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Most Recent PRMIA 8010 Exam Questions & Answers


Prepare for the PRMIA Operational Risk Manager (ORM) Exam exam with our extensive collection of questions and answers. These practice Q&A are updated according to the latest syllabus, providing you with the tools needed to review and test your knowledge.

QA4Exam focus on the latest syllabus and exam objectives, our practice Q&A are designed to help you identify key topics and solidify your understanding. By focusing on the core curriculum, These Questions & Answers helps you cover all the essential topics, ensuring you're well-prepared for every section of the exam. Each question comes with a detailed explanation, offering valuable insights and helping you to learn from your mistakes. Whether you're looking to assess your progress or dive deeper into complex topics, our updated Q&A will provide the support you need to confidently approach the PRMIA 8010 exam and achieve success.

The questions for 8010 were last updated on Jan 17, 2025.
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Question No. 1

Which of the following statements are true:

1. Capital adequacy implies the ability of a firm to remain a going concern

2. Regulatory capital and economic capital are identical as they target the same objectives

3. The role of economic capital is to provide a buffer against expected losses

4. Conservative estimates of economic capital are based upon a confidence level of 100%

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Correct Answer: D

Statement I is true - capital adequacy indeed is a reference to the ability of the firm to stay a 'going concern'. (Going concern is an accounting term that means the ability of the firm to continue in business without the stress of liquidation.)

Statement II is not true because even though the stated objective of regulatory capital requirements is similar to the purposes for which economic capital is calculated, regulatory capital calculations are based upon a large number of ad-hoc estimates and parameters that are 'hard-coded' into regulation, while economic capital is generally calculated for internal purposes and uses an institution's own estimates and models. They are rarely identical.

Statement II is not true as the purpose of economic capital is to provide a buffer against unexpected losses. Expected losses are covered by the P&L (or credit reserves), and not capital.

Statement IV is incorrect as even though economic capital may be calculated at very high confidence levels, that is never 100% which would require running a 'risk-free' business, which would mean there are no profits either. The level of confidence is set at a level which is an acceptable balance between the interests of the equity providers and the debt holders.


Question No. 2

The VaR of a portfolio at the 99% confidence level is $250,000 when mean return is assumed to be zero. If the assumption of zero returns is changed to an assumption of returns of $10,000, what is the revised VaR?

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Correct Answer: B

The exact formula for VaR is = -(Z + ), where Z is the z-multiple for the desired confidence level, and is the mean return. Now Z is always a negative number, or at least will certainly be provided the desired confidence level is greater than 50%, and is often assumed to be zero because generally for the short time periods for which market risk VaR is calculated, its value is very close to zero.

Therefore in practice the formula for VaR just becomes -Z, and since Z is always negative, we normally just multiply the Z factor without the negative sign with the standard deviation to get the VaR.

For this question, there are two ways to get the answer. If we use the formula, we know that -Z= 250,000 (as =0), and therefore -Z - = 250,000 - 10,000 = $240,000.

The other, easier way to think about this is that if the mean changes, then the distribution's shape stays exactly the same, and the entire distribution shifts to the right by $10,000 as the mean moves up by $10,000. Therefore the VaR cutoff, which was previously at -250,000 on the graph also moves up by 10k to -240,000, and therefore $240,000 is the correct answer.

The other choices are intended to confuse by multiplying the z-factor for the 99% confidence level with 10,000 etc.


Question No. 3

There are two bonds in a portfolio, each with a market value of $50m. The probability of default of the two bonds are 0.03 and 0.08 respectively, over a one year horizon. If the probability of the two bonds defaulting simultaneously is 1.4%, what is the default correlation between the two?

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Correct Answer: D

Probability of the joint default of both A and B =

We know all the numbers except default correlation, and we can solve for it.

Default Correlation*SQRT(0.03*(1 - 0.03)*0.08*(1 - 0.08)) + 0.03*0.08 = 0.014.

Solving, we get default correlation = 25%


Question No. 4

A corporate bond has a cumulative probability of default equal to 20% in the first year, and 45% in the second year. What is the monthly marginal probability of default for the bond in the second year, conditional on there being no default in the first year?

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Correct Answer: A

Note that marginal probabilities of default are the probabilities for default for a given period, conditional on survival till the end of the previous period. Cumulative probabilities of default are probabilities of default by a point in time, regardless of when the default occurs. If the marginal probabilities of default for periods 1, 2... n are p1, p2...pn, then cumulative probability of default can be calculated as Cn = 1 - (1 - p1)(1-p2)...(1-pn).

For this question, we can calculate the marginal probability of default for year 2 by solving the equation [1 - (1 - 20%)(1 - P2) = 45%] for P2. Solving, we get the marginal probability of default during year 2 as 31.25%. Since this is the annual marginal probability of default, we will need to convert it to a monthly number, which we can do by solving the following equation where M1 is the monthly marginal probability of default.

1 - 31.25% = (1 - M1)^12, implying M1 = 3.07%


Question No. 5

For a loan portfolio, unexpected losses are charged against:

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Correct Answer: B

Credit reserves are created in respect of expected losses, which are considered the cost of doing business. Unexpected losses are borne by economic credit capital, which is a part of economic capital. This question is a bit nuanced - and 'economic capital' would generally be a good answer as well. However, taking a rather beady eyed view of the terminology and distinguishing between 'economic credit capital' which is a subset of 'economic capital', we can say that 'economic credit capital' is a more appropriate Choice 'a's the question relates to credit losses.


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