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PRMIA 8010 Operational Risk Manager (ORM) Certification Exam is an essential certification for risk management professionals who specialize in operational risk management. 8010 exam covers a broad range of topics related to operational risk management, and is designed to ensure that candidates have the knowledge and skills necessary to effectively identify, assess, and manage operational risks in a variety of industries and contexts. By achieving this certification, risk professionals can demonstrate their expertise in the field of operational risk management and enhance their career opportunities.
PRMIA 8010: Operational Risk Manager (ORM) Exam is an essential certification for professionals seeking to advance their careers in the financial services industry. Operational Risk Manager (ORM) Exam certification provides individuals with the necessary knowledge and skills to identify, assess, and manage operational risks effectively, which is critical for the success and stability of financial institutions.
NEW QUESTION # 23
Which of the following credit risk models considers debt as including a put option on the firm's assets toassess credit risk?
- A. CreditPortfolio View
- B. The contingent claims approach
- C. The actuarial approach
- D. The CreditMetrics approach
Answer: B
Explanation:
Explanation
The correct answer is Choice 'c'. 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 # 24
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.
- A. .011%
- B. 2%
- C. 5.8%
- D. 0%
Answer: C
Explanation:
Explanation
The probability that only one of thethree bonds will default is equal to the sum of the probabilities of the three scenarios where one bond defaults and the other two survive. This probability is given by 1%*(1 - 2%)*(1 -
3%) + (1 - 1%)*2%*(1 - 3%) + (1 - 1%)*(1 - 2%)*3% = 5.7818%. Choice 'c' is the correct answer.
NEW QUESTION # 25
Which of the following statements are true:
I. The set of UoMs used for frequency and severity modeling should be identical II. UoMs can be grouped together into larger combined UoMs using judgment based on the knowledge of the business III. UoMs can be grouped together into combined UoMs using statistical techniques IV. One may use separate sets of UoMs for frequency and severity modeling
- A. All of the above
- B. II, III and IV
- C. I, II and III
- D. IV only
Answer: B
Explanation:
Explanation
One may use separate UoMs for frequency and severity modeling, for example, a combined UoM may be used for estimating thefrequency of cyber attacks in a scenario, while the severity may be modeled using a more granular line-of-business UoM. Therefore statement I is false, while statement IV is true.Statement II is correct, UoMs can be grouped together into larger units based on the facts relating to the business, controls and the business environment. Similarly, UoMs can be grouped together based on statistical clustering techniques using the 'distance' between the units of measure and combining UoMs that are closer to eachother.
In addition, it is also possible to combine both business knowledge and statistical algorithms to combine UoMs.
NEW QUESTION # 26
When considering a request for a loan from a retail customer, which of the following factors is relevant for a bank to consider:
- A. The other retail loans inits portfolio
- B. All of the above
- C. The credit worthiness of the retail customer
- D. The contribution this new loan would bring to total portfolio risk
Answer: B
Explanation:
Explanation
The credit worthiness of the retail customer is certainly a factor for thebank to consider as it will need to price the loan to cover the expectation of default. At the same time, it will need to look at other loans in its portfolio as to avoid unacceptable concentration risk. A corollary of the same theme is that the bank willneed to take a portfolio view of the loan request and consider its contribution to total portfolio risk. Therefore all the choices are appropriate considerations for the bank and Choice 'd' is the correct answer.
NEW QUESTION # 27
Which of the following data sources are expected to influence operational risk capital under the AMA:
I. Internal Loss Data (ILD)
II. External Loss Data (ELD)
III. Scenario Data (SD)
IV. Business Environment and Internal Control Factors (BEICF)
- A. All of the above
- B. I and II
- C. I, II and III only
- D. III only
Answer: A
Explanation:
Explanation
All four data sources are expected to be utilized as inputs as appropriate for operational risk calculations under the advanced measurement approach. Of these, the last one, BEICF, is slightly different from the rest as it does not yield data points that becomethe basis of curve fitting or other statistical computions underlying capital calculations. It includes items such as KRIs, risk assessments etc and allow the risk manager to assess the qualitative aspects of loss data.
NEW QUESTION # 28
Random recovery rates in respectof credit risk can be modeled using:
- A. the beta distribution
- B. the binomial distribution
- C. the normal distribution
- D. the omega distribution
Answer: A
Explanation:
Explanation
The beta distribution is commonly used to model recovery rates. It is a distribution forvariables whose values lie between 0 & 1, and the parameters of the distribution can be estimated using the mean and standard deviation of the data. Therefore Choice 'a' is correct and the others are wrong.
Refer to the tutorial on distributions for an Excel model of the beta distribution.
NEW QUESTION # 29
Which of the following statements are true:
I. A high score according to Altman's Z-Score methodology indicates a lower default risk II. A high score according to theProbit or Logit models indicates a higher default risk III. A high score according to Altman's Z-Score methodology indicates a higher default risk IV. A high score according to the Probit or Logit models indicates a lower default risk
- A. II and III
- B. III and IV
- C. I and IV
- D. I and II
Answer: D
Explanation:
Explanation
A high score under the probit and logit models indicates a higher default risk, while under Altman's methodology it indicates a lower default risk. Therefore Choice 'd' is the correct answer.
NEW QUESTION # 30
If EV be the expected value of a firm's assets in a year, and DP be the 'default point' per the KMV approach to credit risk, and be the standard deviation of future asset returns, then the distance-to-default is given by:
A)
B)
C)
D)
- A. Option C
- B. Option A
- C. Option B
- D. Option D
Answer: D
Explanation:
Explanation
The distance to default is the number of standard deviations that expected asset values are away from the default point. The expression in Choice 'd' represents distance to default. Choice 'd' is the correct answer. The other choices are incorrect.
NEW QUESTION # 31
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?
- A. 40%
- B. 100%
- C. 25%
- D. 0%
Answer: C
Explanation:
Explanation
Probability of the joint default of both A and B =
We know all the numbers except default correlation, and we can solve for it.
DefaultCorrelation*SQRT(0.03*(1 - 0.03)*0.08*(1 - 0.08)) + 0.03*0.08 = 0.014.
Solving, we get default correlation = 25%
NEW QUESTION # 32
A portfolio has two loans, A and B, each worth $1m. The probability of default of loan A is 10% and that of loan B is 15%. Theprobability of both loans defaulting together is 1%. Calculate the expected loss on the portfolio.
- A. 0
- B. 1
- C. 2
- D. 3
Answer: B
Explanation:
Explanation
The easiest way to answer this question is to ignore the joint probability of default as thatis irrelevant to expected losses. The joint probability of default impacts the volatility of the losses, but not the expected amount. One way to think about it is to think of asset portfolios, where diversification reduces risk (ie standard deviation) butthe expected returns are nothing but the average of the expected returns in the portfolio. Just as the expected returns of the portfolio are not affected by the volatility or correlations (these affect standard deviation), in the same way the joint probability of default does not affect the expected losses. Therefore the expected losses for this portfolio are simply $1m x 10% + $1m x 15% = $250,000.
This can also be seen from the lens of a joint probability distribution as follows:
There are four possibilities for this portfolio:
- Only loan A defaults: loss of $1m: 9% probability
- Only loan B defaults: loss of $1m: 14% probability
- Both loan A and B default: loss of $2m: 1% probability
- Neither A nor B default: loss of $0m: 76% probability
Therefore the expected losses on the portfolio are ($1m x 9%) + ($1m x 14%) + ($2m x 1%) + ($0m x 76%) =
$250,000.
(Notes: How is the above table calculated? The totals (10%, 90%, 15% and 85%) are filled in first. The top left cell (both A & B default) is given as 1%. We can now calculate the rest of the cells as the totals are known.)
NEW QUESTION # 33
Which of the following distributions is generally not used for frequency modeling for operational risk
- A. Binomial
- B. Poisson
- C. Negative binomial
- D. Gamma
Answer: D
Explanation:
Explanation
Frequency modeling is performed using discrete distributions that have a positive integer as a resultant - this allows for the number of events per period of time to be modeled. Of thedistributions listed above, Poisson, negative binomial and binomial can be used for modeling frequency distributions. The Poisson and negative binomial distributions are encountered the most in practice.
The gamma distribution is a continuous distributionand cannot be used for frequency modeling.
NEW QUESTION # 34
The risk that a counterparty fails to deliver its obligation upon settlement while having received the leg owed to it is called:
- A. Credit risk
- B. Settlement risk
- C. Replacement risk
- D. Pre-settlement risk
Answer: B
Explanation:
Explanation
Choice 'd' is the correct answer. Settlement risk, as the name suggests, arises upon settlement when one of the parties delivers its obligation under the transaction and the other does not. Consider a EUR/USD FX forward contract maturing in a month. At maturity, one of the parties will deliver EURs and the other USDs. If one party fails to deliver, then it constitutes a very large risk to the other party. This risk is much larger than pre-settlement risk, because the amount at risk is the entire notional and not just the replacement value. Of course, settlement risk exists for a very short period of time, no more than a number or hours or a day.
There is no such thing as 'replacement risk', and credit risk is a larger category of which settlement risks is one component. Settlement risk is the most appropriate answer.
NEW QUESTION # 35
A Bank Holding Company (BHC) is invested in an investment bank and a retail bank. The BHC defaults for certain if either the investment bank or the retail bank defaults. However, the BHC can also default on its own without either the investment bank or the retail bank defaulting. The investment bank and the retail bank's defaults are independent of each other, with a probability of default of 0.05 each. The BHC's probability of default is 0.11.
What is the probabilityof default of both the BHC and the investment bank? What is the probability of the BHC's default provided both the investment bank and the retail bank survive?
- A. 0.0475 and 0.10
- B. 0.05 and 0.0125
- C. 0.08 and 0.0475
- D. 0.11 and 0
Answer: B
Explanation:
Explanation
Since the BHC always fails when the investment bank fails, the joint probability of default of the two is merely the probability of the investment bank failing, ie 0.05.
The probability of just the BHC failing, given that both the investment bank and the retail bank have survived will be equal to 0.11 - (0.05+0.05-0.05*0.05) = 0.0125. (The easiest way to understand this would be to consider a venn diagram, where the area under the largest circle is 0.11, and there are two intersecting circles inside this larger circle, each with an area of 0.05 and their intersection accounting for 0.05*0.05. We need to calculate the area outside of the two smaller circles, but within the larger circle representing the BHC).
Refer diagram below, please excuse the awful colors.
NEW QUESTION # 36
Which of the following statements are correct?
I. A reliance upon conditional probabilities and a-priori views of probabilities is called the 'frequentist' view II. Knightian uncertainty refers to thingsthat might happen but for which probabilities cannot be evaluated III. Risk mitigation and risk elimination are approaches to reacting to identified risks IV. Confidence accounting is a reference to the accounting frauds that were seen in the past decadeas a reflection of failed governance processes
- A. All of the above
- B. I and IV
- C. II and III
- D. II, III and IV
Answer: C
Explanation:
Explanation
In statistics, which is relevant to risk management, a distinction is often drawn between 'frequentists' and
'Bayesians'.Frequentists rely upon data to draw conclusions as to probabilities. Bayesians consider conditional probabilities, ie, take into account what things are already known, and inject sometimes subjective a-priori probabilities into the calculations. StatementI describes Bayesians, and not frequentists. In reality however, the difference is merely academic. Risk managers use whichever technique best applies to the given situation without making it about ideology.
The difference between 'Knightian uncertainty'and 'Risk' is similarly academic. Knightian uncertainty refers to risk that cannot be measured or calculated. 'Risk' on the other hand refers to things for which past data exists and calculations of exposure can be made. To give an example in the contextof the financial world, the risk from a pandemic creating systemic failures from a failure of payment and settlement systems and the like is
'Knightian uncertainty', but the market risk from equity price movements can be modeled (albeit with limitations) and is calculable. Statement II is therefore correct.
Once a risk is identified, it can be mitigated, accepted, avoided or eliminated, or transferred by way of insurance. Therefore statement III is correct.
Confidence accounting is a conceptual idea that suggests that accounting statements make reference to ranges as opposed to point estimates in financial statements. For example, instead of saying that the pension obligation is $xx million, the company should say the pension obligation is in a range of $xxm - $yy m with a certain confidence level. Statement IV is therefore inaccurate.
NEW QUESTION # 37
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?
- A. 0
- B. 1
- C. 2
- D. 3
Answer: B
Explanation:
Explanation
Since the business units are perfectly correlated, we can get the combined EC as equal to the sum of the individual EC estimates.Therefore Choice 'a' is the correct answer.
NEW QUESTION # 38
A bullet bond and an amortizing loan are issued at the same time with the same maturity and with the same principal. Which of these would have a greater credit exposure halfway through their life?
- A. They would have identical exposure half way through their lives
- B. The amortizing loan
- C. The bullet bond
- D. Indeterminate with the given information
Answer: C
Explanation:
Explanation
A bullet bond is a bond that pays coupons covering interest during the life of the bond and theprincipal at maturity. An amortizing loan pays the interest as well as a part of the principal with every payment. Therefore, the exposure of the amortizing loan continually reduces, and approaches zero towards the end of its life. The bullet bond will always have a higher exposure at any time during its life when compared to an equivalent amortizing loan. Hence Choice 'd' is the correct answer.
NEW QUESTION # 39
The 99% 10-day VaR for a bank is $200mm. The average VaR for the past 60 days is $250mm, and the bank specific regulatory multiplier is 3. What is the bank's basic VaR based market risk capital charge?
- A. $250mm
- B. $200mm
- C. $600mm
- D. $750mm
Answer: D
Explanation:
Explanation
The current Basel rules for the basic VaR based charge formarket risk capital set market risk capital requirements as the maximum of the following two amounts:
1. 99%/10-day VaR,
2. Regulatory Multiplier x Average 99%/10-day VaR of the past 60 days
The 'regulatory multiplier' is a number between 3 and 4 (inclusive) calculated based on the number of 1% VaR exceedances in the previous 250 days, as determined by backtesting.
- If the number of exceedances is <= 4, then the regulatory multiplier is 3.
- If the number of exceedances is between 5 and 9, then the multiplier = 3 + 0.2*(N-4), where N is the number of exceedances.
- If the number of exceedances is >=10, then the multiplier is 4.
So you can see that in most normal situations the risk capital requirement will be dictated by the multiplier and the prior 60-dayaverage VaR, because the product of these two will almost often be greater than the current
99% VaR.
The correct answer therefore is = max(200mm, 3*250mm) = $750mm.
Interestingly, also note that a 99% VaR should statistically be exceeded 1%*250 days = 2.5times, which means if the bank's VaR model is performing as it should, it will still need to use a reg multiplier of 3.
NEW QUESTION # 40
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The Professional Risk Managers' International Association (PRMIA) offers a wide range of certification exams for professionals in the risk management field. One of the most popular exams is the PRMIA 8010 Operational Risk Manager (ORM) Certification Exam. Operational Risk Manager (ORM) Exam certification is designed for professionals who wish to demonstrate their expertise in the field of operational risk management.
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