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PRMIA Credit and Counterparty Manager (CCRM) Certificate Exam Sample Questions (Q135-Q140):

NEW QUESTION # 135
Which of the following cannot be used as an internal credit rating model to assess an individual borrower:

A. Logit model
B. Altman's Z-score
C. Distance to default model
D. Probit model

Answer: C

Explanation:
Altman's Z-score, the Probit and the Logit models can all be used to assess the credit rating of anindividual borrower.There is no such model as the 'distance to default model', and therefore Choice 'a' is the correct answer.

NEW QUESTION # 136
Which of the following statements is the most appropriate description of feedback effects:

A. The lack of a comprehensive view of risk across credit, market and liquidity risks leading to an underestimation of correlations that tend to spike up in the event of a crisis
B. The revision of stress testing scenarios based upon management, business unit and regulatory feedback on the plausibility or otherwise of stress scenarios.
C. The amplification of smaller initial shocks to one risk factor creating larger subsequent shocks through system-wide interactions between other risks, creating self-perpetuating downward stresses in the markets
D. The spread of contagion from the bankruptcy of one participant leading to a similar outcome for other market participants

Answer: C

Explanation:
Choice 'a' (The amplification of smaller initial shocks to one risk factor creating larger subsequent shocks through system-wide interactions between other risks, creating self-perpetuating downward stresses in the markets) is the most comprehensive description of 'feedback effects', as described in the BCBS document on stress testing. Choice 'c' is one manifestation of feedback effects, but does not describe the entire effect.
Choice 'b' is not a description of 'feedback effects', but one of the various weaknesses in stress testing that was seen during the crisis. Choice 'd' is plain nonsensical.
The BCBS paper provides a good and succinct description of feedback effect: how mortgage default shocks led to a deterioration of market prices of CDOs, followed by a drying up of the liquidity in these markets. This led to banks having to hold on to assets they intended to securitize (securitization and warehousing risk), and given the absence of transparency on who was exposed to what, banks refusing to lend to each other and a drying up of the wholesale funding market as well. All of this was additionally accompanied by a general flight to quality, households withdrawing money from money market funds creating a crisis in that market as well. At each stage, the initial shock was amplified and fed back into the system through interactions that had not been imagined by any market participant or regulator, leave alone risk managers.

NEW QUESTION # 137
What percentage of average annual gross income is to be held as capital for operational risk under the basic indicator approach specified under Basel II?

A. 0.12
B. 0.15
C. 0.08
D. 0.125

Answer: B

Explanation:
Banks using the basic indicator approach must hold 15% of the average annual gross income for the past three years, excluding any year that had a negative gross income. Therefore Choice 'd' is the correct answer.

NEW QUESTION # 138
Which of the following statements are true with respect to stress testing:
I. Stress testing results in a dollar estimate of losses
II. The results of stress testing can replace VaR as a measure of risk as they are better grounded in reality III. Stress testing provides an estimate of losses at a desired level of confidence IV. Stress testing based on factor shocks can allow modeling extreme events that have not occurred in the past

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

Answer: A

Explanation:
Any stress test is conducted with a view to produce a dollar estimate of losses, therefore statement I is correct.
However, these numbers do not come with any probabilities or confidence levels, unlike VaR, and statement III is incorrect. Stress testing can complement VaR, but not replace it, therefore statement II is not correct.
Statement IV is correct as stress tests can be based on both actual historical events, or simulated factor shocks (eg, a factor, such as interest rates, moves by say 10-z).
Therefore Choice 'a' is correct.

NEW QUESTION # 139
Which of the following would not be a part of the principal component structure of the term structure of futures prices?

A. Curvature component
B. Tilt component
C. Parallel component
D. Trend component

Answer: C

Explanation:
The trend component refers to parallel shifts in the term structure, the tilt refers to changes in the shape of the term structure at the long and short ends, and the curvature refers to movements in the medium term part. The phrase 'parallel component' has no meaning and is not a part of the principal components in analyzing term structures.
Changes in the term structure can also be analyzed as "level, slope and curvature", so you should be aware of this terminology as well to refer to the principal components of a term structure analysis.

NEW QUESTION # 140
......

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