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Associate PRM Exam English Questions and Answers

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Viewing page 8 out of 11 pages

Viewing questions 71-80 out of questions

Questions # 71:

If the exchange rate for USD/AUD is 0.6831 and the rate for SEK/USD is 8.1329, what is the SEK/AUD cross rate?

Options:

7.4498

0.0840

5.5556

11.9059

Answer

Explanation

Since AUD 1 = USD 0.6831, and USD 1 = SEK 8.1329, AUD 1 = SEK 8.1329*0.6831 = 5.5556.

It is important to remember how exchange rates are generally quoted. Most exchange rates are quoted in terms of how many foreign currencies does USD 1 buy. Therefore, a rate of 99 for the JPY means that USD 1 is equal to JPY 99. However, there are four major world currencies where the rate quote convention is the other way round - these are EUR, GBP, AUD and NZD. For these currencies, the FX quote implies how many US dollars can one unit of these currencies buy. So a quote of "1.1023" for the Euro means EUR 1 is equal to USD 1.1023 and not the other way round.

When calculating cross rates, it is important to pay attention to how the rates are quoted. This particular question is quoted in a very straightforward way because it specifies exactly what the rate means, eg by saying USD/AUD it clarifies that the rate is the number of USDs per AUD. If the question is not clear, remember how exchange rates are quoted - all are against 1 USD, except for EUR, GBP, AUD and NZD where it is the other way round.

Questions # 72:

National Australia Bank and Barings cases are similar in that:

Options:

Losses kept increasing while rogue trader(s) hid their positions

The back offices had inadequate procedures

Both A and B

None of the above

Answer

Questions # 73:

When describing the reasons for the collapse of China Aviation Oil, which of the following was not cited?

Options:

No properly defined risk management policies in place and general lack of oversight by senior management

Time value was not taken into account during the contract valuation process

Loss generating positions were rolled over by selling options on larger positions to generate cash premiums' to settle existing position losses

Senior management in China were aware of the positions but did not understand the complexities of risk managing them

Answer

Questions # 74:

Which of the following data sources are expected to influence operational risk capital under the AMA:

I. Internal Loss Data (ILD)

II. External Loss Data (ELD)

III. Scenario Data (SD)

IV. Business Environment and Internal Control Factors (BEICF)

Options:

I and II

I, II and III only

III only

All of the above

Answer

Explanation

All four data sources are expected to be utilized as inputs as appropriate for operational risk calculations under the advanced measurement approach. Of these, the last one, BEICF, is slightly different from the rest as it does not yield data points that become the basis of curve fitting or other statistical computions underlying capital calculations. It includes items such as KRIs, risk assessments etc and allow the risk manager to assess the qualitative aspects of loss data.

Questions # 75:

The Financial Accounting and Reporting Infrastructure of any organization must:

I. Accurately represent the corporation's current and known financial condition in a timely manner

II. Only use off-balance sheet transactions which have a legitimate economic, tax, risk transfer or risk mitigating purpose

III. Provide a detailed description of the Risk Management Infrastructure in the organization's Annual Report to Shareholders

IV. Provide an auditable Annual Statement of Compliance with the Board's publicly stated Standards of Corporate Governance to the Board and Audit Committee

Options:

I, II and III only

I, III and IV only

I and III only

All of these are expected of the Financial Accounting and Reporting Infrastructure

Answer

Questions # 76:

Which of the following is not a permitted approach under Basel II for calculating operational risk capital

Options:

the internal measurement approach

the basic indicator approach

the standardized approach

the advanced measurement approach

Answer

Explanation

The Basel II framework allows the use of the basic indicator approach, the standardized approach and the advanced measurement approaches for operational risk. There is no approach called the 'internal measurement approach' permitted for operational risk. Choice 'a' is therefore the correct answer.

Questions # 77:

[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 best describes a holder extendible option:

Options:

an option in which the buyer of the option has the option to extend the expiry of the option upon the payment of an extra premium

an option in which the holder of the option has the option to extend the expiry of the option in case the option expires out of the money

an option in which the seller of the option can extend the expiry of the option if the underlying's price is beyond an agreed threshold

an option whose expiry is automatically extended if it finishes out of the money.

Answer

Explanation

Choice 'a' correctly describes a holder extendible option. Choice 'd' describes a writer extendible option. The other choices are meaningless.

Questions # 78:

The vast majority of exchange traded futures contracts are:

Options:

closed by an offsetting trade prior to expiry

settled using physical settlements

cash settled upon expiry

settled by delivery

Answer

Explanation

The vast majority of exchange traded futures contracts are closed out prior to expiry by the parties acquiring offsetting positions. Very few contracts are settled by delivery. Since P&L on futures contracts is settled daily, 'cash settlement' really does not mean much as only the previous day's P&L is due or receivable on any given day.

Questions # 79:

According to the G-30 Study, the risk management infrastructure's funding must be