Question 1

The Options Theoretic approach to calculating economic capital considers the value of capital as being equivalent to a call option with a strike price equal to:

Options :

A : The notional value ofthe debt

B : The market value of the debt

C : The value of the firm

D : The value of the assets

Answer: A

Question 2

The frequency distribution for operational risk loss events can be modeled by which of the following

distributions:

I. The binomial distribution

II. The Poisson distribution

III. The negative binomial distribution

IV. The omega distribution

Options :

A : I, II and III

B : I and III

C : I, III and IV

D : I, II, III and IV

Answer: A

Question 3

Whichof the following statements are true in relation to Historical Simulation VaR?

I. Historical Simulation VaR assumes returns are normally distributed but have fat tails

II. It uses full revaluation, as opposed to delta or delta-gamma approximations

III. Acorrelation matrix is constructed using historical scenarios

IV. It particularly suits new products that may not have a long time series of historical data available

Options :

A : II

B : II and III

C : I and IV

D : All of the above

E : A

Answer: A

Question 4

Which of the following is true in relation to the application of Extreme Value Theory when applied to

operational risk measurement?

I. EVT focuses on extreme losses that are generally not covered by standard distribution assumptions

II. EVT considers the distribution of losses in the tails

III. The Peaks-over-thresholds (POT) and the generalized Pareto distributions are used to model extreme value

distributions

IV. EVT is concerned with average losses beyond a given level of confidence

Options :

A : I and IV

B : II and III

C : I, II and III

D : I, II and IV

Answer: C

Question 5

For a hypotherical UoM, the number of losses in two non-overlapping datasets is 24 and 32 respectively. The Pareto tail parameters for the two datasets calculated using the maximum likelihood estimation method are 2 and 3. What is an estimate of the tail parameter of the combined dataset?

Options :

A : 2.57

B : 2.23

C : 3

D : Cannot be determined

Answer: A

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