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8010 Operational Risk Manager (ORM) Exam Questions and Answers

Questions 4

Which of the following is a cause ofmodel risk in risk management?

Options:

A.

Programming errors

B.

Misspecification of the model

C.

Incorrect parameter estimation

D.

All of the above

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Questions 5

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

Options:

A.

lower than the unconditional probability of default in an economic expansion

B.

higherthan the unconditional probability of default in an economic expansion

C.

lower than the unconditional probability of default in an economic contraction

D.

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

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Questions 6

The unexpected loss for a credit portfolio at a given VaR estimate is definedas:

Options:

A.

max(Actual Loss - Expected Loss, 0)

B.

Actual Loss - Expected Loss

C.

Actual Loss - VaR

D.

VaR - Expected Loss

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Questions 7

The sensitivity (delta) of a portfolio to a single point move in the value of the S&P500 is $100. If the current level of the S&P500 is 2000, and has a one day volatility of 1%, what is the value-at-risk for this portfolio at the 99% confidence and a horizon of 10 days? What is this method of calculating VaR called?

Options:

A.

$14,736, parametric VaR

B.

$4,660, Monte Carlo simulation VaR

C.

$14,736, historical simulation VaR

D.

$4,660, parametric VaR

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Questions 8

There are three bonds in a diversified bond portfolio, whose default probabilities are independent of each other and equal to 1%, 2% and 3% respectively over a 1 year time horizon. Calculate the probability that none of the three bonds will default.

Options:

A.

94%

B.

0.11%

C.

0.0006%

D.

2%

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Questions 9

Whichof the following statements are true in relation to Historical Simulation VaR?

I. Historical Simulation VaR assumes returns are normally distributed but have fat tails

II. It uses full revaluation, as opposed to delta or delta-gamma approximations

III. Acorrelation matrix is constructed using historical scenarios

IV. It particularly suits new products that may not have a long time series of historical data available

Options:

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Questions 10

The cumulative probability of default for a security for 4 years is 11.47%. The marginal probability of default for the security for year 5 is 5% during year 5. What is the cumulative probability of default for the security for 5 years?

Options:

A.

16.47%

B.

5.00%

C.

15.90%

D.

None of the above

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Questions 11

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

Options:

A.

less than the economic capital for the firm as a whole

B.

more than the economic capital for the firm as a whole

C.

equalto the economic capital for the firm as a whole

D.

unrelated to the economic capital for the firm as a whole

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Questions 12

When fitting a distribution in excess of a threshold as part of the body-tail distribution method described by the equation below, how is the parameter 'p' calculated.

8010 Question 12

Here, F(x) is the severity distribution. F(Tail) and F(Body) are the parametric distributions selected for the tail and the body, and T is the threshold in excess of which the tail is considered to begin.

Options:

A.

p is a function of the reporting threshold and determined by the log-likelihood functional

B.

If there are K observations up to the tail threshold, then p = k*n

C.

p is a parameter estimated using either the sum of least squares or maximum likelihood estimation

D.

If there are Nobservations, of which K are up to T, then p = k/N

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Questions 13

Which loss event type is the failure to timely deliver collateral classified as under the Basel II framework?

Options:

A.

Clients, products and business practices

B.

External fraud

C.

Information security

D.

Execution, Delivery & Process Management

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Questions 14

Which of the beloware a way to classify risk governance structures:

A Reactive, Preventative and Active

B. Committee based, regulation based and board mandated

C. Top-down and Bottom-up

D. Active and Passive

Options:

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Questions 15

Which of the following cannot be used as an internal credit rating model to assess an individual borrower:

Options:

A.

Distance to default model

B.

Probit model

C.

Logit model

D.

Altman's Z-score

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Questions 16

An operational loss severity distribution is estimated using 4 data points from a scenario. The management institutes additional controls to reduce the severity of the loss if the risk is realized, and as a result the estimated losses from a 1-in-10-year losses are halved. The 1-in-100 loss estimate however remains the same. What would be the impact on the 99.9th percentile capital required for this risk as a result of the improvement in controls?

Options:

A.

The capital required will decrease

B.

The capital required will stay the same

C.

The capital required will increase

D.

Can't say based on the information provided

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Questions 17

Which of the following is not a risk faced by a bank from holding a portfolio of residential mortgages?

Options:

A.

The risk that mortgage interest rates will rise in the future

B.

The risk that the homeowners will pay the mortgage off before they are due

C.

The risk that the homeowners will not be able to pay their mortgage when they are due

D.

The risk that CDSspreads on the bank's debt will rise making funding more expensive

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Questions 18

Which of the following are considered properties of a 'coherent' risk measure:

I. Monotonicity

II. Homogeneity

III. Translation Invariance

IV. Sub-additivity

Options:

A.

II and III

B.

II and IV

C.

I and III

D.

All of theabove

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Questions 19

For a hypotherical UoM, the number of losses in two non-overlapping datasets is 24 and 32 respectively. The Pareto tail parameters for the two datasets calculated using the maximum likelihood estimation method are 2 and 3. What is an estimate of the tail parameter of the combined dataset?

Options:

A.

2.57

B.

2.23

C.

3

D.

Cannot be determined

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Questions 20

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

Options:

A.

The actuarial approach

B.

The CreditMetrics approach

C.

The contingent claims approach

D.

CreditPortfolio View

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Questions 21

For a loan portfolio, unexpected losses are charged against:

Options:

A.

Credit reserves

B.

Economic credit capital

C.

Economic capital

D.

Regulatory capital

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Questions 22

According to the implied capital model, operational risk capital is estimated as:

Options:

A.

Operational risk capital held by similar firms, appropriately scaled

B.

Total capital less market risk capital less credit risk capital

C.

Capitalimplied from known risk premiums and the firm's earnings

D.

Total capital based on the capital asset pricing model

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Questions 23

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?

Options:

A.

39.35%

B.

50.00%

C.

59.05%

D.

60.65%

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Questions 24

Which of the following statements are true:

I. Pre-settlement risk is the risk that one of the parties to a contract might default prior to the maturity date or expiry of the contract.

II. Pre-settlement risk can be partly mitigated by providing for early settlement in the agreements between the counterparties.

III. The current exposure from an OTC derivatives contract is equivalent to its current replacement value.

IV. Loan equivalent exposures are calculated even for exposures that are not loans as a practical matter for calculating credit risk exposure.

Options:

A.

II and IV

B.

III and IV

C.

I, II, III and IV

D.

II and III

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Questions 25

Which of the following best describes a 'break clause ?

Options:

A.

A break clause gives either party to a transaction the right to terminate the transaction at market price at future date(s)

B.

A break clausedetermines the process by which amounts due on early termination will be determined

C.

A break clause describes rights and obligations when the derivative contract is broken

D.

A break clause sets out the conditions under which the transaction will be terminated upon non-compliance with the ISDA MA

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Questions 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

Options:

A.

II and III

B.

III and IV

C.

I and II

D.

I, II and III

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Questions 27

Which of the following statements is true

I. If no loss data is available, good quality scenarios can be used to model operational risk

II. Scenario data can be mixed with observed loss data for modeling severity and frequency estimates

III. Severity estimates should not be created by fitting models to scenario generated loss data points alone

IV. Scenario assessments should only be used as modifiers to ILD or ELD severity models.

Options:

A.

I

B.

I and II

C.

III and IV

D.

All statements are true

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Questions 28

Which of the following risks and reasons justify the use of scenario analysis in operational riskmodeling:

I. Risks for which no internal loss data is available

II. Risks that are foreseeable but have no precedent, internally or externally

III. Risks for which objective assessments can be made by experts

IV. Risks that are known to exist, but for which no reliable external or internal losses can be analyzed

V. Reducing the complexity of having to fit statistical models to internal and external loss data

VI. Managing the capital estimation process as to produce estimates in line with management's desired capital buffers.

Options:

A.

I, II and III

B.

I, II, III and IV

C.

V

D.

All of the above

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Questions 29

Which of the following best describes economic capital?

Options:

A.

Economic capital is the amount of regulatory capital mandated for financial institutions in the OECD countries

B.

Economic capital is the amount of regulatory capital that minimizes the cost ofcapital for firm

C.

Economic capital reflects the amount of capital required to maintain a firm's target credit rating

D.

Economic capital is a form of provision for market risk losses should adverse conditions arise

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Questions 30

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?

Options:

A.

450

B.

269

C.

21

D.

72500

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Questions 31

Company A issues bonds with a face value of$100m, sold at $98. Bank B holds $10m in face of these bonds acquired at a price of $70. Company A then defaults, and the recovery rate is expected to be 30%. What is Bank B's loss?

Options:

A.

$7m

B.

$4m

C.

$2.1m

D.

$4.9m

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Questions 32

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?

Options:

A.

L = 1 + R

B.

R = 1 + L

C.

R = 1 / L

D.

R = 1 - L

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Questions 33

Which of the following carry greater counterparty risk: a forward contract on a 10 year note, or a commercial paper carrying a AA credit rating with identicalmaturity and notional?

Options:

A.

The forward contract has greater credit risk as its future gains are unknown

B.

Credit risk can not be compared in these terms

C.

They both carry the same credit risk

D.

The commercial paper has greater credit risk as the entire notional is outstanding

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Questions 34

There are three bonds in a diversified bond portfolio, whose default probabilities are independent of each other and equal to 1%, 2% and 3% respectively over a 1 year time horizon. Calculate the probability that exactly 1 of the three bonds will default.

Options:

A.

.011%

B.

2%

C.

5.8%

D.

0%

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Questions 35

There are two bonds in a portfolio, each with a market value of $50m. The probability of default of the two bonds are 0.03 and 0.08 respectively, over a one year horizon. If the probability of the two bonds defaulting simultaneously is 1.4%, what is the default correlation between the two?

Options:

A.

0%

B.

100%

C.

40%

D.

25%

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Questions 36

The definition of operational risk per Basel II includes which of the following:

I. Riskof loss resulting from inadequate or failed internal processes, people and systems or from external events

II. Legal risk

III. Strategic risk

IV. Reputational risk

Options:

A.

I, II, III and IV

B.

II and III

C.

I and III

D.

I and II

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Exam Code: 8010
Exam Name: Operational Risk Manager (ORM) Exam
Last Update: Nov 30, 2024
Questions: 240

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