PRMIA 8008 Dumps Questions Answers

Credit VaR is the difference between the expected value of the portfolio and the value of the portfolio at the given confidence level. Therefore the credit VaR is $85m - $ 60m = $25m. Choice 'b' is the correct answer.

Note that economic capital and credit VaR are identical at a risk horizon of one year. Therefore if the question asks for economic capital, the answer would be the same.

[Again, an alternative way to look at this is to consider the explanation given in III.B.6.2.2: Credit Var = Q(L) - EL where Q(L) is the total loss at a given confidence interval, and EL is the expected loss. In this case Q(L) - $100-$60 = $40, and EL = $100-$85=$15. Therefore Credit VaR = $40-$15=$25.]

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%

The economic capital required to avoid insolvency is just the asset VaR, ie $100. This means that if the worst case losses are realized, the institution would need to have a buffer equivalent to those losses which in this case will be $100, and this buffer is the economic capital.

The actual value of liabilities is not relevant as they are considered 'riskless' from the institution's point of view, ie they will be taken at full value. In this particular case, the institution has $200 in capital which is more than the economic capital required.

Therefore Choice 'c' is the correct answer.