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2025 Exam 8011 Prep 100% Pass | Pass-Sure 8011: Credit and Counterparty Manager (CCRM) Certificate Exam 100% Pass
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The Professional Risk Manager's International Association (PRMIA) is a global non-profit organisation dedicated to promoting sound risk management standards and practices throughout the financial industry. As part of their goal, the association offers various certifications designed to benefit risk professionals in pursuing their career goals. Among these is the PRMIA 8011 or Credit and Counterparty Manager (CCRM) Certificate exam.
PRMIA Credit and Counterparty Manager (CCRM) Certificate Exam Sample Questions (Q328-Q333):
NEW QUESTION # 328
Under the KMV Moody's approach to calculating expecting default frequencies (EDF), firms' default on obligations is likely when:
- A. asset values reach a level below total liabilities
- B. asset values reach a level between short term debt and total liabilities
- C. expected asset values one year hence are below total liabilities
- D. asset values reach a level below short term debt
Answer: B
Explanation:
An observed fact that the KMV approach relies upon is that firms do not default when their liabilities exceed assets, but when asset values are somewhere between short term liabilities and the total liabilities. In fact, the
'default point' in the KMV methodology is defined as the short term debt plus half of the long term debt. The difference between expected value of the assets in one year and this 'default point', when expressed in terms of standard deviation of the asset values, is called the 'distance-to-default'.
Therefore Choice 'd' is the correct answer. The other choices are incorrect.
NEW QUESTION # 329
If F be the face value of a firm's debt, V the value of its assets and E the market value of equity, then according to the option pricing approach a default on debt occurs when:
- A. F < V
- B. F > V
- C. F - E < V
- D. V < E
Answer: B
Explanation:
According to the option pricing approach developed by Merton, the shareholders of a firm have a put on the assets of the firm where the strike price is equal to the face value of the firm's debt. This is just a more complicated way of saying that the debt holders are entitled to all the assets of the firm if these assets are insufficient to pay off the debts, and because of limited liability of the shareholders of a corporation this part payment will fully extinguish the debt.
A firm will default on its debt if the value of the assets falls below the face value of the debt. Therefore Choice 'a' is the correct answer. All other choices are incorrect.
(There are two ways to consider this sort of optionality, and I have mentioned only one for this question:
1. The equity holders can sell the assets of the firm to the debt holders at a price equal to the face value of the debt, ie a put. (ie they can extinguish their liability to the debt holders in full by handing them the assets of the firm, effectively selling them the assets at the value of the debt)
2. The equity holders have a long position in a call option where they can keep the assets of the firm by paying a price equal to the face value of the debt (ie, they can pay off the debt holders and keep the assets) For this question, perspective 1 applies but you should be aware of the second one too as a question may reference that view point.)
NEW QUESTION # 330
A bank prices retail credit loans based on median default rates. Over the long run, it can expect:
- A. Overestimation of risk and overpricing, leading to loss of market share
- B. Correct pricing of risk in the retail credit portfolio
- C. A reduction in the rate of defaults
- D. Underestimation and therefore underpricing of risk in it retail portfolio
Answer: D
Explanation:
The key to pricing loans is to make sure that the prices cover expected losses. The correct measure of expected losses is the mean, and not the median. To the extent the median is different from the mean, the loans would be over or underpriced.
The loss curve for credit defaults is a distribution skewed to the right. Therefore its mode is less than its median which is less than its mean. Since the median is less than the mean, the bank is pricing in fewer losses than the mean, which means over the long run it is underestimating risk and underpricing its loans. Therefore Choice 'd' is the correct answer.
If on the other hand for some reason the bank were overpricing risk, its loans would be more expensive than its competitors and it would lose market share. In this case however, this does not apply. Loan pricing decisions are driven by the rate of defaults, and not the other way round, therefore any pricing decisions will not reduce the rate of default.
NEW QUESTION # 331
What does a middle office do for a trading desk?
- A. Risk analysis
- B. Reconciliations
- C. Operations
- D. Transaction data entry
Answer: A
Explanation:
The 'middle office' is a term used for the risk management function, therefore Choice 'd' is the correct answers. The other functions describe what the 'back office' does (IT, accounting). The 'front office' includes the traders.
NEW QUESTION # 332
Which of the following assumptions underlie the 'square root of time' rule used for computing VaR estimates over different time horizons?
I. the portfolio is static from day to day
II. asset returns are independent and identically distributed (i.i.d.)
III. volatility is constant over time
IV. no serial correlation in the forward projection of volatility
V. negative serial correlations exist in the time series of returns
VI. returns data display volatility clustering
- A. I, II, V and VI
- B. I and II
- C. I, II, III and IV
- D. III, IV, V and VI
Answer: C
Explanation:
The square root of time rule can be used to convert, say a 1-day VaR to a 10-day VaR, by multiplying the known number by the square root of time to get the VaR over a different time horizon. However, there are key assumptions that underlie the application of this rule, and statements I to IV correctly state those assumptions.
Statements V and VI are not correct, because the application of the square root of time rule requires the absence of serial correlations, and also the absence of volatility clustering (ie independence). Therefore Choice 'c' is the correct answer.
The square root of time rule is also applied to convert volatility or standard deviation for one period to the volatility for a different time period. Remember that VaR is just a multiple of volatility, and therefore the assumptions that apply to the square root of time rule for VaR also apply to the same rule when used in the context of volatilities or standard deviation.
NEW QUESTION # 333
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