Operational Risk Manager (ORM) Exam (8010) Free Practice Test

Question 1

The principle underlying the contingent claims approach to measuring credit risk equates the cost of eliminating credit risk for a firm to be equal to:

A. the cost of a call on thefirm's assets with a strike equal to the value of the debt

B. the market valuationof the firm's equity less the value of its liabilities

C. the value of a put on the firm's assets with a strike equal to the value of the debt

D. the probability of the firm's assets falling below the critical value for default

Correct Answer: C

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Question 2

What would be the correct order of steps to addressing data quality problems in an organization?

A. Articulate goals, do a 'strategy-fit' analysis and plan for action

B. Assess the current state, design the future state, determine gaps and the actions required to be implemented to eliminate the gaps

C. Call in external consultants

D. Design the future state, perform a gap analysis, analyze the current state and implement the future state

Correct Answer: B

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Question 3

A zero coupon corporate bond maturing in an year has a probability of default of 5% and yields 12%. The recovery rate is zero. What is the risk free rate?

A. 6.40%

B. 5.26%

C. 5.00%

D. 7.00%

Correct Answer: A

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Question 4

Which of the following represents a riskier exposure for a bank: A LIBOR based loan, or an Overnight Indexed Swap? Which of the two rates is expected to be higher?
Assume the same counterparty and the same notional.

A. Overnight Index Swap; LIBOR rate will be higher

B. Overnight Index Swap; OIS rate will be higher

C. A LIBOR based loan; OIS rate will be higher

D. A LIBOR based loan; LIBOR rate will be higher

Correct Answer: D

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Question 5

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.

A. I and II

B. I

C. All statements are true

D. III and IV

Correct Answer: A

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Question 6

All else remaining the same, an increase in the joint probability of default between two obligors causes the default correlation between the two to:

A. Cannot be determined from the given information

B. Increase

C. Decrease

D. Stay the same

Correct Answer: B

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Question 7

According to the Basel framework, reserves resulting from the upward revaluation of assets are considered a part of:

A. Tier 1 capital

B. All of the above

C. Tier 2 capital

D. Tier 3 capital

Correct Answer: C

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Question 8

What would be the consequences of a model of economic risk capital calculation that weighs all loans equallyregardless 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 capitalrequirements

A. I and IV

B. III only

C. II and III

D. I only

Correct Answer: A

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Question 9

Which of the following credit risk models relies upon theanalysis of credit rating migrations to assess credit risk?

A. The contingent claims approach

B. KMV's EDF based approach

C. The actuarial approach

D. The CreditMetrics approach

Correct Answer: D

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Question 10

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:

A. Lower

B. Unaffected by differences in frequency or severity

C. Zero

D. Higher

Correct Answer: C

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Question 11

The sensitivity (delta) of a portfolio to a single point move in the value of the S&P500 is $100. If the current level of the S&P500 is 2000, and has a one day volatility of 1%, what is the value-at-risk for this portfolio at the 99% confidence and a horizon of 10 days? What is this method of calculating VaR called?

A. $14,736, parametric VaR

B. $14,736, historical simulation VaR

C. $4,660, Monte Carlo simulation VaR

D. $4,660, parametric VaR

Correct Answer: A

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Question 12

Aderivative contract has a negative current replacement value. Which of the following statements is true about its loan equivalent value for credit risk calculations over a 2-year horizon?

A. The current exposure can be used for loan equivalence calculations as that is an unbiased proxy for the future value.

B. The notional value of the derivatives contract should be used for loan equivalence calculations.

C. Since the derivatives contract has a negative current replacementvalue, exposure will be zero.

D. The credit exposure will be a given quintile of the expected distribution of the value of the derivatives contract in the future.

Correct Answer: D

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Question 13

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

A. escrow arrangements using a central clearing house

B. providing for physical delivery instead of netted cash settlements

C. increasing the timing differences between the two legs of the transaction

D. all of the above

Correct Answer: B

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Question 14

Credit exposure for derivatives is measured using

A. Notional value of the derivative

B. Forward looking exposure profile of the derivative

C. Current replacement value

D. Standard normal distribution

Correct Answer: B

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PRMIA Operational Risk Manager (ORM) (8010) Free Practice Test