Operational Risk Manager (ORM) Exam 8010 Practice Questions

1. Which of the following is the best description of the spread premium puzzle:

2. 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

3. A corporate bond maturing in 1 year yields 8.5% per year,while a similar treasury bond yields 4% .

What is the probability of default for the corporate bond assuming the recovery rate is zero?

4. As the persistence parameter under EWMA is lowered, which of the following would be true:

5. What is the risk horizon period used for credit risk as generally used for economic capital calculations and as required by regulation?

6. A key problem with return on equity as a measure of comparative performance is:

7. CORRECT TEXT

Which of the following statements are true in relation to Historical Simulation VaR?

I. Historical Simulation VaR assumes returns are normally distributed but have fat tails

II. It uses full revaluation, as opposed to delta or delta-gamma approximations

III. Acorrelation matrix is constructed using historical scenarios

IV. It particularly suits new products that may not have a long time series of historical data available

8. Which of the following statements are true:

I. Pre-settlement risk is the risk that one of the parties to a contract might default prior to the maturity date or expiry of the contract.

II. Pre-settlement risk can be partly mitigated by providing for early settlement in the agreements between the counterparties.

III. The current exposure from an OTC derivatives contract is equivalent to its current replacement value.

IV. Loan equivalent exposures are calculated even for exposures that are not loans as a practical matter for calculating credit risk exposure.

9. Which loss event type is the loss of personally identifiableclient information classified as under the Basel II framework?

10. The Options Theoretic approach to calculating economic capital considers the value of capital as being equivalent to a call option with a strike price equal to:

11. A bank prices retail credit loans based on median default rates. Over the long run, it can expect:

12. In estimating credit exposure for a line of credit, it is usual to consider:

13. When compared to a low severity high frequency risk, the operational risk capital requirement for a medium severity medium frequency risk is likely to be:

14. Which of the following best describes the concept of marginalVaR of an asset in a portfolio:

15. 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?

16. A risk management function is best organized as:

17. Under the ISDA MA, which of the following terms best describes the netting applied upon the bankruptcy of a party?

18. CreditRisk+, the actuarial model for calculating portfolio credit risk, is based upon:

19. Which of the following belong to the family of generalized extreme value distributions:

I. Frechet

II. Gumbel

III. Weibull

IV. Exponential

20. If a borrower has a default probability of 12% over one year, what is the probability of default over a month?

21. 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

22. For a 10 year interest rate swap, what would be the worst time for a counterparty to default (in terms of the maximum likely credit exposure)

23. 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?

24. Loss provisioning is intended to cover:

25. For a hypotherical UoM, the number of losses in two non-overlapping datasets is 24 and 32 respectively. The Pareto tail parameters for the two datasets calculated using the maximum likelihood estimation method are 2 and 3 .

What is an estimate of the tail parameter of the combined dataset?

26. 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?

27. For creditrisk calculations, correlation between the asset values of two issuers is often proxied with:

28. 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

29. The standalone economic capital estimates for the three uncorrelated business units of a bank are $100, $200 and $150 respectively .

What is the combined economic capital for the bank?

30. Which of the following risks and reasons justify the use of scenario analysis in operational risk modeling:

I. Risks for which no internal loss data is available

II. Risks that are foreseeable but have no precedent, internally or externally

III. Risks for which objective assessments can be made by experts

IV. Risks that are known to exist, but for which no reliable external or internal losses can be analyzed

V. Reducing the complexity of having to fit statistical models to internal and external loss data

VI. Managing the capital estimation process as to produce estimates in line with management's desired capital buffers.

31. 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)

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

33. The risk that a counterparty fails to deliver its obligation upon settlement while having received the leg owed to it is called:

34. Which of the following is NOT true in respect of bilateral close out netting:

35. Which of the following techniques is used to generate multivariate normal random numbers that are correlated?

36. 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?

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

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

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

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

41. A bullet bond and an amortizing loan are issued at the same time with the same maturity and with the same principal .

Which of these would have a greater credit exposure halfway through their life?

42. Which of the following are ordered correctly in the order of debt seniority in a bankruptcy situation?

I. Equity, Subordinate debt, Senior debt

II. Senior debt, Preferred stock, Equity

III. Secured debt, Accounts payable, Preferred stock

IV. Secured debt, DIP financing, Equity

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

44. The probability of default of a security over a 1 year period is 3% .

What is the probability that it would not have defaulted at theend of four years from now?

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

46. 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?

47. 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?

48. For a loan portfolio, unexpected losses are charged against:

49. When combining separate bottom up estimates of market, credit and operational risk measures, a most conservative economic capital estimate results from which of the following assumptions:

50. Loss from a lawsuit from an employee due to physical harm caused while at work is categorized per Basel II as:

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

52. If the loss given default is denoted by L, and the recovery rate by R, then which of the following represents the relationship between loss given default and the recovery rate?

53. Which of the following are valid methods for selecting an appropriate model from the model space for severity estimation:

I. Cross-validation method

II. Bootstrap method

III. Complexity penalty method

IV. Maximum likelihood estimation method

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

55. For a loan portfolio, expected losses are charged against:

56. 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