8010 Exam Dumps : Operational Risk Manager (ORM) Exam

Note that events of default under the ISDA MA are caused by one of the parties that is considered 'atfault'. In contrast, "termination events" are events for which no one is at fault, for example changes in legislation, illegality etc that still justify termination of the transactions under the contract.

The ISDA MA describes the following 8 types of events of default:

1. failure of pay or deliver

2. breach of agreement

credit support default

4. misrepresentation

5. default under specified transaction

6. cross default

7. bankruptcy

8. merger without assumption

All of the options presented in the question are events of default.

Statement I is true as expected losses are the 'cost ofdoing business' and charged against the P&L of the unit holding the exposure. When evaluating the business unit, expected losses are taken into account. Unexpected losses however require risk capital reserves to be maintained against them.

Statement II isnot true. Credit portfolio loss distributions are not symmetrical, in fact they are highly skewed and have heavy tails.

Statement III is true. The notional, or the face value of a defaulted debt is the basis for a claim in bankruptcy court, and not the market value.

Statement IV is false. In the case of over the counter instruments, the replacement value of the contract represents the amount of the claim, and not the notional amount (which can be very high!).

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.