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PRMIA 8011 CCRM Certificate Exam is ideal for professionals in the financial industry, particularly those who work in credit risk management, counterparty risk management, portfolio management, asset management, and trading. 8011 exam is designed to test their knowledge of credit and counterparty risk management, as well as their ability to apply this knowledge to practical scenarios. By earning the PRMIA 8011 CCRM certificate, an individual demonstrates their proficiency in managing credit and counterparty risk and highlights their commitment to professional development and career advancement.
The CCRM certification exam tests individuals on a broad range of topics, including risk identification, measurement, and evaluation techniques, calculation of credit and counterparty risk parameters, scenario analysis, optimization of capital allocation, legal and regulatory frameworks, and relevant risk models, among others. Credit and Counterparty Manager (CCRM) Certificate Exam certification exam is structured to evaluate individuals on their ability to understand various risk management strategies and its impact on business performance.
NEW QUESTION # 153
Which of the following cannot be used to address the issue of heavy tails when modeling market returns
- A. Student's t-distribution
- B. EVT
- C. EWMA
- D. Normal mixtures
Answer: C
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 # 154
Which of the following statements is true in relation to the Supervisory Capital Assessment Program (SCAP):
I. The SCAP is an annual exercise conducted by the Treasury Department to determine the health of key financial institutions in the US economy II. The SCAP was essentially a stress test where the stress scenarios were specified by the regulators III. Capital buffers calculated under the SCAP represented the amount of capital that the institutions covered by SCAP held in excess of Basel II requirements IV. The SCAP focused on both total Tier 1 capital as well as Tier 1 common capital
- A. I, II and IV
- B. I and III
- C. I and III
- D. II and IV
Answer: D
Explanation:
In the February of 2009, the Federal Reserve (which is the US central bank system) and other US banking regulators embarked on a simultaneous assessment of the capital held by the 19 largest US bank holding companies. This was an unprecedented exercise of a kind never undertaken before, and was known as the Supervisory Capital Assessment Program (SCAP). The purpose of the exercise was to determine the amount of additional capital (called the 'capital buffer') each of the institutions covered would need to ensure that it would have sufficient capital if the economy weakened more than was then expected. The idea was that these financial institutions would then raise additional capital equal to their respective capital buffers by the fourth quarter of 2009.
Statement I is false on two counts: firstl the SCAP was conducted by the US central bank and other regulators, and not the 'Treasury Department' (the Treasury Department in the US is the equivalent of the Ministry of Finance in may other countries). Second, the SCAP was a one time exercise, and not annual.
Statement II is correct. The regulators prescribed rates of losses on credit assets of different kinds and other macro-economic assumptions, and asked the banks to determine the extent of losses they would need to bear (in addition to calculating them independently too). Therefore the SCAP was a stress test where the scenario was prescribed by the regulators.
Statement III is false. Capital buffer under the SCAP referred to the additional capital the banks would need to have certain ratios of capital, and not 'excess' capital.
Statement IV is correct. The SCAP envisaged two capital targets: a Tier 1 capital ratio in excess of 6% at the end of 2010; and a Tier 1 common capital ratio in excess of 4%. Therefore both the total Tier 1 capital and Tier 1 common capital were targeted.
Therefore Choice 'c' is the correct answer.
NEW QUESTION # 155
Which loss event type is the failure to timely deliver collateral classified as under the Basel II framework?
- A. External fraud
- B. Execution, Delivery & Process Management
- C. Information security
- D. Clients, products and business practices
Answer: B
Explanation:
Refer to the detailed loss event type classification under Basel II (see Annex 9 of the accord). You should know the exact names of all loss event types, and examples of each.
NEW QUESTION # 156
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?
- A. Liquidate his portfolio as soon as possible
- B. Sell 220 futures contracts
- C. Buy 220 futures contracts
- D. Sell 200 futures contracts
Answer: B
Explanation:
The number of futures contracts to sell are equal to $10m x 1.1/$50,000 = 220. Liquidating his portfolio would reduce the beta to zero, but would also get rid of the bets he wants to play on. Therefore Choice 'c' is the correct answer.
(Note that futures and spot prices generally move together allowing futures positions to be used for hedging the risk against movement in spot prices. However there is a basis risk between spot and futures, therefore the a perfect hedge is never possible with futures. If interest rates move a great deal, spot and futures prices may diverge. Of course, this risk is generally quite low but may become amplified with large leveraged portfolios.
Just something to be aware of.)
NEW QUESTION # 157
If the 99% VaR of a portfolio is $82,000, what is the value of a single standard deviation move in the portfolio?
- A. 0
- B. 1
- C. 2
- D. 3
Answer: C
Explanation:
Remember that VaR is merely a multiple of the portfolio's standard deviation. The multiple is determined by the confidence level, and for a 99% confidence level this multiple is 2.3264 (=-NORMSINV(1%) in Excel).
Therefore one standard deviation at this level of confidence would be equal to VaR/2.3264.
In addition to the Z-value at 99% confidence, you should also remember what the Z value is for a 95% level of confidence, as PRM questions may expect you to know these. The standard Windows calculator allowed in the exam does not allow you to calculate these, so it is safer to just remember these values.
NEW QUESTION # 158
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. III and IV
- D. All of the above
Answer: B
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 # 159
A risk management function is best organized as:
- A. a part of the trading desks and other risk taking teams
- B. report independently of the risk taking functions
- C. integrated with the risk taking functions as risk management should be a pervasive activity carried out at all levels of the organization.
- D. reporting directly to the traders, as to be closest to the point at which risks are being taken
Answer: B
Explanation:
The point that this question is trying to emphasize is the independence of the risk management function. The risk function should be segregated from the risk taking functions as to maintain independence and objectivity.
Choice 'd', Choice 'c' and Choice 'a' run contrary to this requirement of independence, and are therefore not correct. The risk function should report directly to senior levels, for example directly to the audit committee, and not be a part of the risk taking functions.
NEW QUESTION # 160
Which of the following is additive, ie equal to the sum of its components
- A. Specific VaR
- B. Component VaR
- C. Incremental VaR
- D. Conditional VaR
Answer: B
Explanation:
Component VaR measures the proportion of total VaR that can be allocated to each asset in the portfolio. It is based upon the covariance matrix multiplied by the weights, and each row represents the component VaR for the asset in question. Since the total of such a matrix is the total VaR, component VaR is additive. Component VaR is used to assess the contribution of each asset in the portfolio to total risk and has the useful property of being additive so some sense can be made of the contribution of each asset to total risk.
Incremental VaR, conditional VaR and VaR are sub-additive by definition, and therefore not the correct answer.
NEW QUESTION # 161
A bank holds $10m of a corporate debt that it has purchased CDS protection against. What is the impact on the short term liquidity of the bank in the event of a default by the corporate on its bonds?
- A. An immediate reduction in available liquidity
- B. No impact
- C. Cannot be determined without information on recovery rates
- D. A short term increase in available liquidity
Answer: D
Explanation:
The immediate impact of the default would be to improve the liquidity available in the short term due to the pay out from the CDSs.
It is also important to consider the impact on liquidity from the occurence of a default even in situations where CDS protection may not have been purchased. In such cases, there may be a nearer term payout in the form of the recovery rate. Of course, recovery payments are generally not realized for longer periods of time as court cases linger on, but there is a good likelihood that a payment, albeit lower in total, is likely to be realized sooner than the maturity of the bond in cases where the bond is a longer term bond. At the same time, any interest payments, and the final principal payment, which may have been included in liquidity projections, will not occur.
NEW QUESTION # 162
Ex-ante VaR estimates may differ from realized P&L due to:
I. the effect of intra day trading
II. timing differences in the accounting systems
III. incorrect estimation of VaR parameters
IV. security returns exhibiting mean reversion
- A. I, II and IV
- B. I and III
- C. I, II and III
- D. II, III and IV
Answer: C
Explanation:
Ex-ante VaR calculations can differ from actual realized P&L due to a large number of reasons. I, II and III represent some of them. Mean reversion however has nothing to do with VaR estimates differing from actual P&L. Therefore Choice 'c' is the correct answer.
NEW QUESTION # 163
When doing stress tests based on historical scenarios, if no appropriate historical scenarios exist for a security, it is most INAPPROPRIATE to:
- A. Leave the position unshocked
- B. Estimate a shock factor based upon extrapolation
- C. Estimate a shock factor based upon interpolation
- D. Estimate a shock factor based on other instruments that might be considered as proxies for such a security
Answer: A
Explanation:
Where a historical shock factor does not exist for a security, for example because the security is new or was only thinly traded earlier, or because a particular emerging market was immature at the time of the historical scenario being considered, it is inappropriate to leave the position unshocked. By and large, the general rule to be followed when carrying out stress testing is to leave no position unshocked. Therefore Choice 'b' is the correct answer.
Choice 'd', Choice 'a' and Choice 'c' all represent valid approaches to estimating a shock factor in such cases.
NEW QUESTION # 164
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
- A. I, II, III and IV
- B. I, III and IV
- C. I and III
- D. I, II and III
Answer: D
Explanation:
The binomial, Poisson and the negative binomial distributions can all be used to model the loss event frequency distribution. The omega distribution is not used for this purpose, therefore Choice 'a' is the correct answer.
Also note that the negative binomial distribution provides the best model fit because it has more parameters than the binomial or the Poisson. However, in practice the Poisson distribution is most often used due to reasons of practicality and the fact that the key model risk in such situations does not arise from the choice of an incorrect underlying distribution.
NEW QUESTION # 165
Under the standardized approach to calculating operational risk capital under Basel II, negative regulatory capital charges for any of the business units:
- A. Should be excluded from capital calculations
- B. Should be ignored completely
- C. Should be included after ignoring the negative sign
- D. Should be offset against positive capital charges from other business units
Answer: D
Explanation:
According to Basel II, in any given year, negative capital charges (resulting from negative gross income) in any business line may offset positive capital charges in other business lines without limit. Therefore Choice 'b' is the correct answer.
NEW QUESTION # 166
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.
- A. III and IV
- B. II and IV
- C. I and II
- D. I, II and III
Answer: A
Explanation:
Unexpected losses (UEL) for individual loans in a portfolio will always sum to greater than the total unexpected loss for the portfolio (unless all the loans are correlated in such a way that they default together).
This is akin to the 'diversification effect' in market risk, in other words, not all the obligors would default together. So the UEL for the portfolio will always be less than the sum of the UELs for individual loans.
Therefore statement III is true.This 'diversification effect' will be affected by the default correlations between the obligors, in cases where the probability of various obligors defaulting together is low, the UEL for the portfolio would be much less than the UEL for the individual loans. Hence statement IV is true.I and II are false for the reasons explained above.
NEW QUESTION # 167
Which of the following risks were not covered in detail in most stress tests prior to the current crisis:
I. The behavior of complex structured products under stressed liquidity conditions II. Pipeline or securitization risk III. Basis risk in relation to hedging strategies IV. Counterparty credit risk
V. Contingent risks
VI. Funding liquidity risk
- A. All of the above
- B. II, III and V
- C. I, IV and VI
- D. I, II, III, IV and VI
Answer: A
Explanation:
The BCBS publication 'Principles for sound stress testing practices and supervision' (May 2009) identifies all of the above as risks that were covered in insufficient detail in most stress tests prior to the current crisis.
Therefore Choice 'd' is the correct answer.
For the PRM exam, you should have read this document. You should also be familiar with all the above risk types as being contributors to the crisis, and know what each of these mean.
NEW QUESTION # 168
For the purposes of calculating VaR, an interest rate swap can be modeled as a combination of:
- A. a fixed rate bond and a zero coupon bond
- B. a fixed coupon bond and a floating rate note
- C. a zero coupon bond and an interest rate swap
- D. two zero coupon bonds
Answer: B
Explanation:
In an interest rate swap, the parties agree to exchanging interest rate payments, with one party being a fixed interest rate payer and the other paying floating rates. The party receiving fixed rates and paying floating can be considered to be long a fixed rate bond and short a floating rate note. Therefore an IRS can be modeled as a combination of a fixed coupon bond and a floating rate note. Choice 'b' is the correct answer.
NEW QUESTION # 169
For a given notional amount, which of the following carries the greatest counterparty exposure (assuming the same counterparty credit rating for each):
- A. A one year forward foreign exchange contract
- B. A one year interest rate swap
- C. A one year certificate of deposit
- D. A futures contract on an equity index
Answer: C
Explanation:
The exposure at default is the greatest for the certificate of deposit as the entire notional amount is exposed to the risk of default. The other choices represent derivatives for which the current replacement value, which would be far less than notional, would be the credit exposure.
Said another way - if the counterparty were to default, the entire money in the CD would be at risk, whereas for the derivative contracts it would only be the replacement value that would be at risk.
NEW QUESTION # 170
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. 0
- B. 1
- C. 2
- D. 3
Answer: D
Explanation:
The minimum multiplication factor specified under Basel II is 3. Therefore the correct answer is Choice 'a'.
The exact requirements are laid down below.
Each bank must meet, on a daily basis, a capital requirement expressed as the higher of (i) its previous day's value-at-risk number measured according to the parameters specified in this section and (ii) an average of the daily value-at-risk measures on each of the preceding sixty business days, multiplied by a multiplication factor.
The multiplication factor will be set by individual supervisory authorities on the basis of their assessment of the quality of the bank's risk management system, subject to an absolute minimum of 3. Banks will be required to add to this factor a "plus" directly related to the ex-post performance of the model, thereby introducing a built in positive incentive to maintain the predictive quality of the model. The plus will range from 0 to 1 based on the outcome of so-called "backtesting."
NEW QUESTION # 171
Which of the following are valid approaches to calculating potential future exposure (PFE) for counterparty 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
- A. All of the able
- B. I, III and IV
- C. I and II
- D. III and IV
Answer: C
Explanation:
When a derivative position is entered into, its mark-to-market value is generally close to zero (though the notional may be high). With the passage of time, the derivative's value fluctuates in an unpredictable way, creating a counterparty exposure that may be difficult to estimate and risk manage. Counterparty risk in such cases is estimated based on Potential Future Exposure, which may be calculated using either:
a) Take the mark-to-market at present, and add a certain percentage of the notional, or b) Perform a Monte Carlo simulation, capturing the stochastic nature of the PFE.
Therefore I and II are valid choices. MLE and parametric estimation are not methods for calculating PFE.
NEW QUESTION # 172
The diversification effect is responsible for:
- A. the super-additivity property of market risk VaR assessments
- B. the sub-additivity property of market risk VaR assessments
- C. total VaR numbers being greater than the sum of the individual VaRs for underlying portfolios
- D. VaR being applicable only to short term horizons
Answer: B
Explanation:
Any good risk measure has the property that it is sub-additive, which means the whole is less than the sum of the parts. In the case of VaR, sub-additivity arises due to the diversification effect, or said differently, due to the correlation between different assets being less than one. Therefore Choice 'd' is the correct answer.
Super-additivity is just the opposite of sub-additivity, ie, the whole is greater than the sum of the parts. Good risk measures do not have super-additivity. Therefore Choice 'b' is incorrect.
Choice 'c' states the same thing as Choice 'b' in different words, and is incorrect. Choice 'a' is non-sensical and incorrect.
NEW QUESTION # 173
Loss provisioning is intended to cover:
- A. Losses in excess of unexpected losses
- B. Expected losses
- C. Both expected and unexpected losses
- D. Unexpected losses
Answer: B
Explanation:
Loss provisioning is intended to cover expected losses. Economic capital is expected to cover unexpected losses. No capital or provisions are set aside for losses in excess of unexpected losses, which will ultimately be borne by equity.
Choice 'd' is the correct answer.
NEW QUESTION # 174
The CDS rate on a defaultable bond is approximated by which of the following expressions:
- A. Hazard rate / (1 - Recovery rate)
- B. Loss given default x Default hazard rate
- C. Hazard rate x Recovery rate
- D. Credit spread x Loss given default
Answer: B
Explanation:
The CDS rate is approximated by the [Loss given default x Default hazard rate]. Thus Choice 'b' is the correct answer.
Note that this is also equal to the credit spread on the reference bond over the risk free rate. Therefore credit spreads and CDS rates are generally the same. Also, 'loss given default' is nothing but (1 - Recovery rate).
This can be substituted in the formula for the credit spread to get an alternative expression that directly refers to the recovery rate. Therefore all other choices are incorrect.
NEW QUESTION # 175
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. A LIBOR based loan; OIS rate will be higher
- B. Overnight Index Swap; LIBOR rate will be higher
- C. A LIBOR based loan; LIBOR rate will be higher
- D. Overnight Index Swap; OIS rate will be higher
Answer: C
Explanation:
A LIBOR based loan requires cash to move from the lender to the borrower in the amount of the notional. The Overnight Index Swap requires only the exchange of interest payments, and therefore represents less risk.
Therefore the LIBOR based loan is a riskier exposure.
The LIBOR is generally higher than the OIS. In fact, the difference between the two, the LIBOR-OIS spread, is a standard measure of the risk premium in the market that goes up when the risk of default by counterparty banks is considered high. This is because when the market perceives the risk of default to be high, the participants need a risk premium to take on the default risk which is considerably lesser with the OIS.
NEW QUESTION # 176
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