PRIMA 8004 2011 PRM Certification - Exam IV: Case Studies; Standards: Governance, Best Practices and Ethics Online Training

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1. What was the main risk scenario on the Metallgesellschaft trading strategy?

Realized losses on short-term contracts against unrealized gains on the long-run contract

The final price of the underlying being higher than the initial price

The initial price of the underlying being higher than the final price

The short-term price of the underlying being higher than the long-run contract

2. Which of the following is part of the Group of 30 Report's market risk and stress testing recommendations?

To be consistent with regulatory capital measures, 10-day holding periods should be standardized for VaR reporting

Historic simulations are not effective methods of stress testing

Stress tests should incorporate changes in liquidity

Market risk VaR measures should be multiplied by 3 to get to a stress test figure, as long as the VaR model has been back-tested

3. 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:

Approach the client about the concern, regardless of what their reaction might be

Respect the client's confidentiality as that takes precedence

Report this conduct to their immediate supervisor

Report the findings immediately to authorities

4. The multi-dimensional risk problem at Northern Rock did not include which one of the combinations of the following?

LPHI Risk; Business Model; Solvency vs. Liquidity: and Deposit Protection

Corporate Governance; Moral Hazard; Role of Government; and Credit Risk

Deposit Protection; Moral Hazard; Business Model; and LPHI Risk

Business Model; Corporate Governance; Moral Hazard; and Deposit Protection

5. For the sentence

"The organization shall encourage all employees to keep abreast of the latest developments in their particular areas of expertise, through ____________, _____________, and _____________ and shall make adequate resources available to enable this to occur,"

Choose the correct combinations of words from the following options:

courses, conferences, journals

conferences, discussion groups, blog sites

courses, educational certification, journals

journals, courses, compliance mandates

6. Which of the following are PRMIA Governance Principles?

I. Sufficiency of Key Resources and Process

II. State of the Art Risk Management Technology

III. Ongoing Education and Discernment

IV. Sufficiency of Key Competencies

I, II and IV only

I and II only

I, III and IV only

All of these are PRMIA Governance Principles

7. Which of the following regarding Orange County is FALSE?

Bob Citron engaged in risky strategies to benefit personally

Bob Citron tried to "ride the yield curve"

Bob Citron heavily leveraged his positions using repos

Citron's losses were eventually exposed by massive margin calls

8. Which of the following is NOT part of the PRMIA Standards of Best Practice, Conduct and Ethics (Code of Conduct) Guidance on Ethical Behavior?

Ensure globally accepted standards are adhered to at all costs

Respect local customs

Respect local laws and regulations

Take responsibility for your work

9. Barings failed to recognize that Nick Leeson's losses were increasing because:

Leeson ran the front office

The London office did not ask for any reports

Leeson hid his trades in a suspense account

The margin report sent to London did not show the true margin needs

10. 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:

The Board of Directors, but only if the Blue Ribbon Panel affirms the change

The Board of Directors and a majority of the Members

The Board of Directors alone

34 of all Members

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11. According to the Group of 30 Report, deriving aggregate potential credit exposure for a counterparty by adding up the potential exposure of multiple transactions:

Gives an accurate result in most cases

Captures portfolio effects but not tenor differences

Can easily reflect the impact of netting

Overstates exposure in most cases

12. When local rules and regulations conflict with the PRMIA Standards of Best Practice, Conduct and Ethics the PRMIA member should …

Seek advice from a qualified party, being mindful of legal and confidentiality requirements

Modify the interpretation of local rules and regulations to meet the situation

Ignore local rules and regulations

Respect local rules and regulations

13. 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?

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

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

Ensures that reporting of risk and governance-related matters are produced in a timely and accurate manner

Acts as sponsor for risk throughout the organization and ensures that a risk culture is implemented, and maintained

14. A risk manager is asked to analyze the credit risk of a convertible bond. The risk manager has never analyzed convertible bonds, but does have significant expertise in credit risk. The risk manager accepts the assignment, finds a paper on the subject through the PRMIA web site and copies the method used there. The risk manager completes the assignment and delivers a report to his or her direct supervisor and the supervisor is quite pleased.

According to the PRMIA Standards of Best Practice, Conduct and Ethics (Code of Conduct), this was acceptable behavior if the following conditions were met:

I. The risk manager disclosed the lack of knowledge about convertible bonds

II. The methodology employed is disclosed and explained

III. The report was just to be used for analysis and not in practice

IV. The risk manager was sure of his/her understanding of the paper found on the web

I and II

I, II and IV

I, II and III

I only

15. Which items below were at the core of the problems at Bankgesellschaft Berlin?

Political corruption and poor management

Over exposure to the property market

Rash guarantees given to investors in property linked funds

All of the above

16. The problems at WorldCom can best be characterized as related to:

Market Risk

Credit Risk

Operational and Regulatory Compliance Risk

All of the Above

17. The key people involved in the application of good governance and risk management must:

I. be trustworthy

II. be honest

III. be approved by the local regulator

IV. treat others fairly at all times

I, II, and III only

III only

I, II, and IV only

I, II, III and IV above

18. As LTCM started to have major losses, it compounded its problems by doing what?

Trying to borrow more money from major money centre banks

Issuing Subordinated Debt

Returning capital to the general partners before others

Unwinding its' more liquid trades thereby creating more liquidity risk overall

19. Washington Mutual's acquisition of Long Beach Financial changed its business model and increased its credit loss profile because

The resulting loss rate for Washington Mutual was more than 3 times higher than other mortgage lenders tracked by the FDIC

the two banks were focussed in different markets

Long Beach Financial had losses which it hadn't realized at the time of the takeover

Of a general deterioration of credit quality generally

20. 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:

Can have their own offices, bylaws and regulations provided they do not conflict with those of PRMIA

Can have meetings that only local members are allowed to attend

Can sign contracts on behalf of PRMIA without prior approval from the Board of Directors

All of the above

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21. John Smith wants to run for election to the Board of Directors of PRMIA.

To be nominated, he needs:

The backing of three other members

To go through a screening process conducted by the Nominations Committee

The backing of 6% of local members

The backing of five other members and to be serving on at least one PRMIA Committee

22. The Fortress Re finite reinsurance model

allowed Fortress to claim re-insurance claims payments from the finite reinsurers and paid premiums to cover these deals over a 5 year period, and as the risks were spread out over time the annual premiums were accounted for as current liabilities on the books of the pool members, giving a true impression of profitability

allowed Fortress to claim re-insurance claims payments from the finite reinsurers and paid annual premiums to cover these policies, and as the risks were spread out over the year the annual premiums were accounted for as current liabilities on the books of the pool members, giving a true impression of profitability

allowed Fortress to claim re-insurance claims payments from the finite reinsurers and paid premiums to cover these deals over a 5 year period, and as the risks were spread out over time the future premiums were accounted for as current liabilities on the books of the pool members, giving a true impression of profitability

allowed Fortress to claim re-insurance claims payments from the finite reinsurers and paid premiums to cover these deals over a 5 year period, but as the risks were spread out over time the future premiums were not accounted for as current liabilities on the books of the pool members, thus giving a false impression of profitability

23. The Financial Accounting and Reporting Infrastructure of any organization must:

I. Accurately represent the corporation's current and known financial condition in a timely manner

II. Only use off-balance sheet transactions which have a legitimate economic, tax, risk transfer or risk mitigating purpose

III. Provide a detailed description of the Risk Management Infrastructure in the organization's Annual Report to Shareholders

IV. Provide an auditable Annual Statement of Compliance with the Board's publicly stated Standards of Corporate Governance to the Board and Audit Committee

I, II and III only

I, III and IV only

I and III only

All of these are expected of the Financial Accounting and Reporting Infrastructure

24. The Q4 2003 trading strategy of China Aviation Oil was

to buy puts and sell calls

to buy calls and sell puts

to sell puts and buy calls

to sell calls and buy puts

25. Which of the following was NOT a factor in the National Australia Bank case?

Rogue traders

Improper or insufficient Board-level communication regarding the importance of risk management and oversight

Inadequate back office procedures

Money laundering using foreign exchange trades for political leaders

26. Select the one correct statement relative to Barings Bank.

Proprietary and agency trading were combined and therefore did not increase risk.

Proprietary and agency trading were separate and therefore did not increase risk.

Proprietary and agency trading were combined and therefore did increase risk.

Proprietary and agency trading were separate and did increase risk.

27. According to PRMIA governance principles, boards and audit committees should …

Review compensation plans to ensure consistency with corporate risk appetite, competitive market conditions, and fiduciary responsibility to shareholders

Collectively assume responsibility of understanding and reporting the effectiveness of the firm risk management infrastructure

Be composed of key business unit representatives

Leave shareholder accountability to senior management who decides strategic direction

28. According to the Northern Rock Case Study, what is Forced Insolvency?

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

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)

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

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

29. Employees shall be remunerated adequately for the roles that they perform, where 'adequately' is defined

as being the market norm for similarly situated personnel in competitive organizations

using external references and benchmarks, and in a framework which is consistent with the type of risk-taking behavior expected of employees

using the risk reward profile for each business line in the organization

as commensurate with policies to attract and retain high income / revenue earners

30. Bankgesellschaft Berlin's failures can be best characterised as

credit risk caused by overexposure to the property market

credit risk caused by a diversified portfolio of poor-quality loans

both A and B

none of the above

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31. Which of the following was the key contributory risk factor to the problems at LTCM in the summer of 1998?

I. Model Risk

II. Lack of Transparency

III. Breakdown of Historical Correlations

IV. Over Regulation by Federal Regulators

I and III only

III only

III and IV only

All of these were key elements of the problems at LTCM

32. 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?

Internal controls of the organization, and the local regulator

Internal controls, and the expectations of stakeholders, shareholders, and the general public

The local regulator, internal controls, and shareholders

Only the internal controls and compliance standards

33. Which of the following was not received by Northern Rock as official support from the UK banking and government authorities?

A covert money market support operation designed to cover up the difficulties Northern Rock was facing

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

The UK government offered to guarantee all existing and new retail deposits, and to most other creditors

The Bank of England provided an additional unlimited facility secured on the collateral of all Northern Rock assets

34. TMFI's internal procedures and management were

fully aware of the uninsured risks Fortress Re were taking

absolutely unaware of their uninsured liabilities

aware that they had some uninsured liabilities but thought they had enough capital to withstand any uninsured losses

None of the above

35. As a result of the US government's intervention, which of the following is true?

The cost of borrowing for Fannie Mae and Freddie Mac should decline because the government will be standing behind their debts and the buying and selling of mortgage debt will continue

The cost of borrowing for house buyers will rise because of the risk premium now built into the cost of such a government guarantee

The systemic risks still remain in the housing market because it increases the US government's debt

Foreign Central Banks will continue to sell their holdings of Fannie Mae and Freddie Mac securities

36. How much of Washington Mutual's assets were funded by customer deposits for the decade ending in 2006?

30%

40%

50%

60%

37. Which of the following is FALSE?

Nick Leeson also ran the back office for his trading area

Nick Leeson dealt in complex derivatives lacking transparency of pricing

SIMEX made inquiries to Barings Bank about large margin calls on its positions

Nick Leeson claimed to be running an arbitrage book

38. A PRMIA member is offered a highly paid work assignment on the condition that some aspects of assignment are not to be done according to PRMIA standards.

What should they do?

Perform the assignment, noting in the final report the standards to which the assignment was done

Accept the assignment, produce and deliver two reports according to both standards

Accept the assignment, and prior to doing any work, report the conflict of interest to the organization's compliance department

The PRMIA member should place the integrity of the risk management profession and users of risk management above their own personal interests, and refuse the work

39. When describing the reasons for the collapse of China Aviation Oil, which of the following was not cited?

No properly defined risk management policies in place and general lack of oversight by senior management

Time value was not taken into account during the contract valuation process

Loss generating positions were rolled over by selling options on larger positions to generate cash premiums' to settle existing position losses

Senior management in China were aware of the positions but did not understand the complexities of risk managing them

40. According to the G-30 Study, the risk management infrastructure's funding must be

determined by business-unit leaders

determined at the Board level with inputs from business unit leaders

determined at the Board level without influence by business unit leaders

determined by the regulators

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