86. Under the Basel II Capital Accord, banks that have obtain prior regulatory approval can use the internal models approach to estimate their market risk capital requirement. What approach or methodology is used under the internal models approach to compute capital requirements?

a.  Internal rating and vendor models

b.  Stress testing and backtesting

c.  Expected tail loss, as VaR is not a coherent measure of risk

d.  VaR methodology

87. Consider the following one-period transition matrix:

If a company is originally in State A, what is the probability that the company will have defaulted strictly before the fourth transition period from now?

a.       0.500%

b.       1.875%

c.       1.375%

d.       0.875%

88. Which of the following approaches for calculating operational risk capital charges leads to a higher capital charge for a given accounting income as risk increases?

a.  The Basic Indicator Approach

b.  The Standardized Approach

c.  The Advanced Measurement approach

d.  All of the above

89. In normal market conditions, which of the following indicators would provide the best assessment of a trader’s ability to trade out of a position?

a.  Daily trading volume

b.  Total market capital

c.  Number of shareholders

d.  Size of the equity derivative market

90. A three-month futures contract on an equity index is currently priced at USD 1,000. The underlying index stocks are valued at USD 990 and pay dividends at a continuously compounded rate of 2% and the current continuously compounded risk-free rate is 4%. The potential arbitrage profit per contract, given this set of data, is closest to

a.  USD 10.00

b.  USD 7.50

c.  USD 5.00

d.  USD 1.50