

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Questions 9

Backwardation can happen in markets where

Options:

A.

convenience yield is less than the total interest and carrying costs

B.

convenience yields are greater than the total interest, storage and other carrying costs

C.

convenience yields are positive

D.

convenience yields are zero

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Questions 10

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?

Options:

A.

Incremental capital for the business unit in consideration

B.

Proportionate capital for the business unit in consideration

C.

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

D.

Marginal capital for the business unit in consideration

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Questions 11

Which of the following statements is true

I. If no loss data is available, good quality scenarios can be used to model operational risk

II. Scenario data can be mixed with observed loss data for modeling severity and frequency estimates

III. Severity estimates should not be created by fitting models to scenario generated loss data points alone

IV. Scenario assessments should only be used as modifiers to ILD or ELD severity models.

Options:

A.

I

B.

I and II

C.

III and IV

D.

All statements are true

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Questions 12

Which of the following should NOT be part of the Risk Management Infrastructure?

Options:

A.

Define the organization's definition of risk management as articulated by the Board in clear and uncertain terms

B.

Include financial risk management, compliance and external reporting and, to the extent that resources allow, should exclude legal or accounting

C.

Be independently staffed and report to an employee who is on the Executive Committee (Operating Committee) but who is NOT a business unit leader

D.

Review continually the application of the Principles of Good Governance to the Risk Management Infrastructure, financial accounting and reporting infrastructure and the organization as a whole

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Questions 13

An operational risk analyst models the occurrence of computer failures as a Poisson process with an arrival rate of 2 events per year. According to this model, what is the probability of zero failures in one year?

Options:

A.

0.02

B.

0.14

C.

0.25

D.

0.50

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Questions 14

The condition where futures prices of an underlying asset are lower than cash (spot) prices is known as:

Options:

A.

Backwardation

B.

Contango

C.

Reverse backwardation

D.

Conchacha

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Questions 15

John Smith wants to run for election to the Board of Directors of PRMIA. To be nominated, he needs:

Options:

A.

The backing of three other members

B.

To go through a screening process conducted by the Nominations Committee

C.

The backing of 6% of local members

D.

The backing of five other members and to be serving on at least one PRMIA Committee

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Questions 16

A bank holds a portfolio of residential mortgages. An increase in the volatility of mortgage interest rates leads to:

Options:

A.

A decrease in the value of the mortgage portfolio

B.

An increase in the value of the mortgage portfolio

C.

An increase in the duration of the mortgage portfolio

D.

Both duration and value of the mortgage portfolio stay unchanged

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Questions 17

The hedging strategy employed by MG Refining & Marketing has been called:

Options:

A.

Dynamic hedging

B.

A stacked hedge

C.

A differential hedge

D.

Nothing because MG Refining & Marketing did not hedge its position

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Questions 18

An asset manager is of the view that interest rates are currently high and can only decline over the coming 5 years. He has a choice of investing in the following four instruments, each of which matures in 5 years. Given his perspective, what would be the most suitable investment for the asset manager? Assume a flat yield curve.

Options:

A.

A floating rate note with annual resets, with the first year's rate yielding 5%

B.

A 15% coupon bond with an yield to maturity of 5%

C.

A zero coupon bond with an yield to maturity of 5%

D.

A 10% coupon bond with an yield to maturity of 5%

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Questions 19

A biased coin has a probability of getting heads equal to 0.3. If the coin is tossed 4 times, what is the probability of getting heads at least two times?

Options:

A.

0.7367

B.

0.3483

C.

0.2646

D.

None of these

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Questions 20

If the exchange rate for USD/AUD is 0.6831 and the rate for SEK/USD is 8.1329, what is the SEK/AUD cross rate?

Options:

A.

7.4498

B.

0.0840

C.

5.5556

D.

11.9059

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Questions 21

Which of the following regarding Orange County is FALSE?

Options:

A.

Bob Citron engaged in risky strategies to benefit personally

B.

Bob Citron tried to "ride the yield curve"

C.

Bob Citron heavily leveraged his positions using repos

D.

Citron's losses were eventually exposed by massive margin calls

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Questions 22

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?

Options:

A.

2.57

B.

2.23

C.

3

D.

Cannot be determined

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Questions 23

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 24

Which of the following is a cause of model risk in risk management?

Options:

A.

Programming errors

B.

Misspecification of the model

C.

Incorrect parameter estimation

D.

All of the above

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Questions 25

[According to the PRMIA study guide for Exam 1, Simple Exotics and Convertible Bonds have been excluded from the syllabus. You may choose to ignore this question. It appears here solely because the Handbook continues to have these chapters.]

The use of numerical pricing methods over analytical methods for valuing exotic options is resorted to allow for which of the following reasons:

I. Efficient valuation

II. Allowing for stochastic volatility

III. Accommodating discontinuous asset prices

IV. Allowing for complex payoffs

Options:

A.

I, II and III

B.

II, III and IV

C.

I, II, III and IV

D.

I

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Questions 26

The sum of the stand alone economic capital of all the business units of a bank is:

Options:

A.

less than the economic capital for the firm as a whole

B.

more than the economic capital for the firm as a whole

C.

equal to the economic capital for the firm as a whole

D.

unrelated to the economic capital for the firm as a whole

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Questions 27

Evaluate the derivative of exp(x2 + 2x + 1) at the point x = -1

Options:

A.

0.5

B.

0

C.

1

D.

2

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Questions 28

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.

Options:

A.

II and III

B.

III and IV

C.

I and II

D.

All statements are true

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Questions 29

Which of the following is part of the Group of 30 Report's market risk and stress testing recommendations?

Options:

A.

To be consistent with regulatory capital measures, 10-day holding periods should be standardized for VaR reporting

B.

Historic simulations are not effective methods of stress testing

C.

Stress tests should incorporate changes in liquidity

D.

Market risk VaR measures should be multiplied by 3 to get to a stress test figure, as long as the VaR model has been back-tested

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Questions 30

In a portfolio there are 7 bonds: 2 AAA Corporate bonds, 2 AAA Agency bonds, 1 AA Corporate and 2 AA Agency bonds. By an unexplained characteristic the probability of any specific AAA bond outperforming the others is twice the probability of any specific AA bond outperforming the others. What is the probability that an AA bond or a Corporate bond outperforms all of the others?

Options:

A.

5/7

B.

8/11

C.

6/11

D.

None of these

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Questions 31

Barings failed to recognize that Nick Leeson's losses were increasing because:

Options:

A.

Leeson ran the front office

B.

The London office did not ask for any reports

C.

Leeson hid his trades in a suspense account

D.

The margin report sent to London did not show the true margin needs

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Questions 32

Conditional default probabilities modeled under CreditPortfolio view use a:

Options:

A.

Power function

B.

Altman's z-score

C.

Probit function

D.

Logit function

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Questions 33

I have a portfolio of two stocks. The weights are equal. The one volatility is 30% while the other is 40%. The minimum and maximum possible values of the volatility of my portfolio are:

Options:

A.

30% and 40%

B.

5% and 35%

C.

10% and 40%

D.

10% and 70%

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Questions 34

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

Options:

A.

None of the above

B.

III and IV

C.

I and II

D.

All of the above

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Questions 35

With respect to the Purpose of Professional Standards, in the event of any difference in standards between local laws/rules and those of PRMIA, members must

Options:

A.

use their best judgment

B.

abide by the applicable laws, rules, and regulations of PRMIA and any government and/or regulatory bodies

C.

comply with the higher standard under all circumstances

D.

refer the matter to their supervisor

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Questions 36

Taisei Fire and Marine Insurance Co

Options:

A.

relied almost entirely on Fortress Re's management team for information on the risks in its portfolio

B.

relied on the information it received from other members of the reinsurance pool to manage its risks

C.

had a full understanding from Fortress Re of the risks in the pool

D.

had a full understanding from other members of the pool of the pool's liabilities

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Questions 37

The two components of risk in a commodities futures portfolio are:

Options:

A.

Changes in the convenience yield and storage costs

B.

Changes in spot prices and carrying costs, also called commodity lease rates

C.

Changes in interest rates and spot prices

D.

The risk from change in basis and interest rates

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Questions 38

Finite insurance is reinsurance which

Options:

A.

transfers only a limited amount of risk at the usual reinsurance price

B.

transfers the total risk at less cost than traditional reinsurance

C.

transfers the total risk at the usual reinsurance price

D.

transfers only a limited amount of risk at less cost than traditional reinsurance

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Questions 39

Which of the following best characterize the problems that developed at Bankers Trust?

Options:

A.

Volume growth at the expense of margin

B.

Excessive reliance on volatile and sophisticated derivatives

C.

A failure to try to protect their clients' interests

D.

Over exposure to the property market

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Questions 40

If EV be the expected value of a firm's assets in a year, and DP be the 'default point' per the KMV approach to credit risk, andσbe the standard deviation of future asset returns, then the distance-to-default is given by:

A)

B)

C)

D)

Options:

A.

Option A

B.

Option B

C.

Option C

D.

Option D

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Questions 41

National Australia Bank and Barings cases are similar in that:

Options:

A.

Losses kept increasing while rogue trader(s) hid their positions

B.

The back offices had inadequate procedures

C.

Both A and B

D.

None of the above

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Questions 42

The definition of operational risk per Basel II includes which of the following:

I. Risk of loss resulting from inadequate or failed internal processes, people and systems or from external events

II. Legal risk

III. Strategic risk

IV. Reputational risk

Options:

A.

I, II, III and IV

B.

II and III

C.

I and III

D.

I and II

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Questions 43

The financial intermediary services provided by Fannie Mae and Freddie Mac were designed to

Options:

A.

Offer loans directly to the consumer

B.

Compete directly with banks in selling mortgaged to would-be home owners

C.

Repackage mortgage loans made by banks and sell them on to investors as asset backedsecurities

D.

Buy mortgage-backed loans for banks and keep them all on their books, using them as collateral for the US government to borrow

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Questions 44

Let A be a squarematrix and denote its determinant by x. Then the determinant of A transposed is:

Options:

A.

x -1

B.

x

C.

ln(x)

D.

-x

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Questions 45

Which of the following was not considered to be a positive outcome of the Northern Rock Case Study?

Options:

A.

The role of the UK government and the possible underwriting of risks by tax-payers, and the general question of Moral Hazard

B.

The reform of the Deposit Protection Scheme because of its internal inconsistencies

C.

It emphasised the importance of effective governance arrangements within financial firms

D.

The original successful business model had not stress tested sufficiently for the incidence of Low Probability, High Impact incidents

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Questions 46

Employees shall be remunerated adequately for the roles that they perform, where 'adequately' is defined

Options:

A.

as being the market norm for similarly situated personnel in competitive organizations

B.

using external references and benchmarks, and in a framework which is consistent with the type of risk-taking behavior expected of employees

C.

using the risk reward profile for each business line in the organization

D.

as commensurate with policies to attract and retain high income / revenue earners

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Questions 47

A 2-year bond has a yield of 5% and an annual coupon of 5%. What is the Modified Duration of the bond?

Options:

A.

2

B.

1.95

C.

1.86

D.

1.75

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Questions 48

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

Options:

A.

III only

B.

I only

C.

I and II

D.

II and III

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Questions 49

Evaluate the derivative of ln(1+ x2) at the point x = 1

Options:

A.

0.5

B.

0

C.

1

D.

2

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Questions 50

Under the basic indicator approach to determining operational risk capital, operational risk capital isequal to:

Options:

A.

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

B.

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

C.

25% of the average gross income (considering only the positive years) of the past three years

D.

15% of the average gross income of the past five years

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Questions 51

Determine the price of a 3 year bond paying a 5% coupon. The 1,2 and 3 year spot rates are 5%, 6% and 7% respectively. Assume a face value of $100.

Options:

A.

$ 94.92

B.

$ 106.00

C.

$ 100.00

D.

$93.92

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Questions 52

MGRM's losses due to "stacking" started to increase when

Options:

A.

the oil market went from contango to backwardation

B.

the oil market went from backwardation to contango

C.

the oil market went from weak backwardation to strong backwardation

D.

the oil market went from strong contango to weak contango

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Questions 53

When considering the performance of Northern Rock within its peer group of banks, which of the following is not correct?

Options:

A.

Only a few months previously it had reported record profits.

B.

The quality of its' assets was never in question.

C.

For many years it was regarded as a star-performer in the financial markets.

D.

Its' loan loss record was poor by industry standards.

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Questions 54

[According to the PRMIA study guide for Exam 1, Simple Exotics and Convertible Bonds have been excluded from the syllabus. You may choose to ignore this question. It appears here solely because the Handbook continues to have these chapters.]

The price of an 'out-of-the-money' convertible security is affected by:

I. Changes in interest rates

II. Changes in the issuer's credit risk

III. Changes in the issuer's share price

IV. Changes in the implied volatility of the issuer's share price

Options:

A.

I and II

B.

III and IV

C.

I, III and IV

D.

All of the above

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Questions 55

The "Renewing the Dream" program signed into law by President George W Bush in 2002 was designed to

Options:

A.

Recapitalise Fannie Mae and Freddie Mac with US$2.4 billion of additional capital to ensure they weathered the risks associated with any future downturn in the housing markets

B.

Provide grants of US$800 million to help home buyers with down-payment and closing costs

C.

Allow risky, high-cost loans to be credited towards affordable housing goals

D.

Provide tax credits of nearly US$2.4 billion over the next 5 years to investors and builders who developed affordable single-family housing in poor and distressed areas

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Questions 56

Which of the following statements is true:

I. Confidence levels for economic capital calculations are driven by desired credit ratings

II. Loss distributions for operational risk are affected more by the severity distribution than the frequency distribution

III. The Advanced Measurement Approach (AMA) referred to in the Basel II standard is a type of a Loss Distribution Approach (LDA)

IV. The loss distribution for operational risk under the LDA (Loss Distribution Approach) is estimated by separately estimating the frequency and severity distributions.

Options:

A.

I and II

B.

I, III and IV

C.

I, II and IV

D.

III and IV

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Questions 57

[According to the PRMIA study guide for Exam 1, Simple Exotics and Convertible Bonds have been excluded from the syllabus. You may choose to ignore this question. It appears here solely because the Handbook continues to have these chapters.]

Which of the following statements are true for a contingent premium option:

I. They are also called 'pay-later' options

II. Premiums are due only if the option expires in the money

III. They are a combination of a vanilla option and an appropriate number of cash-or-nothing options

IV. They are preferred because the premiums are always less than those on equivalent vanilla options

Options:

A.

II, III and IV

B.

I, II and III

C.

I, II, III and IV

D.

I, II and IV

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Questions 58

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

Options:

A.

a fixed percentage of the latest gross income of the bank

B.

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

C.

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

D.

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

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Questions 59

A PRMIA member is offered a highly paid work assignment on the condition that some aspects of assignment are not to be done according to PRMIA standards.

What should they do?

Options:

A.

Perform the assignment, noting in the final report the standards to which the assignment was done

B.

Accept the assignment, produce and deliver two reports according to both standards

C.

Accept the assignment, and prior to doing any work, report the conflict of interest to the organization's compliance department

D.

The PRMIA member should place the integrity of the risk management profession and users of risk management above their own personal interests, and refuse the work

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Questions 60

The steps which the US Treasury Department and the Federal Reserve took in July 2008 to boost confidence in both Fannie Mae and Freddie Mac did not include which one of the following:

Options:

A.

Access to the Federal Reserve discount window

B.

Removing the prohibition on the Treasury Department to buy both companies stock

C.

Restricting the sale of new Fannie Mae and Freddie Mac securities only to US citizens

D.

Reiterating their belief that both companies played a central role in the US housing finance system

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Questions 61

At what point x does the function f(x) = x3 - 4x2 + 1 have a local minimum?

Options:

A.

-0.666666667

B.

0

C.

2.66667

D.

2

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Questions 62

Which loss event type is the failure to timely deliver collateral classified as under the Basel II framework?

Options:

A.

Clients, products and business practices

B.

External fraud

C.

Information security

D.

Execution, Delivery & Process Management

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Questions 63

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 64

Which of the following are PRMIA Governance Principles?

I. Sufficiency of Key Resources and Process

II. State of the Art Risk Management Technology

III. Ongoing Education and Discernment

IV. Sufficiency of Key Competencies

Options:

A.

I, II and IV only

B.

I and II only

C.

I, III and IV only

D.

All of these are PRMIA Governance Principles

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Questions 65

A risk manager is asked to analyze the credit risk of a convertible bond. The risk manager has never analyzed convertible bonds, but does have significant expertise in credit risk. The risk manager accepts the assignment, finds a paper on the subject through the PRMIA web site and copies the method used there. The risk manager completes the assignment and delivers a report to his or her direct supervisor and the supervisor is quite pleased.

According to the PRMIA Standards of Best Practice, Conduct and Ethics (Code of Conduct), this was acceptable behavior if the following conditions were met:

I. The risk manager disclosed the lack of knowledge about convertible bonds

II. The methodology employed is disclosed and explained

III. The report was just to be used for analysis and not in practice

IV. The risk manager was sure of his/her understanding of the paper found on the web

Options:

A.

I and II

B.

I, II and IV

C.

I, II and III

D.

I only

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Questions 66

Which of the following risks and reasons justify the use of scenario analysis in operational risk modeling:

I. Risks for which no internal loss data is available

II. Risks that are foreseeable but have no precedent, internally or externally

III. Risks for which objective assessments can be made by experts

IV. Risks that are known to exist, but for which no reliable external or internal losses can be analyzed

V. Reducing the complexity of having to fit statistical models to internal and external loss data

VI. Managing the capital estimation process as to produce estimates in line with management's desired capital buffers.

Options:

A.

I, II and III

B.

I, II, III and IV

C.

V

D.

All of the above

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Questions 67

The correlation between two asset returns is 0.5. What is the largest eigenvalue of their correlationmatrix?

Options:

A.

0.5

B.

1

C.

1.5

D.

None of the above

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Questions 68

Several clients, including Procter and Gamble took legal action against Bankers Trust, claiming Bankers Trust

Options:

A.

sold them derivative products without properly advising them of the relevant risks

B.

did not honour its contractual obligations to pay

C.

was involved in accounting fraud

D.

hid profits

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Questions 69

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%

Options:

A.

I and III

B.

I, III and IV

C.

III

D.

I

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Questions 70

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

Options:

A.

I and IV

B.

III only

C.

II only

D.

None of the above

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Questions 71

LIBOR is determined by the:

Options:

A.

LIFFE

B.

EUREX

C.

FSA

D.

BBA

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Questions 72

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

Options:

A.

I, II, III and IV

B.

II and III

C.

I, II and III

D.

I and II

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Questions 73

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.

higher than 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 74

Under the standardized approach to calculating operational risk capital, how many business lines are a bank's activities divided into per Basel II?

Options:

A.

7

B.

15

C.

8

D.

12

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Questions 75

The gamma in a commodity futures contract is:

Options:

A.

zero

B.

always negative

C.

parabolic

D.

dependent upon the convexity

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Questions 76

Which of the following was NOT a factor in the National Australia Bank case?

Options:

A.

Rogue traders

B.

Improper or insufficient Board-level communication regarding the importance of risk management and oversight

C.

Inadequate back office procedures

D.

Money laundering using foreign exchange trades for political leaders

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Questions 77

In respect of operational risk capital calculations, the Basel II accord recommends a confidence level and 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 78

The rate of dividend on a stock goes up. What is the effect on the price of a call option on this stock?

Options:

A.

It may affect the call value either way depending upon the risk-free rate

B.

It decreases the value of the call

C.

It increases the value of the call

D.

It does not affect the value of the call

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Questions 79

Every covariance matrix must be positive semi-definite. If it were not then:

Options:

A.

Some portfolios could have a negative variance

B.

One or more of its eigenvalues would be negative

C.

There would be no Cholesky decomposition matrix

D.

All the above statements are true

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Questions 80

What would be the consequences of a model of economic risk capital calculation that weighs all loans equally regardless of the credit rating of the counterparty?

I. Create an incentive to lend to the riskiest borrowers

II. Create an incentive to lend to the safest borrowers

III. Overstate economic capital requirements

IV. Understate economic capital requirements

Options:

A.

III only

B.

I and IV

C.

II and III

D.

I only

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Questions 81

What was the main risk scenario on the Metallgesellschaft trading strategy?

Options:

A.

Realized losses on short-term contracts against unrealized gains on the long-run contract

B.

The final price of the underlying being higher than the initial price

C.

The initial price of the underlying being higher than the final price

D.

The short-term price of the underlying being higher than the long-run contract

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Questions 82

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 number of 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 83

Barings Bank and Orange County have many similarities. Which of the following is NOT a similarity?

Options:

A.

Both relied on a star manger, supposedly in a low risk business.

B.

Both losses grew over time, but were not discovered by management until too late.

C.

Both traded in illiquid and obscure markets that were easy to manipulate.

D.

Both losses were eventually exposed by massive margin calls.

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Questions 84

According to the Group of 30 Report, deriving aggregate potential credit exposure for a counterparty by adding up the potential exposure of multiple transactions:

Options:

A.

Gives an accurate result in most cases

B.

Captures portfolio effects but not tenor differences

C.

Can easily reflect the impact of netting

D.

Overstates exposure in most cases

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Questions 85

The Financial Accounting and Reporting Infrastructure of any organization must:

I. Accurately represent the corporation's current and known financial condition in a timely manner

II. Only use off-balance sheet transactions which have a legitimate economic, tax, risk transfer or risk mitigating purpose

III. Provide a detailed description of the Risk Management Infrastructure in the organization's Annual Report to Shareholders

IV. Provide an auditable Annual Statement of Compliance with the Board's publicly stated Standards of Corporate Governance to the Board and Audit Committee

Options:

A.

I, II and III only

B.

I, III and IV only

C.

I and III only

D.

All of these are expected of the Financial Accounting and Reporting Infrastructure

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Questions 86

Which of the following is a measure of the level of capital that an institution needs to hold in order to maintain a desired credit rating?

Options:

A.

Shareholders' equity

B.

Economic capital

C.

Regulatory capital

D.

Book value

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Questions 87

The Options Theoretic approach to calculating economic capital considers the value of capital as being equivalent to a call option with a strike price equal to:

Options:

A.

The notional value of the debt

B.

The market value of the debt

C.

The value of the firm

D.

The value of the assets

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Questions 88

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

Options:

A.

Earthquakes

B.

Fat finger losses

C.

Systems failure

D.

Strategic planning

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Questions 89

TMFI's internal procedures and management were

Options:

A.

fully aware of the uninsured risks Fortress Re were taking

B.

absolutely unaware of their uninsured liabilities

C.

aware that they had some uninsured liabilities but thought they had enough capital to withstand any uninsured losses

D.

None of the above

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Questions 90

Which of the following statements is true:

I. In a Dutch auction, every successful bidder pays the same price regardless of their bid

II. In a standard auction, every successful bidder pays the same price regardless of their bid

III. Dutch auctions start high and progressive bids are lower

IV. Standard auctions start high and progressive bids are lower

Options:

A.

II and IV

B.

I, II and IV

C.

I and III

D.

I and II

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Questions 91

Which of the following best describes a 'when-issued' market?

Options:

A.

where members of the syndicate bringing a bond issue to the market are obliged to not undercut the issue price till the first settlement date

B.

The when-issued market is one where dealers trade in a security after its price has been set but before the bonds are available for delivery

C.

The when-issued market is one where securities are traded on the OTC forward markets prior to their issue

D.

The when-issues market is one where the lead manager agreed to buy an entire bond issue at an agreed price, and having done so may sell them onwards to institutional or other investors

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Questions 92

Buying an option on a futures contract requires:

Options:

A.

both initial margin and option premium to be paid upfront at the time of entering into the contract

B.

the option premium to be paid upfront and futures margins will become due if the option is exercised

C.

only option premiums to be paid upfront and any daily mark-to-market P&L

D.

only initial margin to be paid at the time of the option exercise

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Questions 93

The early 2003 trading strategy of China Aviation oil was

Options:

A.

to buy calls and sell puts

B.

to buy puts and sell calls

C.

to sell puts and buy calls

D.

to sell calls and buy puts

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Questions 94

The VaR of a portfolio at the 99% confidence level is $250,000 when mean return is assumed to be zero. If the assumption of zero returns is changed to an assumption of returns of $10,000, what is the revised VaR?

Options:

A.

260000

B.

240000

C.

273260

D.

226740

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Questions 95

PwC concluded that the accounting policy adopted by China Aviation Oil was incorrect because it

Options:

A.

only regarded the intrinsic value (i.e. the difference between the strike price and the forward price of the underlying commodity) as the fair value of its options

B.

took into account both the intrinsic value and the time value

C.

only took into account the time value of the option (which includes recognizing the time left to maturity of the option, the volatility of the spot price of the underlying commodity, interest rates and other factors)

D.

used neither the intrinsic value nor the time value

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Questions 96

Which of the following are valid reasons that explain an upward sloping yield curve?

I. The market expects interest rates to increase in the future

II. The market expects interest rates to decline in the future

III. Investors prize liquidity over illiquidity

IV. Investors believe the economy is likely to enter recession

Options:

A.

I, III and IV

B.

II and III

C.

II and IV

D.

I and III

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Questions 97

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 98

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

Options:

A.

Zero

B.

Lower

C.

Higher

D.

Unaffected by differences in frequency or severity

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Questions 99

As a PRMIA member, you have certain responsibilities. Among these are the requirement(s) to:

Options:

A.

Vote in Board elections

B.

Attend at least one PRMIA chapter meeting per year

C.

Adhere to the PRMIA Standards of Best Practice, Conduct and Ethics

D.

All of the above

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Questions 100

A risk manager has just completed a risk assessment project. The report has been given to the risk manager's direct supervisor, who refuses to escalate the material issues raised in the report. Further, the direct supervisor edits the report to remove the section describing the material risk, who then submits it to the firm's Executive Committee.

According to the PRMIA Standards of Best Practice, Conduct and Ethics (Code of Conduct), which of the following actions is most appropriate:

Options:

A.

The risk manager has submitted the report to their direct supervisor and their obligation ends at this point, nothing further should be done

B.

The risk manager should attempt to resolve the conflict with the direct supervisor, but if that does not work, they should contact the Whistle-Blowing Hotline of the organization. If no such hot-line is in place, they should contact the PRMIA Ethics Committee

C.

Escalation of the issue is against the Code of Conduct because one should respect the administrative structure of the organization

D.

If the risk manager deems it appropriate, he / she should send a copy of the original report to the CEO

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Questions 101

The rate of dividend on a stock goes up. What is the effect on the price of a put option on this stock?

Options:

A.

It may affect the put value either way depending upon the risk-free rate

B.

It increases the value of the put

C.

It decreases the value of the put

D.

It does not affect the value of the put

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Questions 102

According to Basel II's definition of operational loss event types, losses due to acts by third parties intended to defraud, misappropriate property or circumvent the law are classified as:

Options:

A.

Internal fraud

B.

Execution delivery and system failure

C.

External fraud

D.

Third party fraud

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Questions 103

When modeling operational risk using separate distributions for loss frequency and loss severity, which of the following is true?

Options:

A.

Loss severity and loss frequency are considered independent

B.

Loss severity and loss frequency distributions are considered as a bivariate model with positive correlation

C.

Loss severity and loss frequency are modeled using the same units of measurement

D.

Loss severity and loss frequency are modeled as conditional probabilities

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Questions 104

For a back office function processing 15,000 transactions a day with an error rate of 10 basis points, what is the annual expected loss frequency (assume 250 days in a year)

Options:

A.

3750

B.

0.06

C.

37500

D.

375

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Questions 105

If the CHF/USD spot rate is 1.1010 and the one year forward is 1.1040, what is the annualized forward premium or discount, and the one year swap rate?

Options:

A.

An annualized forward discount of 30 basis points and a swap rate of 27 points

B.

An annualized forward premium of 30 basis points and a swap rate of 27 points

C.

An annualized forward premium of 27 basis points and a swap rate of 30 points

D.

An annualized forward discount of 27 basis points and a swap rate of 30 points

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Exam Code: 8005
Exam Name: Associate PRM Exam English
Last Update: Jul 12, 2024
Questions: 352
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