RELIABLE 8011 GUIDE FILES | LATEST TEST 8011 SIMULATIONS

Reliable 8011 Guide Files | Latest Test 8011 Simulations

Reliable 8011 Guide Files | Latest Test 8011 Simulations

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PRMIA Credit and Counterparty Manager (CCRM) Certificate Exam Sample Questions (Q239-Q244):

NEW QUESTION # 239
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?

  • A. The capital required will stay the same
  • B. The capital required will increase
  • C. The capital required will decrease
  • D. Can't say based on the information provided

Answer: B

Explanation:
This situation represents one of the paradoxes in estimating severity that one needs to be aware of - the improvement in controls reduces the weight of the body/middle of the distribution and moves it towards the tails (as the total probability under the curve must stay at 100%) and the distributionbecomes more heavy tailed. As a result, the 99.9th percentile loss actually increases. instead of decreasing, creating a counterintuitive result. Therefore the correct answer is that the capital required will increase.
If scenario analysis produces such a result, the analyst must question if the 1 in 100 year loss severity is still accurate. If the new control has reduced the severity in the body of the distribution, the question as to why the more extreme losses have not changed should be raised.


NEW QUESTION # 240
Which of the following are valid techniques used when performing stress testing based on hypothetical test scenarios:
I. Modifying the covariance matrix by changing asset correlations
II. Specifying hypothetical shocks
III. Sensitivity analysis based on changes in selected risk factors
IV. Evaluating systemic liquidity risks

  • A. II, III and IV
  • B. I, II and III
  • C. I and II
  • D. I, II, III and IV

Answer: C

Explanation:
Each of these represent valid techniques for performing stress testing and building stress scenarios. Therefore d is the correct answer. In practice, elements of each of these techniques is used depending upon the portfolio and the exact situation.


NEW QUESTION # 241
If two bonds with identical credit ratings, coupon and maturity but from different issuers trade at different spreads to treasury rates, which of the following is a possible explanation:
I. The bonds differ in liquidity
II. Events have happened that have changed investor perceptions but these are not yet reflected in the ratings III. The bonds carry different market risk IV. The bonds differ in their convexity

  • A. I and II
  • B. III and IV
  • C. I, II and IV
  • D. II and IV

Answer: A

Explanation:
When two bonds that appear identical in every respect trade at different prices, the difference is often due to differences in liquidity between the two bonds (the less liquid bond will be cheaper and yield higher), and also due to the fact that ratings from the major rating agencies do not generally react to day to day changes in the market. The market's perception of the differences in the two credits will cause a divergence in the prices.
This has been an extremely visible phenomenon during the credit crisis of 2007-2009, where fixed income security prices have changed sharply for many securities without any changes in external credit ratings.
Bonds carrying 'different market risk' is meaningless, and so is the difference in convexity (because the calculated convexity would be identical for similar bonds).
Therefore Choice 'c' is the correct answer.


NEW QUESTION # 242
Which of the following is not a risk faced by a bank from holding a portfolio of residential mortgages?

  • A. The risk that mortgage interest rates will rise in the future
  • B. The risk that CDS spreads on the bank's debt will rise making funding more expensive
  • C. The risk that the homeowners will pay the mortgage off before they are due
  • D. The risk that the homeowners will not be able to pay their mortgage when they are due

Answer: B

Explanation:
Choice 'd' represents a risk that does not arise from its holdings of mortgages. Therefore Choice 'd' is the correct answer.
All the other risks identified are correct - the bank faces interest rate, default and prepayment risks on its mortgages.


NEW QUESTION # 243
According to the Basel II standard, which of the following conditions must be satisfied before a bank can use
'mark-to-model' for securities in its trading book?
I. Marking-to-market is not possible
II. Market inputs for the model should be sourced in line with market prices III. The model should have been created by the front office IV. The model should be subject to periodic review to determine the accuracy of its performance

  • A. II and III
  • B. I, II and IV
  • C. III and IV
  • D. I, II, III and IV

Answer: B

Explanation:
According to Basel II, where marking-to-market is not possible, banks may mark-to-model, where this can be demonstrated to be prudent. Marking-to-model is defined as any valuation which has to be benchmarked, extrapolated or otherwise calculated from a market input. When marking to model, an extra degree of conservatism is appropriate. Supervisory authorities will consider thefollowing in assessing whether a mark- to-model valuation is prudent:
* Senior management should be aware of the elements of the trading book which are subject to mark to model and should understand the materiality of the uncertainty this creates in the reporting of the risk/performance of the business.
* Market inputs should be sourced, to the extent possible, in line with market prices. The appropriateness of the market inputs for the particular position being valued should be reviewed regularly.
* Where available, generally accepted valuation methodologies for particular products should be used as far as possible.
* Where the model is developed by the institution itself, it should be based on appropriate assumptions, which have been assessed and challenged by suitably qualified parties independent of the development process. The model should be developed or approved independently of the front office. It should be independently tested.
This includes validating the mathematics, the assumptions and the software implementation.
* There should be formal change control procedures in place and a secure copy of the model should be held and periodically used to check valuations.
* Risk management should be aware of the weaknesses of the models used and how best to reflect those in the valuation output.
* The model should be subject to periodic review to determine the accuracy of its performance (e.g. assessing continued appropriateness of the assumptions, analysis of P&L versus risk factors, comparison of actual close out values to model outputs).
* Valuation adjustments should be made as appropriate, for example, to cover the uncertainty of the model valuation.
The model should be created independent of the front office, and not by it. Therefore statement III does not represent an appropriate choice. Choice 'a' is the correct answer.


NEW QUESTION # 244
......

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