8010 Exam Dumps : Operational Risk Manager (ORM) Exam

The index option is affected by the spot value for the underlying index, as also the risk free interest rate, or the zero rate for the duration of the option. It is also affected by the volatility of the underlying.The 'strike price' is set and is fixed at the time the option is purchased, and therefore is not a risk factor.

Therefore other than IV, all other choices are valid risk factors that underlie an equity index option.

Other instruments may have other risk factors - for example, a long forex position will have the spot exchange rate as the only risk factor.

Statement I is correct. Economic capital is the capital available to absorbunexpected losses, and credit ratings are also based upon a certain probability of default. Economic capital is often calculated at a level equal to the confidence required for the desired credit rating. For example, if the probability of default for a AArating is 0.02%, then economic capital maintained at a 99.98% would allow for such a rating. Economic capital set at a 99.8% level can be thought of as the level of losses that would not be exceeded with a 99.8% probability.

Loss distributions are the product of the severity and frequency distributions, each of which are estimated separately. The total loss distribution is affected far more by the severity distribution than by the frequency distribution, therefore statement II is correct.

The Loss Distribution Approach (LDA) is one of the ways in which the requirements of the AMA can be satisfied, and not the other way round. Therefore statement III is incorrect.

Statement IV is correct as the total loss distribution is estimated using separate estimatesof loss frequency and distributions.

A PRNG (pseudorandom number generators of the kind included in statistical packages and Excel) is used to generate random numbers that are not correlated with each other, ie they are random. A Markov process is a stochastic model that depends only upon its current state. Simulation underlies many financial calculations. None of these directly relate to generating correlated multivariate normal random numbers. That job is done utilizing a Cholesky decomposition of the correlation matrix.

Specifically, a Cholesky decomposition involves the factorization of the correlation matrix into a lower triangular matrix (a square matrix all of whose entries above the diagonal are zero) and its transpose. This can then be combined with random numbers to generate a set of correlated normal random numbers. This technique is used for calculating Monte Carlo VaR.