PRMIA 8010 Exam With Confidence Using Practice Dumps

If the current level of the S&P 500 is 2000, and a single day volatility is 1%, and the delta (ie change in portfolio value from a one point change) is $100, then the 1 day volatility for the portfolio in dollars is 2000 * 1% * $100 = $2,000.

At the 99% confidence level, the value of the inverse cumulative density function for the normal distribution is 2.33 (=NORMSINV(99%), in Excel). Therefore the 1 day VaR will be 2.33 * $2000 =$4,660. Extending it to 10 days using the square root of time rule, we get the 10 day VaR as equal to SQRT(10)*4660 = $14,736.

Since this method of calculating VaR relies upon a delta approximation of a risk factor (in this case the S&P500), it is the parametric approach to calculating VaR (the other methods being historical simulation, and Monte Carlo simulation).

The 2015 Handbook provides an excellent example of parametric (and other) VaR calculations in Chapter 3 of Volume III of Book 3. The spreadsheet used for the illustration can be downloaded from

Current replacement values are a very poor measure of the credit exposure from a derivative contract, because the future value of these instruments is unpredictable, ie is stochastic, and the range of values it can take increases the further ahead in the future we look. Therefore it is common for credit exposures for derivatives to be measured using forward looking exposure profiles, which are distributions of the expected value of the derivative at the time horizon for which credit risk is being measured. To be conservative, a high enough quintile of this distribution is taken as the 'loan equivalent value' of the derivative as the exposure.Choice 'c' is the correct answer.

The notional value of derivative contracts generally tends to be quite high and unrelated to their economic value or the counterparty exposure. Therefore notional value is irrelevant.

Statement I is correct. Economic capital is the capital available to absorbunexpected losses, and credit ratings are also based upon a certain probability of default. Economic capital is often calculated at a level equal to the confidence required for the desired credit rating. For example, if the probability of default for a AArating is 0.02%, then economic capital maintained at a 99.98% would allow for such a rating. Economic capital set at a 99.8% level can be thought of as the level of losses that would not be exceeded with a 99.8% probability.

Loss distributions are the product of the severity and frequency distributions, each of which are estimated separately. The total loss distribution is affected far more by the severity distribution than by the frequency distribution, therefore statement II is correct.

The Loss Distribution Approach (LDA) is one of the ways in which the requirements of the AMA can be satisfied, and not the other way round. Therefore statement III is incorrect.

Statement IV is correct as the total loss distribution is estimated using separate estimatesof loss frequency and distributions.