Four Flashcards
With respect to the Purpose of Professional Standards, in the event of any difference in
standards between local laws/rules and those of PRMIA, members must
A. use their best judgment
B. abide by the applicable laws, rules, and regulations of PRMIA and any government and/or regulatory bodies
C. comply with the higher standard under all circumstances
D. refer the matter to their supervisor
C. comply with the higher standard under all circumstances
Which of the following was not received by Northern Rock as official support from the UK
banking and government authorities?
A. A covert money market support operation designed to cover up the difficulties Northern Rock was facing
B. The Bank of England’s role as Lender-Of-Last-resort was activated at a penalty interest rate of 150 basis points above the Bank Rate
C. The UK government offered to guarantee all existing and new retail deposits, and to most other creditors
D. The Bank of England provided an additional unlimited facility secured on the collateral of all Northern Rock assets
A. A covert money market support operation designed to cover up the difficulties Northern Rock was facing
Mary Jones wants the Bylaws of PRMIA to be changed so that people can’t join PRMIA
unless they meet a set of criteria she has devised with her colleagues. She can do this by
getting which of the following approvals:
A. The Board of Directors, but only if the Blue Ribbon Panel affirms the change
B. The Board of Directors and a majority of the Members
C. The Board of Directors alone
D. 34 of all Members
B. The Board of Directors and a majority of the Members
Which of the following was NOT a factor in the National Australia Bank case?
A. Rogue traders
B. Improper or insufficient Board-level communication regarding the importance of risk management and oversight
C. Inadequate back office procedures
D. Money laundering using foreign exchange trades for political leaders
D. Money laundering using foreign exchange trades for political leaders
What is (are) the lesson(s) of the Barings’ failure?
A. Incentive plans have risk management implications
B. Front and back offices need to be independent
C. Large profits can be an indicator of risk
D. All of the above
D. All of the above
What was the main type of risk that Metallgesellschaft was exposed to?
A. Basis Risk
B. Currency Settlement
C. Interest Rate
D. Inflation
A. Basis Risk
According to the Group of 30 Report, deriving aggregate potential credit exposure for a
counterparty by adding up the potential exposure of multiple transactions:
A. Gives an accurate result in most cases
B. Captures portfolio effects but not tenor differences
C. Can easily reflect the impact of netting
D. Overstates exposure in most cases
D. Overstates exposure in most cases
Up until 2006, which of the following was not a primary driver for Washington Mutual’s
earning?
A. Lending to consumers and small businesses.
B. Deposit taking activities which generated net interest income.
C. The provision of fee based services to its customers.
D. Complex derivative trades based on volatility indices.
D. Complex derivative trades based on volatility indices.
Which of the following are PRMIA Governance Principles? I.Independence of Key Parties II.Disclosure and Transparency III.Internal Validation IV.Solvency
A. I and II only
B. I, II and III only
C. I, II and IV only
D. All are PRMIA Governance Principles
A. I and II only
A risk manager finds that a client is engaged in a practice that looks like money laundering.
According to the PRMIA Standards of Best Practice, Conduct and Ethics (Code of
Conduct), the risk manager should:
A. Approach the client about the concern, regardless of what their reaction might be
B. Respect the client’s confidentiality as that takes precedence
C. Report this conduct to their immediate supervisor
D. Report the findings immediately to authorities
C. Report this conduct to their immediate supervisor
Boards of Directors, including Audit and Risk Committees must review thoroughly
compensation plans of potentially “highly compensated positions” for:
I.competitive market conditions
II.ensuring compliance with their corporate risk appetite and fiduciary responsibility to
shareholders
III.ensuring any discretionary bonus plans are geared towards keeping high income /
revenue generators
IV.reporting all such personnel to the local regulator
A. II, III and IV only
B. I, II and IV only
C. All of the above
D. I and II only
D. I and II only
The hedging strategy employed by MG Refining & Marketing has been called:
A. Dynamic hedging
B. A stacked hedge
C. A differential hedge
D. Nothing because MG Refining & Marketing did not hedge its position
B. A stacked hedge
The failure of Washington Mutual was NOT due to which one of the following?
A. Using a combination of subprime mortgage loans and credit cards
B. It failed due to the poor quality of its assets
C. Low lending standards and bad quality acquisitions
D. A run on its deposits by bank customers
D. A run on its deposits by bank customers
Every PRMIA chapter is designed to serve the local needs of members, so they often have
fairly independent planning structures and ideas. According to the PRMIA Bylaws, Regional
Chapters and Regional Directors:
A. Can have their own offices, bylaws and regulations provided they do not conflict with those of PRMIA
B. Can have meetings that only local members are allowed to attend
C. Can sign contracts on behalf of PRMIA without prior approval from the Board of Directors
D. All of the above
A. Can have their own offices, bylaws and regulations provided they do not conflict with those of PRMIA
The problems in the Orange County case can best be characterized as failures related to:
A. Market Risk
B. Credit Risk
C. Operational and Regulatory Compliance Risk
D. All of the Above
A. Market Risk
What was the most important loss for Bankers Trust?
A. Money due to unfavourable market moves
B. Loss of its’ reputation due to actions seen as detrimental to their clients
C. Loss of market share due to their licenses being revoked
D. Time spent on legal proceedings in courts
B. Loss of its’ reputation due to actions seen as detrimental to their clients
Which of the following CANNOT be counted as a reason why LTCM was given a rescue
package and not left to default?
A. Many of the banks in the rescue consortium were among LTCM’s counterparties
B. Some of the banks in the rescue consortium were LTCM investors
C. Untimely unwinding of some LTCM positions would lead to large market fluctuations and possible turmoil
D. The consortium wanted to keep this out of the regulators’ eyes
D. The consortium wanted to keep this out of the regulators’ eyes
With a PRMIA member’s need to reconcile their internal and external responsibility to
perform their work in an independent and appropriate fiduciary manner, which of the
following options must be taken into consideration when performing risk management
duties?
A. Internal controls of the organization, and the local regulator
B. Internal controls, and the expectations of stakeholders, shareholders, and the general public
C. The local regulator, internal controls, and shareholders
D. Only the internal controls and compliance standards
B. Internal controls, and the expectations of stakeholders, shareholders, and the general public
According to the Group of 30 Report, option contracts:
A. Always generate credit risk to both counterparties
B. Create credit risk only for the buyer (due to default by the seller) provided the premium is due, and paid, at contract initiation
C. Create no credit risk, since the buyer need not exercise the option
D. Usually create credit risk only for the seller (to default by the buyer)
B. Create credit risk only for the buyer (due to default by the seller) provided the premium is due, and paid, at contract initiation
Washington Mutual’s acquisition of Long Beach Financial changed its business model and
increased its credit loss profile because
A. The resulting loss rate for Washington Mutual was more than 3 times higher than other mortgage lenders tracked by the FDIC
B. the two banks were focussed in different markets
C. Long Beach Financial had losses which it hadn’t realized at the time of the takeover
D. Of a general deterioration of credit quality generally
A. The resulting loss rate for Washington Mutual was more than 3 times higher than other mortgage lenders tracked by the FDIC
Employees shall be remunerated adequately for the roles that they perform, where
‘adequately’ is defined
A. as being the market norm for similarly situated personnel in competitive organizations
B. using external references and benchmarks, and in a framework which is consistent with the type of risk-taking behavior expected of employees
C. using the risk reward profile for each business line in the organization
D. as commensurate with policies to attract and retain high income / revenue earners
B. using external references and benchmarks, and in a framework which is consistent with the type of risk-taking behavior expected of employees
The Chair of the PRMIA Board of Directors may hold the following offices:
A. Parliamentarian
B. Secretary
C. Vice Chair
D. Chair only
D. Chair only
Which of the following should NOT be part of the Risk Management Infrastructure?
A. Define the organization’s definition of risk management as articulated by the Board in clear and uncertain terms
B. Include financial risk management, compliance and external reporting and, to the extent that resources allow, should exclude legal or accounting
C. Be independently staffed and report to an employee who is on the Executive Committee (Operating Committee) but who is NOT a business unit leader
D. Review continually the application of the Principles of Good Governance to the Risk Management Infrastructure, financial accounting and reporting infrastructure and the organization as a whole
D. Review continually the application of the Principles of Good Governance to the Risk Management Infrastructure, financial accounting and reporting infrastructure and the organization as a whole
Which of the following does NOT relate to the Orange County case?
A. Where there are excess rewards, there must be risks
B. The Know Your Customer rule
C. Strategies that are not possible to explain to third parties should not be employed by the risk averse
D. Fractured organisational structure and poor risk oversight mechanism make it easy for powerful individuals to hide risk in the gaps
B. The Know Your Customer rule
What was the main risk scenario on the Metallgesellschaft trading strategy?
A. Realized losses on short-term contracts against unrealized gains on the long-run contract
B. The final price of the underlying being higher than the initial price
C. The initial price of the underlying being higher than the final price
D. The short-term price of the underlying being higher than the long-run contract
A. Realized losses on short-term contracts against unrealized gains on the long-run contract
The Risk Management Infrastructure of an organization must:
I.To the extent possible, avoid silos of control and oversight
II.Have budgets set by the business unit leaders
III.Actively provide ongoing professional development for risk management staff and
require them to be committed to standards of best practice, conduct and ethics in their work
IV.Provide general risk management and related corporate governance training for
employees of the organization as a Whole
A. I only
B. I, III and IV only
C. I and III only
D. All of these are expected of the Risk Management Infrastructure
B. I, III and IV only
The “normal” credit loss profile of Washington Mutual was increased by which of the
following?
A. The general downturn in the economy of the US
B. By lowering its own credit underwriting standards
C. Acquisitions like Long Beach and Providian
D. Catastrophic losses in its own credit card division
C. Acquisitions like Long Beach and Providian
The Basic Knowledge a PPRMIA member should comply with, as stipulated within the
PRMIA Standards of Best Practice, Conduct & Ethics, is to
A. only improve their PERSONAL professional competence
B. maintains and improve their professional competence and strive to maintain and improve the competence of other risk professionals
C. only possess the required skills and/or certification to complete the risk assessment / management work at hand
D. learn from a qualified risk management practitioner
B. maintains and improve their professional competence and strive to maintain and improve the competence of other risk professionals
Question #29
The problems at Bankgesellschaft Berlin can best be characterized as failures related to:
A. Market Risk
B. Credit Risk
C. Operational Risk
D. Both B and C
D. Both B and C
The financial intermediary services provided by Fannie Mae and Freddie Mac were
designed to
A. Offer loans directly to the consumer
B. Compete directly with banks in selling mortgaged to would-be home owners
C. Repackage mortgage loans made by banks and sell them on to investors as asset backed securities
D. Buy mortgage-backed loans for banks and keep them all on their books, using them as collateral for the US government to borrow
C. Repackage mortgage loans made by banks and sell them on to investors as asset backed securities
PwC concluded that the accounting policy adopted by China Aviation Oil was incorrect
because it
A. only regarded the intrinsic value (i.e. the difference between the strike price and the forward price of the underlying commodity) as the fair value of its options
B. took into account both the intrinsic value and the time value
C. only took into account the time value of the option (which includes recognizing the time left to maturity of the option, the volatility of the spot price of the underlying commodity, interest rates and other factors)
D. used neither the intrinsic value nor the time value
A. only regarded the intrinsic value (i.e. the difference between the strike price and the forward price of the underlying commodity) as the fair value of its options
Unlike the case at Barings Bank, National Australia Bank:
A. Had a risk management infrastructure that was credited with doing its’ job well, despite the losses
B. Was not dealing in derivatives
C. Had a Board of Directors that was unaware of the true nature of trading activities
D. Had a separation of duties between trading and back office
D. Had a separation of duties between trading and back office
According to the Northern Rock Case Study, what is Forced Insolvency?
A. The bank is insolvent in that the current value of its assets (measured at book value) is less than the value of its liabilities; thus even if the bank were to liquidate all of its assets it would not be able to repay all depositors and other creditors
B. The bank is legally solvent but if, because it cannot fund its operations, it is forced to liquidate assets it could do so only at less than nominal values (fire sale) and this would make it legally insolvent (value of assets falls below those of liabilities)
C. The bank is legally solvent but its current funding costs (which are likely to continue) exceed the average rate of return on its assets and hence it would soon become insolvent as it would be making losses and would eventually exhaust its equity capital
D. The bank is solvent in that the current value of its assets (measured at book value) is more than the value of its liabilities; so even if the bank were to liquidate all of its assets it would be able to repay all depositors and other creditors
B. The bank is legally solvent but if, because it cannot fund its operations, it is forced to liquidate assets it could do so only at less than nominal values (fire sale) and this would make it legally insolvent (value of assets falls below those of liabilities)
Which of the following best characterizes the problems that developed at Bankgesellschaft
Berlin?
A. Volume growth at the expense of margin.
B. Excessive reliance on volatile trading income.
C. Banking is a “for-profit” business, not a means of fulfilling political goals.
D. A company culture where profits may justify “excesses.”
C. Banking is a “for-profit” business, not a means of fulfilling political goals.
When supervising others, a PRMIA member must comply with
A. PRMIA Standards
B. the standards of the organization where the work is being performed
C. his / her established personal standards of work approved in previous work situations
D. local regulatory authority standards which may be less onerous than PRMIA standards
A. PRMIA Standards
Metallgesellschaft’s retail contracts were
A. unhedged
B. hedged using exchange-traded futures with longer maturities than the retail contracts
C. hedged using exchange-traded futures with shorter maturities than the retail contracts
D. fully hedged using exchange-traded futures of the same maturities as the retail contracts
C. hedged using exchange-traded futures with shorter maturities than the retail contracts
The problems at Bankers Trust can best be characterized as failures related to:
A. Market Risk
B. Credit Risk
C. Operational and Regulatory Compliance Risk
D. All of the Above
C. Operational and Regulatory Compliance Risk
According to LTCM managers:
A. Stress Testing looked at the 12 biggest deals with each of their top 20 counterparties
B. Stress Testing was not conducted
C. Stress Testing was not necessary because their trades were hedged
D. Stress Testing was elaborate, complex and conducted on their entire portfolio. It included the assumptions of a major breakdown in historical correlations
A. Stress Testing looked at the 12 biggest deals with each of their top 20 counterparties
Which of the following would have contributed to noticing and preventing Leeson’s
violations at Barings?
A. Separation of front and back offices
B. More senior level involvement at Barings regarding use of derivatives
C. Recognition that large profits can be an indicator of higher risk
D. All of the above
D. All of the above
When considering the performance of Northern Rock within its peer group of banks, which
of the following is not correct?
A. Only a few months previously it had reported record profits.
B. The quality of its’ assets was never in question.
C. For many years it was regarded as a star-performer in the financial markets.
D. Its’ loan loss record was poor by industry standards.
D. Its’ loan loss record was poor by industry standards.
As a PRMIA member, you have certain responsibilities. Among these are the
requirement(s) to:
A. Vote in Board elections
B. Attend at least one PRMIA chapter meeting per year
C. Adhere to the PRMIA Standards of Best Practice, Conduct and Ethics
D. All of the above
C. Adhere to the PRMIA Standards of Best Practice, Conduct and Ethics
The Chief Risk Officer is responsible for the management of the Risk Management
Infrastructure, and as such helps the Board define, and then implements throughout the
organization, the risk appetite of the organization.
Which of the following is also the responsibility of the Chief Risk Officer?
A. Maintaining appropriate assurance measures to ensure that the Governance and Risk framework of the organization is effective, and, if any shortcomings are discovered, to escalate these to the Board so that remedial action can be taken in an appropriate and timely manner
B. ensuring that all employees understand the rules and regulations (both internal and external) with which they must comply and the implications, for them and for the organization, of non-compliance
C. Ensures that reporting of risk and governance-related matters are produced in a timely and accurate manner
D. Acts as sponsor for risk throughout the organization and ensures that a risk culture is implemented, and maintained
C. Ensures that reporting of risk and governance-related matters are produced in a timely and accurate manner
In the case of National Australia Bank, which of the following was present?
A. A window of time between close of day for reporting purposes and back office checking that allowed traders to hide losses using fictitious trades
B. The Board received risk management information that was incorrect, incomplete or insufficiently detailed
C. Both A and B
D. Neither A nor B
C. Both A and B
