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

The 99% 10-day VaR for a bank is $200mm. The average VaR for the past 60 days is $250mm, and the bank specific regulatory multiplier is 3. What is the bank's basic VaR based market risk capital charge?

• $250mm
• $200mm
• $750mm
• $600mm

When considering a request for a loan from a retail customer, which of the following factors is relevant for a bank to consider:

• The other retail loans in its portfolio
• The credit worthiness of the retail customer
• The contribution this new loan would bring to total portfolio risk
• All of the above

In January, a bank buys a basket of mortgages with a view to securitize them by April. Due to an unexpected lack of investors in the securitization market, it is unable to do so and is left with the exposure to the mortgages on its books. This is an example of:

• Market risk
• Wrong-way risk
• Basis risk
• Pipeline and warehousing risk

Which of the following statements are true:I,Credit risk and counterparty risk are synonymousII,Counterparty risk is the contingent risk from a counterparty's default in derivative transactionsIII,Counterparty risk is the risk of a loan default or the risk from moneys lent directlyIV. The exposure at default is difficult to estimate for credit risk as it depends upon market movements

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

Which of the following is true in relation to the application of Extreme Value Theory when applied to operational risk measurement?I,EVT focuses on extreme losses that are generally not covered by standard distribution assumptionsII,EVT considers the distribution of losses in the tailsIII,The Peaks-over-thresholds (POT) and the generalized Pareto distributions are used to model extreme value distributionsIV. EVT is concerned with average losses beyond a given level of confidence

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

CreditRisk+, the actuarial model for calculating portfolio credit risk, is based upon:

• the exponential distribution
• the normal distribution
• the Poisson distribution
• the log-normal distribution

If A and B be two uncorrelated securities, VaR(A) and VaR(B) be their values-at-risk, then which of the following is true for a portfolio that includes A and B in any proportion. Assume the prices of A and B are log-normally distributed.

• VaR(A+B) > VaR(A) + VaR(B)
• VaR(A+B) = VaR(A) + VaR(B)
• VaR(A+B) < VaR(A) + VaR(B)
• The combined VaR cannot be predicted till the correlation is known

The diversification effect is responsible for:

• VaR being applicable only to short term horizons
• the super-additivity property of market risk VaR assessments
• total VaR numbers being greater than the sum of the individual VaRs for underlying portfolios
• the sub-additivity property of market risk VaR assessments

Which of the following statements is true in relation to a normal mixture distribution:I,The mixture will always have a kurtosis greater than a normal distribution with the same mean and varianceII,A normal mixture density function is derived by summing two or more normal distributionsIII,VaR estimates for normal mixtures can be calculated using a closed form analytic formula

• I and III
• I, II and III
• II and III
• I and II Normal mixtures have higher peaks, and therefore higher kurtosis than a normal distribution with an equivalent mean and variance. Therefore statement I is correct. The term 'normal mixture' literally means that - the distribution is derived by summing two or more normal distributions. Statement II is correct. One interesting thing to note about normal mixtures is that their mean and variances are just the weighted averages of the means and variances of their underlying component normal distributions. But their kurtosis is higher than that of either of the components. They are more peaked, and have fatter tails, a property that makes them useful in finance. Unfortunately there is no analytical formula for calculating VaR based on normal mixtures. However, we can back solve for VaR (using Excel's Solver, for example), given we know the density functions for the underlying normal distributions. Statement III is not correct.

Which of the following best describes Altman's Z-score

• A calculation of default probabilities
• A regression of probability of survival against a given set of factors
• A numerical computation based upon accounting ratios
• A standardized z based upon the normal distribution