8010 Exam Dumps : Operational Risk Manager (ORM) Exam

Note that events of default under the ISDA MA are caused by one of the parties that is considered 'atfault'. In contrast, "termination events" are events for which no one is at fault, for example changes in legislation, illegality etc that still justify termination of the transactions under the contract.

The ISDA MA describes the following 8 types of events of default:

1. failure of pay or deliver

2. breach of agreement

credit support default

4. misrepresentation

5. default under specified transaction

6. cross default

7. bankruptcy

8. merger without assumption

All of the options presented in the question are events of default.

If the current level of the S&P 500 is 2000, and a single day volatility is 1%, and the delta (ie change in portfolio value from a one point change) is $100, then the 1 day volatility for the portfolio in dollars is 2000 * 1% * $100 = $2,000.

At the 99% confidence level, the value of the inverse cumulative density function for the normal distribution is 2.33 (=NORMSINV(99%), in Excel). Therefore the 1 day VaR will be 2.33 * $2000 =$4,660. Extending it to 10 days using the square root of time rule, we get the 10 day VaR as equal to SQRT(10)*4660 = $14,736.

Since this method of calculating VaR relies upon a delta approximation of a risk factor (in this case the S&P500), it is the parametric approach to calculating VaR (the other methods being historical simulation, and Monte Carlo simulation).

The 2015 Handbook provides an excellent example of parametric (and other) VaR calculations in Chapter 3 of Volume III of Book 3. The spreadsheet used for the illustration can be downloaded from

Statement I is correct as credit VaR calculations often use a one year time horizon. This is primarily because the cycle in respect of credit related activities, such as loan loss reviews, accounting cycles for borrowers etc last a year.

Statement II is false. There are two ways in which loss assessments in respect of credit risk can be made: default mode, where losses are considered only in respect of default, and no losses are recognized in respect of the deterioration of the creditworthiness of the borrower (which is often expressed through a credit rating transition matrix); and the mark-to-market mode, where losses due to both defaults and credit quality are considered. The default mode is used for the loan book where the institution has lentmoneys and generally intends to hold the loan on its books till maturity. The mark to market mode is used for traded securities which are not held to maturity, or are held only for trading.

Statement III is correct. The confidence interval, or the quintile of losses used for maintaining credit ratings tends to be very high as the possibility of the institution's default needs to be remote.

Statement IV is correct too, for the reasons explained earlier.