8008 Practice Exam Questions and Answers

A portfolio has two loans, A and B, each worth $1m. The probability of default of loan A is 10% and that of loan B is 15%. The probability of both loans defaulting together is 1%. Calculate the expected loss on the portfolio.

Which of the following is not true about the ISDA master agreement (ISDA MA):

If A and B be two uncorrelated securities, VaR(A) and VaR(B) be their values-at-risk, then which of the following is true for a portfolio that includes A and B in any proportion. Assume the prices of A and B are log-normally distributed.

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

Which of the following should be included when calculating the Gross Income indicator used to calculate operational risk capital under the basic indicator and standardized approaches under Basel II?

Which of the following statements is true in relation to a normal mixture distribution:

I. The mixture will always have a kurtosis greater than a normal distribution with the same mean and variance

II. A normal mixture density function is derived by summing two or more normal distributions

III. VaR estimates for normal mixtures can be calculated using a closed form analytic formula

Which of the following event types is hacking damage classified under Basel II operational risk classifications?

A bank holds a portfolio of corporate bonds. Corporate bond spreads widen, resulting in a loss of value for the portfolio. This loss arises due to:

If the annual variance for a portfolio is 0.0256, what is the daily volatility assuming there are 250 days in a year.

Which of the following correctly describes a reverse stress test:

The standard error of a Monte Carlo simulation is:

Which of the following statements are true in relation to Monte Carlo based VaR calculations:

I. Monte Carlo VaR relies upon a full revalution of the portfolio for each simulation

II. Monte Carlo VaR relies upon the delta or delta-gamma approximation for valuation

III. Monte Carlo VaR can capture a wide range of distributional assumptions for asset returns

IV. Monte Carlo VaR is less compute intensive than Historical VaR

Conditional VaR refers to:

Which of the following losses can be attributed to credit risk:

I. Losses in a bond's value from a credit downgrade

II. Losses in a bond's value from an increase in bond yields

III. Losses arising from a bond issuer's default

IV. Losses from an increase in corporate bond spreads

In the case of historical volatility weighted VaR, a higher current volatility when compared to historical volatility:

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

What percentage of average annual gross income is to be held as capital for operational risk under the basic indicator approach specified under Basel II?

Which of the following represent the parameters that define a VaR estimate?

According to the Basel II framework, subordinated term debt that was originally issued 4 years ago with a maturity of 6 years is considered a part of:

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 the end of four years from now?

The generalized Pareto distribution, when used in the context of operational risk, is used to model:

Which of the following statements are true:

I. Liquidity risks during time of crisis may be exacerbated by large collateral calls continuing over a period of time.

II. Stress tests are always separately modeled from VaR computations which cannot deal with stress scenarios of the kind considered in stress tests.

III. A maximum loss scenario considers the maximum possible loss given a 'plausibility constraint' that is based upon the joint probability of such a loss happening

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

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 default correlation is 25%, what is the one year expected loss on this portfolio?

Which of the following statements is true in respect of different approaches to calculating VaR?

I. Linear or parametric VaR does not take correlations into account

II. For large portfolios with little or no optionality or other non-linear attributes, parametric VaR is an efficient approach to calculating VaR

III. For large portfolios with complex sources of risk and embedded optionalities, the full revaluation method of calculating VaR should be preferred

IV. Delta normal local revaluation based VaR is suitable for fixed income and option portfolios only

According to the implied capital model, operational risk capital is estimated as:

For a loan portfolio, expected losses are charged against:

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

If the returns of an asset display a strong tendency for mean reversion, what is the relationship between annualized volatility calculated based on daily versus weekly volatilities (using the square root of time rule)?

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?

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)

Which of the following statements is true in respect of a non financial manufacturing firm?

I. Market risk is not relevant to the manufacturing firm as it does not take proprietary positions

II. The firm faces market risks as an externality which it must bear and has no control over

III. Market risks can make a comparative assessment of profitability over time difficult

IV. Market risks for a manufacturing firm are not directionally biased and do not increase the overall risk of the firm as they net to zero over a long term time horizon

Assuming all other factors remain the same, an increase in the volatility of the returns on the assets of a firm causes which of the following outcomes?

For a security with a daily standard deviation of 2%, calculate the 10-day VaR at the 95% confidence level. Assume expected daily returns to be nil.

Consider a portfolio with a large number of uncorrelated assets, each carrying an equal weight in the portfolio. Which of the following statements accurately describes the volatility of the portfolio?

Which of the following are considered asset based credit enhancements?

I. Collateral

II. Credit default swaps

III. Close out netting arrangements

IV. Cash reserves

Financial institutions need to take volatility clustering into account:

I. To avoid taking on an undesirable level of risk

II. To know the right level of capital they need to hold

III. To meet regulatory requirements

IV. To account for mean reversion in returns

Company A issues bonds with a face value of $100m, sold at issuance at $98. Bank B holds $10m in face of these bonds acquired at a price of $70. What is Bank B's exposure to the debt issued by Company A?

The VaR of a portfolio at the 99% confidence level is $250,000 when mean return is assumed to be zero. If the assumption of zero returns is changed to an assumption of returns of $10,000, what is the revised VaR?

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

If P be the transition matrix for 1 year, how can we find the transition matrix for 4 months?

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

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:

Which of the following statements are true in relation to Principal Component Analysis (PCA) as applied to a system of term structures?

I. The factor weights on the first principal component will show whether there is common trend in the system

II. The factors to be applied to principal components are obtained from eigenvectors of the correlation matrix

III. PCA is a standard method for reducing dimensionality in data when considering a large number of correlated variables

IV. The smallest absolute eigenvalues and their associated eigenvectors are the most useful for explaining most of the variation

A bank expects the error rate in transaction data entry for a particular business process to be 0.005%. What is the range of expected errors in a day within +/- 2 standard deviations if there are 2,000,000 such transactions each day?

Which of the following statements is the most appropriate description of feedback effects:

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

For a corporate bond, which of the following statements is true:

I. The credit spread is equal to the default rate times the recovery rate

II. The spread widens when the ratings of the corporate experience an upgrade

III. Both recovery rates and probabilities of default are related to the business cycle and move in opposite directions to each other

IV. Corporate bond spreads are affected by both the risk of default and the liquidity of the particular issue

Which of the following are considered counterparty based credit enhancements?

I. Collateral

II. Credit default swaps

III. Close out netting arrangements

IV. Guarantees

Who has the ultimate responsibility for the overall stress testing programme of an institution?

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

Which of the following are measures of liquidity risk

I. Liquidity Coverage Ratio

II. Net Stable Funding Ratio

III. Book Value to Share Price

IV. Earnings Per Share

Which of the following are valid objectives of a reverse stress test:

I. Ensure that a firm can survive for long enough after risks have materialized for it to either regain market confidence, restructure or be sold, or be closed down in an orderly manner,

II. Discover the vulnerabilities of the current business plan,

III. Better integrate business and capital planning,

IV. Create a 'zero-failure' environment at the systemic level in the financial sector

What is the combined VaR of two securities that are perfectly positively correlated.