Question 1

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 2

A risk management function is best organized as:

Options :

A : integrated with the risk taking functions as risk management should be a pervasive activity carried out at all levels of theorganization.

B : report independently of the risk taking functions

C : reporting directly to the traders, as to be closest to the point at which risks are being taken

D : a part of the trading desks and other risk taking teams

Answer: B

Question 3

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 4

The key difference between 'top down models' and 'bottom up models' foroperational risk assessment is:

Options :

A : Top down approaches to operational risk are based upon an analysis of key risk drivers, while bottom up approaches consider causality in risk scenarios.

B : Bottom up approaches to operational risk are based upon an analysis of key risk drivers, while top down approaches consider causality in risk scenarios.

C : Bottom up approaches to operational risk calculate the implied operational risk using available data such as income volatility, capital etc; while top down approaches use causal factors, risk drivers and other factors to get an aggregated estimate of risk

D : Top down approaches to operational risk calculate the implied operational risk using available data such as income volatility, capital etc; while bottom up approaches use causal factors, risk drivers and other factors to get an aggregated estimate of risk.

Answer: D

Question 5

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