8009 Practice Exam Questions with Answers Exam IV: Case Studies: Standards: Governance, Best Practices and Ethics - 2015 Edition Certification

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

I, II, and III only

III only

I, II, and IV only

I, II, III and IV above

Always generate credit risk to both counterparties

Create credit risk only for the buyer (due to default by the seller) provided the premium is due, and paid, at contract initiation

Create no credit risk, since the buyer need not exercise the option

Usually create credit risk only for the seller (to default by the buyer)

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

Where there are excess rewards, there must be risks

The Know Your Customer rule

Strategies that are not possible to explain to third parties should not be employed by the risk averse

Fractured organisational structure and poor risk oversight mechanism make it easy for powerful individuals to hide risk in the gaps

Inadequate separation of front and back offices

Model risk

Changes/breakdowns in historical correlations

Unwinding of liquid positions at the beginning of major losses

Recapitalise Fannie Mae and Freddie Mac with US$2.4 billion of additional capital to ensure they weathered the risks associated with any future downturn in the housing markets

Provide grants of US$800 million to help home buyers with down-payment and closing costs

Allow risky, high-cost loans to be credited towards affordable housing goals

Provide tax credits of nearly US$2.4 billion over the next 5 years to investors and builders who developed affordable single-family housing in poor and distressed areas

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

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

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

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

Define the organization's definition of risk management as articulated by the Board in clear and uncertain terms

Include financial risk management, compliance and external reporting and, to the extent that resources allow, should exclude legal or accounting

Be independently staffed and report to an employee who is on the Executive Committee (Operating Committee) but who is NOT a business unit leader

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

A for-profit corporation

A non-profit corporation

A charitable trust

A non profit corporation with for profit subsidiaries

The general downturn in the economy of the US

By lowering its own credit underwriting standards

Acquisitions like Long Beach and Providian

Catastrophic losses in its own credit card division

Losses kept increasing while rogue trader(s) hid their positions

The back offices had inadequate procedures

Both A and B

None of the above

Know and abide by applicable rules and regulations

Clearly inform all affected parties of any apparent or actual conflicts of interest

Report to the Regulator any departures from generally accepted methodology or practices

Provide advice that is clear and accurate

Market Risk

Credit Risk

Operational and Regulatory Compliance Risk

All of the Above

Fannie Mae and Freddie Mac will continue to buy home loans from banks to repackage them as mortgage-backed securities

The US government will provide capital as needed in return for preferred shares in the companies

The US government will buy mortgage-backed securities in the open market as needed

There was a 2 year limit to the conservatorship

Eliminates risk to the greatest extent possible

Is defined as the assembled knowledge and wisdom of the collective stakeholders in the organization, set to maximize shareholder value

Is defined as business decision making predicated on a belief in potential rewards, balanced with the knowledge, understanding and appreciation of the risk taken to pursue those potential rewards

Is defined as that which is best practiced within an enterprise risk management framework, guided by the PRMIA Standards of Best Practice, Conduct and Ethics above all else

unhedged

hedged using exchange-traded futures with longer maturities than the retail contracts

hedged using exchange-traded futures with shorter maturities than the retail contracts

fully hedged using exchange-traded futures of the same maturities as the retail contracts

courses, conferences, journals

conferences, discussion groups, blog sites

courses, educational certification, journals

journals, courses, compliance mandates

I, II, III, and IV

IV, III, II, and I

II, I, IV, and III

III, II, IV, and I

Market Risk

Credit Risk

Operational and Regulatory Compliance Risk

All of the Above

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

The role of the UK government and the possible underwriting of risks by tax-payers, and the general question of Moral Hazard

The reform of the Deposit Protection Scheme because of its internal inconsistencies

It emphasised the importance of effective governance arrangements within financial firms

The original successful business model had not stress tested sufficiently for the incidence of Low Probability, High Impact incidents

Basis Risk

Currency Settlement

Interest Rate

Inflation

Dynamic hedging

A stacked hedge

A differential hedge

Nothing because MG Refining & Marketing did not hedge its position

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