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Which of the following is not a parameter to be determined by the risk manager that affects the level of economic credit capital:A . Risk horizonB . Confidence levelC . Probability of defaultD . Definition of credit lossesView AnswerAnswer: C Explanation: Three parameters define economic credit capital: the risk horizon,...

What is the risk horizon period used for credit risk as generally used for economic capital calculations and as required by regulation?A . 1-dayB . 1 yearC . 10 yearsD . 10 daysView AnswerAnswer: B Explanation: The credit risk horizon for credit VaR is generally one year. Therefore Choice 'b'...

An assumption of normality when returns data have fat tails leads to: I. underestimation of VaR at high confidence levels II. overestimation of VaR at low confidence levels III. overestimation of VaR at high confidence levels IV. underestimation of VaR at low confidence levelsA . I and IIB . I,...

Which of the following statements are true: I. The three pillars under Basel II are market risk, credit risk and operational risk. II. Basel II is an improvement over Basel I by increasing the risk sensitivity of the minimum capital requirements. III. Basel II encourages disclosure of capital levels and...

A bank extends a loan of $1m to a home buyer to buy a house currently worth $1.5m, with the house serving as the collateral. The volatility of returns (assumed normally distributed) on house prices in that neighborhood is assessed at 10% annually. The expected probability of default of the...

Ex-ante VaR estimates may differ from realized P&L due to: I. the effect of intra day trading II. timing differences in the accounting systems III. incorrect estimation of VaR parameters IV. security returns exhibiting mean reversionA . I and IIIB . II, III and IVC . I, II and IIID...

Which of the following statements are true: I. Stress testing, if exhaustive, can replace traditional risk management tools such as value-at-risk (VaR) II. Stress tests can be particularly useful in identifying risks with new products III. Stress testing is distinct from a bank's ICAAP carried out periodically IV. Stress testing...

Which of the following statements are true with respect to stress testing: I. Stress testing results in a dollar estimate of losses II. The results of stress testing can replace VaR as a measure of risk as they are better grounded in reality III. Stress testing provides an estimate of...

Which of the following describes rating transition matrices published by credit rating firms:A . Expected ex-ante frequencies of migration from one credit rating to another over a one year periodB . Probabilities of default for each credit rating classC . Probabilities of ratings transition from one rating to another for...

Which of the following credit risk models focuses on default alone and ignores credit migration when assessing credit risk?A . CreditPortfolio ViewB . The contingent claims approachC . The CreditMetrics approachD . The actuarial approachView AnswerAnswer: D Explanation: The correct answer is Choice 'd'. The following is a brief description...