Use Real 8008 - 100% Cover Real Exam Questions [Mar-2022]
Dumps Brief Outline Of The 8008 Exam - DumpsActual
NEW QUESTION 138
Which of the following are attributes of a robust stress testing programme at a bank?
- A. All of the above
- B. Robust systems infrastructure
- C. Data of appropriate quality and granularity
- D. Written policies and procedures
Answer: A
Explanation:
Explanation
A bank's stress testing programme in relation to firm wide stress tests should document the type, frequency and the purpose of the programme, as well as methodologies for defining scenarios and the remedial actions envisaged. Choice 'b' is therefore a necessary attribute of a robust stress testing programme.
The programme should be supported by a robust systems infrastructure that allows the execution of periodic as well as ad-hoc stress tests at the right level (business unit, as well as firm-wide) at the right level of detail or granularity. Choice 'c' also therefore is a valid choice.
A related element is data quality - without which no stress tests can be be credible.
Therefore all the choices listed are correct and Choice 'd' is the correct answer.
NEW QUESTION 139
For an investor with a long position in market index futures, which of the following is a primary risk:
- A. Increase or decrease in the level of the underlying index
- B. Movement in interest rates underlying the futures prices
- C. Basis risk between futures and spot prices
- D. Risk that expected dividends will differ from realized dividend yields
Answer: A
Explanation:
Explanation
This question emphasizes the difference between primary and secondary risks. Primary risks are the risks consciously undertaken, ie the risks whose premium the investor is trying to earn. Secondary risks are risks that accompany the primary risks that the investor will either hedge, or will ignore if they are small. It is important to watch out for secondary risks because they could become significant and offset the returns being sought even if the investor's market view is proved correct.
An investor in market index futures is betting that the index will rise. Index futures prices are largely driven by the spot value of the index, but are also affected by costs of carry. In particular, futures prices will be driven by interest rates, expected dividends, and any other factors that may cause the basis between spot and futures prices to diverge. These risks are secondary risks.
In this question, Choice 'd' represents the primary risk, and Choice 'a', Choice 'b' and Choice 'c' are all secondary risks. Therefore Choice 'd' is the correct answer.
NEW QUESTION 140
Which of the following credit risk models focuses on default alone and ignores credit migration when assessing credit risk?
- A. The contingent claims approach
- B. The actuarial approach
- C. The CreditMetrics approach
- D. CreditPortfolio View
Answer: B
Explanation:
Explanation
The correct answer is Choice 'd'. The following is a brief description of the major approaches available to model credit risk, and the analysis that underlies them:
1. CreditMetrics: based on the credit migration framework. Considers the probability of migration to other credit ratings and the impact of such migrations on portfolio value.
2. CreditPortfolio View: similar to CreditMetrics, but adds the impact of the business cycle to the evaluation.
3. The contingent claims approach: uses option theory by considering a debt as a put option on the assets of the firm.
4. KMV's EDF (expected default frequency) based approach: relies on EDFs and distance to default as a measure of credit risk.
5. CreditRisk+: Also called the 'actuarial approach', considers default as a binary event that either happens or does not happen. This approach does not consider the loss of value from deterioration in credit quality (unless the deterioration implies default).
NEW QUESTION 141
According to the implied capital model, operational risk capital is estimated as:
- A. Operational risk capital held by similar firms, appropriately scaled
- B. Capital implied from known risk premiums and the firm's earnings
- C. Total capital based on the capital asset pricing model
- D. Total capital less market risk capital less credit risk capital
Answer: D
Explanation:
Explanation
Operational risk capital estimated using the implied capital model is merely the capital that is not attributable to market or credit risk. Therefore Choice 'b' is the correct answer. All other responses are incorrect.
NEW QUESTION 142
Which of the following would not be a part of the principal component structure of the term structure of futures prices?
- A. Parallel component
- B. Trend component
- C. Tilt component
- D. Curvature component
Answer: A
Explanation:
Explanation
The trend component refers to parallel shifts in the term structure, the tilt refers to changes in the shape of the term structure at the long and short ends, and the curvature refers to movements in the medium term part. The phrase 'parallel component' has no meaning and is not a part of the principal components in analyzing term structures.
Changes in the term structure can also be analyzed as "level, slope and curvature", so you should be aware of this terminology as well to refer to the principal components of a term structure analysis.
NEW QUESTION 143
For a bank using the advanced measurement approach to measuring operational risk, which of the following brings the greatest 'model risk' to its estimates:
- A. Insufficient number of simulations when building the loss distribution
- B. Choice of an incorrect distribution for loss event frequencies
- C. Aggregation risk, from selecting an incorrect value of estimated correlations between different operational risk estimates
- D. Choice of incorrect parameters for loss severity distributions
Answer: C
Explanation:
Explanation
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.
NEW QUESTION 144
An investor holds a bond portfolio with three bonds with a modified duration of 5, 10 and 12 years respectively. The bonds are currently valued at $100, $120 and $150. If the daily volatility of interest rates is
2%, what is the 1-day VaR of the portfolio at a 95% confidence level?
- A. 0
- B. 1
- C. 115.51
- D. 163.11
Answer: C
Explanation:
Explanation
The total value of the portfolio is $370 (=$100 + $120 + $150). The modified duration of the portfolio is the weighted average of the MDs of the different bonds, ie =(5 * 100/370) + (10 * 120/370) + (12 * 150/370) =
9.46.
This means that for every 1% change in interest rates, the value of the portfolio changes by 9.46%. Since the daily volatility of interest rates is 2%, the 95% confidence level move will be 1.65 * 2% = 3.30%. Thus, the VaR of the portfolio at the 95% confidence level will be 3.3 * 9.46% * $370 = $115.51.
All other answers are incorrect.
NEW QUESTION 145
Which of the following event types is hacking damage classified under Basel II operational risk classifications?
- A. Information security
- B. Technology risk
- C. External fraud
- D. Damage to physical assets
Answer: C
Explanation:
Explanation
Choice 'b' is the correct answer. All other answers are incorrect.
Refer to the detailed loss event type classification under Basel II (see Annex 9 of the accord). You should know the exact names of all loss event types, and examples of each.
NEW QUESTION 146
For a loan portfolio, unexpected losses are charged against:
- A. Economic capital
- B. Regulatory capital
- C. Economic credit capital
- D. Credit reserves
Answer: C
Explanation:
Explanation
Credit reserves are created in respect of expected losses, which are considered the cost of doing business.
Unexpected losses are borne by economic credit capital, which is a part of economic capital. This question is a bit nuanced - and 'economic capital' would generally be a good answer as well. However, taking a rather beady eyed view of the terminology and distinguishing between 'economic credit capital' which is a subset of
'economic capital', we can say that 'economic credit capital' is a more appropriate Choice 'a's the question relates to credit losses.
NEW QUESTION 147
Which of the following introduces model error when basing VaR on a normal distribution with a static mean and standard deviation?
- A. Autocorrelation of squared returns
- B. All of the above
- C. Volatility clustering
- D. Heavy tails
Answer: B
Explanation:
Explanation
When VaR is based on an assumption of normality with a static mean and volatility, it means anything that violates these assumptions will introduce model error. Volatility clustering implies a non-static volatility.
Heavy tails imply non-normality of the shape of the distribution. Autocorrelation of squared returns implies that returns are not independent and identically distributed. Therefore all of these introduce model error.
Choice 'd' is therefore the correct answer.
NEW QUESTION 148
Conditional default probabilities modeled under CreditPortfolio view use a:
- A. Altman's z-score
- B. Power function
- C. Probit function
- D. Logit function
Answer: D
Explanation:
Explanation
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.
NEW QUESTION 149
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 default correlation is 25%, what is the one year expected loss on this portfolio?
- A. $5.26m
- B. $5.5mc
- C. $11m
- D. $1.38m
Answer: B
Explanation:
Explanation
We will need to calculate the joint probability distribution of the portfolio as follows.Probability of the joint default of both A and B =
The marginal probabilities (ie the standalone probabilities of default of the two bonds) are known, and if we can calculate the probability of joint defaults of the two bonds, we can calculate the rest of the entries. We then multiply the probabilities with the expected loss under each scenario and add them up to get the total expected loss.
The calculations are shown below. The expected loss is $5.5m, and therefore the correct answer is Choice 'd'.
NEW QUESTION 150
Monte Carlo simulation based VaR is suitable in which of the following scenarios:
I. When no assumption can be made about the distribution of underlying risk factors II. When underlying risk factors are discontinuous, show heavy tails or are otherwise difficult to model III. When the portfolio consists of a heterogeneous mix of disparate financial instruments with complex correlations and non-linear payoffs IV. A picture of the complete distribution is desired in addition to the VaR estimate
- A. D
- B. III and IV
- C. I, III and IV
- D. II, III and IV
- E. I, II and III
Answer: A
Explanation:
Explanation
I, III and IV represent situations where Monte Carlo simulations can be employed. I is not a situation where Monte Carlo can be used, as there is no basis available to simulate the returns. When no distribution assumption is possible, it may be advisable to use historical simulations. Therefore Choice 'd' is the correct answer, and the others are incorrect.
NEW QUESTION 151
For a corporate issuer, which of the following can be used to calculate market implied default probabilities?
I. CDS spreads
II. Bond prices
III. Credit rating issued by S&P
IV. Altman's scoring model
- A. I and II
- B. III and IV
- C. I, II and III
- D. II and III
Answer: A
Explanation:
Explanation
Generally, the probability of default is an input into determining the price of a security. However, if we know the market price of a security, we can back out the probability of default that the market is factoring into pricing that security. Market implied default probabilities are the probabilities of default priced into security prices, and can be determined from both bond prices and CDS spreads. Credit ratings issued by a credit agency do not give us 'market implied default probabilities', and neither does an internal scoring model like Altman's as these do not consider actual market prices in any way.
Therefore Choice 'b' is the correct answer and the others are not.
NEW QUESTION 152
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 being no default in the first year?
- A. 3.07%
- B. 2.60%
- C. 31.25%
- D. 15.00%
Answer: A
Explanation:
Explanation
Note that marginal probabilities of default are the probabilities for default for a given period, conditional on survival till the end of the previous period. Cumulative probabilities of default are probabilities of default by a point in time, regardless of when the default occurs. If the marginal probabilities of default for periods 1, 2... n are p1, p2...pn, then cumulative probability of default can be calculated as Cn = 1 - (1 - p1)(1-p2)...(1-pn).
For this question, we can calculate the marginal probability of default for year 2 by solving the equation [1 - (1
- 20%)(1 - P2) = 45%] for P2. Solving, we get the marginal probability of default during year 2 as 31.25%.
Since this is the annual marginal probability of default, we will need to convert it to a monthly number, which we can do by solving the following equation where M1 is the monthly marginal probability of default.
1 - 31.25% = (1 - M1)^12, implying M1 = 3.07%
NEW QUESTION 153
The generalized Pareto distribution, when used in the context of operational risk, is used to model:
- A. Average losses
- B. Unexpected losses
- C. Tail events
- D. Expected losses
Answer: C
Explanation:
Explanation
Some risk experts have suggested the use of extreme value theory to model tail risk or extreme events for operational risk. The generalized Pareto model or the Peaks-over-Threshold (POT) model are often used to model extreme value distributions, and therefore Choice 'a' is the correct answer.
NEW QUESTION 154
Which of the following is closest to the description of a 'risk functional'?
- A. Risk functional refers to the Kolmogorov-Smirnov distance
- B. A risk functional assigns a penalty value for the difference between a model distribution and a risk's severity distribution
- C. A risk functional is a model distribution that is an approximation of the true loss distribution of a risk
- D. A risk functional is the distribution that models the severity of a risk
Answer: B
Explanation:
Explanation
For operational risk modeling, both frequency and severity distributions need to be modeled. Modeling severity involves finding an analytical distribution, such as log-normal or other that approximates the distribution best represented by known data - whether from the internal loss database, the external loss database or scenario data. A 'risk functional' is a measure of the deviation of the model distribution from the risk's actual severity distribution. It assigns a penalty value for the deviation, using a statistical measure, such as the KS distance (Kolmogorov-Smirnov distance).
The problem of finding the right distribution then becomes the problem of optimizing the risk functional. For example, if F is the model distribution, and G is the actual, or empirical severity distribution, and we are using the KS test, then the Risk Functional R is defined as follows:
Note that supx stands for 'supremum', which is a more technical way of saying 'maximum'. In other words, we are calculating the maximum absolute KS distance between the two distributions. (Note that the KS distance is the max of the distance between identical percentiles of the two distributions using the CDFs of the two.) Once the risk functional is identified, we can minimize it to determine the best fitting distribution for severity.
NEW QUESTION 155
If the annual variance for a portfolio is 0.0256, what is the daily volatility assuming there are 250 days in a year.
- A. 0.0101
- B. 0.4048
- C. 0.0006
- D. 0.0016
Answer: A
Explanation:
Explanation
If annual variance is 0.0256, then annual volatility (ie standard deviation) is 0.0256. Therefore the daily volatility will be 0.0256/250 = 1.01%. The other choices are not correct.
NEW QUESTION 156
Which of the following statements is a correct description of the phrase present value of a basis point?
- A. It refers to the discounted present value of 1/100th of 1% of a future cash flow
- B. It is another name for duration
- C. It is the principal component representation of the duration of a bond
- D. It refers to the present value impact of 1 basis point move in an interest rate on a fixed income security
Answer: D
Explanation:
Explanation
This is a trick question, no great science to it. Remember that the 'present value of a basis point' refers to PV01, which is the same as BPV (basis point value) referred to in the PRMIA handbook. In other textbooks, the same term is also variously called 'DV01' (dollar value of a basis point). Remember these other terms too.
PV01, or the present value of a basis point, is the change in the value of a bond (or other fixed income security) from a 1 basis point change in the yield. PV01 is calculated as (Price * Modified Duration/10,000).
Therefore Choice 'a' is the correct answer.
NEW QUESTION 157
Which of the following methods cannot be used to calculate Liquidity at Risk?
- A. Analytical or parametric approaches
- B. Monte Carlo simulation
- C. Historical simulation
- D. Scenario analysis
Answer: A
Explanation:
Explanation
Analytical or parametric approaches are not useful at all for liquidity at risk calculations because there are no neat distributions available to parameterize the large number of factors that affect the calculations of liquidity inflows and outflows. Historical simulations, Monte Carlo and scenario analysis (which can complement historical scenarios) are all valid choices
NEW QUESTION 158
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 for individual 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.
- A. II and IV
- B. III and IV
- C. I and II
- D. I, II and III
Answer: B
Explanation:
Explanation
Unexpected losses (UEL) for individual loans in a portfolio will always sum to greater than the total unexpected loss for the portfolio (unless all the loans are correlated in such a way that they default together).
This is akin to the 'diversification effect' in market risk, in other words, not all the obligors would default together. So the UEL for the portfolio will always be less than the sum of the UELs for individual loans.
Therefore statement III is true.This 'diversification effect' will be affected by the default correlations between the obligors, in cases where the probability of various obligors defaulting together is low, the UEL for the portfolio would be much less than the UEL for the individual loans. Hence statement IV is true.I and II are false for the reasons explained above.
NEW QUESTION 159
If X represents a matrix with ratings transition probabilities for one year, the transition probabilities for 3 years are given by the matrix:
- A. P x P x P
- B. 3 [P]
- C. 3 [P ^ (-1)]
- D. P ^ (-3)
Answer: A
Explanation:
Explanation
Assuming time invariance and the Markov property, it is easy to calculate the transition matrix for any time period as P^n, where P is the given transition matrix for one period and n the number of time periods that we need to compute the new transition matrix for. Thus Choice 'b' is the correct answer.
NEW QUESTION 160
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 identical maturity and notional?
- A. Credit risk can not be compared in these terms
- B. The forward contract has greater credit risk as its future gains are unknown
- C. They both carry the same credit risk
- D. The commercial paper has greater credit risk as the entire notional is outstanding
Answer: D
Explanation:
Explanation
The commercial paper has greater credit risk as the entire notional is outstanding. On the forward contract, only the replacement value of the contract, which normally would be a mere fraction of the notional, would be at risk.
Therefore Choice 'd' is the correct answer.
NEW QUESTION 161
A portfolio's 1-day VaR at the 99% confidence level is $250m. What is the annual volatility of the portfolio?
(assuming 250 days in the year)
- A. $3,952.8m
- B. $1,699.4m
- C. $2,410.3m
- D. $107.5m
Answer: B
Explanation:
Explanation
This is easy to calculate as follows: At the 99% confidence level, the VaR=2.326 * Std Deviation (remember the z values at the 95% and 99% levels, the PRMIA exam may not give you these values). Thus the 1-day standard deviation is $250m/2.326, and the 250-day standard deviation is 250 * ($250m/2.326) = $1,699.4m.
Remember: if you know the VaR, you know the standard deviation. Once you know the standard deviation for any period of time, you can convert it into standard deviation for another period using the square root of time rule. You can also calculate the VaR at a different confidence level too.
NEW QUESTION 162
Which of the following is a most complete measure of the liquidity gap facing a firm?
- A. Cumulative liquidity gap
- B. Residual liquidity gap
- C. Liquidity at Risk
- D. Marginal liquidity gap
Answer: B
Explanation:
Explanation
Marginal liquidity gap measures the expected net change in liquidity over, say, a day. It is just equal to the liquidity inflow minus liquidity outflow. The cumulative liquidity gap measures the aggregate change in liquidity from a point in time, in other words it is just the summation of the marginal liquidity gap for each of the days included in the period under consideration. The residual liquidity gap goes one step further and adds available 'opening balance' of liquidity to the cumulative liquidity gap to reveal the days or times when the net liquidity is most at risk.
Liquidity at Risk measures the expected time to survival at a certain confidence level applied to the firm's cash flows - and is not a measure of the liquidity gap.
Therefore Choice 'a' is the correct answer.
NEW QUESTION 163
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