Four Flashcards
(109 cards)
1
Q
With respect to the Purpose of Professional Standards, in the event of any difference in
standards between local laws/rules and those of PRMIA, members must
A. use their best judgment
B. abide by the applicable laws, rules, and regulations of PRMIA and any government and/or regulatory bodies
C. comply with the higher standard under all circumstances
D. refer the matter to their supervisor
A
C. comply with the higher standard under all circumstances
2
Q
Which of the following was not received by Northern Rock as official support from the UK
banking and government authorities?
A. A covert money market support operation designed to cover up the difficulties Northern Rock was facing
B. The Bank of England’s role as Lender-Of-Last-resort was activated at a penalty interest rate of 150 basis points above the Bank Rate
C. The UK government offered to guarantee all existing and new retail deposits, and to most other creditors
D. The Bank of England provided an additional unlimited facility secured on the collateral of all Northern Rock assets
A
A. A covert money market support operation designed to cover up the difficulties Northern Rock was facing
3
Q
Mary Jones wants the Bylaws of PRMIA to be changed so that people can’t join PRMIA
unless they meet a set of criteria she has devised with her colleagues. She can do this by
getting which of the following approvals:
A. The Board of Directors, but only if the Blue Ribbon Panel affirms the change
B. The Board of Directors and a majority of the Members
C. The Board of Directors alone
D. 34 of all Members
A
B. The Board of Directors and a majority of the Members
4
Q
Which of the following was NOT a factor in the National Australia Bank case?
A. Rogue traders
B. Improper or insufficient Board-level communication regarding the importance of risk management and oversight
C. Inadequate back office procedures
D. Money laundering using foreign exchange trades for political leaders
A
D. Money laundering using foreign exchange trades for political leaders
5
Q
What is (are) the lesson(s) of the Barings’ failure?
A. Incentive plans have risk management implications
B. Front and back offices need to be independent
C. Large profits can be an indicator of risk
D. All of the above
A
D. All of the above
6
Q
What was the main type of risk that Metallgesellschaft was exposed to?
A. Basis Risk
B. Currency Settlement
C. Interest Rate
D. Inflation
A
A. Basis Risk
7
Q
According to the Group of 30 Report, deriving aggregate potential credit exposure for a
counterparty by adding up the potential exposure of multiple transactions:
A. Gives an accurate result in most cases
B. Captures portfolio effects but not tenor differences
C. Can easily reflect the impact of netting
D. Overstates exposure in most cases
A
D. Overstates exposure in most cases
8
Q
Up until 2006, which of the following was not a primary driver for Washington Mutual’s
earning?
A. Lending to consumers and small businesses.
B. Deposit taking activities which generated net interest income.
C. The provision of fee based services to its customers.
D. Complex derivative trades based on volatility indices.
A
D. Complex derivative trades based on volatility indices.
9
Q
Which of the following are PRMIA Governance Principles? I.Independence of Key Parties II.Disclosure and Transparency III.Internal Validation IV.Solvency
A. I and II only
B. I, II and III only
C. I, II and IV only
D. All are PRMIA Governance Principles
A
A. I and II only
10
Q
A risk manager finds that a client is engaged in a practice that looks like money laundering.
According to the PRMIA Standards of Best Practice, Conduct and Ethics (Code of
Conduct), the risk manager should:
A. Approach the client about the concern, regardless of what their reaction might be
B. Respect the client’s confidentiality as that takes precedence
C. Report this conduct to their immediate supervisor
D. Report the findings immediately to authorities
A
C. Report this conduct to their immediate supervisor
11
Q
Boards of Directors, including Audit and Risk Committees must review thoroughly
compensation plans of potentially “highly compensated positions” for:
I.competitive market conditions
II.ensuring compliance with their corporate risk appetite and fiduciary responsibility to
shareholders
III.ensuring any discretionary bonus plans are geared towards keeping high income /
revenue generators
IV.reporting all such personnel to the local regulator
A. II, III and IV only
B. I, II and IV only
C. All of the above
D. I and II only
A
D. I and II only
12
Q
The hedging strategy employed by MG Refining & Marketing has been called:
A. Dynamic hedging
B. A stacked hedge
C. A differential hedge
D. Nothing because MG Refining & Marketing did not hedge its position
A
B. A stacked hedge
13
Q
The failure of Washington Mutual was NOT due to which one of the following?
A. Using a combination of subprime mortgage loans and credit cards
B. It failed due to the poor quality of its assets
C. Low lending standards and bad quality acquisitions
D. A run on its deposits by bank customers
A
D. A run on its deposits by bank customers
14
Q
Every PRMIA chapter is designed to serve the local needs of members, so they often have
fairly independent planning structures and ideas. According to the PRMIA Bylaws, Regional
Chapters and Regional Directors:
A. Can have their own offices, bylaws and regulations provided they do not conflict with those of PRMIA
B. Can have meetings that only local members are allowed to attend
C. Can sign contracts on behalf of PRMIA without prior approval from the Board of Directors
D. All of the above
A
A. Can have their own offices, bylaws and regulations provided they do not conflict with those of PRMIA
15
Q
The problems in the Orange County case can best be characterized as failures related to:
A. Market Risk
B. Credit Risk
C. Operational and Regulatory Compliance Risk
D. All of the Above
A
A. Market Risk
16
Q
What was the most important loss for Bankers Trust?
A. Money due to unfavourable market moves
B. Loss of its’ reputation due to actions seen as detrimental to their clients
C. Loss of market share due to their licenses being revoked
D. Time spent on legal proceedings in courts
A
B. Loss of its’ reputation due to actions seen as detrimental to their clients
17
Q
Which of the following CANNOT be counted as a reason why LTCM was given a rescue
package and not left to default?
A. Many of the banks in the rescue consortium were among LTCM’s counterparties
B. Some of the banks in the rescue consortium were LTCM investors
C. Untimely unwinding of some LTCM positions would lead to large market fluctuations and possible turmoil
D. The consortium wanted to keep this out of the regulators’ eyes
A
D. The consortium wanted to keep this out of the regulators’ eyes
18
Q
With a PRMIA member’s need to reconcile their internal and external responsibility to
perform their work in an independent and appropriate fiduciary manner, which of the
following options must be taken into consideration when performing risk management
duties?
A. Internal controls of the organization, and the local regulator
B. Internal controls, and the expectations of stakeholders, shareholders, and the general public
C. The local regulator, internal controls, and shareholders
D. Only the internal controls and compliance standards
A
B. Internal controls, and the expectations of stakeholders, shareholders, and the general public
19
Q
According to the Group of 30 Report, option contracts:
A. Always generate credit risk to both counterparties
B. Create credit risk only for the buyer (due to default by the seller) provided the premium is due, and paid, at contract initiation
C. Create no credit risk, since the buyer need not exercise the option
D. Usually create credit risk only for the seller (to default by the buyer)
A
B. Create credit risk only for the buyer (due to default by the seller) provided the premium is due, and paid, at contract initiation
20
Q
Washington Mutual’s acquisition of Long Beach Financial changed its business model and
increased its credit loss profile because
A. The resulting loss rate for Washington Mutual was more than 3 times higher than other mortgage lenders tracked by the FDIC
B. the two banks were focussed in different markets
C. Long Beach Financial had losses which it hadn’t realized at the time of the takeover
D. Of a general deterioration of credit quality generally
A
A. The resulting loss rate for Washington Mutual was more than 3 times higher than other mortgage lenders tracked by the FDIC
21
Q
Employees shall be remunerated adequately for the roles that they perform, where
‘adequately’ is defined
A. as being the market norm for similarly situated personnel in competitive organizations
B. using external references and benchmarks, and in a framework which is consistent with the type of risk-taking behavior expected of employees
C. using the risk reward profile for each business line in the organization
D. as commensurate with policies to attract and retain high income / revenue earners
A
B. using external references and benchmarks, and in a framework which is consistent with the type of risk-taking behavior expected of employees
22
Q
The Chair of the PRMIA Board of Directors may hold the following offices:
A. Parliamentarian
B. Secretary
C. Vice Chair
D. Chair only
A
D. Chair only
23
Q
Which of the following should NOT be part of the Risk Management Infrastructure?
A. Define the organization’s definition of risk management as articulated by the Board in clear and uncertain terms
B. Include financial risk management, compliance and external reporting and, to the extent that resources allow, should exclude legal or accounting
C. Be independently staffed and report to an employee who is on the Executive Committee (Operating Committee) but who is NOT a business unit leader
D. Review continually the application of the Principles of Good Governance to the Risk Management Infrastructure, financial accounting and reporting infrastructure and the organization as a whole
A
D. Review continually the application of the Principles of Good Governance to the Risk Management Infrastructure, financial accounting and reporting infrastructure and the organization as a whole
24
Q
Which of the following does NOT relate to the Orange County case?
A. Where there are excess rewards, there must be risks
B. The Know Your Customer rule
C. Strategies that are not possible to explain to third parties should not be employed by the risk averse
D. Fractured organisational structure and poor risk oversight mechanism make it easy for powerful individuals to hide risk in the gaps
A
B. The Know Your Customer rule
25
What was the main risk scenario on the Metallgesellschaft trading strategy?
A. Realized losses on short-term contracts against unrealized gains on the long-run contract
B. The final price of the underlying being higher than the initial price
C. The initial price of the underlying being higher than the final price
D. The short-term price of the underlying being higher than the long-run contract
A. Realized losses on short-term contracts against unrealized gains on the long-run contract
26
The Risk Management Infrastructure of an organization must:
I.To the extent possible, avoid silos of control and oversight
II.Have budgets set by the business unit leaders
III.Actively provide ongoing professional development for risk management staff and
require them to be committed to standards of best practice, conduct and ethics in their work
IV.Provide general risk management and related corporate governance training for
employees of the organization as a Whole
A. I only
B. I, III and IV only
C. I and III only
D. All of these are expected of the Risk Management Infrastructure
B. I, III and IV only
27
The "normal" credit loss profile of Washington Mutual was increased by which of the
following?
A. The general downturn in the economy of the US
B. By lowering its own credit underwriting standards
C. Acquisitions like Long Beach and Providian
D. Catastrophic losses in its own credit card division
C. Acquisitions like Long Beach and Providian
28
The Basic Knowledge a PPRMIA member should comply with, as stipulated within the
PRMIA Standards of Best Practice, Conduct & Ethics, is to
A. only improve their PERSONAL professional competence
B. maintains and improve their professional competence and strive to maintain and improve the competence of other risk professionals
C. only possess the required skills and/or certification to complete the risk assessment / management work at hand
D. learn from a qualified risk management practitioner
B. maintains and improve their professional competence and strive to maintain and improve the competence of other risk professionals
29
Question #29
The problems at Bankgesellschaft Berlin can best be characterized as failures related to:
A. Market Risk
B. Credit Risk
C. Operational Risk
D. Both B and C
D. Both B and C
30
The financial intermediary services provided by Fannie Mae and Freddie Mac were
designed to
A. Offer loans directly to the consumer
B. Compete directly with banks in selling mortgaged to would-be home owners
C. Repackage mortgage loans made by banks and sell them on to investors as asset backed securities
D. Buy mortgage-backed loans for banks and keep them all on their books, using them as collateral for the US government to borrow
C. Repackage mortgage loans made by banks and sell them on to investors as asset backed securities
31
PwC concluded that the accounting policy adopted by China Aviation Oil was incorrect
because it
A. only regarded the intrinsic value (i.e. the difference between the strike price and the forward price of the underlying commodity) as the fair value of its options
B. took into account both the intrinsic value and the time value
C. only took into account the time value of the option (which includes recognizing the time left to maturity of the option, the volatility of the spot price of the underlying commodity, interest rates and other factors)
D. used neither the intrinsic value nor the time value
A. only regarded the intrinsic value (i.e. the difference between the strike price and the forward price of the underlying commodity) as the fair value of its options
32
Unlike the case at Barings Bank, National Australia Bank:
A. Had a risk management infrastructure that was credited with doing its' job well, despite the losses
B. Was not dealing in derivatives
C. Had a Board of Directors that was unaware of the true nature of trading activities
D. Had a separation of duties between trading and back office
D. Had a separation of duties between trading and back office
33
According to the Northern Rock Case Study, what is Forced Insolvency?
A. The bank is insolvent in that the current value of its assets (measured at book value) is less than the value of its liabilities; thus even if the bank were to liquidate all of its assets it would not be able to repay all depositors and other creditors
B. The bank is legally solvent but if, because it cannot fund its operations, it is forced to liquidate assets it could do so only at less than nominal values (fire sale) and this would make it legally insolvent (value of assets falls below those of liabilities)
C. The bank is legally solvent but its current funding costs (which are likely to continue) exceed the average rate of return on its assets and hence it would soon become insolvent as it would be making losses and would eventually exhaust its equity capital
D. The bank is solvent in that the current value of its assets (measured at book value) is more than the value of its liabilities; so even if the bank were to liquidate all of its assets it would be able to repay all depositors and other creditors
B. The bank is legally solvent but if, because it cannot fund its operations, it is forced to liquidate assets it could do so only at less than nominal values (fire sale) and this would make it legally insolvent (value of assets falls below those of liabilities)
34
Which of the following best characterizes the problems that developed at Bankgesellschaft
Berlin?
A. Volume growth at the expense of margin.
B. Excessive reliance on volatile trading income.
C. Banking is a "for-profit" business, not a means of fulfilling political goals.
D. A company culture where profits may justify "excesses."
C. Banking is a "for-profit" business, not a means of fulfilling political goals.
35
When supervising others, a PRMIA member must comply with
A. PRMIA Standards
B. the standards of the organization where the work is being performed
C. his / her established personal standards of work approved in previous work situations
D. local regulatory authority standards which may be less onerous than PRMIA standards
A. PRMIA Standards
36
Metallgesellschaft's retail contracts were
A. unhedged
B. hedged using exchange-traded futures with longer maturities than the retail contracts
C. hedged using exchange-traded futures with shorter maturities than the retail contracts
D. fully hedged using exchange-traded futures of the same maturities as the retail contracts
C. hedged using exchange-traded futures with shorter maturities than the retail contracts
37
The problems at Bankers Trust can best be characterized as failures 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
38
According to LTCM managers:
A. Stress Testing looked at the 12 biggest deals with each of their top 20 counterparties
B. Stress Testing was not conducted
C. Stress Testing was not necessary because their trades were hedged
D. Stress Testing was elaborate, complex and conducted on their entire portfolio. It included the assumptions of a major breakdown in historical correlations
A. Stress Testing looked at the 12 biggest deals with each of their top 20 counterparties
39
Which of the following would have contributed to noticing and preventing Leeson's
violations at Barings?
A. Separation of front and back offices
B. More senior level involvement at Barings regarding use of derivatives
C. Recognition that large profits can be an indicator of higher risk
D. All of the above
D. All of the above
40
When considering the performance of Northern Rock within its peer group of banks, which
of the following is not correct?
A. Only a few months previously it had reported record profits.
B. The quality of its' assets was never in question.
C. For many years it was regarded as a star-performer in the financial markets.
D. Its' loan loss record was poor by industry standards.
D. Its' loan loss record was poor by industry standards.
41
As a PRMIA member, you have certain responsibilities. Among these are the
requirement(s) to:
A. Vote in Board elections
B. Attend at least one PRMIA chapter meeting per year
C. Adhere to the PRMIA Standards of Best Practice, Conduct and Ethics
D. All of the above
C. Adhere to the PRMIA Standards of Best Practice, Conduct and Ethics
42
The Chief Risk Officer is responsible for the management of the Risk Management
Infrastructure, and as such helps the Board define, and then implements throughout the
organization, the risk appetite of the organization.
Which of the following is also the responsibility of the Chief Risk Officer?
A. Maintaining appropriate assurance measures to ensure that the Governance and Risk framework of the organization is effective, and, if any shortcomings are discovered, to escalate these to the Board so that remedial action can be taken in an appropriate and timely manner
B. ensuring that all employees understand the rules and regulations (both internal and external) with which they must comply and the implications, for them and for the organization, of non-compliance
C. Ensures that reporting of risk and governance-related matters are produced in a timely and accurate manner
D. Acts as sponsor for risk throughout the organization and ensures that a risk culture is implemented, and maintained
C. Ensures that reporting of risk and governance-related matters are produced in a timely and accurate manner
43
In the case of National Australia Bank, which of the following was present?
A. A window of time between close of day for reporting purposes and back office checking that allowed traders to hide losses using fictitious trades
B. The Board received risk management information that was incorrect, incomplete or insufficiently detailed
C. Both A and B
D. Neither A nor B
C. Both A and B
44
Taisei Fire and Marine Insurance Co
A. relied almost entirely on Fortress Re's management team for information on the risks in its portfolio
B. relied on the information it received from other members of the reinsurance pool to manage its risks
C. had a full understanding from Fortress Re of the risks in the pool
D. had a full understanding from other members of the pool of the pool's liabilities
A. relied almost entirely on Fortress Re's management team for information on the risks in its portfolio
45
According to the G-30 Study, the risk management infrastructure's funding must be
A. determined by business-unit leaders
B. determined at the Board level with inputs from business unit leaders
C. determined at the Board level without influence by business unit leaders
D. determined by the regulators
C. determined at the Board level without influence by business unit leaders
46
Which of the following is NOT part of the PRMIA Standards of Best Practice, Conduct and
Ethics (Code of Conduct) Guidance on Ethical Behavior?
A. Ensure globally accepted standards are adhered to at all costs
B. Respect local customs
C. Respect local laws and regulations
D. Take responsibility for your work
A. Ensure globally accepted standards are adhered to at all costs
47
A risk manager has just completed a risk assessment project. The report has been given to
the risk manager's direct supervisor, who refuses to escalate the material issues raised in
the report. Further, the direct supervisor edits the report to remove the section describing
the material risk, who then submits it to the firm's Executive Committee.
According to the PRMIA Standards of Best Practice, Conduct and Ethics (Code of
Conduct), which of the following actions is most appropriate:
A. The risk manager has submitted the report to their direct supervisor and their obligation ends at this point, nothing further should be done
B. The risk manager should attempt to resolve the conflict with the direct supervisor, but if that does not work, they should contact the Whistle-Blowing Hotline of the organization. If no such hot-line is in place, they should contact the PRMIA Ethics Committee
C. Escalation of the issue is against the Code of Conduct because one should respect the administrative structure of the organization
D. If the risk manager deems it appropriate, he / she should send a copy of the original report to the CEO
B. The risk manager should attempt to resolve the conflict with the direct supervisor, but if that does not work, they should contact the Whistle-Blowing Hotline of the organization. If no such hot-line is in place, they should contact the PRMIA Ethics Committee
48
For the sentence
"The organization shall encourage all employees to keep abreast of the latest
developments in their particular areas of expertise, through ____________,
_____________, and _____________ and shall make adequate resources available to
enable this to occur,"
Choose the correct combinations of words from the following options:
A. courses, conferences, journals
B. conferences, discussion groups, blog sites
C. courses, educational certification, journals
D. journals, courses, compliance mandates
A. courses, conferences, journals
49
Which of the following was NOT a factor in the WorldCom collapse?
A. Failed corporate governance
B. Accounting abuses
C. Unfair pricing to customers
D. Over stating actual sales
C. Unfair pricing to customers
50
Barings failed to recognize that Nick Leeson's losses were increasing because:
A. Leeson ran the front office
B. The London office did not ask for any reports
C. Leeson hid his trades in a suspense account
D. The margin report sent to London did not show the true margin needs
C. Leeson hid his trades in a suspense account
51
The condition where futures prices of an underlying asset are lower than cash (spot) prices
is known as:
A. Backwardation
B. Contango
C. Reverse backwardation
D. Conchacha
A. Backwardation
52
When Fannie Mae and Freddie Mac were taken under US government conservatorship,
which of the following was not included within their operating mandate?
A. Fannie Mae and Freddie Mac will continue to buy home loans from banks to repackage them as mortgage-backed securities
B. The US government will provide capital as needed in return for preferred shares in the companies
C. The US government will buy mortgage-backed securities in the open market as needed
D. There was a 2 year limit to the conservatorship
D. There was a 2 year limit to the conservatorship
53
According to PRMIA governance principles, boards and audit committees should …
A. Review compensation plans to ensure consistency with corporate risk appetite, competitive market conditions, and fiduciary responsibility to shareholders
B. Collectively assume responsibility of understanding and reporting the effectiveness of the firm risk management infrastructure
C. Be composed of key business unit representatives
D. Leave shareholder accountability to senior management who decides strategic direction
A. Review compensation plans to ensure consistency with corporate risk appetite, competitive market conditions, and fiduciary responsibility to shareholders
54
The problems which initiated the crisis at Northern Rock during the summer of 2007 were:
A. Large customer withdrawals despite the UK regulator and the UK Treasury giving assurances that the bank was solvent
B. Doubts arising about the viability of the business model which necessitated Bank of England intervention
C. A general lack of confidence in mortgage backed securities associated in large part with developments in the US sub-prime mortgage market, and doubts emerging about the viability of the Northern Rock business model
D. A depositor run on the bank, following doubts about the viability of the Northern Rock business model
C. A general lack of confidence in mortgage backed securities associated in large part with developments in the US sub-prime mortgage market, and doubts emerging about the viability of the Northern Rock business model
55
Bankgesellschaft Berlin's failures can be best characterised as
A. credit risk caused by overexposure to the property market
B. credit risk caused by a diversified portfolio of poor-quality loans
C. both A and B
D. none of the above
A. credit risk caused by overexposure to the property market
56
The sensitivity analysis required under IFRS would have done what for China Aviation Oil?
A. Provided investors and analysts with insight into the dynamics of value changes, and the sensitivity of fair value to the underlying drivers of interest rates, exchange rates, and commodity prices
B. Only provided the intrinsic value of its outstanding option positions
C. Only provided the time value of its outstanding option position
D. None of the above
A. Provided investors and analysts with insight into the dynamics of value changes, and the sensitivity of fair value to the underlying drivers of interest rates, exchange rates, and commodity prices
57
The "Renewing the Dream" program signed into law by President George W Bush in 2002
was designed to
A. Recapitalise Fannie Mae and Freddie Mac with US$2.4 billion of additional capital to ensure they weathered the risks associated with any future downturn in the housing markets
B. Provide grants of US$800 million to help home buyers with down-payment and closing costs
C. Allow risky, high-cost loans to be credited towards affordable housing goals
D. Provide tax credits of nearly US$2.4 billion over the next 5 years to investors and builders who developed affordable single-family housing in poor and distressed areas
D. Provide tax credits of nearly US$2.4 billion over the next 5 years to investors and builders who developed affordable single-family housing in poor and distressed areas
58
How much of Washington Mutual's assets were funded by customer deposits for the
decade ending in 2006?
A. 30%
B. 40%
C. 50%
D. 60%
D. 60%
59
The Fortress Re finite reinsurance model
A. allowed Fortress to claim re-insurance claims payments from the finite reinsurers and paid premiums to cover these deals over a 5 year period, and as the risks were spread out over time the annual premiums were accounted for as current liabilities on the books of the pool members, giving a true impression of profitability
B. allowed Fortress to claim re-insurance claims payments from the finite reinsurers and paid annual premiums to cover these policies, and as the risks were spread out over the year the annual premiums were accounted for as current liabilities on the books of the pool members, giving a true impression of profitability
C. allowed Fortress to claim re-insurance claims payments from the finite reinsurers and paid premiums to cover these deals over a 5 year period, and as the risks were spread out over time the future premiums were accounted for as current liabilities on the books of the pool members, giving a true impression of profitability
D. allowed Fortress to claim re-insurance claims payments from the finite reinsurers and paid premiums to cover these deals over a 5 year period, but as the risks were spread out over time the future premiums were not accounted for as current liabilities on the books of the pool members, thus giving a false impression of profitability
D. allowed Fortress to claim re-insurance claims payments from the finite reinsurers and paid premiums to cover these deals over a 5 year period, but as the risks were spread out over time the future premiums were not accounted for as current liabilities on the books of the pool members, thus giving a false impression of profitability
60
Which of the following is FALSE?
A. Nick Leeson also ran the back office for his trading area
B. Nick Leeson dealt in complex derivatives lacking transparency of pricing
C. SIMEX made inquiries to Barings Bank about large margin calls on its positions
D. Nick Leeson claimed to be running an arbitrage book
B. Nick Leeson dealt in complex derivatives lacking transparency of pricing
61
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
62
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
63
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
64
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
65
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
66
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
67
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
68
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
69
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
70
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
71
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
72
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
73
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
74
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
75
Which of the following was not cited within the chain of miscalculations and deferred
decisions for the downfall of Fannie Mae and Freddie Mac
A. Extreme exposure to foreign currency exposures and losses from non-US$ mortgages
B. Lawmakers postponed strenghtening regulatory oversight due to partisan infighting
C. Under-management and under-measurement of market and liquidity risk
D. They did not raise enough capital to weather the storm as the housing slump expanded
A. Extreme exposure to foreign currency exposures and losses from non-US$ mortgages
76
Select the one correct statement relative to Barings Bank.
A. Proprietary and agency trading were combined and therefore did not increase risk.
B. Proprietary and agency trading were separate and therefore did not increase risk.
C. Proprietary and agency trading were combined and therefore did increase risk.
D. Proprietary and agency trading were separate and did increase risk.
C. Proprietary and agency trading were combined and therefore did increase risk.
77
Which of the following are PRMIA Governance Principles?
I.Sufficiency of Key Resources and Process
II.State of the Art Risk Management Technology
III.Ongoing Education and Discernment
IV.Sufficiency of Key Competencies
A. I, II and IV only
B. I and II only
C. I, III and IV only
D. All of these are PRMIA Governance Principles
C. I, III and IV only
78
According to the PwC report China Aviation Oil, in order to avoid recording and reporting
losses, the company adopted which approach covering up its losses?
A. selling short-term options with extremely low-risk profiles to generate premiums to cover the cost of closing out loss-making option positions
B. selling long-term options with extremely low-risk profiles to generate premiums to cover the cost of closing out loss-making option positions
C. selling short-term options with extremely high-risk profiles to generate premiums to cover the cost of closing out loss-making option positions
D. selling long-term options with extremely high-risk profiles to generate premiums to cover the cost of closing out loss-making option positions
D. selling long-term options with extremely high-risk profiles to generate premiums to cover the cost of closing out loss-making option positions
79
```
Which of the following was the key contributory risk factor to the problems at LTCM in the
summer of 1998?
I.Model Risk
II.Lack of Transparency
III.Breakdown of Historical Correlations
IV.Over Regulation by Federal Regulators
```
A. I and III only
B. III only
C. III and IV only
D. All of these were key elements of the problems at LTCM
B. III only
80
Which is NOT part of the guidance on Professional Conduct in the PRMIA Standards of
Best Practice, Conduct and Ethics (Code of Conduct)?
A. Know and abide by applicable rules and regulations
B. Clearly inform all affected parties of any apparent or actual conflicts of interest
C. Report to the Regulator any departures from generally accepted methodology or practices
D. Provide advice that is clear and accurate
C. Report to the Regulator any departures from generally accepted methodology or practices
81
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
82
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
83
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
84
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
85
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
86
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
87
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.
88
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
89
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
90
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
91
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
92
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
93
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
94
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
95
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
96
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
97
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
98
```
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
99
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.
100
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
101
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
102
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
103
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
104
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
105
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
106
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
107
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
108
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
109
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
