Question 1

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 2

Under the internal ratings based approach for risk weighted assets, for which of the following parameters must each institution make internal estimates (as opposed to relying upon values determined by a national supervisor):

Options :

A : Probability of default

B : Effective maturity

C : Loss given default

D : Exposure at default

Answer: A

Question 3

A financial institution is considering shedding a business unit to reduce its economic capital requirements. Which of the following is an appropriate measure of theresulting reduction in capital requirements?

Options :

A : Incremental capital for the business unit in consideration

B : Proportionate capital for the business unit in consideration

C : Percentage of total gross income contributed by the business unit in question

D : Marginal capital for the business unit in consideration

Answer: A

Question 4

Which of the following is not a limitation of the univariate Gaussian model to capture the codependence structure between risk factros used for VaR calculations?

Options :

A : The univariate Gaussian model fails to fit to the empirical distributions of risk factors, notably their fat tails and skewness.

B : Determining the covariance matrix becomes an extremely difficult task as the number of risk factors increases.

C : It cannot capture linear relationships between risk factors.

D : A single covariance matrix is insufficient to describe the fine codependence structure among risk factors as non-linear dependencies or tail correlations are not captured.

Answer: C

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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