Real PRMIA 8008 Exam Dumps with Correct 359 Questions and Answers
Valid 8008 Test Answers & PRMIA 8008 Exam PDF
NEW QUESTION 11
Which of the following statements is correct?
- A. Funding liquidity risks present themselves in the form of an adverse market impact on prices from a trade
- B. Market liquidity risk is idiosyncratic while funding liquidity risk is not
- C. Dynamic simulations of liquidity needs require an assumption of counterparty risk remaining constant
- D. Market liquidity risks present themselves in the form of higher bid offer spreads
Answer: D
Explanation:
Explanation
Simulations of liquidity needs can be of various types: historical simulations, where the current positions are subjected to the kind of liquidity shocks experienced in the past; static simulations, where a static view of current positions, counterparty credit position, and the business is considered; and dynamic simulations where all factors are dynamically changed including counterparty credit standing, changes to the current portfolio and behavioural aspects of the business. Choice 'b' is incorrect as dynamic simulations require no such assumptions.
Liquidity risk is often thought of in terms of market liquidity risk and funding liquidity risk. Market liquidity risk relates to the the liquidity for a particular type of asset drying up. For example, during the 2007-2009 crisis a large number of corporate bonds and structured products became extremely illiquid. Market liquidity risk manifests itself in the form of higher bid offer spreads, higher pricde impact, and a reduction in the normal market size (ie, the 'normal' size of a trade for which a dealer quote is valid for). Therefore Choice 'd' is correct. Similarly, Choice 'a' is incorrect as adverse price impact results from market liquidity risk and not funding liquidity risk.
Market liquidity risk applies to the entire market and all its participants. It is not idiosyncratic. Therefore Choice 'c' is incorrect too. Funding liquidity risk on the other hand applies to an individual institution that is under liquidity stress in the sense of not being able to meet its obligations such as margin or collateral calls because of a lack of liquid assets. Thus it is funding liquidity that is idiosyncratic. Market liquidity risk often leads to funding liquidity risks materializing as firms are unable to get to the funds they were relying upon due to assets becoming illiquid.
NEW QUESTION 12
For identical mean and variance, which of the following distribution assumptions will provide a higher estimate of VaR at a high level of confidence?
- A. A distribution with kurtosis = 3
- B. A distribution with kurtosis = 8
- C. A distribution with kurtosis = 0
- D. A distribution with kurtosis = 2
Answer: B
Explanation:
Explanation
A fat tailed distribution has more weight in the tails, and therefore at a high level of confidence the VaR estimate will be higher for a distribution with heavier tails. At relatively lower levels of confidence however, the situation is reversed as the heavier tailed distribution will have a VaR estimate lower than a thinner tailed distribution.
A higher level of kurtosis implies a 'peaked' distribution with fatter tails. Among the given choices, a distribution with kurtosis equal to 8 will have the heaviest tails, and therefore a higher VaR estimate. Choice 'a' is therefore the correct answer. Also refer to the tutorial about VaR and fat tails.
NEW QUESTION 13
Which of the following belong to the family of generalized extreme value distributions:
I. Frechet
II. Gumbel
III. Weibull
IV. Exponential
- A. All of the above
- B. II and III
- C. I, II and III
- D. IV
Answer: C
Explanation:
Explanation
Extreme value theory focuses on the extreme and rare events, and in the case of VaR calculations, it is focused on the right tail of the loss distribution. In very simple and non-technical terms, EVT says the following:
1. Pull a number of large iid random samples from the population,
2. For each sample, find the maximum,
3. Then the distribution of these maximum values will follow a Generalized Extreme Value distribution.
(In some ways, it is parallel to the central limit theorem which says that the the mean of a large number of random samples pulled from any population follows a normal distribution, regardless of the distribution of the underlying population.) Generalized Extreme Value (GEV) distributions have three parameters: (shape parameter), (location parameter) and (scale parameter). Based upon the value of , a GEV distribution may either be a Frechet, Weibull or a Gumbel. These are the only three types of extreme value distributions.
NEW QUESTION 14
Which of the following statements is true?
- A. For an issuer of life insurance policies, longevity risk can lead to reserves falling short of payments due
- B. Only the drawn portions of credit facilities extended to clients by a bank count towards its liquidity exposure
- C. Under times of liquidity stress, both prepayments of loans extended and expected withdrawals from on-demand deposits will decrease
- D. Deterioration in the balance sheets of key counterparties is a concern for a liquidity manager even though it may not immediately affect a firm
Answer: D
Explanation:
Explanation
Deterioration in the balance sheets of key counterparties is a concern for a liquidity manager even though it may not immediately affect a firm, and this is true because counterparty failures may lead to liquidity shortfalls for an institution for no fault of its own. It is important for a liquidity risk manager to watch the health of key counterparties where exposure is concentrated and take timely steps to reduce it should the health deteriorate.
Under times of liquidity stress, prepayments of loans extended will decline while withdrawals of demand deposits are likely to increase. Both will not decrease, and therefore Choice 'b' is incorrect.
A bank is exposed to the undrawn portions of a line of credit extended to a borrower as the borrower, with superior information on its own finances, is likely to draw upon undrawn lines of credit thereby increasing the bank's exposure. Therefore Choice 'a' is incorrect. Generally, a portion of the undrawn part is counted towards a liquidity outflow.
Longevity risk is the risk facing sellers of annuities that their clients will outlive their assumptions on their length of life, while mortality risk is the downside risk for an insurer that clients will die sooner than expected causing the reserves to fall short of what is needed. Therefore Choice 'd' is not correct as the opposite is true.
NEW QUESTION 15
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. I and II
- B. All of the above
- C. III only
- D. I, II and III only
Answer: B
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 become the 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 16
When combining separate bottom up estimates of market, credit and operational risk measures, a most conservative economic capital estimate results from which of the following assumptions:
- A. Assuming that market, credit and operational risk estimates are perfectly negatively correlated
- B. Assuming that market, credit and operational risk estimates are perfectly positively correlated
- C. Assuming that the resulting distributions have a correlation between 0 and 1
- D. Assuming that market, credit and operational risk estimates are uncorrelated
Answer: B
Explanation:
Explanation
If the risks are considered perfectly positively correlated, ie assumed to have a correlation equal to 1, the standard deviations can simply be added together. This gives the most conservative estimate of combined risk for capital calculation purposes. In practice, this is the assumption used most often.
If risks are uncorrelated, ie correlation is assumed to be zero, variances can be added or the standard deviation is the root of the sum of the squares of the individual standard deviations. This obviously gives a number lower than that given when correlation is assumed to be +1.
Similarly, assumptions of negative correlation, or any correlation other than +1 will give a standard deviation number that is smaller and therefore less conservative. Choice 'b' is the correct answer.
NEW QUESTION 17
The results of 'desk-level' stress tests cannot be added together to arrive at institution wide estimates because:
- A. All of the above
- B. Desk-level stress tests tend to focus on extreme movements in risk parameters (such as volatility) without considering economy wide scenarios that may represent more realistic and consistent situations for the institution.
- C. Desk-level stress tests focus on desk specific risks that may be minor or irrelevant in the larger scheme at the institution level.
- D. Desk-level stress tests tend to ignore higher level risks that are relevant to the institution but completely outside the control of the individual desks.
Answer: B
Explanation:
Explanation
All the above listed reasons are valid explanations as to why an institution level stress test cannot be estimated by merely summing up the results of the stress tests of the individual desks.
NEW QUESTION 18
Credit exposure for derivatives is measured using
- A. Forward looking exposure profile of the derivative
- B. Notional value of the derivative
- C. Current replacement value
- D. Standard normal distribution
Answer: A
Explanation:
Explanation
Current replacement values are a very poor measure of the credit exposure from a derivative contract, because the future value of these instruments is unpredictable, ie is stochastic, and the range of values it can take increases the further ahead in the future we look. Therefore it is common for credit exposures for derivatives to be measured using forward looking exposure profiles, which are distributions of the expected value of the derivative at the time horizon for which credit risk is being measured. To be conservative, a high enough quintile of this distribution is taken as the 'loan equivalent value' of the derivative as the exposure. Choice 'c' is the correct answer.
The notional value of derivative contracts generally tends to be quite high and unrelated to their economic value or the counterparty exposure. Therefore notional value is irrelevant.
NEW QUESTION 19
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. $107.5m
- B. $3,952.8m
- C. $2,410.3m
- D. $1,699.4m
Answer: D
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 20
For credit risk calculations, correlation between the asset values of two issuers is often proxied with:
- A. Default correlations
- B. Transition probabilities
- C. Equity correlations
- D. Credit migration matrices
Answer: C
Explanation:
Explanation
Asset returns are relevant for credit risk models where a default is related to the value of the assets of the firm falling below the default threshold. When assessing credit risk for portfolios with multiple credit assets, it becomes necessary to know the asset correlations of the different firms. Since this data is rarely available, it is very common to approximate asset correlations using equity prices. Equity correlations are used as proxies for asset correlation, therefore Choice 'c' is the correct answer.
NEW QUESTION 21
Which of the following does not affect the credit risk facing a lender institution?
- A. The state of the economy
- B. Credit ratings of individual borrowers
- C. The applicability or otherwise of mark to market accounting to the institution
- D. The degree of geographical or sectoral concentration in the loan book
Answer: C
Explanation:
Explanation
The state of the economy, credit quality of individual borrowers and concentration risk are all factors that affect the credit risk facing a lender. Mark to market accounting does not change the credit risk, or the underlying economic reality facing the institution. Therefore Choice 'b' is the correct answer.
NEW QUESTION 22
For a given mean, which distribution would you prefer for frequency modeling where operational risk events are considered dependent, or in other words are seen as clustering together (as opposed to being independent)?
- A. Poisson
- B. Negative binomial
- C. Binomial
- D. Gamma
Answer: B
Explanation:
Explanation
An interesting property that distinguishes the three most used distributions for modeling event frequency is that for a given mean, their variances differ. The ratio of variance to mean (the variance-mean ratio, calculated as variance/mean) can then be used to decide the kind of distribution to use. Both the variance and the mean can be estimated from available data points from the internal or external loss databases, or the scenario exercise.
The variance-mean ratio reflects how dispersed a distribution is. (In the PRMIA handbook, the variance to mean ratio has been described as the "Q-Factor".) The Poisson distribution has its mean equal to its variance, and therefore the variance to mean ratio is 1. For the negative binomial distribution, this ratio is always greater than 1, which means there is greater dispersion compared to the mean - or more intervals with low counts as well as more intervals with high counts. For the binomial distribution, the variance to mean ratio is less than one, which means it is less dispersed than the Poisson distribution with values closer to the mean.
In a situation where operational risk events are seen as clustering together, or dependent, the variance will be higher and it would be more appropriate to use the negative binomial distribution.
NEW QUESTION 23
Under the KMV Moody's approach to credit risk measurement, how is the distance to default converted to expected default frequencies?
- A. Using Monte Carlo simulations
- B. Using a proprietary database based on historical information
- C. Using migration matrices
- D. Using a normal distribution
Answer: B
Explanation:
Explanation
KMV Moody's uses a proprietary database to convert the distance to default to expected default probabilities.
NEW QUESTION 24
Which of the following is not a possible early warning indicator in relation to the health of a counterparty?
- A. A decline in the counterparty's corporate debt yield
- B. Credit rating downgrade
- C. Falling stock price
- D. Negative publicity
Answer: A
Explanation:
Explanation
Negative publicity, a downgrade in the credit rating, a falling stock price are all pointers to potential credit problems, and the counterparty credit monitoring group of a bank should be using these as possible early indicators of an upcoming credit health problem. A decline in the yield of the debt issued by a counterparty means its spread is declining and the health of the credit is actually improving. Therefore a decline in the counterparty's corporate debt yield cannot be used as an indicator of potential credit problems.
Choice 'c' is therefore the correct answer.
NEW QUESTION 25
If the default hazard rate for a company is 10%, and the spread on its bonds over the risk free rate is 800 bps, what is the expected recovery rate?
- A. 0.00%
- B. 20.00%
- C. 8.00%
- D. 40.00%
Answer: B
Explanation:
Explanation
The recovery rate, the default hazard rate (also called the average default intensity) and the spread on debt are linked by the equation Hazard Rate = Spread/(1 - Recovery Rate). Therefore, the recovery rate implicit in the given data is = 1 - 8%/10% = 20%.
NEW QUESTION 26
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