PRMIA Operational Risk Manager (ORM) - 8010 Exam Practice Test
Question 1
The CDS quote for the bonds of Bank X is 200 bps. Assuming a recovery rate of 40%, calculate the default hazard rate priced in the CDS quote.
Correct Answer: B
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Question 2
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
I. Time invariance
II. Markov property
III. Normal distribution
IV. Zero skewness
Correct Answer: B
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Question 3
Which of the following are valid approaches to calculating potential future exposure (PFE) forcounterparty risk:
I. Add a percentage of the notional to the mark-to-market value
II. Monte Carlo simulation
III. Maximum Likelihood Estimation
IV. Parametric Estimation
I. Add a percentage of the notional to the mark-to-market value
II. Monte Carlo simulation
III. Maximum Likelihood Estimation
IV. Parametric Estimation
Correct Answer: C
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Question 4
For a group of assets known to be positively correlated, what is the impact on economic capital calculations if we assume the assets to be independent (or uncorrelated)?
Correct Answer: D
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Question 5
Which of the following statements are true:
I. Credit VaR often assumes a one year time horizon, as opposed to a shorter time horizon for market risk as credit activities generally span alonger time period.
II. Credit losses in the banking book should be assessed on the basis of mark-to-market mode as opposed to the default-only mode.
III. The confidence level used in the calculation of credit capital is high when the objective is tomaintain a high credit rating for the institution.
IV. Credit capital calculations for securities with liquid markets and held for proprietary positions should be based on marking positions to market.
I. Credit VaR often assumes a one year time horizon, as opposed to a shorter time horizon for market risk as credit activities generally span alonger time period.
II. Credit losses in the banking book should be assessed on the basis of mark-to-market mode as opposed to the default-only mode.
III. The confidence level used in the calculation of credit capital is high when the objective is tomaintain a high credit rating for the institution.
IV. Credit capital calculations for securities with liquid markets and held for proprietary positions should be based on marking positions to market.
Correct Answer: A
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Question 6
The definition of operational risk per Basel II includes which of the following:
I. Riskof loss resulting from inadequate or failed internal processes, people and systems or from external events II. Legal risk III. Strategic risk IV. Reputational risk
I. Riskof loss resulting from inadequate or failed internal processes, people and systems or from external events II. Legal risk III. Strategic risk IV. Reputational risk
Correct Answer: C
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Question 7
Once the frequency and severity distributions for loss events have been determined, which of the following is an accurate description of the process to determine a full loss distribution for operational risk?
Correct Answer: B
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Question 8
According to the Basel framework, shareholders' equity and reserves are considered a part of:
Correct Answer: A
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Question 9
A bank's detailed portfolio data on positions held in a particular security across the bank does not agree with the aggregate total position for that security for the bank. What data quality attribute is missing in this situation?
Correct Answer: B
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Question 10
If the full notional value of a debt portfolio is $100m, its expected value in a year is $85m, and the worst value of the portfolio in one year's time at 99% confidence level is $60m, then what is the credit VaR?
Correct Answer: B
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Question 11
According to the Basel framework, reserves resulting from the upward revaluation of assets are considered a part of:
Correct Answer: C
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Question 12
What isthe risk horizon period used for credit risk as generally used for economic capital calculations and as required by regulation?
Correct Answer: B
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Question 13
Which of the following are valid criticisms of value at risk:
I. There are many risks that a VaR framework cannot model
II. VaR does not considerliquidity risk
III. VaR does not account for historical market movements
IV. VaR does not consider the risk of contagion
I. There are many risks that a VaR framework cannot model
II. VaR does not considerliquidity risk
III. VaR does not account for historical market movements
IV. VaR does not consider the risk of contagion
Correct Answer: C
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Question 14
If the marginal probabilities of default for a corporate bond for years 1, 2 and 3 are 2%, 3% and 4% respectively, what is the cumulative probability of default at the end of year 3?
Correct Answer: D
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