Question 1

Which of the following decisions need to be made as part of laying down a system for calculating VaR:I. The confidence level and horizonII. Whether portfolio valuation is based upon a delta-gamma approximation or a full revaluationIII. Whether the VaR is to be disclosed in the quarterly financial statementsIV. Whether a 10 day VaR will be calculated based on 10-day return periods, or for 1-day and scaled to 10days

Options :

A : I and III

B : II and IV

C : I, II and IV

D : All of the above

Answer: C

Question 2

Which of the following is true for the actuarial approach to credit risk modeling (CreditRisk+):

Options :

A : Default correlations between obligors are accounted for using a multivariate normal model

B : The number ofdefaults is modeled using a binomial distribution where the number of defaults are considered discrete events

C : The approach considers only default risk, and ignores the risk to portfolio value from credit downgrades

D : The approach is based upon historical rating transition matrices

Answer: C

Question 3

Which of the following statements are true:

I.Top down approaches help focus management attention on the frequency and severity of loss events, while

bottom up approaches do not.

II. Top down approaches rely upon high level data while bottom up approaches need firm specific risk data to

estimate risk.

III. Scenario analysis can help capture both qualitative and quantitative dimensions of operational risk.

Options :

A : III only

B : II and III

C : I only

D : II only

Answer: B

Question 4

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

Answer: D

Question 5

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?

Options :

A : A firm wide operational risk distribution is generated by adding together the frequency and severity distributions

B : A firm wide operational risk distribution is generated using Monte Carlo simulations

C : A firm wide operational risk distribution is set to be equal to the product of the frequency and severity distributions

D : The frequency distribution alone forms the basis for the loss distribution for operational risk

Answer: B

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