16. Which of the following statements is not correct about the foundation IRB and the advanced IRB approaches for credit risk capital charges in Basel II?

A. Under the advanced IRB approach, banks are allowed to use their own estimates of PD, LGD, EAD and correlation coefficient but must use the risk-weight functions provided by the supervisors.

B. Under the foundation IRB approach, banks provide their own estimates of PD and rely on supervisory estimates for other risk components.

C. Banks adopting the advanced IRB approach are expected to continue to employ this approach. A voluntary return to the standardized approach is permitted.

D. Under both foundation IRB and advanced IRB approaches, the expected loss is not included in

the credit risk capital charge.

17. A rapidly growing bank wants to calculate its RAROC. The bank has one-year income per dollar loaned equal to 0.6 cents, its return on equity is 0.12, its maximum loan loss (for a given confidence interval) is 0.09, its unexpected default rate is 0.05 and its recovery on defaulted loans is 35%. What is the bank's RAROC?

A. 34.29%

B. 1.66%

C. 20.72%

D. 18.46%

18. The following statements about combating model risk are true except:

I. If a position is known to have considerable model risk, a firm can limit its exposure to this source of model risk by imposing a tighter position limit.

II. If we always choose the model that takes into account the largest number of real-world factors that affect prices, this will help to reduce the firm's exposure to model risk.

III. Running regular stress tests or scenario analyses to test the volatility, correlation and liquidity assumptions in models helps reduce model risk.

IV. Risk managers should check the traders' pricing models, ensuring model calibration is up-to-date and that models are upgraded in line with market best practice, and to ensure that obsolete models are identified and taken out of use:

A. None are true

B. II only

C. I, III and IV

D. I, II and III

19. Based on a 90% confidence level, how many exceptions in back testing a VaR would be expected over a 250-day trading year?

A. 10

B. 15

C. 25

D. 50

20. You are evaluating USD-based bond investments issued by the 4 companies below. According to your investment guidelines, you may only invest in companies that have an investment grade rating from 2 recognized credit agencies and are located in a country with favorable sovereign risk quality (i.e., countries in which common sovereign risk probability models indicate a low probability of debt rescheduling). Assuming the company is located in the paired country, which (country, company) pair would be the most appropriate investment? 

A. (Atlantis, Cappuccino Capital)

B. (Neptune, Pyramid Bank Holdings)

C. (Wally World, Big Ben Financial)

D. (Eurasia, Maple Leaf Holdings)

16. Which of the following statements is not correct about the foundation IRB and the advanced IRB approaches for credit risk capital charges in Basel II?

A. Under the advanced IRB approach, banks are allowed to use their own estimates of PD, LGD, EAD and correlation coefficient but must use the risk-weight functions provided by the supervisors.

B. Under the foundation IRB approach, banks provide their own estimates of PD and rely on supervisory estimates for other risk components.

C. Banks adopting the advanced IRB approach are expected to continue to employ this approach. A voluntary return to the standardized approach is permitted.

D. Under both foundation IRB and advanced IRB approaches, the expected loss is not included in the credit risk capital charge.

Correct answer is A

Under the advanced IRB approach, banks are allowed to provide their own estimate of PD, LGD, and EAD, but must use the correlation coefficient formula specified by the supervisor.fficeffice" />

ffice:smarttags" />Reading: Basel Capital Accord II.

17. A rapidly growing bank wants to calculate its RAROC. The bank has one-year income per dollar loaned equal to 0.6 cents, its return on equity is 0.12, its maximum loan loss (for a given confidence interval) is 0.09, its unexpected default rate is 0.05 and its recovery on defaulted loans is 35%. What is the bank's RAROC?

A. 34.29%

B. 1.66%

C. 20.72%

D. 18.46%

Correct answer is D

ROE, and Maximum Loan loss is Unused informations in calculating RAROC.

Options A, B and C are incorrect because if you chose one of them, it means you don't understand the nature of RAROC and its calculation.

Reference:  Anthony Saunders, Financial Institutions Management, 4th edition, 2003, McGraw-Hill, Chapter 11.

18. The following statements about combating model risk are true except:

I. If a position is known to have considerable model risk, a firm can limit its exposure to this source of model risk by imposing a tighter position limit.

II. If we always choose the model that takes into account the largest number of real-world factors that affect prices, this will help to reduce the firm's exposure to model risk.

III. Running regular stress tests or scenario analyses to test the volatility, correlation and liquidity assumptions in models helps reduce model risk.

IV. Risk managers should check the traders' pricing models, ensuring model calibration is up-to-date and that models are upgraded in line with market best practice, and to ensure that obsolete models are identified and taken out of use:

A. None are true

B. II only

C. I, III and IV

D. I, II and III

Correct answer is B

I is true because by considering potential model risk exposure in setting position limits is one of the institutional methods of dealing with model risk highlighted in the chapter of model risk by Kevin Dowd.

II is false and take note this is exactly what the question is asking for! Statement (II) is false because unnecessary complexity is never a virtue, in fact, exposure to model risk is reduced if practitioners always choose the simplest reasonable model for the task at hand.

III is true because by running regular stress tests can help to determine prospective losses if the models' assumptions don't hold and the scenario analyses help to test the degree of dependence on particular assumptions.

IV is true because it has always been risk management best practice to have independent assessment of traders' models by risk managers, and to prevent traders from hiding losses by manipulating their own models. This statement is quoted as a way to combat model risk in Kevin Dowd's book.

19. Based on a 90% confidence level, how many exceptions in back testing a VaR would be expected over a 250-day trading year?

A. 10

B. 15

C. 25

D. 50

Correct answer is C

The number of exceptions = (1 ? confidence interval) * (number of days) = (1 ?0.90) * (250) = 25.

Reference: Understanding Market, Credit, and Operational Risk,, Allen, Boudoukh and Saunders, 2004.

20. You are evaluating USD-based bond investments issued by the 4 companies below. According to your investment guidelines, you may only invest in companies that have an investment grade rating from 2 recognized credit agencies and are located in a country with favorable sovereign risk quality (i.e., countries in which common sovereign risk probability models indicate a low probability of debt rescheduling). Assuming the company is located in the paired country, which (country, company) pair would be the most appropriate investment? 

A. (Atlantis, Cappuccino Capital)

B. (Neptune, Pyramid Bank Holdings)

C. (Wally World, Big Ben Financial)

D. (Eurasia, Maple Leaf Holdings)

Correct answer is B

An investment grade bond has S& rating BBB or above or Moody's ratings Baa or above.  Also relates to the "6" B's rule, with "a" being considered a "b".  Any bonds having 6-B's is rated as investment grade.

The larger the ratio of imports to foreign exchange reserves the higher the probability of default resulting in a rescheduling of payments (Import ratio)

The larger the hard currency debt repayment is in relation to export revenues, the greater the probability of rescheduling debt (Debt service ratio)

Reference: Anthony Saunders and Marcia Million Cornett, Financial Institutions Management, 5th ed. (New York; McGraw-Hill, 2006), Chapter 16

谢谢

感谢分享

ADBCB