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Download Operational Risk Manager (ORM) Exam Exam Dumps
NEW QUESTION 51
Which of the following was not a policy response introduced by Basel 2.5 in response to the global financial crisis:
- A. Stressed VaR (SVaR)
- B. Comprehensive Risk Model (CRM)
- C. Comprehensive Capital Analysis and Review (CCAR)
- D. Incremental Risk Charge (IRC)
Answer: C
Explanation:
Explanation
The CCAR is a supervisory mechanism adopted by the US Federal Reserve Bank to assess capital adequacy for bank holding companies it supervises. Itwas not a concept introduced by the international Basel framework.
The other three were indeed rules introduced by Basel 2.5, which was ultimately subsumed into Basel III.
Stressed VaR is just the standard 99%/10 day VaR, calculated with theassumption that relevant market factors are under stress.
The Incremental Risk Charge (IRC) is an estimate of default and migration risk of unsecuritized credit products in the trading book. (Though this may sound like a credit risk term, it relates to market risk - for example, a bond rated A being downgraded to BBB. In the old days, the banking book where loans to customers are held was the primary source of credit risk, but with OTC trading and complex products the trading book also now holds a good dealof credit risk. Both IRC and CRM account for these.) While IRC considers only non-securitized products, the CRM (Comprehensive Risk Model) considers securitized products such as tranches, CDOs, and correlation based instruments.
The IRC, SVaR and CRMcomplement standard VaR by covering risks that are not included in a standard VaR model. Their results are therefore added to the VaR for capital adequacy determination.
NEW QUESTION 52
Which of the following are ordered correctly in the order of debt seniority in a bankruptcy situation?
I. Equity, Subordinate debt, Senior debt
II. Senior debt, Preferred stock, Equity
III.Secured debt, Accounts payable, Preferred stock
IV. Secured debt, DIP financing, Equity
- A. II, III and IV
- B. I and IV
- C. II and III
- D. I
Answer: C
Explanation:
Explanation
In a bankruptcy, equity ranks last. Preferred equity is one level above equity. Senior debt gets paid outfirst compared to junior debt, and secured debt is paid out first to the extent of the asset securing it (after which it counts as unsecured debt). Accounts payable and other short term liabilities are treated like unsecured creditors. Debtor-in-possession(DIP) financing ranks higher than any other asset as it is financing secured after the bankruptcy to continue the business.
Based on the above, statement I does not represent a correct ordering of seniority as equity is paid last.
Similarly, DIP financingreceives higher priority than even secured debt, and therefore statement IV is incorrect. Therefore the only correct statements are II and III and Choice 'a' is the correct answer.
NEW QUESTION 53
Which of the following statements are correct in relation to the financial system just prior to the current financial crisis:
I. The system was robustagainst small random shocks, but not against large scale disturbances to key hubs in the network II. Financial innovation helped reduce the complexity of the financial network III. Knightian uncertainty refers to risk that can be quantified and measured IV. Feedback effects under stress accentuated liquidity problems
- A. I and IV
- B. I, II and IV
- C. III and IV
- D. II and III
Answer: A
Explanation:
Explanation
Statement I is correct. The financial system proved to be stable against small shocks and disturbances, or shocksof a particular type (eg, the dotcom crash, the wars in the Persian Gulf); but rather fragile against other types of shocks, including disturbances to key market participants caused by a worsening of mortgage defaults.Statement II is incorrect. Financialinnovation, in particular the slicing and dicing of 'risk' through securitization, significantly increased interrelationships, dependence on the same risk factors, and the complexity of the system as a whole.Statement III is incorrect. A distinction is sometimes made between risk that is knowable, measureable, and quantifiable through parameters; and uncertainty, where the parameters are not known at all. The latter is called 'Knightian uncertainty' after the name of the scholar who came up with the distinction between the two.Statement IV is correct. Feedback effects had the greatest impact on liquidity which was tended to be hoarded, and on asset prices that tumbled as market participants tried to sell assets to become more liquid.Thus, choice is a the correct answer.
NEW QUESTION 54
According to the implied capital model, operational risk capital is estimated as:
- A. Operational risk capital held by similar firms, appropriately scaled
- B. Total capital less market risk capital less credit risk capital
- C. Total capital based on the capital asset pricing model
- D. Capitalimplied from known risk premiums and the firm's earnings
Answer: B
Explanation:
Explanation
Operational risk capital estimated using the implied capital model is merely the capital that is not attributable to market or credit risk. Therefore Choice 'b' is the correct answer. All other responses are incorrect.
NEW QUESTION 55
There are two bonds in a portfolio, each with a market value of $50m. The probability of default of the two bonds are 0.03 and 0.08 respectively, over a one year horizon. If the probability of the two bonds defaulting simultaneously is 1.4%, what is the default correlation between the two?
- A. 100%
- B. 40%
- C. 0%
- D. 25%
Answer: D
Explanation:
Explanation
Probability of the joint default of both A and B =
We know all the numbers except default correlation, and we can solve for it.
DefaultCorrelation*SQRT(0.03*(1 - 0.03)*0.08*(1 - 0.08)) + 0.03*0.08 = 0.014.
Solving, we get default correlation = 25%
NEW QUESTION 56
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