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PRMIA Credit and Counterparty Manager (CCRM) Certificate Exam Sample Questions (Q74-Q79):

NEW QUESTION # 74
An asset has a volatility of 10% per year. An investment manager chooses to hedge it with another asset that has a volatility of 9% per year and a correlation of 0.9. Calculate the hedge ratio.

A. 0
B. 1.2345
C. 0.9
D. 0.81

Answer: A

Explanation:
The minimum variance hedge ratio answers the question of how much of the hedge to buy to hedge a given position. It minimizes the combined volatility of the primary and the hedge position. The minimum variance hedge ratio is given by the expression [ #(x) / #(y) ] * #(x,y)]. Effectively, this is the same as the beta of the primary position with respect to the hedge.
In this case, the hedge ratio is = 10%/9% * 0.9 = 1

NEW QUESTION # 75
Which of the following statements are true:
I. A transition matrix is the probability of a security migrating from one rating class to another during its lifetime.
II. Marginal default probabilities refer to probabilities of default in a particular period, given survival at the beginning of that period.
III. Marginal default probabilities will always be greater than the corresponding cumulative default probability.
IV. Loss given default is generally greater when recovery rates are low.

A. I and IV
B. I and III
C. II and IV
D. I, III and IV

Answer: C

Explanation:
Statement I is incorrect. A transition matrix expresses the probabilities of moving to a given set of ratings at the end of a period (usually one year) conditional upon a given rating at the beginning of the period. It does not make a reference to an individual security and certainly not to the probability of migrating to other ratings during its entire lifetime.
Statement II is correct. Marginal default probabilities are the probability of default in a given year, conditional upon survival at the beginning of that year.
Statement III is incorrect. Cumulative probabilities of default will always be greater than the marginal probabilities of default - except in year 1 when they will be equal.
Statement IV is correct. LGD = 1 - Recovery Rate, therefore a low recovery rate implies higher LGD.

NEW QUESTION # 76
Which of the following statements are true:
I. Top down approaches help focus management attention on the frequency and severity of loss events, while bottom up approaches do not.
II. Top down approaches rely upon high level data while bottom up approaches need firm specific risk data to estimate risk.
III. Scenario analysis can help capture both qualitative and quantitative dimensions of operational risk.

A. II and III
B. II only
C. III only
D. I only

Answer: A

Explanation:
Top down approaches do not consider event frequency and severity, on the other hand they focus on high level available data such as total capital, income volatility, peer group information on risk capital etc. Bottom up approaches focus on severity and frequency distributions for events. Statement I is therefore not correct.
Top down approaches do indeed rely upon high level aggregate data and tend to infer operational risk capital requirements from these. Bottom up approaches look at more detailed firm specific information. Statement II is correct.
Scenario analysis requires estimating losses from risk scenarios, and allows incorporating the judgment and views of managers in addition to any data that might be available from internal or external loss databases.
Statement III is correct. Therefore Choice 'b' is the correct answer.

NEW QUESTION # 77
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 period
B. Realized frequencies of migration from one credit rating to another over a one year period
C. Probabilities of ratings transition from one rating to another for a given set of issuers
D. Probabilities of default for each credit rating class

Answer: B

Explanation:
Transition matrices are used for building distributions of the value of credit portfolios, and are the realized frequencies of migration from one credit rating to another over a period, generally one year. Therefore Choice
'd' is the correct answer.
Since they represent an actually observed set of values, they are not probabilities nor are they forward looking ex-ante estimates, though they are often used as proxies for probabilities. Choice 'a' and Choice 'c' are not correct. They include more than information on just defaults, therefore Choice 'b' is not correct.

NEW QUESTION # 78
The probability of default of a security over a 1 year period is 3%. What is the probability that it would not have defaulted at the end of four years from now?

A. 11.47%
B. 88.00%
C. 12.00%
D. 88.53%

Answer: D

Explanation:
The probability that the security would not default in the next 4 years is equal to the probability of survival raised to the power four. In other words, =(1 - 3%)