Question 1

The risk that a counterparty fails to deliver its obligation upon settlement while having received the leg owed

to it is called:

Options :

A : Pre-settlement risk

B : Credit risk

C : Replacement risk

D : Settlement risk

Answer: D

Question 2

Under the KMV Moody's approach to calculating expectingdefault frequencies (EDF), firms' default on obligations is likely when:

Options :

A : expected asset values one year hence are below total liabilities

B : asset values reach a level below short term debt

C : asset values reach a level below totalliabilities

D : asset values reach a level between short term debt and total liabilities

Answer: D

Question 3

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?

Options :

A : Incremental capital for the business unit in consideration

B : Proportionate capital for the business unit in consideration

C : Percentage of total gross income contributed by the business unit in question

D : Marginal capital for the business unit in consideration

Answer: A

Question 4

There are two bonds in a portfolio, each with a marketvalue of $50m. The probability of default of the two bonds over a one year horizon are 0.03 and 0.08 respectively. If the default correlation is zero, what is the one year expected loss on this portfolio?

Options :

A : $11m

B : $5.26m

C : $5.5m

D : $1.38m

Answer: C

Question 5

The key difference between 'top down models' and 'bottom up models' foroperational risk assessment is:

Options :

A : Top down approaches to operational risk are based upon an analysis of key risk drivers, while bottom up approaches consider causality in risk scenarios.

B : Bottom up approaches to operational risk are based upon an analysis of key risk drivers, while top down approaches consider causality in risk scenarios.

C : Bottom up approaches to operational risk calculate the implied operational risk using available data such as income volatility, capital etc; while top down approaches use causal factors, risk drivers and other factors to get an aggregated estimate of risk

D : Top down approaches to operational risk calculate the implied operational risk using available data such as income volatility, capital etc; while bottom up approaches use causal factors, risk drivers and other factors to get an aggregated estimate of risk.

Answer: D

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