Question 1

The CRO of a regional bank expresses concern in a meeting of the risk team thatthe bank’s internal risk models are not adequately assessing potential randomextreme losses. A risk analyst asks if implementing a model based on extremevalue theory (EVT) would address the CRO’s concern. Which of the following iscorrect when applying EVT and examining distributions of losses exceeding a threshold value?

Options :

A : C To apply EVT, the underlying loss distribution must be either normal or lognormal.

B : value converges to a generalized Pareto distribution.

C : causes the reliability of the parameter estimates to increase.

D : to infinity, then the GEV essentially becomes a normal distribution.

Answer: B

Question 2

Which of the following statements concerning the calculation of value at a node in a fixed-income binomial interest rate tree is most accurate? The value at each node is the:

Options :

A : average of the present values of the two possible values from the next period.

B : present value of the two possible values from the next period.

C : average of the future values of the two possible values from the next period.

D : sum of the present values of the two possible values from the next period.

Answer: A

Question 3

Which of the following statements regarding risk assessment is most accurate?

Options :

A : Risk and control self-assessments (RCSAs) are a good mixture of qualitative and quantitative aspects.

B : The main purpose of risk assessment is to prioritize risk management and risk mitigation responses.

C : When backtesting the results of risk assessment against past incident experience, there is a tendency to underestimate the impact of an operational risk event.

D : When backtesting the results of risk assessment against past incident experience, there is a tendency to overestimate the likelihood of an operational risk event.

Answer: B

Question 4

The treasurer of a regional bank is concerned that the bank may not be properlycompensated for the services it provides to its depositors and asks a manager toassess a price for these services. The manager applies cost-plus pricing for alldepository services and uses the following data for pricing the automated tellermachine (ATM) service:• Operating expense per ATM visit: USD 0.25• Estimated overhead cost allocated per ATM visit: USD 0.35• Profit required per ATM visit: USD 0.05• The bank’s target return on capital: 15%What is the correct amount for the bank to charge per ATM visit according to the cost-plus pricing model?

Options :

A : D USD 0.74

B : B USD 0.65

C : A USD 0.30

D : C USD 0.70

Answer: B

Question 5

Given the following three events, what is the proper order of the CCP loss waterfall?I. Nondefaulting member’s default fund contributions are exhausted.II. Defaulting member’s collateral and default fund contributions are exhausted.III. CCP taps an amount of its equity that enables them to function normally.

Options :

A : I, II, III.

B : II, I, III.

C : III, II, I.

D : II, III, I.

Answer: D

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