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36. Which of the following is not a true statement about internal credit ratings?
A. The "at-the-point-in-time" approach makes heavy use of econometric modeling that relates current financial variables to estimated default risk.
B. The "through-the-cycle" approach is forward-looking and attempts to incorporate future economic scenarios into current default risk estimates.
C. "At-the-point-in-time" credit scores volatility is much higher than "through-the-cycle" score volatility.
D. A sound internal system uses at-the-point-in-time scoring for small-to-medium-sized companies and private firms and through-the-cycle scoring for large firms.
Correct answer is D
Explanation: The approaches are not compatible or directly comparable, and using the two approaches for different firms can yield highly inconsistent and misleading results.ffice ffice" />
Reference: de Servigny and Renault, Chapter 2
37. Which of the following is not a commonly used method for generating a recovery rate function?
A. Nonparametric kernel estimation.
B. Cubic SPLINE estimation.
C. Assume the recovery rate follows a beta distribution.
D. Estimate conditional densities with generalized method of moments.
Correct answer is B
xplanation: Cubic SPLINE estimation would make little sense here.
Reference: de Servigny and Renault, Chapter 4
38. A bond with a face value of 300 matures in 10 years, and it is calculated to be worth 150 using the Merton model. The risk-free rate is 5%. What is the bond's spread?
A. 693bp
B. 1193 bp
C. 193 bp
D. 2bp
Correct answer is C
A is incorrect because it is the yield of the bond, not its spread. The yield is calculated by multiplying 1/remaining maturity by ln(D/F).
B is incorrect because it adds the yield to the riskfree rate instead of subtracting it off.
C is correct. Use the yield in a and subtract off the riskfree rate of 5 to get this.
D is incorrect. It is the answer one gets by making a mistake in going to basis points and rounding 1.9 bp to 2 bp.
Reference: Stulz, Risk Management and Derivatives, Chapter 18
39. You are the CRO of a financial intermediary acting on behalf of Big Bank in an advisory capacity providing advice on Big Bank's acquisition of Global Financial Services, a firm primarily engaged in back office transaction processing. Your firm also represents South American Associates which is looking to expand its revenue stream and has mentioned to you that they are considering making Global Financials Services an acquisition target. You are now losing sleep as you've been having this vision of a visit from your regulatory authorities asking you to explain what was done to avoid a conflict. You can point to the following steps you've taken as being appropriate:
I. Established a Business Review Process that allows you to document the framework you have followed to allow for ex-post review of the advice you've provided.
II. You called the CRO of South American Associates and told her that your firm is representing Big Bank and that your firm will be careful in what they say to South American.
III. You send an email to the investment banking staff representing Big Bank telling them that South American is in the market for an acquisition such as Global Financial and to make sure they do not share any information with South American.
IV. You decide that you can hold off informing your immediate superior of this potential problem issue until South American has made it clear that it is going to target Global Financial Services.
A. I only
B. II, III and IV
C. I and IV only
D. I, II, III
Correct answer is A
I. The establishment of a Business Review Process covers a wide variety of issues including reputation risk, the effectiveness of the conflict management process other financial and conflict issues. It also includes an assessment of the firm's policies and procedures, disclosure practices, suitability standards and employee training programs.
II. This step will not alleviate you of any potential conflict of interest from developing and in fact raises another conflict in that you disclosed your relationship with Big Bank.
III. An email will only alert your banking staff to an issue that may not have been an issue previously, making worse the potential conflict of interest.
IV. The potential conflict of interest is sufficient to bring it to the attention of the appropriate staff within your organization in order to decide how to best proceed irrespective of whether South American has made a definite overture to Global Financial Services. You would not have access to all information necessary to make an informed judgment.
40. John is an internal auditor covering risk management for a global insurance group in ffice:smarttags" />Asia. The company offers and manages investment-linked products ("ILP") for retail clients. ILP is an insurance that allows policyholders to participate in the return of the underlying investment portfolio. Which of the following assessments made during John's audit is indicative of a serious problem?
A. Local subsidiary of the group offers 5% of the portfolio return to the ILP investment manager as an incentive. There is no regulation or group policy that restricts such arrangement.
B. The portfolio accounting and valuation are calculated accurately by the investment manager.
C. Investment manager provides regular investment report to policyholders and its management.
D. The investment manager employs third-party analytic software to assist its daily portfolio management.
Correct answer is B
In developing the lines of authority and responsibility for the risk management and control process, a primary consideration of senior management is the separation of responsibility for the measurement, monitoring and control of risk from the execution of transactions that give rise to the risk. Senior management should ensure 1) that there is appropriate segregation of duties and 2) that personnel are not assigned conflicting responsibilities.
Choice 'B' violates this principal of "Segregation of Duties", despite that they are calculated accurately. The portfolio accounting and valuation should be calculated by the Accounting Department. The accounting department is an independent department and it does report to the Investment Manager.
Reference: Risk Management and Capital Adequacy, Gallati, 2003. | 
发表于 2009-6-13 14:20
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