8010 Exam Dumps : Operational Risk Manager (ORM) Exam

Assuming timeinvariance and the Markov property, it is easy to calculate the transition matrix for any time period as P^n, where P is the given transition matrix for one period and n the number of time periods that we need to compute the new transition matrix for. ThusChoice 'b' is the correct answer.

Statement I is correct as credit VaR calculations often use a one year time horizon. This is primarily because the cycle in respect of credit related activities, such as loan loss reviews, accounting cycles for borrowers etc last a year.

Statement II is false. There are two ways in which loss assessments in respect of credit risk can be made: default mode, where losses are considered only in respect of default, and no losses are recognized in respect of the deterioration of the creditworthiness of the borrower (which is often expressed through a credit rating transition matrix); and the mark-to-market mode, where losses due to both defaults and credit quality are considered. The default mode is used for the loan book where the institution has lentmoneys and generally intends to hold the loan on its books till maturity. The mark to market mode is used for traded securities which are not held to maturity, or are held only for trading.

Statement III is correct. The confidence interval, or the quintile of losses used for maintaining credit ratings tends to be very high as the possibility of the institution's default needs to be remote.

Statement IV is correct too, for the reasons explained earlier.

All of the distributions referred to in the question can be used to model the loss severity distribution for op risk.Therefore Choice 'c' is the correct answer.