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PRMIA Exam 8010 Topic 7 Question 61 Discussion

Actual exam question for PRMIA's 8010 exam
Question #: 61
Topic #: 7
[All 8010 Questions]

Under the contingent claims approach to credit risk, risk increases when:

1. Volatility of the firm's assets increases

2. Risk free rate increases

3. Maturity of the debt increases

Show Suggested Answer Hide Answer
Suggested Answer: B

The point that this question is trying to emphasize is the independence of the risk management function. The risk function should be segregated from the risk taking functions as to maintain independence and objectivity.

Choice 'd', Choice 'c' and Choice 'a' run contrary to this requirement of independence, and are therefore not correct. The risk function should report directly to senior levels, for example directly to the audit committee, and not be a part of the risk taking functions.


Contribute your Thoughts:

Makeda
17 days ago
I think the correct answer is C) 1, 2 and 3. Under the contingent claims approach, all three factors increase the risk of credit default.
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Hayley
18 days ago
So, the answer must be B) 1 and 3 then.
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Rodrigo
20 days ago
I agree with Raylene, but I also think risk increases when maturity of the debt increases.
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Raylene
23 days ago
I think risk increases when volatility of the firm's assets increases.
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