ARM 54 Chapter 4 Questions

Which one of the following statements is true regarding operational risk

Operational risk is integrated in every activity of an organization.

Which one of the following statements is true regarding key risk indicates (KRI)

A KRI must be leading, rather than lagging, to be effective.

Which one of the following types of organization would most likely be affected by commodity price risk?

A manufacturer

Sixth National Bank stores all of its financial records in an electronic data base. Sixth National customers are able to access their accounts on-line with a user identification number and a password. Last weekend, a computer hacker was able to breach the firewall of the electronic data base and gain access to customer account data. Their operation risk for Sixth National Bank is

A systems risk

The market value surplus of an insurer is equal to the fair value of assets minus the present value of liabilities plus the market value margin. The market value margin is

An additional payment in case the reserves are inadequate

Which one of the following organizations would most likely be able to compete effectively during financial crises

An organization with large cash reserves

An insurer can eliminate interest rate risk through which one of the following?

Cash matching

Determing earnings-at-risk (EaR) entails modeling the influence of factors such as

Changes in the prices of production costs on an organization's earnings

The Basel I capital requirements differ from capital-to-assets ratios used to 2003 by

Considering the relative risk of the asset

Which one of the following types of financial risk has only negative potential?

Credit risk

Insurance companies use a number of measures to track their operating performance. One measure employed compares the amount the insurer has paid in losses to the premiums it has earned. This measure is the insurer's

Loss Ratio

Insurance companies use a number of measurers to track their operating performance. One measure employed compares the amount the insurer paid in losses to the premiums it has earned. This measure is the insurer's

Loss ratio

One strategic risk confronting organizations is changes in the statistical characteristics of human populations. Increasing longevity may make it difficult for a company to pay post-retirement health care benefits and pension benefits, and decreasing fertility rates may reduce sales for baby-products companies. This strategic risk is called

Demographics

A disadvantage of value-at-risk (VaR) is that VaR

Does not accurately measure the extent to which a loss might exceed the threshold.

Which one of the following statements is true if earnings at risk are $200,000 with 90% confidence?>

Earnings at risk are projected to be less than $200,000 10% of the time.

Market Value Surplus (MVS) of an insurer =

Fair Value of assets - Fair Value of liabilities

Most organizations face some market risk, credit risk, and/or price risk. Collectively, these risk are called

Financial Risk

Basel I and Basel II prescribe capital requirements for

Financial institutions

An insurer's fair value is complicated because no market exists for trading in insurers. To calculate the fair value of an insurer's reserves, a present value discount is used and a

Market value margin is added

Value at risk (VaR) is a method of determining the probability of loss on an investment portfolio over a certain time horizon. The VaR method includes which one of the following assumptions?

No trading in the portfolio

A significant difference between the Basel I regulatory capital requirements and the Basel II regulatory capital requirements is that Basel II

Includes a capital requirement for operational risk that Basel I does not include

In determining economic capital for insurers, various risks are quantified. One such risk is the potential for adverse loss experience or catastrophic losses. This risk is known as

Insurance risk

There are numerous advantages associated with economic capital analysis. One of these advantages is that

It focuses attention on the risks attached to each of an organization's activities.

There are numerous advantages with economic capital analysis. One of these advantages is that

It focuses attention on the risks to each of an organization's activities.

Which one of the following was considered a weakness of the Basal I methodology?

It not sufficiently account for systemic risk

Which one of the following is a benefit of the conditional value at risk (CVaR) method?

It takes into account the extremely large losses that may occur.

Risk indicators such as experience and authority levels apply to which of the following operational risk classes

People

U.S. Petroleum Company would like to purchase oil drilling rights in another nation. That nation, however, is run by a dictator who last year confiscated another foreign company's oil equipment. U.S. Petroleum decided to enter the country through a joint venture with the dictator's brother who heads a small oil company. By entering the foreign nation through a joint venture, U.S. Petroleum was addressing which risk?

Political risk

Market value surplus (MVS) of an insurer =

Present Value of liabilities - Fair Value of liabilities

One category of operational risk includes procedures and practices organizations use to conduct their business activities. This category is

Process Risk

One category of operational risk includes procedures and practices organizations use to conduct their business activities. This category is

Process risk

When interest rates were high, Protection First Insurance Company purchased a $1000 corporate bond that will pay $80 in interest annually until it matures in 15 years. Based on the purchase price, this bond will provide Protection First a 10 percent annual rate of return if the insurer holds the bond until it matures. Six years after the bond was purchased, interest rates had declined significantly. Although the bond still pays $80 in interest annually, Protection First can no longer earn a 10 percent rate of return on the periodic Interest payments. This risk is called

Reinvestment risk

One category of operational risk that a business must manage is risk associated with people. One of the strategies to mitigate people risk is to use care when hiring employees. This strategy employs background checks, pre-employment tests, and checking references. This strategy is

Selection

Which one of the following statements is true regarding strategic risks?

Strategic risks are external to an organization.

Which one of the following statements is true regarding strategic risks?

Strategic risks are external to an organziation

Risk that is common to all securities of the same general class and cannot be eliminated through diversification is called

Systematic risk

Economic capital is defined as

The amount of capital required to maintain solvency at a given risk tolerance level

The financial crisis of 2008 highlighted the leverage of many global institutions and lead regulators to focus on risk-based capital. Leverage refers to

Using borrowed money to invest

Economic capital models the potential variability in a firm's market assets and liabilities, taking into consideration all of the firm's risks. These risks are considered together to estimate at the firm-level the probability the firm's liabilities may exceed assets by specified levels over a one-year period. This probability measure is based on a concept called

Value at risk