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PRMIA PRM Certification - Exam IV: Case Studies; Standards: Governance, Best Practices and Ethics Sample Questions:
1. According to the Northern Rock Case Study, what is Forced Insolvency?
A) The bank is solvent in that the current value of its assets (measured at book value) is more than the value of its liabilities; so even if the bank were to liquidate all of its assets it would be able to repay all depositors and other creditors
B) The bank is legally solvent but if, because it cannot fund its operations, it is forced to liquidate assets it could do so only at less than nominal values (fire sale) and this would make it legally insolvent (value of assets falls below those of liabilities)
C) The bank is insolvent in that the current value of its assets (measured at book value) is less than the value of its liabilities; thus even if the bank were to liquidate all of its assets it would not be able to repay all depositors and other creditors
D) The bank is legally solvent but its current funding costs (which are likely to continue) exceed the average rate of return on its assets and hence it would soon become insolvent as it would be making losses and would eventually exhaust its equity capital
2. When local rules and regulations conflict with the PRMIA Standards of Best Practice, Conduct and Ethics the PRMIA member should ...
A) Respect local rules and regulations
B) Modify the interpretation of local rules and regulations to meet the situation
C) Ignore local rules and regulations
D) Seek advice from a qualified party, being mindful of legal and confidentiality requirements
3. Boards, including Audit and Risk Committees must:
I Clearly articulate the corporate risk appetite to senior management
II Thoroughly review compensation plans of potentially "highly compensated positions" for consistency with corporate risk appetite, competitive market conditions and fiduciary responsibility to shareholders III Have a single member formally given responsibility for understanding and reporting the effectiveness of the corporation's risk management infrastructure IV. Be fully accountable to shareholders and work to the benefit of public good and financial stability
A) All of these are responsibilities of Board and Audit Committees
B) I, II and III only
C) I and II only
D) I, II and IV only
4. Which of the following was a key problem in the Barings Bank case?
A) Having the back office and front office operations under the same person
B) The different time zones that the office was trading in
C) Difference in the contract sizes in the OSE and SIMEX
D) Leeson was executing an arbitrage strategy even though he was not authorized to do so
5. The multi-dimensional risk problem at Northern Rock did not include which one of the combinations of the following?
A) Deposit Protection; Moral Hazard; Business Model; and LPHI Risk
B) Corporate Governance; Moral Hazard; Role of Government; and Credit Risk
C) Business Model; Corporate Governance; Moral Hazard; and Deposit Protection
D) LPHI Risk; Business Model; Solvency vs. Liquidity: and Deposit Protection
Solutions:
| Question # 1 Answer: B | Question # 2 Answer: D | Question # 3 Answer: A | Question # 4 Answer: A | Question # 5 Answer: B |

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