Question # 4

The CDS rate on a defaultable bond is approximated by which of the following expressions:

Question # 5

A financial institution is considering shedding a business unit to reduce its economic capital requirements. Which of the following is an appropriate measure of theresulting reduction in capital requirements?

Question # 6

The VaR of a portfolio at the 99% confidence level is $250,000 when mean return is assumed to be zero. If the assumption of zero returns is changed to an assumption of returns of $10,000, what is the revised VaR?

Question # 7

Which of the following are true:

I. The total of the component VaRs for all components of a portfolio equals the portfolio VaR.

II. The total of the incremental VaRs for each position in a portfolio equals the portfolio VaR.

III. Marginal VaR and incremental VaR are identical for a $1 change in the portfolio.

IV. The VaR for individual components of a portfolio is sub-additive, ie the portfolio VaR is less than (or in extreme cases equal to) the sum of the individual VaRs.

V. The component VaR for individual components of a portfolio is sub-additive, ie the portfolio VaR is less than the sum of the individual component VaRs.

Question # 8

The probability of default of a security over a 1 year period is 3%. What is the probability that it would have defaulted within 6 months?

Question # 9

If the default hazard rate for a company is 10%, and the spread on its bondsover the risk free rate is 800 bps, what is the expected recovery rate?

Question # 10

Which of the following can be used to reduce credit exposures to a counterparty:

I. Netting arrangements

II. Collateral requirements

III. Offsetting tradeswith other counterparties

IV. Credit default swaps

Question # 11

Which of the following statements are correct?

I. A reliance upon conditional probabilities and a-priori views of probabilities is called the 'frequentist' view

II. Knightian uncertainty refers to thingsthat might happen but for which probabilities cannot be evaluated

III. Risk mitigation and risk elimination are approaches to reacting to identified risks

IV. Confidence accounting is a reference to the accounting frauds that were seen in the past decadeas a reflection of failed governance processes

Question # 12

According to Basel II's definition of operational loss event types, losses due to acts by third parties intended to defraud, misappropriate property or circumvent the law are classified as:

Question # 13

Under the ISDA MA, which of the following terms best describes the netting applied upon the bankruptcy of a party?

Question # 14

A corporate bond maturing in 1 year yields 8.5% per year,while a similar treasury bond yields 4%. What is the probability of default for the corporate bond assuming the recovery rate is zero?

Question # 15

In respect of operational risk capital calculations, the Basel II accord recommends a confidence leveland time horizon of:

Question # 16

If P be the transition matrix for 1 year, how can we find the transition matrix for 4 months?

Question # 18

The standalone economic capital estimates for the three business units of a bank are $100, $200 and $150 respectively. What is the combined economic capital for the bank, assuming the risks of the three business units are perfectly correlated?

Question # 19

Which of the following statements are true:

I. The sum of unexpected losses for individual loans in a portfolio is equal to the total unexpected loss for the portfolio.

II. The sum of unexpected losses for individual loans in a portfolio is less than the total unexpected loss for the portfolio.

III. The sum of unexpected losses forindividual loans in a portfolio is greater than the total unexpected loss for the portfolio.

IV. The unexpected loss for the portfolio is driven by the unexpected losses of the individual loans in the portfolio and the default correlation between these loans.

Question # 20

A stock that follows the Weiner process has its future price determined by:

Question # 21

Once the frequency and severity distributions for loss events have been determined, which of the following is an accurate description of the process to determine a full loss distribution for operational risk?

Question # 22

Which of the following best describes the concept of marginalVaR of an asset in a portfolio:

Question # 23

The CDS quote for the bonds of Bank X is 200 bps. Assuming a recovery rate of 40%, calculate the default hazard rate priced in the CDS quote.

Question # 24

A corporate bond has a cumulative probability of default equal to 20% in the first year, and 45% in the second year. What is the monthly marginal probability of default for the bond in the second year, conditional on there beingno default in the first year?

Question # 25

A bank extends a loan of $1m to a home buyer to buy a house currently worth $1.5m, with the house serving as the collateral. The volatility of returns (assumed normally distributed) on house prices in that neighborhood is assessed at 10% annually. The expected probability of default of the home buyer is 5%.

What is the probability that the bank will recover less than the principal advanced on this loan; assuming the probability of the home buyer's default is independent of the value of the house?

Question # 26

Which of the following objectives are targeted by rating agencies when assigning ratings:

I. Ratings accuracy

II. Ratings stability

III. High accuracy ratio (AR)

IV. Ranked ratings

Question # 28

In estimating credit exposure for a line of credit, it is usual to consider:

Question # 29

Which of the following is not one of the 'three pillars' specified in the Basel accord:

Question # 30

Which of the following statements is true in respect of a non financial manufacturing firm?

I. Market risk is not relevant to the manufacturing firm as it does not take proprietary positions

II. The firm faces market risks as an externality which it must bear and has no control over

III. Market risks can make a comparative assessment of profitability over time difficult

IV. Market risks for a manufacturing firm are not directionally biased and do not increase the overall risk of the firm as they net to zero over a long term time horizon

Question # 31

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 assumptions

II. EVT considers the distribution of losses in the tails

III. The Peaks-over-thresholds (POT) and the generalized Pareto distributions are used to model extreme value distributions

IV. EVT is concerned with average losses beyond a given level of confidence

Question # 32

Which of the following formulae describes CVA (Credit Valuation Adjustment)? All acronyms have their usual meanings (LGD=Loss Given Default, ENE=Expected Negative Exposure, EE=Expected Exposure, PD=Probability of Default, EPE=Expected Positive Exposure, PFE=Potential Future Exposure)

Question # 33

Under the KMV Moody's approach to credit risk measurement, which of the following expressions describes the expected 'default point' value of assets at which the firm may be expected to default?

Question # 34

Which of the following credit risk models considers debt as including a put option on the firm's assets toassess credit risk?

Question # 35

Under thebasic indicator approach to determining operational risk capital, operational risk capital is equal to:

Question # 36

For a corporate bond, which of the following statements is true:

I. The credit spread is equal to the default rate times the recovery rate

II. The spread widens when the ratings of the corporate experience an upgrade

III. Both recovery rates and probabilities of default are related to the business cycle and move in oppositedirections to each other

IV. Corporate bond spreads are affected by both the risk of default and the liquidity of the particular issue