PRMIA IV Flashcards
A VaR model for managing market risk at Barings Bank in London would most likely have:
A. Alerted senior management to the problems before the major losses occurred
B. Helped very little as Nick Leeson hid many trades
C. Not correctly assessed the risk in Nick Leeson’s option trades as they have non-linear price characteristics
D. Been used if senior management had ever seen it
B. Helped very little as Nick Leeson hid many trades
The steps which the US Treasury Department and the Federal Reserve took in July 2008
to boost confidence in both Fannie Mae and Freddie Mac did not include which one of the
following:
A. Access to the Federal Reserve discount window
B. Removing the prohibition on the Treasury Department to buy both companies stock
C. Restricting the sale of new Fannie Mae and Freddie Mac securities only to US citizens
D. Reiterating their belief that both companies played a central role in the US housing finance system
D. Reiterating their belief that both companies played a central role in the US housing finance system
According to the Group of 30 Report, important risks associated with dynamic hedging are:
A. Greater volatility than expected over the life of an option
B. Sudden gaps in market prices
C. Both A and B
D. Neither A nor B
C. Both A and B
For the sentence
“The organization should have at its disposal employees who have adequate _________,
________ and _______ to perform the tasks assigned to them”,
Choose the correct combination of words from the following options:
A. knowledge, skills, expertise
B. experience, skills, previous successes
C. risk appetite, knowledge, expertise
D. track record, expertise, skills
A. knowledge, skills, expertise
Corporate Governance �
A. Eliminates risk to the greatest extent possible
B. Is defined as the assembled knowledge and wisdom of the collective stakeholders in the organization, set to maximize
shareholder value
C. Is defined as business decision making predicated on a belief in potential rewards, balanced with the knowledge,
understanding and appreciation of the risk taken to pursue those potential rewards
D. Is defined as that which is best practiced within an enterprise risk management framework, guided by the PRMIA
Standards of Best Practice, Conduct and Ethics above all else
C. Is defined as business decision making predicated on a belief in potential rewards, balanced with the knowledge,
understanding and appreciation of the risk taken to pursue those potential rewards
The Bankers Trust Case Study is about:
A. overexposure to the real estate market
B. large losses at the proprietary trading desk
C. reliance on thinly traded derivatives to hedge
D. failure to guard its clients’ best interests
D. failure to guard its clients’ best interests
According to the Group of 30 Report, dealers and end-users are encouraged to:
A. Use separate trading agreements for interest rate derivatives, equity derivatives and foreign exchange transactions.
B. Use a common trading agreement for interest rate and equity derivatives but a separate agreement for foreign exchange
transactions.
C. Use one trading agreement for foreign exchange forwards and another for foreign exchange options.
D. Use a single master trading agreement as widely as possible with each counter party.
D. Use a single master trading agreement as widely as possible with each counter party.
The Fortress Re accounting risk transfer procedures
A. made it straightforward for TFMI to determine whether risk had actually been transferred and they decided not to take out
more catastrophe insurance cover
B. made it difficult for TFMI to determine whether risk had actually been transferred so they had to take out additional
catastrophe insurance cover
C. made it straightforward for TFMI to determine when the risk had been transferred and to take out additional catastrophe
insurance cover
D. made it difficult for TFMI to determine whether risk had actually been transferred and whether it had sufficient catastrophe
insurance cover
D. made it difficult for TFMI to determine whether risk had actually been transferred and whether it had sufficient catastrophe
insurance cover
National Australia Bank and Barings cases are similar in that:
A. Losses kept increasing while rogue trader(s) hid their positions
B. The back offices had inadequate procedures
C. Both A and B
D. None of the above
C. Both A and B
As a result of the US government’s intervention, which of the following is true?
A. The cost of borrowing for Fannie Mae and Freddie Mac should decline because the government will be standing behind
their debts and the buying and selling of mortgage debt will continue
B. The cost of borrowing for house buyers will rise because of the risk premium now built into the cost of such a government
guarantee
C. The systemic risks still remain in the housing market because it increases the US government’s debt
D. Foreign Central Banks will continue to sell their holdings of Fannie Mae and Freddie Mac securities
A. The cost of borrowing for Fannie Mae and Freddie Mac should decline because the government will be standing behind
their debts and the buying and selling of mortgage debt will continue
Zheng Zhu wants to open a new PRMIA Chapter in Wuhan, China. He can do this if:
A. At least 100 members live within 50 miles
B. A local business sponsors the chapter
C. Approved by the Board of Directors
D. All of the above
C. Approved by the Board of Directors
An Organization as a Whole must:
I.Provide an environment in which an Escalation Policy can be effective
II.Commit itself to actual enforcement of corporate governance policies
III.Provide ongoing education and training to all employees on the role of risk management
and corporate governance in the organization
IV.Publish an external auditor’s opinion that the corporation is in compliance with the
Board’s publicly stated Standards of Corporate Governance
A. I, II and III only
B. I, III and IV only
C. I, II and IV only
D. All of these are expectations of the Organization as a Whole
D. All of these are expectations of the Organization as a Whole
When describing the reasons for the collapse of China Aviation Oil, which of the following
was not cited?
A. No properly defined risk management policies in place and general lack of oversight by senior management
B. Time value was not taken into account during the contract valuation process
C. Loss generating positions were rolled over by selling options on larger positions to generate cash premiums’ to settle
existing position losses
D. Senior management in China were aware of the positions but did not understand the complexities of risk managing them
D. Senior management in China were aware of the positions but did not understand the complexities of risk managing them
The multi-dimensional risk problem at Northern Rock did not include which one of the
combinations of the following?
A. LPHI Risk; Business Model; Solvency vs. Liquidity: and Deposit Protection
B. Corporate Governance; Moral Hazard; Role of Government; and Credit Risk
C. Deposit Protection; Moral Hazard; Business Model; and LPHI Risk
D. Business Model; Corporate Governance; Moral Hazard; and Deposit Protection
B. Corporate Governance; Moral Hazard; Role of Government; and Credit Risk
Boards, including Audit and Risk Committees must:
I.Clearly articulate the corporate risk appetite to senior management
II.Thoroughly review compensation plans of potentially “highly compensated positions” for
consistency with corporate risk appetite, competitive market conditions and fiduciary
responsibility to shareholders
III.Have a single member formally given responsibility for understanding and reporting the
effectiveness of the corporation’s risk management infrastructure
IV.Be fully accountable to shareholders and work to the benefit of public good and financial
stability
A. I and II only
B. I, II and IV only
C. I, II and III only
D. All of these are responsibilities of Board and Audit Committees
D. All of these are responsibilities of Board and Audit Committees
The Financial Accounting and Reporting Infrastructure of any organization must:
I.Accurately represent the corporation’s current and known financial condition in a timely
manner
II.Only use off-balance sheet transactions which have a legitimate economic, tax, risk
transfer or risk mitigating purpose
III.Provide a detailed description of the Risk Management Infrastructure in the
organization’s Annual Report to Shareholders
IV.Provide an auditable Annual Statement of Compliance with the Board’s publicly stated
Standards of Corporate Governance to the Board and Audit Committee
A. I, II and III only
B. I, III and IV only
C. I and III only
D. All of these are expected of the Financial Accounting and Reporting Infrastructure
D. All of these are expected of the Financial Accounting and Reporting Infrastructure
Which of the following regarding Orange County is FALSE?
A. Bob Citron engaged in risky strategies to benefit personally
B. Bob Citron tried to “ride the yield curve”
C. Bob Citron heavily leveraged his positions using repos
D. Citron’s losses were eventually exposed by massive margin calls
A. Bob Citron engaged in risky strategies to benefit personally
The key people involved in the application of good governance and risk management must: I.be trustworthy II.be honest III.be approved by the local regulator IV.treat others fairly at all times A. I, II, and III only B. III only C. I, II, and IV only D. I, II, III and IV above
C. I, II, and IV only
Barings Bank and Orange County have many similarities. Which of the following is NOT a
similarity?
A. Both relied on a star manger, supposedly in a low risk business.
B. Both losses grew over time, but were not discovered by management until too late.
C. Both traded in illiquid and obscure markets that were easy to manipulate.
D. Both losses were eventually exposed by massive margin calls.
C. Both traded in illiquid and obscure markets that were easy to manipulate.
Which of the following was NOT a factor in the Long Term Capital Management case?
A. Inadequate separation of front and back offices
B. Model risk
C. Changes/breakdowns in historical correlations
D. Unwinding of liquid positions at the beginning of major losses
A. Inadequate separation of front and back offices
Which items below were at the core of the problems at Bankgesellschaft Berlin?
A. Political corruption and poor management
B. Over exposure to the property market
C. Rash guarantees given to investors in property linked funds
D. All of the above
D. All of the above
A. The backing of three other members
B. To go through a screening process conducted by the Nominations Committee
C. The backing of 6% of local members
D. The backing of five other members and to be serving on at least one PRMIA Committee
A. The backing of three other members
The Q4 2003 trading strategy of China Aviation Oil was A. to buy puts and sell calls B. to buy calls and sell puts C. to sell puts and buy calls D. to sell calls and buy puts
D. to sell calls and buy puts
Which of the following best characterize the problems that developed at Bankers Trust?
A. Volume growth at the expense of margin
B. Excessive reliance on volatile and sophisticated derivatives
C. A failure to try to protect their clients’ interests
D. Over exposure to the property market
C. A failure to try to protect their clients’ interests
While doing a work assignment, a PRMIA member notices behaviour that is outside the
ethical standards of their client organization and reports the matter to their immediate
supervisor in the organization (if he or she wasn’t the one engaging in such behaviour).
The matter is neither progressed nor actioned.
The PRMIA member should:
A. stay silent on the basis that they have reported it
B. report the matter to their PRMIA chapter
C. contact the Whistle-Blowing Hotline of the organization or, if none exits, to the PRMIA Ethics Committee for guidance and
assistance
D. report the matter to the organization’s Compliance Dept.
C. contact the Whistle-Blowing Hotline of the organization or, if none exits, to the PRMIA Ethics Committee for guidance and
assistance
TMFI’s internal procedures and management were
A. fully aware of the uninsured risks Fortress Re were taking
B. absolutely unaware of their uninsured liabilities
C. aware that they had some uninsured liabilities but thought they had enough capital to withstand any uninsured losses
D. None of the above
B. absolutely unaware of their uninsured liabilities
The problems at WorldCom can best be characterized as related to:
A. Market Risk
B. Credit Risk
C. Operational and Regulatory Compliance Risk
D. All of the Above
C. Operational and Regulatory Compliance Risk
MGRM’s losses due to “stacking” started to increase when
A. the oil market went from contango to backwardation
B. the oil market went from backwardation to contango
C. the oil market went from weak backwardation to strong backwardation
D. the oil market went from strong contango to weak contango
B. the oil market went from backwardation to contango
PRMIA Governance Principles
A. must be adhered to by all PRMIA member organizations
B. is a set of recommendations based on research and best practice
C. must be adhered to by all PRM charter holders
D. must be adhered to by all financial firms that are PRMIA members
B. is a set of recommendations based on research and best practice
Finite insurance is reinsurance which
A. transfers only a limited amount of risk at the usual reinsurance price
B. transfers the total risk at less cost than traditional reinsurance
C. transfers the total risk at the usual reinsurance price
D. transfers only a limited amount of risk at less cost than traditional reinsurance
D. transfers only a limited amount of risk at less cost than traditional reinsurance
A risk manager is asked to analyze the credit risk of a convertible bond. The risk manager
has never analyzed convertible bonds, but does have significant expertise in credit risk.
The risk manager accepts the assignment, finds a paper on the subject through the PRMIA
web site and copies the method used there. The risk manager completes the assignment
and delivers a report to his or her direct supervisor and the supervisor is quite pleased.
According to the PRMIA Standards of Best Practice, Conduct and Ethics (Code of
Conduct), this was acceptable behavior if the following conditions were met:
I.The risk manager disclosed the lack of knowledge about convertible bonds
II.The methodology employed is disclosed and explained
III.The report was just to be used for analysis and not in practice
IV.The risk manager was sure of his/her understanding of the paper found on the web
A. I and II
B. I, II and IV
C. I, II and III
D. I only
A. I and II
As LTCM started to have major losses, it compounded its problems by doing what?
A. Trying to borrow more money from major money centre banks
B. Issuing Subordinated Debt
C. Returning capital to the general partners before others
D. Unwinding its’ more liquid trades thereby creating more liquidity risk overall
D. Unwinding its’ more liquid trades thereby creating more liquidity risk overall
The retrocession insurance cover was provided by A. Fortress Re and other insurers B. The Fortress Re reinsurers only C. The fronting insurance companies D. Fortress Re and their reinsurers
B. The Fortress Re reinsurers only
Which of the following was not considered to be a positive outcome of the Northern Rock
Case Study?
A. The role of the UK government and the possible underwriting of risks by tax-payers, and the general question of Moral
Hazard
B. The reform of the Deposit Protection Scheme because of its internal inconsistencies
C. It emphasised the importance of effective governance arrangements within financial firms
D. The original successful business model had not stress tested sufficiently for the incidence of Low Probability, High Impact
incidents
D. The original successful business model had not stress tested sufficiently for the incidence of Low Probability, High Impact
incidents
Which US regulatory authority resolved the restructuring of Washington Mutual? A. The Office of Thrift Supervision B. Federal Deposit Insurance Corporation C. The Federal Reserve Bank D. None of the above
A. The Office of Thrift Supervision
Which of the following is part of the Group of 30 Report’s market risk and stress testing
recommendations?
A. To be consistent with regulatory capital measures, 10-day holding periods should be standardized for VaR reporting
B. Historic simulations are not effective methods of stress testing
C. Stress tests should incorporate changes in liquidity
D. Market risk VaR measures should be multiplied by 3 to get to a stress test figure, as long as the VaR model has been
back-tested
C. Stress tests should incorporate changes in liquidity
The early 2003 trading strategy of China Aviation oil was A. to buy calls and sell puts B. to buy puts and sell calls C. to sell puts and buy calls D. to sell calls and buy puts
A. to buy calls and sell puts
A risk assessment report generated by a PRMIA member creates an apparent conflict of
interest between the PRMIA standards and those of the client organization.
Of the following, which is the correct hierarchy to follow to resolve the conflict?
I.The decision of a superior within the organization
II.PRMIA Standards
III.Guidelines from the regulators in which the organization operates
IV.The laws of the country
A. I, II, III, and IV
B. IV, III, II, and I
C. II, I, IV, and III
D. III, II, IV, and I
B. IV, III, II, and I
Several clients, including Procter and Gamble took legal action against Bankers Trust,
claiming Bankers Trust
A. sold them derivative products without properly advising them of the relevant risks
B. did not honour its contractual obligations to pay
C. was involved in accounting fraud
D. hid profits
A. sold them derivative products without properly advising them of the relevant risks
A PRMIA member is offered a highly paid work assignment on the condition that some
aspects of assignment are not to be done according to PRMIA standards.
What should they do?
A. Perform the assignment, noting in the final report the standards to which the assignment was done
B. Accept the assignment, produce and deliver two reports according to both standards
C. Accept the assignment, and prior to doing any work, report the conflict of interest to the organization’s compliance
department
D. The PRMIA member should place the integrity of the risk management profession and users of risk management above
their own personal interests, and refuse the work
D. The PRMIA member should place the integrity of the risk management profession and users of risk management above
their own personal interests, and refuse the work
Which of the following was a key problem in the Barings Bank case?
A. Having the back office and front office operations under the same person
B. Difference in the contract sizes in the OSE and SIMEX
C. The different time zones that the office was trading in
D. Leeson was executing an arbitrage strategy even though he was not authorized to do so
A. Having the back office and front office operations under the same person
The Chair, Vice Chair, Secretary and Treasurer of the PRMIA Board of Directors are
elected by:
A. All PRMIA Fellow Members
B. The Regional Directors
C. The Blue Ribbon Advisory Panel
D. A two-thirds affirmative vote of all members
B. The Regional Directors
PRMIA is incorporated as: A. A for-profit corporation B. A non-profit corporation C. A charitable trust D. A non profit corporation with for profit subsidiaries
B. A non-profit corporation
When local rules and regulations conflict with the PRMIA Standards of Best Practice,
Conduct and Ethics the PRMIA member should
A. Seek advice from a qualified party, being mindful of legal and confidentiality requirements
B. Modify the interpretation of local rules and regulations to meet the situation
C. Ignore local rules and regulations
D. Respect local rules and regulations
A. Seek advice from a qualified party, being mindful of legal and confidentiality requirements
