Most UptoDate PRMIA 8008 Exam Dumps PDF 2022
100% Free PRM Certification 8008 Dumps PDF Demo Cert Guide Cover
NEW QUESTION 58
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. I, II and III
- B. I, II and IV
- C. I and IV
- D. II and III
Answer: A
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) and not EVT.
Choice 'c' is the correct answer.
NEW QUESTION 59
When considering a request for a loan from a retail customer, which of the following factors is relevant for a bank to consider:
- A. The other retail loans in its portfolio
- B. All of the above
- C. The credit worthiness of the retail customer
- D. The contribution this new loan would bring to total portfolio risk
Answer: B
Explanation:
Explanation
The credit worthiness of the retail customer is certainly a factor for the bank to consider as it will need to price the loan to cover the expectation of default. At the same time, it will need to look at other loans in its portfolio as to avoid unacceptable concentration risk. A corollary of the same theme is that the bank will need to take a portfolio view of the loan request and consider its contribution to total portfolio risk. Therefore all the choices are appropriate considerations for the bank and Choice 'd' is the correct answer.
NEW QUESTION 60
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
- A. III only
- B. I only
- C. I and II
- D. II and III
Answer: D
Explanation:
Explanation
The three pillars under Basel II are minimum capital requirements, supervisory review process and market discipline. Therefore statement I is false. The other two statements are accurate. Therefore Choice 'd' is the correct answer.
NEW QUESTION 61
Under the internal ratings based approach for risk weighted assets, for which of the following parameters must each institution make internal estimates (as opposed to relying upon values determined by a national supervisor):
- A. Effective maturity
- B. Probability of default
- C. Exposure at default
- D. Loss given default
Answer: B
Explanation:
Explanation
Regardless of the approach being followed by a bank (ie, whether foundation IRB or advanced IRB), it must make its own estimates for the probability of default. Banks following the foundation IRB approach may use values set by the supervisor for the other three parameters, though those following the advanced IRB approach may use their own estimates for all four inputs. (This is also the difference between advanced IRB and the foundation IRB approaches.) Therefore Choice 'a' is the correct answer.
Also note the four difference elements that go as inputs to the internal ratings based approach in the choices provided.
NEW QUESTION 62
A risk analyst peforming PCA wishes to explain 80% of the variance. The first orthogonal factor has a volatility of 100, and the second 40, and the third 30. Assume there are no other factors. Which of the factors will be included in the final analysis?
- A. Insufficient information to answer the question
- B. First
- C. First and Second
- D. First, Second and Third
Answer: B
Explanation:
Explanation
The total variance of the system is 100^2 + 40^2 + 30^2 = 12500 (as variance = volatility squared). The first factor alone has a variance of 10,000, or 80%. Therefore only the first factor will be included in the final analysis, and the rest will be ignored.
Interestingly, this example highlights one of the limitations of PCA. Obviously, the second and third factors are material when considering volatility, though the effect of squaring them to get the variance makes them appear less important than they are.
NEW QUESTION 63
Which of the following steps are required for computing the aggregate distribution for a UoM for operational risk once loss frequency and severity curves have been estimated:
I. Simulate number of losses based on the frequency distribution
II. Simulate the dollar value of the losses from the severity distribution III. Simulate random number from the copula used to model dependence between the UoMs IV. Compute dependent losses from aggregate distribution curves
- A. None of the above
- B. I and II
- C. All of the above
- D. III and IV
Answer: B
Explanation:
Explanation
A recap would be in order here: calculating operational risk capital is a multi-step process.
First, we fit curves to estimate the parameters to our chosen distribution types for frequency (eg, Poisson), and severity (eg, lognormal). Note that these curves are fitted at the UoM level - which is the lowest level of granularity at which modeling is carried out. Since there are many UoMs, there are are many frequency and severity distributions. However what we are interested in is the loss distribution for the entire bank from which the 99.9th percentile loss can be calculated. From the multiple frequency and severity distributions we have calculated, this becomes a two step process:
- Step 1: Calculate the aggregate loss distribution for each UoM. Each loss distribution is based upon and underlying frequency and severity distribution.
- Step 2: Combine the multiple loss distributions after considering the dependence between the different UoMs. The 'dependence' recognizes that the various UoMs are not completely independent, ie the loss distributions are not additive, and that there is a sort of diversification benefit in the sense that not all types of losses can occur at once and the joint probabilities of the different losses make the sum less than the sum of the parts.
Step 1 requires simulating a number, say n, of the number of losses that occur in a given year from a frequency distribution. Then n losses are picked from the severity distribution, and the total loss for the year is a summation of these losses. This becomes one data point. This process of simulating the number of losses and then identifying that number of losses is carried out a large number of times to get the aggregate loss distribution for a UoM.
Step 2 requires taking the different loss distributions from Step 1 and combining them considering the dependence between the events. The correlations between the losses are described by a 'copula', and combined together mathematically to get a single loss distribution for the entire bank. This allows the 99.9th percentile loss to be calculated.
NEW QUESTION 64
What does a middle office do for a trading desk?
- A. Transaction data entry
- B. Reconciliations
- C. Operations
- D. Risk analysis
Answer: D
Explanation:
Explanation
The 'middle office' is a term used for the risk management function, therefore Choice 'd' is the correct answers.
The other functions describe what the 'back office' does (IT, accounting). The 'front office' includes the traders.
NEW QUESTION 65
Which of the following statements is true in respect of different approaches to calculating VaR?
I. Linear or parametric VaR does not take correlations into account
II. For large portfolios with little or no optionality or other non-linear attributes, parametric VaR is an efficient approach to calculating VaR III. For large portfolios with complex sources of risk and embedded optionalities, the full revaluation method of calculating VaR should be preferred IV. Delta normal local revaluation based VaR is suitable for fixed income and option portfolios only
- A. III only
- B. I, II, III and IV
- C. I and IV
- D. II and III
Answer: D
Explanation:
Explanation
This question is different in that it uses terminology you will not find in the PRMIA handbook. Yet it is important to understand these as there may be a question based on this slightly different terminology. (It is only the terminology that is different, the concepts are the same.) If you read the PRMIA handbook, there are three methods of calculating VaR: Analytical or parametric, historical simulation and Monte Carlo simulations. There is one more way of categorizing the methods of calculating VaR, and these are as follows:
1. Local valuation: This refers to analytical or parametric VaR. This relies upon a neat statistical formula to calculate VaR and assumes a normal distribution. It also relies upon a known covariance matrix between the different components of VaR. Local valuation based VaR is further subdivided into two types:
a. Linear VaR: Linear VaR is calculated assuming the portfolio is linear, and its value changes just based upon the delta of the portfolio. In such cases, once a change (eg, in stock values) is known, that change is multiplied by the delta alone to get the VaR. Second order effects, such as gamma or convexity are ignored.
b. Non-linear VaR: Non linear analytical VaR is calculated using both delta and the second derivative, ie gamma or the convexity. This is more accurate if the portfolio is non-linear.
The key thing about 'local revaluation' VaR is that it does not require us to reprice or completely value all instruments in the portfolio. All we have to know is the delta (or the gamma and convexity as well) and multiply that with the number of standard deviations of change in the risk factor that we are interested in. So if we are considering a bond, we don't have to recalculate the new value of the bond as we can just use the delta.
This can be a significant computational advantage for a large financial institution where there may be a large number of positions.
2. Full revaluation: This refers to a VaR method where the asset in question is fully repriced based on the new value of the risk factor - and this includes both historical and Monte Carlo based VaR methods.
Local revaluation, or analytical method based VaR is computationally easier to calculate, specially if based on just the delta-normal method (ie ignoring second order effects from convexity or gamma). But it will give incorrect results if the portfolio includes substantial non-linearity or other complexities. The full revaluation methods will always give the correct results, but they can be computationally difficult to arrive at.
Statement I is completely inaccurate - local revaluation methods do take correlations into account through the correlation or covariance matrices. Statement IV is false too - the 'delta normal' VaR refers to Var calculations based upon just the delta and do not account for the convexity or optionality. Statements II and III are correct.
Therefore Choice 'c' is the correct answer.
NEW QUESTION 66
If a borrower has a default probability of 12% over one year, what is the probability of default over a month?
- A. 1.06%
- B. 1.00%
- C. 2.00%
- D. 12.00%
Answer: A
Explanation:
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 67
Which of the following introduces model error when basing VaR on a normal distribution with a static mean and standard deviation?
- A. Autocorrelation of squared returns
- B. All of the above
- C. Volatility clustering
- D. Heavy tails
Answer: B
Explanation:
Explanation
When VaR is based on an assumption of normality with a static mean and volatility, it means anything that violates these assumptions will introduce model error. Volatility clustering implies a non-static volatility.
Heavy tails imply non-normality of the shape of the distribution. Autocorrelation of squared returns implies that returns are not independent and identically distributed. Therefore all of these introduce model error.
Choice 'd' is therefore the correct answer.
NEW QUESTION 68
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
- A. I
- B. Neither statement is true
- C. I & II
- D. II
Answer: C
Explanation:
Explanation
The correct answer is choice 'b'
Both statements are accurate. Basel II requires pooled probabilities of default to be applied to risk buckets that contain similar exposures. Also, stress testing is mandatory for both market and credit risk.
NEW QUESTION 69
For a 10 year interest rate swap, what would be the worst time for a counterparty to default (in terms of the maximum likely credit exposure)
- A. 7 years
- B. Right after inception
- C. 10 years
- D. 2 years
Answer: A
Explanation:
Explanation
Right after inception' is incorrect as the interest rate swap (IRS) would be valued at close to zero right after inception and the credit risk would be minimum. Choice 'a' (ie 10 years, at maturity) is incorrect as at maturity there would be no more cash flows to exchange, and the replacement value of the contract would again be close to zero.
Therefore the worst time for the counterparty to default is somewhere between inception and maturity - in fact the range of possible outcomes for the contract increases with the passage of time, and we should find the worst time to default to be a later date. However, towards maturity, the value of the contract starts to go towards zero again, and the maximum value is reached around 7 years. 2 years is too early for the maximum to be reached for the 10 year IRS, and therefore choice a is the correct answer.
NEW QUESTION 70
A risk analyst analyzing the positions for a proprietary trading desk determines that the combined annual variance of the desk's positions is 0.16. The value of the portfolio is $240m. What is the 10-day stand alone VaR in dollars for the desk at a confidence level of 95%? Assume 250 trading days in a year.
- A. 0
- B. 1
- C. 2
- D. 3
Answer: C
Explanation:
Explanation
The z value at the 95% confidence level is 1.64. Since the variance is 0.16, the annual volatility is 40%.
Therefore the daily volatility is 40% x 10/250 = 8%. The VaR therefore is 8% x 1.64 x $240m = $31,488,000
NEW QUESTION 71
Which of the following was not a policy response introduced by Basel 2.5 in response to the global financial crisis:
- A. Comprehensive Risk Model (CRM)
- B. Comprehensive Capital Analysis and Review (CCAR)
- C. Incremental Risk Charge (IRC)
- D. Stressed VaR (SVaR)
Answer: B
Explanation:
Explanation
The CCAR is a supervisory mechanism adopted by the US Federal Reserve Bank to assess capital adequacy for bank holding companies it supervises. It was not a concept introduced by the international Basel framework.
The other three were indeed rules introduced by Basel 2.5, which was ultimately subsumed into Basel III.
Stressed VaR is just the standard 99%/10 day VaR, calculated with the assumption that relevant market factors are under stress.
The Incremental Risk Charge (IRC) is an estimate of default and migration risk of unsecuritized credit products in the trading book. (Though this may sound like a credit risk term, it relates to market risk - for example, a bond rated A being downgraded to BBB. In the old days, the banking book where loans to customers are held was the primary source of credit risk, but with OTC trading and complex products the trading book also now holds a good deal of credit risk. Both IRC and CRM account for these.) While IRC considers only non-securitized products, the CRM (Comprehensive Risk Model) considers securitized products such as tranches, CDOs, and correlation based instruments.
The IRC, SVaR and CRM complement standard VaR by covering risks that are not included in a standard VaR model. Their results are therefore added to the VaR for capital adequacy determination.
NEW QUESTION 72
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. III and IV
- C. I and IV
- D. II and III
Answer: A
Explanation:
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 73
Which of the following cannot be used to address the issue of heavy tails when modeling market returns
- A. Normal mixtures
- B. Student's t-distribution
- C. EVT
- D. EWMA
Answer: D
Explanation:
Explanation
Normal mixtures, EVT and the t-distribution are all possible solutions addressing the issue of heavy tails in financial returns.
EWMA and GARCH address volatility clustering, which is the other problem when doing risk calculations.
Therefore Choice 'b' is the correct answer as EWMA is not used to address heavy tails but volatility clustering.
NEW QUESTION 74
......
Updated PRMIA 8008 Dumps – PDF & Online Engine: https://pass4sure.practicetorrent.com/8008-practice-exam-torrent.html