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Associate PRM Exam English Questions and Answers

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Questions # 51:

Consider two functions f(x) and g(x) with indefinite integrals F(x) and G(x), respectively. The indefinite integral of the product f(x)g(x) is given by

Options:

F(x)G(x)

F(x)g(x) + f(x)G(x)

F(x)g(x) - ∫F(x)g'(x)dx

f(x)G(x) - ∫F(x)g'(x)dx

Answer

Questions # 52:

The principle underlying the contingent claims approach to measuring credit risk equates the cost of eliminating credit risk for a firm to be equal to:

Options:

the cost of a call on the firm's assets with a strike equal to the value of the debt

the value of a put on the firm's assets with a strike equal to the value of the debt

the probability of the firm's assets falling below the critical value for default

the market valuation of the firm's equity less the value of its liabilities

Answer

Explanation

Under the contingent claims approach, a firm will default on its debt when the value of its assets fall to less than the face value of the debt. Debt holders can protect themselves against such an event by buying a put on the assets of the firm, where the strike price is equal to the value of the debt. In other words, Risky Debt + Put on the firm's assets = Risk free debt. This is because if the value of the assets is greater than the value of the debt, they will be paid in full. If the value of the assets is lower than the value of the debt, they will exercise the put and be paid in full.

Therefore the value of the put on the firm's assets with a strike equal to the value of the debt represents the cost of eliminating credit risk. Choice 'b' is the correct answer.

Note that it is improbable that a put on the firm's assets is available in real life to debt holders. However, the same effect can be synthetically achieved by using the shares of the firm as a proxy for its assets, and shorting an appropriate number of shares. Such a synthetic put will require frequent readjustments.

Questions # 53:

The Fortress Re accounting risk transfer procedures

Options:

made it straightforward for TFMI to determine whether risk had actually been transferred and they decided not to take out more catastrophe insurance cover

made it difficult for TFMI to determine whether risk had actually been transferred so they had to take out additional catastrophe insurance cover

made it straightforward for TFMI to determine when the risk had been transferred and to take out additional catastrophe insurance cover

made it difficult for TFMI to determine whether risk had actually been transferred and whether it had sufficient catastrophe insurance cover

Answer

Questions # 54:

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?

Options:

2.57

2.23

Cannot be determined

Answer

Explanation

For a number of processes, including many in finance, while a distribution such as the normal distribution is a good approximation of the distribution near the modal value of the variable, the same normal distribution may not be a good estimate of the tails. For this reason, the Pareto distribution is one of the distributions that is often used to model the tails of another distribution. Generally, if you have a set of observations, and you discard all observations below a threshold, you are left with what are called 'exceedances'. The threshold needs to be reasonably far out in the tail. If from each value of the exceedances you subtract the threshold value, the resulting dataset is estimated by the generalized Pareto distribution.

A mathematical equation with black text Description automatically generated

The Pareto distribution has a 'shape parameter'. The average of two Pareto distributions with tail parametersξ1 andξ2 (ξis a Greek character, pronounced as 'sai' (saa-eee)), is the weighted average ofξ1 andξ2 with weights proportional to the number of observations in the datasets underlying the distributions.

Questions # 55:

For a back office function processing 15,000 transactions a day with an error rate of 10 basis points, what is the annual expected loss frequency (assume 250 days in a year)

Options:

3750

0.06

37500

375

Answer

Explanation

An error rate of 10 basis points means the number of errors expected in a day will be 15 (recall that 100 basis points = 1%). Therefore the total number of errors expected in a year will be 15 x 250 = 3750. Choice 'a' is the correct answer.

Questions # 56:

The financial intermediary services provided by Fannie Mae and Freddie Mac were designed to

Options:

Offer loans directly to the consumer

Compete directly with banks in selling mortgaged to would-be home owners

Repackage mortgage loans made by banks and sell them on to investors as asset backedsecurities

Buy mortgage-backed loans for banks and keep them all on their books, using them as collateral for the US government to borrow

Answer

Questions # 57:

What was the most important loss for Bankers Trust?

Options:

Money due to unfavourable market moves

Loss of its' reputation due to actions seen as detrimental to their clients

Loss of market share due to their licenses being revoked

Time spent on legal proceedings in courts

Answer

Questions # 58:

According to the dividend discount model, if d be the dividend per share in perpetuity of a company and g its expected growth rate, what would the share price of the company be.'r' is the discount rate.

Options:

https://riskprep.com/images/stories/questions/123.01.a.png

https://riskprep.com/images/stories/questions/123.01.c.png

https://riskprep.com/images/stories/questions/123.01.d.png

https://riskprep.com/images/stories/questions/123.01.b.png

Option

Answer

Explanation

According to the dividend discount model, the spot share prices represent the present value of all the future cash flows from the stock. If held till perpetuity, this becomes an annuity equal to the dividend, growing at its expected growth rate. Therefore Choice 'a' is the correct answer. Choice 'c' would represent the total market cap, and not the value per share that the question asks.

Questions # 59:

Which of the following markets are characterized by the presence of a market maker always making two-way prices?

Options:

Exchanges

OTC markets

ECNs

Dark pools

Answer

Explanation

Over the counter and electronic communication networks match buyers and sellers. However, there is no market making function, ie, in periods of stress liquidity may completely disappear from these markets. Exchanges normally have market makers that are required to present two way quotes on the securities they are making the market for. Therefore Choice 'a' is the correct answer.

Questions # 60:

PwC concluded that the accounting policy adopted by China Aviation Oil was incorrect because it

Options:

only regarded the intrinsic value (i.e. the difference between the strike price and the forward price of the underlying commodity) as the fair value of its options

took into account both the intrinsic value and the time value

only took into account the time value of the option (which includes recognizing the time left to maturity of the option, the volatility of the spot price of the underlying commodity, interest rates and other factors)

used neither the intrinsic value nor the time value

Answer

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