How To Pass Operational Risk Manager (ORM) 8010 Exam?

1. When considering a request for a loan from a retail customer, which of the following factors is relevant for a bank to consider:

2. For creditrisk calculations, correlation between the asset values of two issuers is often proxied with:

3. Which of the following is not a risk faced by a bank from holding a portfolio of residential mortgages?

4. Which of the following statements are correct in relation to the financial system just prior to the current financial crisis:

I. The system was robust against 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

5. Which of the following statements is true:

I. When averaging quantiles of two Pareto distributions, the quantiles of the averaged models are equal to the geometric average of the quantiles of the original models based upon the number of data items in each original model.

II. When modeling severity distributions, we can only use distributions which have fewer parameters than the number of datapoints we are modeling from.

III. If an internal loss data based model covers the same risks as a scenario based model, they can can be combined using the weighted average of their parameters.

IV If an internal loss model and a scenario based model address different risks, the models can be combined by taking their sums.

6. Which of the formulae below describes incremental VaR where a new position 'm' is added to the portfolio? (where p is theportfolio, and V_i is the value of the i-th asset in the portfolio. All other notation and symbols have their usual meaning.)

A)





B)





C)





D)

7. If the odds of default are 1:5, what is the probability of default?

8. Which of the following are valid approaches to leveraging external loss data for modeling operational risks:

I. Both internal and external losses can be fitted with distributions, and a weighted average approach using these distributions is relied upon for capital calculations.

II. External loss data is used to inform scenario modeling.

III. External loss data is combined with internal loss data points, and distributions fitted to the combined data set.

IV. External loss data is used to replace internal loss data points to create a higher quality data set to fit distributions.

9. The standalone economic capital estimates for the three business units of a bank are $100, $200 and $150 respectively .

What is the combined economic capital for the bank, assuming the risks of the three business units are perfectly correlated?

10. Company A issues bonds with a face value of $100m, sold at issuance at $98. Bank B holds $10m in face of these bonds acquired at a price of $70 .

What is Bank B's exposure to the debt issued by Company A?

11. Which of the following credit risk models relies upon theanalysis of credit rating migrations to assess credit risk?

12. Which of the following is not an event of default covered in the ISDA Master Agreement?

I. failure to pay or deliver

II. credit support default

III. merger without assumption

IV. Bankruptcy

13. When modeling severity of operational risk losses using extreme value theory (EVT), practitioners often use which of the following distributions to model loss severity:

I. The 'Peaks-over-threshold' (POT) model

II. Generalized Pareto distributions

III. Lognormal mixtures

IV. Generalized hyperbolic distributions

14. In estimating credit exposure for a line of credit, it is usual to consider:

15. Concentration risk in a credit portfolio arises due to:

16. Random recovery rates in respectof credit risk can be modeled using:

17. A risk analyst attempting to model the tail of a loss distribution using EVT divides the available dataset into blocks of data, and picks the maximum of each block as a data point to consider.

Which approach is the risk analyst using?

18. Under the ISDA MA, which of the following terms best describes the netting applied upon the bankruptcy of a party?

19. Which of the following data sources are expected to influence operational risk capital under the AMA:

I. Internal Loss Data (ILD)

II. External Loss Data (ELD)

III. Scenario Data (SD)

IV. Business Environment and Internal Control Factors (BEICF)

20. A bullet bond and an amortizing loan are issued at the same time with the same maturity and with the same principal .

Which of these would have a greater credit exposure halfway through their life?

21. The principle underlying the contingent claims approach to measuring credit risk equates the cost of eliminating credit risk for a firm to be equal to:

22. Which of the following statements are true in relation to Monte Carlo based VaR calculations:

I. Monte Carlo VaR relies upon a full revalution of theportfolio for each simulation

II. Monte Carlo VaR relies upon the delta or delta-gamma approximation for valuation

III. Monte Carlo VaR can capture a wide range of distributional assumptions for asset returns

IV. Monte Carlo VaR is less compute intensive than Historical VaR

23. A key problem with return on equity as a measure of comparative performance is:

24. For a group of assets known to be positively correlated, what is the impact on economic capital calculations if we assume the assets to be independent (or uncorrelated)?

25. For a loan portfolio, unexpected losses are charged against:

26. 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?

27. Which of the following techniques is used to generate multivariate normal random numbers that are correlated?

28. A corporate bond maturing in 1 year yields 8.5% per year,while a similar treasury bond yields 4% .

What is the probability of default for the corporate bond assuming the recovery rate is zero?

29. Under the standardized approach to calculating operational risk capital, how many business lines are a bank's activities divided into per Basel II?

30. 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

31. The difference between true severity and the best approximation of the true severity is called:

32. What would be the consequences of a model of economic risk capital calculation that weighs all loans equally regardless of the credit rating of the counterparty?

I. Create an incentive to lend to the riskiest borrowers

II. Create an incentive to lend to the safest borrowers

III. Overstate economic capital requirements

IV. Understate economic capital requirements

33. Which of the following will be a loss not covered by operational risk as defined under Basel II?

34. A Bank Holding Company (BHC) is invested in an investment bank and a retail bank. The BHC defaults for certain if either the investment bank or the retail bank defaults. However, the BHC can also default on its own without either the investment bank or the retail bank defaulting. The investment bank and the retail bank's defaults are independent of each other, with a probability of default of 0.05 each. The BHC's probability of default is 0.11.

What is the probability of default of both the BHC and the investment bank?

What is the probability of the BHC's default provided both the investment bank and the retail bank survive?

35. Which of the following best describes the concept of marginalVaR of an asset in a portfolio:

36. Under the CreditPortfolio View approach to credit risk modeling, which of the following best describes the conditional transition matrix:

37. When compared to a high severity low frequency risk, the operational risk capital requirement for a low severity high frequency risk is likely to be:

38. A risk analyst peforming PCA wishes to explain80% of the variance. The first orthogonal factor has a volatility of 100, and the second 40, and the third 30. Assume there are no other factors .

Which of the factors will be included in the final analysis?

39. Which of the following credit risk models includes a consideration of macro economic variables such as unemployment, balance of payments etc to assess credit risk?

40. If X represents a matrix with ratings transition probabilities for one year, the transition probabilities for 3 years are given by the matrix:

41. There are two bonds in a portfolio, each with a marketvalue of $50m. The probability of default of the two bonds over a one year horizon are 0.03 and 0.08 respectively.

If the default correlation is zero, what is the one year expected loss on this portfolio?

42. 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:

43. A stock that follows the Weiner process has its future price determined by:

44. Which of the following credit risk models focuses on default alone and ignores credit migration when assessing credit risk?

45. As the persistence parameter under EWMA is lowered, which of the following would be true:

46. The risk that a counterparty fails to deliver its obligation upon settlement while having received the leg owed to it is called:

47. Economic capital under the Earnings Volatility approach is calculated as:

48. Under the basic indicator approach to determining operational risk capital, operational risk capital is equal to:

49. The cumulative probability of default for a security for 4 years is 11.47%. The marginal probability of default for the security for year 5 is 5% during year 5 .

What is the cumulative probability of default for the security for 5 years?

50. Which of the following are valid methods for selecting an appropriate model from the model space for severity estimation:

I. Cross-validation method

II. Bootstrap method

III. Complexity penalty method

IV. Maximum likelihood estimation method

51. The Basel framework does not permit which of the following Units of Measure (UoM) for operational risk modeling:

I. UoM based on legal entity

II. UoM based on event type

III. UoM based on geography

IV. UoM based on line of business