8011 EXAMCOLLECTION - 8011 VALID TEST PAPERS

8011 Examcollection - 8011 Valid Test Papers

8011 Examcollection - 8011 Valid Test Papers

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PRMIA Credit and Counterparty Manager (CCRM) Certificate Exam Sample Questions (Q50-Q55):

NEW QUESTION # 50
The EWMA and GARCH approaches to volatility clustering can be applied to VaR calculations using:

  • A. historical simulations
  • B. Monte Carlo simulations
  • C. analytical VaR
  • D. all of the above

Answer: D

Explanation:
The EWMA and GARCH approaches to volatility clustering are independent of the method used to calculate VaR. Therefore Choice 'd' is the correct answer


NEW QUESTION # 51
Which of the following credit risk models relies upon the analysis of credit rating migrations to assess credit risk?

  • A. The actuarial approach
  • B. KMV's EDF based approach
  • C. The contingent claims approach
  • D. The CreditMetrics approach

Answer: D

Explanation:
The correct answer is Choice 'b'. The following is a brief description of the major approaches available to model credit risk, and the analysis that underlies them:
1. CreditMetrics: based on the credit migration framework. Considers the probability of migration to other credit ratings and the impact of such migrations on portfolio value.
2. CreditPortfolio View: similar to CreditMetrics, but adds the impact of the business cycle to the evaluation.
3. The contingent claims approach: uses option theory by considering a debt as a put option on the assets of the firm.
4. KMV's EDF (expected default frequency) based approach: relies on EDFs and distance to default as a measure of credit risk.
5. CreditRisk+: Also called the 'actuarial approach', considers default as a binary event that either happens or does not happen. This approach does not consider the loss of value from deterioration in credit quality (unless the deterioration implies default).


NEW QUESTION # 52
When fitting a distribution in excess of a threshold as part of the body-tail distribution method described by the equation below, how is the parameter 'p' calculated.

Here, F(x) is the severity distribution. F(Tail) and F(Body) are the parametric distributions selected for the tail and the body, and T is the threshold in excess of which the tail is considered to begin.

  • A. If there are N observations, of which K are up to T, then p = k/N
  • B. If there are K observations up to the tail threshold, then p = k*n
  • C. p is a function of the reporting threshold and determined by the log-likelihood functional
  • D. p is a parameter estimated using either the sum of least squares or maximum likelihood estimation

Answer: A

Explanation:
p = k/N. If there are N observations of which K are upto T, then p = k/N allows us to have a continuous unbroken curve which gets increasingly weighted towards the distribution selected for the tail as we move towards the 'right', ie the higher values of losses.
The other choices are incorrect and mostly nonsensical.


NEW QUESTION # 53
Which of the following can be used to reduce credit exposures to a counterparty:
I. Netting arrangements
II. Collateral requirements
III. Offsetting trades with other counterparties
IV. Credit default swaps

  • A. I, II, III and IV
  • B. I, II and IV
  • C. I and II
  • D. III and IV

Answer: B

Explanation:
Offsetting trades with other counterparties will not reduce credit exposure to a given counterparty. All other choices represent means of reducing credit risk. Therefore Choice 'c' is the correct answer.


NEW QUESTION # 54
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. V < E
  • D. F < V

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 # 55
......

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