26. Calculate the marginal mortality rate in year 3 for the following class of issuers.

 [attach]13824[/attach]

A. 3.45%

B. 6.38%

C. 6.40%

D. 8.89%

27. Which of the following statistical distributions is commonly used to model the distribution of loss severity when modelling operational risk?

A. The Weibull distribution

B. The Beta distribution

C. The normal distribution

D. The Poisson distribution

28. Which of the following disclosures are not required with Basel II?

A. Geographic distribution of exposures and the criteria used to allocate the loans to geographic areas.

B. Industry- or counterparty-type distribution of exposures.

C. Amount of impaired loans and a reconciliation of changes in the allowance for loan impairment.

D. An analysis of aging of past due loans by major industry or counterparty type.

29. Which of the following statements are valid with regard to risk management information systems?

i) RAROC performance reporting platforms must integrate risk-based capital and loan losses and ensure integrity with other financial information at various levels of aggregation.

ii) A long-term approach to the development of a risk management information system helps avoid a system that is laborious and manually intensive.

iii) A comprehensive risk management information system requires detailed data collection, a powerful computational engine and massive storage capability.

iv) Done properly, a risk management information system can become a hub of a bank's information infrastructure.

A. i, iii and iv only

B. i, ii, iii and iv

C. ii and iv only

D. i, ii, and iii only

30. In an attempt to provide guidance on the additional steps to be taken by the private sector to promote the efficiency, effectiveness and stability of the global financial system, the Counterparty Risk Management Policy Group II (CRMPG II) published a report in July 2005 containing recommendations and guiding principles. According to the CRMPG II report, which of the following statements relating to Emerging Issues is incorrect?

A. CRMPG II recommends that fiduciaries taking on risks associated with complex products should have the ability to aggregate risk across their entire pool of assets in order to understand portfolio level implications.

B. CRMPG II recommends that hedge funds, on a voluntary basis, adopt the relevant Recommendations and Guiding Principles contained in their (CRMPG II) report.

C. As a guiding principle in selling structured products to retail investors, financial intermediaries should consider whether disclosure appropriately conveys the fact that the secondary market value, at maturity, will be less than the issue price.

D. As a guiding principle, senior management should conduct periodic reviews of the financial intermediary's internal controls for the sale of complex products to retail investors.

26. Calculate the marginal mortality rate in year 3 for the following class of issuers.

fficeffice" />

ffice:smarttags" /> [attach]13826[/attach]

A. 3.45%

B. 6.38%

C. 6.40%

D. 8.89%

Correct answer is D

The marginal mortality rate is dollar value of debt defaulting in year T divided by total

dollar value of bonds outstanding at the beginning of the year.

 [attach]13827[/attach]

In the above table, the dollar value outstanding at the beginning of year 3 is 900.  Therefore, the marginal mortality rate is 80/900 = 8.89%

Reference: Financial Institutions Management, Saunders and Cornett, 2005.

27. Which of the following statistical distributions is commonly used to model the distribution of loss severity when modelling operational risk?

A. The Weibull distribution

B. The Beta distribution

C. The normal distribution

D. The Poisson distribution

Correct answer is A

The Weibull distribution is used to model the distribution of loss severity operational risk events.

28. Which of the following disclosures are not required with Basel II?

A. Geographic distribution of exposures and the criteria used to allocate the loans to geographic areas.

B. Industry- or counterparty-type distribution of exposures.

C. Amount of impaired loans and a reconciliation of changes in the allowance for loan impairment.

D. An analysis of aging of past due loans by major industry or counterparty type.

Correct answer is D

D: This is not a required disclosure, but banks are encouraged to provide this information.

A to C: All are mandatory disclosure requirements.

29. Which of the following statements are valid with regard to risk management information systems?

i) RAROC performance reporting platforms must integrate risk-based capital and loan losses and ensure integrity with other financial information at various levels of aggregation.

ii) A long-term approach to the development of a risk management information system helps avoid a system that is laborious and manually intensive.

iii) A comprehensive risk management information system requires detailed data collection, a powerful computational engine and massive storage capability.

iv) Done properly, a risk management information system can become a hub of a bank's information infrastructure.

A. i, iii and iv only

B. i, ii, iii and iv

C. ii and iv only

D. i, ii, and iii only

Correct answer is B

Explanation:

(i) is VALID.

(ii) is VALID.

(iii) is VALID.

(iv) is VALID.

Hence, B is correct, and A, C, and D are incorrect.

30. In an attempt to provide guidance on the additional steps to be taken by the private sector to promote the efficiency, effectiveness and stability of the global financial system, the Counterparty Risk Management Policy Group II (CRMPG II) published a report in July 2005 containing recommendations and guiding principles. According to the CRMPG II report, which of the following statements relating to Emerging Issues is incorrect?

A. CRMPG II recommends that fiduciaries taking on risks associated with complex products should have the ability to aggregate risk across their entire pool of assets in order to understand portfolio level implications.

B. CRMPG II recommends that hedge funds, on a voluntary basis, adopt the relevant Recommendations and Guiding Principles contained in their (CRMPG II) report.

C. As a guiding principle in selling structured products to retail investors, financial intermediaries should consider whether disclosure appropriately conveys the fact that the secondary market value, at maturity, will be less than the issue price.

D. As a guiding principle, senior management should conduct periodic reviews of the financial intermediary's internal controls for the sale of complex products to retail investors.

Correct answer is C

A is incorrect. Because the statement is correct according to CRMPG II report. This basically comes from the New Prudent Man Rule as opposed to the traditional Fiduciary Rule.

B is incorrect. Because the statement is correct according to CRMPG II report. This recommendation is an effort to promote the efficiency, effectiveness and stability of the global financial system.

C is correct. Per CRMPG II report, disclosure should relate to the secondary market value at or near issuance (not at maturity).

D is incorrect. Because the statement is correct according to CRMPG II report. This is the essence of Sarbane-Oxley requirement.