Question 1

Which of the following carry greater counterparty risk: a forward contract on a 10 year note, or a commercial paper carrying a AA credit rating with identicalmaturity and notional?

Options :

A : The forward contract has greater credit risk as its future gains are unknown

B : Credit risk can not be compared in these terms

C : They both carry the same credit risk

D : The commercial paper has greater credit risk as the entire notional is outstanding

Answer: D

Question 2

Once the frequency and severity distributions for loss events have been determined, which of the following is an accurate description of the process to determine a full loss distribution for operational risk?

Options :

A : A firm wide operational risk distribution is generated by adding together the frequency and severity distributions

B : A firm wide operational risk distribution is generated using Monte Carlo simulations

C : A firm wide operational risk distribution is set to be equal to the product of the frequency and severity distributions

D : The frequency distribution alone forms the basis for the loss distribution for operational risk

Answer: B

Question 3

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

Question 4

Under the KMV Moody's approach to calculating expectingdefault frequencies (EDF), firms' default on obligations is likely when:

Options :

A : expected asset values one year hence are below total liabilities

B : asset values reach a level below short term debt

C : asset values reach a level below totalliabilities

D : asset values reach a level between short term debt and total liabilities

Answer: D

Question 5

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

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