PRIMA PRM Designation Exam 8008 Actual Dumps Questions

1. Which of the following would not be a part of the principal component structure of the term structure of futures prices?

2. Loss provisioning is intended to cover:

3. For a security with a daily standard deviation of 2%, calculate the 10-day VaR at the 95% confidence level. Assume expected daily returns to be nil.

4. If and are the expected rate of return and volatility of an asset whose prices are log-normally distributed, and a random drawing from a standard normal distribution, we can simulate the asset's returns using the expressions:

5. Which of the following statements is true?

I. It is sufficient to ensure that a parent entity has sufficient excess liquidity to cover a liquidity shortfall for a subsidiary.

II. If a parent entity has a shortfall of liquidity, it can always rely upon any excess liquidity that its foreign subsidiaries might have.

III. Wholesale funding sources for a bank refer to stable sources of funding provided by the central bank.

IV. Funding diversification refers to diversification of both funding sources and funding tenors.

6. The loss severity distribution for operational risk loss events is generally modeled by which of the following distributions:

I. the lognormal distribution

II. The gamma density function

III. Generalized hyperbolic distributions

IV. Lognormal mixtures

7. Which of the following cannot be used as an internal credit rating model to assess an individual borrower:

8. If the 1-day VaR of a portfolio is $25m, what is the 10-day VaR for the portfolio?

9. Which of the following statements are true:

I. Top down approaches help focus management attention on the frequency and severity of loss events, while bottom up approaches do not.

II. Top down approaches rely upon high level data while bottom up approaches need firm specific risk data to estimate risk.

III. Scenario analysis can help capture both qualitative and quantitative dimensions of operational risk.

10. The results of 'desk-level' stress tests cannot be added together to arrive at institution wide estimates because:

11. Regulatory arbitrage refers to:

12. According to the Basel II standard, which of the following conditions must be satisfied before a bank can use 'mark-to-model' for securities in its trading book?

I. Marking-to-market is not possible

II. Market inputs for the model should be sourced in line with market prices

III. The model should have been created by the front office

IV. The model should be subject to periodic review to determine the accuracy of its performance

13. For identical mean and variance, which of the following distribution assumptions will provide a higher estimate of VaR at a high level of confidence?

14. A stock's volatility under EWMA is estimated at 3.5% on a day its price is $10. The next day, the price moves to $11.

What is the EWMA estimate of the volatility the next day? Assume the persistence parameter = 0.93.

15. CORRECT TEXT

A Monte Carlo simulation based VaR can be effectively used in which of the following cases:

16. 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

17. 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

18. Which of the following is not a credit event under ISDA definitions?

19. An equity manager holds a portfolio valued at $10m which has a beta of 1.1. He believes the market may see a dip in the coming weeks and wishes to eliminate his market exposure temporarily. Market index futures are available and the current futures notional on these is $50,000 per contract.

Which of the following represents the best strategy for the manager to hedge his risk according to his views?

20. Which of the following best describes Altman's Z-score

21. Which of the following are considered asset based credit enhancements?

I. Collateral

II. Credit default swaps

III. Close out netting arrangements

IV. Cash reserves

22. When considering a request for a loan from a retail customer, which of the following factors is relevant for a bank to consider:

23. 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.

24. The largest 10 losses over a 250 day observation period are as follows. Calculate the expected shortfall at a 98% confidence level:

20m

19m

19m

17m

16m

13m

11m

10m

9m

9m

25. Which of the following describes rating transition matrices published by credit rating firms:

26. Under the KMV Moody's approach to calculating expecting default frequencies (EDF), firms' default on obligations is likely when:

27. If the default hazard rate for a company is 10%, and the spread on its bonds over the risk free rate is 800 bps, what is the expected recovery rate?

28. Which of the following are considered counterparty based credit enhancements?

I. Collateral

II. Credit default swaps

III. Close out netting arrangements

IV. Guarantees

29. 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?

30. Which of the following best describes economic capital?

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

32. In respect of operational risk capital calculations, the Basel II accord recommends a confidence level and time horizon of:

33. Which of the following statements are true:

I. Stress testing, if exhaustive, can replace traditional risk management tools such as value-at-risk (VaR)

II. Stress tests can be particularly useful in identifying risks with new products

III. Stress testing is distinct from a bank's ICAAP carried out periodically

IV. Stress testing is a powerful communication tool that can convey risks to decisionmakers in an organization

34. CORRECT TEXT

The standard error of a Monte Carlo simulation is:

35. Which of the following is not a consideration in determining the liquidity needs of a firm (as opposed to determining the time horizon for liquidity risk)?

36. Changes in which of the following do not affect the expected default frequencies (EDF) under the KMV Moody's approach to credit risk?

37. Which of the following is NOT an approach used to allocate economic capital to underlying business units:

38. Which of the following is closest to the description of a 'risk functional'?

39. 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

40. Which of the following is not an approach proposed by the Basel II framework to compute

operational risk capital?

41. 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

42. Which of the following are valid approaches to leveraging external loss data for modeling operational risks:

I. Both internal and external losses can be fitted with distributions, and a weighted average approach using these distributions is relied upon for capital calculations.

II. External loss data is used to inform scenario modeling.

III. External loss data is combined with internal loss data points, and distributions fitted to the combined data set.

IV. External loss data is used to replace internal loss data points to create a higher quality data set to fit distributions.

43. If the duration of a bond yielding 10% is 6 years, the volatility of the underlying interest rates 5% per annum, what is the 10-day VaR at 99% confidence of a bond position comprising just this bond with a value of $10m? Assume there are 250 days in a year.

44. Which of the following is a valid approach to determining the magnitude of a shock for a given risk factor as part of a historical stress testing exercise?

I. Determine the maximum peak-to-trough change in the risk factor over the defined period of the historical event

II. Determine the minimum peak-to-trough change in the risk factor over the defined period of the historical event

III. Determine the total change in the risk factor between the start date and the finish date of the event regardless of peaks and troughs in between

IV. Determine the maximum single day change in the risk factor and multiply by the number of days covered by the stress event

45. Which of the following are valid techniques used when performing stress testing based on hypothetical test scenarios:

I. Modifying the covariance matrix by changing asset correlations

II. Specifying hypothetical shocks

III. Sensitivity analysis based on changes in selected risk factors

IV. Evaluating systemic liquidity risks

46. Which of the following need to be assumed to convert a transition probability matrix for a given time period to the transition probability matrix for another length of time:

I. Time invariance

II. Markov property

III. Normal distribution

IV. Zero skewness

47. Which of the following formulae describes Marginal VaR for a portfolio p, where V_i is the value of the i-th asset in the portfolio? (All other notation and symbols have their usual meaning.)

A)

B)

C)

D)

All of the above

48. 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

49. The daily VaR of an investor's commodity position is $10m. The annual VaR, assuming daily returns are independent, is ~$158m (using the square root of time rule).

Which of the following statements are correct?

I. If daily returns are not independent and show mean-reversion, the actual annual VaR will be higher than $158m.

II. If daily returns are not independent and show mean-reversion, the actual annual VaR will be lower than $158m.

III. If daily returns are not independent and exhibit trending (autocorrelation), the actual annual VaR will be higher than $158m.

IV. If daily returns are not independent and exhibit trending (autocorrelation), the actual annual VaR will be lower than $158m.

50. Which of the following is a most complete measure of the liquidity gap facing a firm?

51. Which of the following statements is a correct description of the phrase present value of a basis point?

52. Calculate the 99% 1-day Value at Risk of a portfolio worth $10m with expected returns of 10% annually and volatility of 20%.

53. If E denotes the expected value of a loan portfolio at the end on one year and U the value of the portfolio in the worst case scenario at the 99% confidence level, which of the following expressions correctly describes economic capital required in respect of credit risk?

54. Which of the following are valid objectives of a reverse stress test:

I. Ensure that a firm can survive for long enough after risks have materialized for it to either regain market confidence, restructure or be sold, or be closed down in an orderly manner,

II. Discover the vulnerabilities of the current business plan,

III. Better integrate business and capital planning,

IV. Create a 'zero-failure' environment at the systemic level in the financial sector

55. 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?

56. A Bank Holding Company (BHC) is invested in an investment bank and a retail bank. The BHC defaults for certain if either the investment bank or the retail bank defaults. However, the BHC can also default on its own without either the investment bank or the retail bank defaulting. The investment bank and the retail bank's defaults are independent of each other, with a probability of default of 0.05 each. The BHC's probability of default is 0.11.

What is the probability of default of both the BHC and the investment bank? What is the probability of the BHC's default provided both the investment bank and the retail bank survive?

57. When pricing credit risk for an exposure, which of the following is a better measure than the others:

58. Which of the following statements are true:

I. The sum of unexpected losses for individual loans in a portfolio is equal to the total unexpected loss for the portfolio.

II. The sum of unexpected losses for individual loans in a portfolio is less than the total unexpected loss for the portfolio.

III. The sum of unexpected losses for individual loans in a portfolio is greater than the total unexpected loss for the portfolio.

IV. The unexpected loss for the portfolio is driven by the unexpected losses of the individual loans in the portfolio and the default correlation between these loans.

59. For an equity portfolio valued at V whose beta is, the value at risk at a 99% level of confidence is represented by which of the following expressions? Assume represents the market volatility.

60. There are two bonds in a portfolio, each with a market value of $50m. The probability of default of the two bonds are 0.03 and 0.08 respectively, over a one year horizon.

If the default correlation is 25%, what is the one year expected loss on this portfolio?

61. An assumption of normality when returns data have fat tails leads to:

I. underestimation of VaR at high confidence levels

II. overestimation of VaR at low confidence levels

III. overestimation of VaR at high confidence levels

IV. underestimation of VaR at low confidence levels

62. If an institution has $1000 in assets, and $800 in liabilities, what is the economic capital required to avoid insolvency at a 99% level of confidence? The VaR in respect of the assets at 99% confidence over a one year period is $100.

63. The CDS rate on a defaultable bond is approximated by which of the following expressions:

64. Which of the following measures can be used to reduce settlement risks:

65. For a FX forward contract, what would be the worst time for a counterparty to default (in terms of the maximum likely credit exposure)

66. Which of the following is the most accurate description of EPE (Expected Positive Exposure):

67. If the odds of default are 1:5, what is the probability of default?

68. Which of the following decisions need to be made as part of laying down a system for calculating VaR:

I. The confidence level and horizon

II. Whether portfolio valuation is based upon a delta-gamma approximation or a full revaluation

III. Whether the VaR is to be disclosed in the quarterly financial statements

IV. Whether a 10 day VaR will be calculated based on 10-day return periods, or for 1-day and scaled to 10 days

69. What is the 1-day VaR at the 99% confidence interval for a cash flow of $10m due in 6 months time? The risk free interest rate is 5% per annum and its annual volatility is 15%. Assume a 250 day year.

70. The frequency distribution for operational risk loss events can be modeled by which of the following distributions:

I. The binomial distribution

II. The Poisson distribution

III. The negative binomial distribution

IV. The omega distribution

71. Which of the following are considered properties of a 'coherent' risk measure:

I. Monotonicity

II. Homogeneity

III. Translation Invariance

IV. Sub-additivity

72. Which of the following statements are true with respect to stress testing:

I. Stress testing results in a dollar estimate of losses

II. The results of stress testing can replace VaR as a measure of risk as they are better grounded in reality

III. Stress testing provides an estimate of losses at a desired level of confidence

IV. Stress testing based on factor shocks can allow modeling extreme events that have not occurred in the past

73. For a US based investor, what is the 10-day value-at risk at the 95% confidence level of a long spot position of EUR 15m, where the volatility of the underlying exchange rate is 16% annually. The current spot rate for EUR is 1.5. (Assume 250 trading days in a year).

74. Which of the following credit risk models focuses on default alone and ignores credit migration when assessing credit risk?

75. There are two bonds in a portfolio, each with a market value of $50m. The probability of default of the two bonds are 0.03 and 0.08 respectively, over a one year horizon.

If the probability of the two bonds defaulting simultaneously is 1.4%, what is the default correlation between the two?

76. Which of the following best describes a 'break clause?

77. Under the CreditPortfolio View approach to credit risk modeling, which of the following best describes the conditional transition matrix:

78. Which of the following are elements of 'group risk':

I. Market risk

II. Intra-group exposures

III. Reputational contagion

IV. Complex group structures

79. A bank extends a loan of $1m to a home buyer to buy a house currently worth $1.5m, with the house serving as the collateral. The volatility of returns (assumed normally distributed) on house prices in that neighborhood is assessed at 10% annually. The expected probability of default of the home buyer is 5%.

What is the probability that the bank will recover less than the principal advanced on this loan; assuming the probability of the home buyer's default is independent of the value of the house?

80. When the volatility of the yield for a bond increases, which of the following statements is true:

81. Altman's Z-score does not consider which of the following ratios:

82. Which of the following methods cannot be used to calculate Liquidity at Risk?

83. For a corporate issuer, which of the following can be used to calculate market implied default probabilities?

I. CDS spreads

II. Bond prices

III. Credit rating issued by S&P

IV. Altman's scoring model

84. Which of the following is not a limitation of the univariate Gaussian model to capture the codependence structure between risk factros used for VaR calculations?

85. An investor holds a bond portfolio with three bonds with a modified duration of 5, 10 and 12 years respectively. The bonds are currently valued at $100, $120 and $150.

If the daily volatility of interest rates is 2%, what is the 1-day VaR of the portfolio at a 95% confidence level?

86. A bank evaluates the impact of large and severe changes in certain risk factors on its risk using a quantitative valuation model.

Which of the following best describes this exercise?

87. If the cumulative default probabilities of default for years 1 and 2 for a portfolio of credit risky assets is 5% and 15% respectively, what is the marginal probability of default in year 2 alone?

88. In the case of historical volatility weighted VaR, a higher current volatility when compared to historical volatility:

89. Which of the following are true:

I. Delta hedges need to be rebalanced frequently as deltas fluctuate with fluctuating prices.

II. Portfolio managers are right to focus on primary risks over secondary risks.

III. Increasing the hedge rebalance frequency reduces residual risks but increases transaction costs.

IV. Vega risk can be hedged using options.

90. Which of the following losses can be attributed to credit risk:

I. Losses in a bond's value from a credit downgrade

II. Losses in a bond's value from an increase in bond yields

III. Losses arising from a bond issuer's default

IV. Losses from an increase in corporate bond spreads

91. Which of the following situations are not suitable for applying parametric VaR:

I. Where the portfolio's valuation is linearly dependent upon risk factors

II. Where the portfolio consists of non-linear products such as options and large moves are involved

III. Where the returns of risk factors are known to be not normally distributed

92. Which of the following is not a parameter to be determined by the risk manager that affects the level of economic credit capital:

93. 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. The legal claim in bankruptcy court for an over the counter derivatives contract will be the notional value of the contract.