PRMIA 8010 Exam - Topic 7 Question 61 Discussion

Actual exam question for PRMIA's 8010 exam

Question #: 61
Topic #: 7

[All 8010 Questions]

Under the contingent claims approach to credit risk, risk increases when:

1. Volatility of the firm's assets increases

2. Risk free rate increases

3. Maturity of the debt increases

A2 and 3

B1 and 3

C1, 2 and 3

D1 and 2

Show Suggested Answer

Suggested Answer: B

The point that this question is trying to emphasize is the independence of the risk management function. The risk function should be segregated from the risk taking functions as to maintain independence and objectivity.

Choice 'd', Choice 'c' and Choice 'a' run contrary to this requirement of independence, and are therefore not correct. The risk function should report directly to senior levels, for example directly to the audit committee, and not be a part of the risk taking functions.

by Darci at Sep 13, 2024, 02:43 AM

Limited Time Offer

25%

Off

Get Premium 8010 Questions as Interactive Web-Based Practice Test or PDF

Contribute your Thoughts:

Submit Cancel

Elizabeth

6 months ago

I’d say 1 and 3 make the most sense here.

upvoted 0 times

...

Gayla

6 months ago

Wait, are we sure about all three factors increasing risk? Seems off.

upvoted 0 times

...

Alethea

6 months ago

Totally agree, maturity plays a big role in risk assessment.

upvoted 0 times

...

Juliana

7 months ago

I think 2 is a stretch, not sure it really impacts credit risk.

upvoted 0 times

...

Glenna

7 months ago

Definitely, risk goes up with asset volatility!

upvoted 0 times

...

Kattie

7 months ago

I’m leaning towards option C because it seems like all three factors would logically increase credit risk under the contingent claims approach.

upvoted 0 times

...

Shawnee

7 months ago

I feel like all three factors could contribute to increased risk, but I can't recall if the risk-free rate really matters in this context.

upvoted 0 times

...

Ben

7 months ago

I think I saw a practice question where increasing debt maturity was linked to higher risk. So maybe B is right?

upvoted 0 times

...

My

8 months ago

I remember studying that higher asset volatility definitely increases credit risk, but I'm not sure about the risk-free rate.

upvoted 0 times

...

Franchesca

8 months ago

I'm a bit confused by this question. I know the contingent claims approach is used to model credit risk, but I'm not sure I fully understand how each of these factors impacts the risk. I'll have to review my notes and maybe ask the professor for some clarification before the exam.

upvoted 0 times

...

Emmett

8 months ago

Okay, let me walk through this step-by-step. If the volatility of the firm's assets increases, that makes the firm's default more likely, so that increases risk. And if the risk-free rate goes up, that also increases the risk. The maturity of the debt is trickier, but I think the longer the maturity, the higher the risk. So I'm going to go with C on this one.

upvoted 0 times

...

Kate

8 months ago

Hmm, I'm a little unsure about this one. I know the contingent claims approach is related to credit risk, but I'm not totally clear on how the different factors impact the risk. I'll have to think this through carefully.

upvoted 0 times

...

Twanna

8 months ago

This one seems pretty straightforward. I think the answer is C - risk increases when volatility of the firm's assets, the risk-free rate, and the maturity of the debt all increase.

upvoted 0 times

...

Benedict

1 year ago

D) 1 and 2 makes the most sense to me. The risk-free rate and asset volatility are the crucial elements in this model. Time to brush up on my contingency planning!

upvoted 0 times