8010 Exam Dumps : Operational Risk Manager (ORM) Exam

Three parameters define economic credit capital: the risk horizon, ie the time horizon over which the risk is being assessed; the confidence level, ie the quintile of the loss distribution; and the definition of credit losses, ie whether mark-to-market losses are considered in addition to default-only losses. The probability of default is not a parameter within the control of the risk manager, but an input into the capital calculation process that he has to estimate. Therefore Choice 'c' is the correct answer.

Statement I is true as expected losses are the 'cost ofdoing business' and charged against the P&L of the unit holding the exposure. When evaluating the business unit, expected losses are taken into account. Unexpected losses however require risk capital reserves to be maintained against them.

Statement II isnot true. Credit portfolio loss distributions are not symmetrical, in fact they are highly skewed and have heavy tails.

Statement III is true. The notional, or the face value of a defaulted debt is the basis for a claim in bankruptcy court, and not the market value.

Statement IV is false. In the case of over the counter instruments, the replacement value of the contract represents the amount of the claim, and not the notional amount (which can be very high!).

The risk analyst is using the block maxima approach. The data points that result will then be used to fit a GEV distribution.

Expected shortfall refers to the expected losses beyond a specified threshold. The peaks-over-threshold approach is an alternative approach to the block maxima approach, and involves considering exceedances above a threshold. Fourier transformation is not relevant in this context, and is a non-sensical option.