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8005
Associate PRM Exam English Questions and Answers

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Viewing page 9 out of 11 pages

Viewing questions 81-90 out of questions

Questions # 81:

The problems which initiated the crisis at Northern Rock during the summer of 2007 were:

Options:

Large customer withdrawals despite the UK regulator and the UK Treasury giving assurances that the bank was solvent

Doubts arising about the viability of the business model which necessitated Bank of England intervention

A general lack of confidence in mortgage backed securities associated in large part with developments in the US sub-prime mortgage market, and doubts emerging about the viability of the Northern Rock business model

A depositor run on the bank, following doubts about the viability of the Northern Rock business model

Answer

Questions # 82:

By market convention, which of the following currencies are not quoted in terms of 'direct quotes' versus the USD?

Options:

EUR

INR

KWD

CAD

Answer

Explanation

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. These are called 'direct rates'. 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.

Questions # 83:

The steps which the US Treasury Department and the Federal Reserve took in July 2008 to boost confidence in both Fannie Mae and Freddie Mac did not include which one of the following:

Options:

Access to the Federal Reserve discount window

Removing the prohibition on the Treasury Department to buy both companies stock

Restricting the sale of new Fannie Mae and Freddie Mac securities only to US citizens

Reiterating their belief that both companies played a central role in the US housing finance system

Answer

Questions # 84:

[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.]

The use of numerical pricing methods over analytical methods for valuing exotic options is resorted to allow for which of the following reasons:

I. Efficient valuation

II. Allowing for stochastic volatility

III. Accommodating discontinuous asset prices

IV. Allowing for complex payoffs

Options:

I, II and III

II, III and IV

I, II, III and IV

Answer

Explanation

Analytical methods are more 'efficient' than numerical methods in terms of computing power required, consistency of results and providing clarity on the inputs driving the results. Therefore 'efficient valuation' is not a reason to adopt numerical pricing methods over analytical methods.

It is much easier to incorporate changing stochastic volatility, discontinuous asset prices or other complex payoffs using numerical pricing methods. So these certainly represent good reasons to use numerical pricing methods for valuing exotics.

Therefore Choice 'b' is the correct answer.

Questions # 85:

A digital cash-or-nothing option can be hedged reasonably effectively using:

Options:

a long call and a long put with a higher strike

a long call and a short call with a lower strike

a long call and a short call with a higher strike

a short call and a long put with a higher strike

Answer

Explanation

Consider a long vanilla call at a strike of K1, and a short call with a strike price of K2 so that K2>K1. If you construct the payoff diagrams for these option positions, you will see that the combined payoff resembles very closely the payoff of a digital cash-or-nothing option. By bringing K2 and K1 closer together, we can make it very close to a digital cash-or-nothing option. Therefore Choice 'c' is the correct answer.

Questions # 86:

If the CHF/USD spot and 3 month (91 days) forward rates are 1.1763 and 1.1652, what is the annualized forward premium or discount?

Options:

3.73% premium

0.94% premium

0.94% discount

3.785% discount

Answer

Explanation

Forward premium or discount can be easily calculated as {(Forward rate - Spot rate) / Spot rate x 365/number of days]. In this case, it can be calculated as =((1.1652 - 1.1763) / 1.1763 ) * 365/91 = 3.785%, which is a discount as it is a negative number. It can also be interpreted as a discount as the forward price is lower than the spot price.

Questions # 87:

Loss provisioning is intended to cover:

Options:

Unexpected losses

Losses in excess of unexpected losses

Both expected and unexpected losses

Expected losses

Answer

Explanation

Loss provisioning is intended to cover expected losses. Economic capital is expected to cover unexpected losses. No capital or provisions are set aside for losses in excess of unexpected losses, which will ultimately be borne by equity.

Choice 'd' is the correct answer.

Questions # 88:

The sum of the stand alone economic capital of all the business units of a bank is:

Options:

less than the economic capital for the firm as a whole

more than the economic capital for the firm as a whole

equal to the economic capital for the firm as a whole

unrelated to the economic capital for the firm as a whole

Answer

Explanation

Economic capital is sub-additive, ie, because of the correlation being less than perfect between the risks of the different business units, the total economic capital for the firm will be less than the sum of the EC for the individual business units. Therefore Choice 'b' is the correct answer.

In practice, correlations are difficult to estimate reliably, and banks often use estimates and corroborate their capital calculations with reference to a number of data points.

Questions # 89:

Under the CreditPortfolio View model of credit risk, the conditional probability of default will be:

Options:

lower than the unconditional probability of default in an economic expansion

higher than the unconditional probability of default in an economic expansion

lower than the unconditional probability of default in an economic contraction

the same as the unconditional probability of default in an economic expansion

Answer

Explanation

When the economy is expanding, firms are less likely to default. Therefore the conditional probability of default, given an economic expansion, is likely to be lower than the unconditional probability of default. Therefore Choice 'a' is the correct answer and the other statements are incorrect.

Questions # 90:

Which statement regarding the matrix below is true?