Which of the following are valid objectives of a reverse stress test:
I. Ensure that a firm can survive for long enough after risks have materialized for it to either regain market confidence, restructure or be sold, or be closed down in an orderly manner,
II. Discover the vulnerabilities of the current business plan,
III. Better integrate business and capital planning,
IV. Create a 'zero-failure' environment at the systemic level in the financial sector
In estimating credit exposure for a line of credit, it is usual to consider:
A loan portfolio's full notional value is $100, and its value in a worst case scenario at the 99% level of confidence is $65. Expected losses on the portfolio are estimated at 10%. What is the level of economic capital required to cushion unexpected losses?
Consider a portfolio with a large number of uncorrelated assets, each carrying an equal weight in the portfolio. Which of the following statements accurately describes the volatility of the portfolio?
If μ and σ are the expected rate of return and volatility of an asset whose prices are log-normally distributed, and Ψ a random drawing from a standard normal distribution, we can simulate the asset's returns using the expressions:
Which of the following need to be assumed to convert a transition probability matrix for a given time period to the transition probability matrix for another length of time:
I. Time invariance
II. Markov property
III. Normal distribution
IV. Zero skewness
If the loss given default is denoted by L, and the recovery rate by R, then which of the following represents the relationship between loss given default and the recovery rate?
Under the internal ratings based approach for risk weighted assets, for which of the following parameters must each institution make internal estimates (as opposed to relying upon values determined by a national supervisor):
Which of the following statements is correct in relation to liquidity risk management?
I. Pricing for products that do not impact the balance sheet need not reflect the cost of maintaining liquidity
II. Time horizons for liquidity risk management are impacted by both regulatory requirements and the speed at which new sources of liquidity can be tapped
III. Collateral management is an important aspect of liquidity risk management
IV. The maturity period of various instruments in the capital structure has a significant impact on liquidity needs
Which of the following statements are true in relation to Principal Component Analysis (PCA) as applied to a system of term structures?
I. The factor weights on the first principal component will show whether there is common trend in the system
II. The factors to be applied to principal components are obtained from eigenvectors of the correlation matrix
III. PCA is a standard method for reducing dimensionality in data when considering a large number of correlated variables
IV. The smallest absolute eigenvalues and their associated eigenvectors are the most useful for explaining most of the variation