PRMIA 8011 VALID EXAM SIMS | 8011 EXAM CERTIFICATION COST

PRMIA 8011 Valid Exam Sims | 8011 Exam Certification Cost

PRMIA 8011 Valid Exam Sims | 8011 Exam Certification Cost

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PRMIA Credit and Counterparty Manager (CCRM) Certificate Exam Sample Questions (Q204-Q209):

NEW QUESTION # 204
If F be the face value of a firm's debt, V the value of its assets and E the market value of equity, then according to the option pricing approach a default on debt occurs when:

  • A. F > V
  • B. F - E < V
  • C. F < V
  • D. V < E

Answer: A

Explanation:
According to the option pricing approach developed by Merton, the shareholders of a firm have a put on the assets of the firm where the strike price is equal to the face value of the firm's debt. This is just a more complicated way of saying that the debt holders are entitled to all the assets of the firm if these assets are insufficient to pay off the debts, and because of limited liability of the shareholders of a corporation this part payment will fully extinguish the debt.
A firm will default on its debt if the value of the assets falls below the face value of the debt. Therefore Choice 'a' is the correct answer. All other choices are incorrect.
(There are two ways to consider this sort of optionality, and I have mentioned only one for this question:
1. The equity holders can sell the assets of the firm to the debt holders at a price equal to the face value of the debt, ie a put. (ie they can extinguish their liability to the debt holders in full by handing them the assets of the firm, effectively selling them the assets at the value of the debt)
2. The equity holders have a long position in a call option where they can keep the assets of the firm by paying a price equal to the face value of the debt (ie, they can pay off the debt holders and keep the assets) For this question, perspective 1 applies but you should be aware of the second one too as a question may reference that view point.)


NEW QUESTION # 205
For credit risk calculations, correlation between the asset values of two issuers is often proxied with:

  • A. Equity correlations
  • B. Transition probabilities
  • C. Default correlations
  • D. Credit migration matrices

Answer: A

Explanation:
Asset returns are relevant for credit risk models where a default is related to the value of the assets of the firm falling below the default threshold. When assessing credit risk for portfolios with multiple credit assets, it becomes necessary to know the asset correlations of the different firms. Since this data is rarely available, it is very common to approximate asset correlations using equity prices. Equity correlations are used as proxies for asset correlation, therefore Choice 'c' is the correct answer.


NEW QUESTION # 206
Which of the following statements is correct?

  • A. Funding liquidity risks present themselves in the form of an adverse market impact on prices from a trade
  • B. Market liquidity risks present themselves in the form of higher bid offer spreads
  • C. Market liquidity risk is idiosyncratic while funding liquidity risk is not
  • D. Dynamic simulations of liquidity needs require an assumption of counterparty risk remaining constant

Answer: B

Explanation:
Simulations of liquidity needs can be of various types: historical simulations, where the current positions are subjected to the kind of liquidity shocks experienced in the past; static simulations, where a static view of current positions, counterparty credit position, and the business is considered; and dynamic simulations where all factors are dynamically changed including counterparty credit standing, changes to the current portfolio and behavioural aspects of the business. Choice 'b' is incorrect as dynamic simulations require no such assumptions.
Liquidity risk is often thought of in terms of market liquidity risk and funding liquidity risk. Market liquidity risk relates to the the liquidity for a particular type of asset drying up. For example, during the 2007-2009 crisis a large number of corporate bonds and structured products became extremely illiquid. Market liquidity risk manifests itself in the form of higher bid offer spreads, higher pricde impact, and a reduction in the normal market size (ie, the 'normal' size of a trade for which a dealer quote is valid for). Therefore Choice 'd' is correct. Similarly, Choice 'a' is incorrect as adverse price impact results from market liquidity risk and not funding liquidity risk.
Market liquidity risk applies to the entire market and all its participants. It is not idiosyncratic. Therefore Choice 'c' is incorrect too. Funding liquidity risk on the other hand applies to an individual institution that is under liquidity stress in the sense of not being able to meet its obligations such as margin or collateral calls because of a lack of liquid assets. Thus it is funding liquidity that is idiosyncratic. Market liquidity risk often leads to funding liquidity risks materializing as firms are unable to get to the funds they were relying upon due to assets becoming illiquid.


NEW QUESTION # 207
Which of the following is not an example of a risk concentration?

  • A. Large combined positions in assets affected by different risk factors that are highly correlated
  • B. Material amounts of treasury obligations held as collateral provided by a single counterparty
  • C. Location of a portfolio's assets in a single country but spread across different industries
  • D. Origination of a large number of SIVs with exposures to the same asset class, where the SIVs are separate legal entities without recourse to the originator

Answer: B

Explanation:
Choice 'd' represents a risk concentration due to excessive exposure to a single country, even though spread across different industries as the risk factors (economy, exchange rate, interest rate, political risk etc) are the same for all companies in the country.
Choice 'a' represents a risk concentration because even though the risk factors are different, they are highly correlated and therefore effectively behave as one. These undetected correlations proved to be fatal to many financial institutions during the credit crisis.
Choice 'b' represents a risk concentration as was borne out by the recent credit crisis. Large banks had to take over the obligations of SIVs they had created, even though the SIVs were separate legal entities with no legally enforceable recourse to the originating bank. This had to be done for moral and reputational reasons, and banks had to absorb the losses of these supposedly separate vehicles.
Choice 'c' does not represent a risk concentration, in fact it is not a risk at all because it refers to collateral held, even though the collateral may have been provided by the same counterparty. In this case the risk is to the party providing the collateral (in case the party holding the collateral rehypothecates or sells the collateral and is unable to return it).
Therefore Choice 'c' is the correct answer.
The BCBS document on stress testing provides a very nice articulation of risk concentration, and the relevant text from that document is produced verbatim here: [Risk concentration] may arise along different dimensions: single name concentrations; concentrations in regions or industries; concentrations in single risk factors; concentrations that are based on correlated risk factors that reflect subtler or more situation-specific factors, such as previously undetected correlations betweenmarket and credit risks, as well as between those risks and liquidity risk; concentrations in indirect exposures via posted collateral or hedge positions; concentrations in off-balance sheet exposure, contingent exposure, non-contractual obligations due to reputational reasons.


NEW QUESTION # 208
Which of the following belong to the family of generalized extreme value distributions:
I. Frechet
II. Gumbel
III. Weibull
IV. Exponential

  • A. I, II and III
  • B. II and III
  • C. All of the above
  • D. IV

Answer: A

Explanation:
Extreme value theory focuses on the extreme and rare events, and in the case of VaR calculations, it is focused on the right tail of the loss distribution. In very simple and non-technical terms, EVT says the following:
1. Pull a number of large iid random samples from the population,
2. For each sample, find the maximum,
3. Then the distribution of these maximum values will follow a Generalized Extreme Value distribution.
(In some ways, it is parallel to the central limit theorem which says that the the mean of a large number of random samples pulled from any population follows a normal distribution, regardless of the distribution of the underlying population.) Generalized Extreme Value (GEV) distributions have three parameters: # (shape parameter), # (location parameter) and # (scale parameter). Based upon the value of #, a GEV distribution may either be a Frechet, Weibull or a Gumbel. These are the only three types of extreme value distributions.


NEW QUESTION # 209
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