PRM Certification - Exam III: Risk Management Frameworks, Operational Risk, Credit Risk, Counterparty Risk, Market Risk, ALM, FTP - 2015 Edition (8008) Free Practice Test

Question 1

Which of the following carry greater counterparty risk: a forward contract on a 10 year note, or a commercial paper carrying a AA credit rating with identical maturity and notional?

A. Credit risk can not be compared in these terms

B. The forward contract has greater credit risk as its future gains are unknown

C. They both carry the same credit risk

D. The commercial paper has greater credit risk as the entire notional is outstanding

Correct Answer: D

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Question 2

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

A. Risk functional refers to the Kolmogorov-Smirnov distance

B. A risk functional is a model distribution that is an approximation of the true loss distribution of a risk

C. A risk functional assigns a penalty value for the difference between a model distribution and a risk's severity distribution

D. A risk functional is the distribution that models the severity of a risk

Correct Answer: C

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Question 3

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

A. I, II, III and IV

B. I and III

C. II and III

D. I and II

Correct Answer: D

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Question 4

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, and be the standard deviation of future asset returns, then the distance-to-default is given by:
A)

B)

C)

D)

A. Option D

B. Option C

C. Option A

D. Option B

Correct Answer: A

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Question 5

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

A. I, II and III

B. II and III

C. I and II

D. III and IV

Correct Answer: C

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Question 6

Which of the following are attributes of a robust stress testing programme at a bank?

A. Written policies and procedures

B. All of the above

C. Robust systems infrastructure

D. Data of appropriate quality and granularity

Correct Answer: B

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Question 7

The key difference between 'top down models' and 'bottom up models' for operational risk assessment is:

A. Bottom up approaches to operational risk are based upon an analysis of key risk drivers, while top down approaches consider causality in risk scenarios.

B. Top down approaches to operational risk calculate the implied operational risk using available data such as income volatility, capital etc; while bottom up approaches use causal factors, risk drivers and other factors to get an aggregated estimate of risk.

C. Bottom up approaches to operational risk calculate the implied operational risk using available data such as income volatility, capital etc; while top down approaches use causal factors, risk drivers and other factors to get an aggregated estimate of risk.

D. Top down approaches to operational risk are based upon an analysis of key risk drivers, while bottom up approaches consider causality in risk scenarios.

Correct Answer: B

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Question 8

Which of the following statements is true?

A. Under times of liquidity stress, both prepayments of loans extended and expected withdrawals from on-demand deposits will decrease

B. For an issuer of life insurance policies, longevity risk can lead to reserves falling short of payments due

C. Only the drawn portions of credit facilities extended to clients by a bank count towards its liquidity exposure

D. Deterioration in the balance sheets of key counterparties is a concern for a liquidity manager even though it may not immediately affect a firm

Correct Answer: D

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Question 9

Which of the following are elements of 'group risk':
I. Market risk
II. Intra-group exposures
III. Reputational contagion
IV. Complex group structures

A. I and IV

B. II and III

C. II, III and IV

D. I and II

Correct Answer: C

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Question 10

The minimum 'multiplication factor' to be applied to VaR calculations for calculating the capital requirements for the trading book per Basel II is equal to:

A. 4

B. 3

C. 1

D. 2

Correct Answer: B

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PRMIA PRM Certification - Exam III: Risk Management Frameworks, Operational Risk, Credit Risk, Counterparty Risk, Market Risk, ALM, FTP - 2015 Edition (8008) Free Practice Test