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PRMIA Credit and Counterparty Manager (CCRM) Certificate Exam Sample Questions (Q180-Q185):
NEW QUESTION # 180
Which of the following methods cannot be used to calculate Liquidity at Risk?
- A. Historical simulation
- B. Monte Carlo simulation
- C. Scenario analysis
- D. Analytical or parametric approaches
Answer: D
Explanation:
Analytical or parametric approaches are not useful at all for liquidity at risk calculations because there are no neat distributions available to parameterize the large number of factors that affect the calculations of liquidity inflows and outflows. Historical simulations, Monte Carlo and scenario analysis (which can complement historical scenarios) are all valid choices
NEW QUESTION # 181
Which of the following is a valid approach to determining the magnitude of a shock for a given risk factor as part of a historical stress testing exercise?
I. Determine the maximum peak-to-trough change in the risk factor over the defined period of the historical event II. Determine the minimum peak-to-trough change in the risk factor over the defined period of the historical event III. Determine the total change in the risk factor between the start date and the finish date of the event regardless of peaks and troughs in between IV. Determine the maximum single day change in the risk factor and multiply by the number of days covered by the stress event
- A. I and III
- B. II and IV
- C. I, II and IV
- D. IV only
Answer: A
Explanation:
Stress events rarely play out in a well defined period of time, and looking back it is always difficult to put exact start and end dates on historical stress events. Even after that is done, the question arises as to what magnitude of a change in a particular risk factor (for example interest rates, spreads, or exchange rates) are reasonable to consider for the purposes of the stress test.
Statements I and III correctly identify the two approaches that are acceptable and used in practice - the risk manager can either take the maximum adverse move - from peak to trough - in the risk factor, or alternatively he or she could consider the change in the risk factor from the start of the event to the end as defined for the purposes of the stress test. Between the two, the approach mentioned in statement III is considered slightly superior as it produces more believable shocks.
Statement II is incorrect because we never want to consider the minimum, and statement IV is not correct as it is likely to generate a shock of a magnitude that is not plausible. Therefore Choice 'b' is the correct answer.
NEW QUESTION # 182
Which of the following are true:
I. Monte Carlo estimates of VaR can be expected to be identical or very close to those obtained using analytical methods if both are based on the same parameters.
II. Non-normality of returns does not pose a problem if we use Monte Carlo simulations based upon parameters and a distribution assumed to be normal.
III. Historical VaR estimates do not require any distribution assumptions.
IV. Historical simulations by definition limit VaR estimation only to the range of possibilities that have already occurred.
- A. III and IV
- B. All of the above
- C. I, III and IV
- D. I, II and III
Answer: C
Explanation:
Statement I is true. If a Monte Carlo simulation is based upon the same parameters as used for analytical VaR, and enough number of simulations are carried out, we would get the same results as with analytical VaR.
Statement II is false. We cannot use Monte Carlo simulations using parameters based upon a normal assumption when the underlying distribution is not normal. For example, if a return stream is based upon say a uniform distribution, we cannot use a simulation based upon drawings from a normal distribution even though we use the same mean and standard deviation.
Statement III is true. This is the advantage of historical simulations - no assumptions are necessary.
(Historical simulations however often suffer from the great disadvantage of the paucity of data that would cover all possibilities.) Statement IV is true. The results of historical simulations are limited to the data they are based upon.
NEW QUESTION # 183
Which of the following is not an example of a risk concentration?
- A. Large combined positions in assets affected by different risk factors that are highly correlated
- B. Location of a portfolio's assets in a single country but spread across different industries
- C. Origination of a large number of SIVs with exposures to the same asset class, where the SIVs are separate legal entities without recourse to the originator
- D. Material amounts of treasury obligations held as collateral provided by a single counterparty
Answer: D
Explanation:
Choice 'd' represents a risk concentration due to excessive exposure to a single country, even though spread across different industries as the risk factors (economy, exchange rate, interest rate, political risk etc) are the same for all companies in the country.
Choice 'a' represents a risk concentration because even though the risk factors are different, they are highly correlated and therefore effectively behave as one. These undetected correlations proved to be fatal to many financial institutions during the credit crisis.
Choice 'b' represents a risk concentration as was borne out by the recent credit crisis. Large banks had to take over the obligations of SIVs they had created, even though the SIVs were separate legal entities with no legally enforceable recourse to the originating bank. This had to be done for moral and reputational reasons, and banks had to absorb the losses of these supposedly separate vehicles.
Choice 'c' does not represent a risk concentration, in fact it is not a risk at all because it refers to collateral held, even though the collateral may have been provided by the same counterparty. In this case the risk is to the party providing the collateral (in case the party holding the collateral rehypothecates or sells the collateral and is unable to return it).
Therefore Choice 'c' is the correct answer.
The BCBS document on stress testing provides a very nice articulation of risk concentration, and the relevant text from that document is produced verbatim here: [Risk concentration] may arise along different dimensions: single name concentrations; concentrations in regions or industries; concentrations in single risk factors; concentrations that are based on correlated risk factors that reflect subtler or more situation-specific factors, such as previously undetected correlations betweenmarket and credit risks, as well as between those risks and liquidity risk; concentrations in indirect exposures via posted collateral or hedge positions; concentrations in off-balance sheet exposure, contingent exposure, non-contractual obligations due to reputational reasons.
NEW QUESTION # 184
An assumption regarding the absence of ratings momentum is referred to as:
- A. Herstatt risk
- B. Time invariance
- C. Markov property
- D. Ratings stability
Answer: C
Explanation:
Choice 'c' is the correct answer. The Markov property is the assumption that there is no ratings momentum, and that transition probabilities are dependent only upon where the rating currently is and where it is going to.
Where it has come from, or what the past changes in ratings have been, have no effect on the transition probabilities. ('Herstatt risk' refers to settlement risk, and is irrelevant.)
NEW QUESTION # 185
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