nayizhenfeng

 

2、Which of the following statements regarding models to estimate economic capital is (are) TRUE?

      I. Pykhtin and Garcia Cespedes et al. rely on average values of intra condition sector correlations.

     II. Garcia Cespedes et al. is a default mode model and ASRF IRB is a marked to market model.

    III. Duellmann is a multifactor model including three systematic risk measures.

    IV. The out of sample performance of the Garcia Cespedes et al. model is extremely good.

A) II and IV.  

B) I and IV. 

C) I, II, and III.  

D) III only.

nayizhenfeng

 

The correct answer is A

 

Duellmann and Garcia Cespedes et al. rely on average values of intra and inter sector correlations. Duellman is classified as a tractable closed form solution, not a multifactor solution.

nayizhenfeng

 

AIM 12: Discuss the Basel II Accord’s standardized and IRB treatments of asset securitization.

1、According to Basel II, if an internal ratings-based (IRB) bank retains a first-loss position in an asset securitization:

A) the bank must deduct this position from capital.   

B) an adjustment is made to the estimated loss given default.  

C) an adjustment is made to the estimated probability of default.

D) higher risk weights are applied.

nayizhenfeng

 

The correct answer is A

 

The full amount of any first–loss position in an asset securitization (losses the bank must absorb before other security holders hear losses) is deducted from regulation capital under Basel II.

nayizhenfeng

 

2、The Internal Assessment Approach (IAA) for calculating capital requirements for securitized assets is:

A) acceptable as a means of addressing the risk of unrated assets.  

B) the most common way for banks to determine the capital required for securitized assets.  

C) entirely independent of any external rating system.

D) available to any bank using IRB risk weighting methods.

nayizhenfeng

 

The correct answer is A

 

Both the IAA and the Supervisory Formula (SF) approaches can be used for unrated assets. The IAA is only used in limited situations, with specific permission from the regulatory authority. The IAA is based on systems used by external ratings agencies.

nayizhenfeng

 

3、The Standardized Approach to operational risk links a:

A) static proportion to a static risk indicator variable.

B) dynamic proportion to a static risk indicator variable.

C) static proportion to a dynamic risk indicator variable.  

D) dynamic proportion to a dynamic risk indicator variable.

nayizhenfeng

 

The correct answer is D

 

The Standardized Approach to operational risk allows banks to assign dynamic risk indicators across business lines and allows the proportions attached to each indicator variable to vary (be dynamic) across risk indicators.

nayizhenfeng

 

AIM 13: Discuss the supervisory backtesting framework used in conjunction with an institution’s internal models, and describe the 3-zone supervisory framework for evaluating backtesting results.

1、According to the Basel Accord, if the number of exceptions to the back-testing of value at risk (VAR) models exceeds four at the 99 percent confidence level, which of the following may occur (given 250 data points)?

A) Regulators may decrease the multiplier.  

B) Banks may ignore the model for future VARs. 

C) Regulators may increase the multiplier.  

D) Risk managers may be decertified.

nayizhenfeng

 

The correct answer is C

 

The Basel Accord established a scale by which the multiplier may be increased for the number of exceptions above four (or 100 given 5,000 data points). For example, if a model has 5 exceptions, the multiplier will increase by 0.40 to 3.40 (or similarity, the floor value of 3 will be multiplied by 1.13 to get 3.4). This in turn increases the amount of capital a bank must hold, and in turn lowers performance measures like return on equity.