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8005
Associate PRM Exam English Questions and Answers

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Viewing page 4 out of 11 pages

Viewing questions 31-40 out of questions

Questions # 31:

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:

Options:

The notional value of the debt

The market value of the debt

The value of the firm

The value of the assets

Answer

Explanation

The Options Theoretic approach to calculating economic capital is a top-down approach that considers the value of capital as being equivalent to a call option with a strike price equal to the notional value of the debt - ie, the shareholders have a call option on the assets of the firm which they can acquire by paying the debt holders a value equal to their notional claim (ie the face value of the debt). Therefore Choice 'a' is the correct answer and the other choices are incorrect.

Questions # 32:

Which of the following is the most important problem to solve for fitting a severity distribution for operational risk capital:

Options:

The risk functional's minimization should lead to a good estimate of the 0.999 quantile

Determine plausible scenarios to fill the data gaps in the internal and external loss data

Empirical loss data needs to be extended to the ranges below the reporting threshold and above large value losses

The fit obtained should reduce the combination of the fitting and approximation errors to a minimum

Answer

Explanation

Ultimately, the objective of the operational risk severity estimation exercise is to calculate the 99.9th percentile loss over a one year horizon; and everything else we do with data, collecting loss information, modeling, curve fitting etc revolves around this objective. If we cannot estimate the 99.9th percentile loss accurately, then not much else matters. Therefore Choice 'a' is the correct answer.

Minimizing the combination of fitting and approximation errors is one of the things we do with a view to better estimating the operational loss distribution. Likewise, empirical loss data generally is range bound because corporations do not require employees to log losses less than an threshold, and high value losses are generally rare. This problem is addressed by extrapolating both large and small losses, something that impacts the performance of our model. Likewise, one of the objectives of scenario analysis is to fill data gaps by generating plausible scenarios. Yet while all these are real issues to address, the primary problem we are trying to solve is estimating the 0.999th quantile.

Questions # 33:

Every covariance matrix must be positive semi-definite. If it were not then:

Options:

Some portfolios could have a negative variance

It could not be used to simulate correlated asset paths

The associated correlation matrix would not be positive semi-definite

All the above statements are true

Answer

Questions # 34:

The determinant of a matrix X is equal 2. Which of the following statements is true?

Options:

det(2X) =

det(2X) = 2 det(X)

det(2X) = det(X)2

det(2X) = 4 det(X)

Answer

Questions # 35:

John Smith wants to run for election to the Board of Directors of PRMIA. To be nominated, he needs:

Options:

The backing of three other members

To go through a screening process conducted by the Nominations Committee

The backing of 6% of local members

The backing of five other members and to be serving on at least one PRMIA Committee

Answer

Questions # 36:

Evaluate the derivative of exp(x2 + 2x + 1) at the point x = -1

Options:

0.5

Answer

Questions # 37:

According to the Group of 30 Report, option contracts:

Options:

Always generate credit risk to both counterparties

Create credit risk only for the buyer (due to default by the seller) provided the premium is due, and paid, at contract initiation

Create no credit risk, since the buyer need not exercise the option

Usually create credit risk only for the seller (to default by the buyer)

Answer

Questions # 38:

While doing a work assignment, a PRMIA member notices behaviour that is outside the ethical standards of their client organization and reports the matter to their immediate supervisor in the organization (if he or she wasn't the one engaging in such behaviour). The matter is neither progressed nor actioned.

The PRMIA member should:

Options:

stay silent on the basis that they have reported it

report the matter to their PRMIA chapter

contact the Whistle-Blowing Hotline of the organization or, if none exits, to the PRMIA Ethics Committee for guidance and assistance

report the matter to the organization's Compliance Dept.

Answer

Questions # 39:

A bond has modified duration 6 and convexity 30. Find the duration-convexity approximation to the percentage change in bond price when its yield increases by 5 basis points