Free Risk Management Frameworks, Operational Risk, Credit Risk, Counterparty Risk, Market Risk, ALM, FTP – 2015 Edition Exam 8008 Exam Practice Test

Which of the following losses can be attributed to credit risk:I,Losses in a bond's value from a credit downgradeII,Losses in a bond's value from an increase in bond yieldsIII,Losses arising from a bond issuer's defaultIV. Losses from an increase in corporate bond spreads

• I, III and IV
• II and IV
• I and II
• I and III

The probability of default of a security over a 1 year period is 3%. What is the probability that it would not have defaulted at the end of four years from now?

• 11.47%
• 88.53%
• 12.00%
• 88.00%

Which of the following statements is true:I,If the sum of its parameters is less than one, GARCH is a mean reverting model of volatility, while EWMA is never mean revertingII,Standardized returns under both EWMA and GARCH show less non-normality than non standardized returnsIII,Steady state variance under GARCH is affected only by the persistence coefficientIV. Good risk measures are always sub-additive

• II, III and IV
• I & II
• I, II and IV
• I, II and III

Which of the following represent the parameters that define a VaR estimate?

• trading position and distribution assumption
• confidence level and the underlying stochastic process
• confidence level, the holding period and expected volatility
• confidence level and the holding period

Which of the following is not true about the ISDA master agreement (ISDA MA):

• All transactions under the ISDA MA are considered separate obligations
• The ISDA MA describes the close out process
• The CSA (Credit Support Annex) is one of the parts of the ISDA MA
• The ISDA MA describes events of default, and termination events

For a bank using the advanced measurement approach to measuring operational risk, which of the following brings the greatest 'model risk' to its estimates:

• Choice of an incorrect distribution for loss event frequencies
• Insufficient number of simulations when building the loss distribution
• Choice of incorrect parameters for loss severity distributions
• Aggregation risk, from selecting an incorrect value of estimated correlations between different operational risk estimates The greatest model risk when calculating operational risk capital comes from incorrect assumptions about correlations between different operational risks for which standalone risk calculations have been made. Generally, the correlation can be expected to be positive, and would therefore vary between 0 and 1. These two values determine the 'bounds' between which the total operational risk capital would lie, and these bounds are generally quite far apart. Therefore the total value of the operational risk capital is very sensitive to the value chosen for the correlation, and this is the source of the biggest model risk under the AMA.

According to the Basel II framework, subordinated term debt that was originally issued 4 years ago with a maturity of 6 years is considered a part of:

• Tier 2 capital
• Tier 1 capital
• Tier 3 capital
• None of the above

If the annual default hazard rate for a borrower is 10%, what is the probability that there is no default at the end of 5 years?

• 39.35%
• 50.00%
• 59.05%
• 60.65%

Conditional default probabilities modeled under CreditPortfolio view use a:

• Power function
• Altman's z-score
• Probit function
• Logit function Conditional default probabilities are modeled as a logit function under CreditPortfolio view. That ensures the resulting probabilities are 'well behaved', ie take a value between 0 and 1. The probability may be expressed as = 1/ (1 + exp(I)), where I is a country specific index taking various macro economic factors into account.

If the loss given default is denoted by L, and the recovery rate by R, then which of the following represents the relationship between loss given default and the recovery rate?

• L = 1 + R
• R = 1 + L
• R = 1 / L
• R = 1 - L When a default occurs, the proportion of the exposure represented by the recovery rate is recovered. For example, if the recovery rate is 40% for a loan, the actual loss in the event of a default would be $60 for a $100 loan. In other words, the loss given default = 1 - recovery rate. Hence Choice 'd' is the correct answer. All other choices are incorrect.