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8005
Associate PRM Exam English Questions and Answers

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Questions # 91:

In a portfolio there are 7 bonds: 2 AAA Corporate bonds, 2 AAA Agency bonds, 1 AA Corporate and 2 AA Agency bonds. By an unexplained characteristic the probability of any specific AAA bond outperforming the others is twice the probability of any specific AA bond outperforming the others. What is the probability that an AA bond or a Corporate bond outperforms all of the others?

Options:

5/7

8/11

6/11

None of these

Answer

Questions # 92:

The problems in the Orange County case can best be characterized as failures related to:

Options:

Market Risk

Credit Risk

Operational and Regulatory Compliance Risk

All of the Above

Answer

Questions # 93:

The standalone economic capital estimates for the three business units of a bank are $100, $200 and $150 respectively. What is the combined economic capital for the bank, assuming the risks of the three business units are perfectly correlated?

Options:

450

269

72500

Answer

Explanation

Since the business units are perfectly correlated, we can get the combined EC as equal to the sum of the individual EC estimates. Therefore Choice 'a' is the correct answer.

Questions # 94:

The Federal Reserve tries to limit margin trading using which of the following techniques?

Options:

Setting a maximum leverage ratio as a multiple of capital posted for margin trading

By using the discount window

By using open market operations to mop up extra liquidity in the system

Setting limits on margin trading is not a part of the Federal Reserve's remit.

Answer

Explanation

In the US, the Federal Reserve sets a limit (eg, 2 x, so that only 50% of the money could be borrowed) as a multiple of capital posted to prevent excessive leverage or gearing in the system.

The other choices are incorrect.

Questions # 95:

What does a middle office do for a trading desk?

Options:

Operations

Transaction data entry

Reconciliations

Risk analysis

Answer

Explanation

The 'middle office' is a term used for the risk management function, therefore Choice 'd' is the correct answers. The other functions describe what the 'back office' does (IT, accounting). The 'front office' includes the traders.

Questions # 96:

Under the standardized approach to determining operational risk capital, operations risk capital is equal to:

Options:

a fixed percentage of the latest gross income of the bank

a varying percentage, determined by the national regulator, of the gross revenue of each of the bank's business lines

15% of the average gross income (considering only the positive years) of the past three years

a fixed percentage (different for each business line) of the gross income of the eight specified business lines, averaged over three years

Answer

Explanation

Choice 'd' is the correct answer, as laid down in the Basel II document. The other choices are incorrect.

Questions # 97:

A risk manager is asked to analyze the credit risk of a convertible bond. The risk manager has never analyzed convertible bonds, but does have significant expertise in credit risk. The risk manager accepts the assignment, finds a paper on the subject through the PRMIA web site and copies the method used there. The risk manager completes the assignment and delivers a report to his or her direct supervisor and the supervisor is quite pleased.

According to the PRMIA Standards of Best Practice, Conduct and Ethics (Code of Conduct), this was acceptable behavior if the following conditions were met:

I. The risk manager disclosed the lack of knowledge about convertible bonds

II. The methodology employed is disclosed and explained

III. The report was just to be used for analysis and not in practice

IV. The risk manager was sure of his/her understanding of the paper found on the web

Options:

I and II

I, II and IV

I, II and III

I only

Answer

Questions # 98:

[According to the PRMIA study guide for Exam 1, Simple Exotics and Convertible Bonds have been excluded from the syllabus. You may choose to ignore this question. It appears here solely because the Handbook continues to have these chapters.]

Which of the following statements is true:

I. American options can only be exercised at expiry

II. European options can be exercised at any time up to expiry

III. Bermudan options can be exercised at any time up to expiry except at certain times

IV. A European option can never be worth more than an American option

Options:

I and III

I and II

II, III and IV

IV only

Answer

Explanation

Remember that:

- American options can be exercised at any time up to expiry

- European options can only be exercised at expiry

- Bermudan options can be exercised prior to expiry but only at certain dates or during certain specified periods, and not otherwise

- Since an American option can be exercised at any time prior to expiry while a European option can only be exercised at expiry, an American option will always be worth more than a European option

Therefore the first three statements are incorrect and Choice 'd' is the correct answer.

Questions # 99:

Two vectors are orthogonal when:

Options:

one is a scalar multiple of the other

their components are linearly dependent

their determinant is zero

their scalar product (sum product) is zero

Answer

Questions # 100:

Which of the following is NOT a historical event which serves as an example of a short squeeze that happened in the markets?

Options:

The great Chicago fire, 1872

The CDO squeeze, 2008

The wheat squeeze, 1866

The great silver squeeze, 1979-80

Answer

Explanation

There was no event such as the CDO squeeze in 2008. (Quite on the contrary, securitized products were selling at distressed prices.).

The silver squeeze of 1979-80 (Hunt brothers), the Chicago fire of 1872 (leading to a short squeeze on wheat), and the wheat squeeze (Hutchingson) of 1866 are real historical events that led to short squeezes in commodity markets. Choice 'b' is therefore the correct answer.

For the PRM exam, you should try to remember the event broadly, and the commodity involved.

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