8008 Exam Dumps : PRM Certification - Exam III: Risk Management Frameworks, Operational Risk, Credit Risk, Counterparty Risk, Market Risk, ALM, FTP - 2015 Edition

The recovery rate, the default hazard rate (also called the average default intensity) and the spread on debt are linked by the equation Hazard Rate = Spread/(1 - Recovery Rate). Therefore, the recovery rate implicit in the given data is = 1 - 8%/10% = 20%.

Analytical or parametric approaches are not useful at all for liquidity at risk calculations because there are no neat distributions available to parameterize the large number of factors that affect the calculations of liquidity inflows and outflows. Historical simulations, Monte Carlo and scenario analysis (which can complement historical scenarios) are all valid choices

When we do a Monte Carlo simulation, the statistic we obtain (eg, the expected price) is an estimate of the real variable. The difference between the real value (which would be what we would get if we had access to the entire population) and that estimated by the Monte Carlo simulation is measured by the 'standard error', which is the standard deviation of the difference between the 'real' value and the simulated value (ie, the 'error').

As we increase the number of draws in a Monte Carlo simulation, the closer our estimate will be to the true value of the variable we are trying to estimate. But increasing the sample size does not reduce the error in a linear way, ie doubling the sample size does not halve the error, but reduces it by the inverse of the square root of the sample size. So if we have a sample size of 1000, going up to a sample size of 100,000 will reduce the standard error by a factor of 10 (and not 100), ie, SQRT(1/100) = 1/10. In other words, standard error is proportional to 1/√N, where N is the sample size.

Therefore Choice 'c' is correct and the others are incorrect.