The trend component refers to parallel shifts in the term structure, the tilt refers to changes in the shape of the term structure at the long and short ends, and the curvature refers to movements in the medium term part. The phrase 'parallel component' has no meaning and is not a part of the principal components in analyzing term structures.

Changes in the term structure can also be analyzed as "level, slope and curvature", so you should be aware of this terminology as well to refer to the principal components of a term structure analysis.

Refer to the detailed loss event type classification under Basel II (see Annex 9 of the accord). You should know the exact names of all loss event types, and examples of each.

Offsetting trades with other counterparties will not reduce credit exposure to a given counterparty. All other choices represent means of reducing credit risk. Therefore Choice 'c' is the correct answer.

Measures of risk sensitivity include delta, gamma, vega, PV01, convexity and CR01, among others. They allow approximating the change in the value of a portfolio from a change (generally small) in one of the underlying risk factors.

Risk sensitivity measures are derivatives of the value of the portfolio, calculated with respect to the risk factor. Some risk sensitivity measures are second derivatives, and allow a more precise calculation of the change in the value of the portfolio. Many risk sensitivities are represented by Greek letter, but not all.

Delta (δ) is a measure of the change in portfolio value based on a 1% change in the value of the underlying. Gamma (γ) is a second order derivative that improves the calculation as part of a Taylor expansion. CR01 is a measure of the change due to a 1 basis point change in the credit spread. PL01 is not a measure of any kind of risk sensitivity, it does not mean anything.

The correct answer is Choice 'c'. The other choices do not refer to 'regulatory arbitrage'.

Choice 'a' is the correct answer. Exposures such as those to a line of credit of which only a part (or none) may be drawn at the time of assessment present a difficulty when attempting to quantify credit risk. It is not correct to take the entire amount of the line as the exposure at default, and likewise the current exposure is likely to be too aggressively low a number to consider.

While the borrower has an information advantage in that he would be aware of the deterioration in credit standing before the bank and would probably draw cash prior to default, it is unlikely that the entire amount of the line of credit would be drawn in all cases. In some cases, none may be drawn. In other cases, the bank would become aware of the situation and curtail or cancel access to the credit line in a timely fashion.

Therefore a fixed proportion of existing credit lines is considered a reasonable approximation of the exposure at default against credit lines.

Probability of the joint default of both A and B =

A math equation with black text Description automatically generated

We know all the numbers except default correlation, and we can solve for it.

Default Correlation*SQRT(0.03*(1 - 0.03)*0.08*(1 - 0.08)) + 0.03*0.08 = 0.014.

Solving, we get default correlation = 25%

Conditional default probabilities are modeled as a logit function under CreditPortfolio view. That ensures the resulting probabilities are 'well behaved', ie take a value between 0 and 1. The probability may be expressed as = 1/ (1 + exp(I)), where I is a country specific index taking various macro economic factors into account.

Choice 'c' correctly describes Altman's z-score. All other choices are incorrect.

Odds are the ratio between the probability of the occurence of an event to the probability that the event does not occur.

If odds are H, then p = H/(1 + H) and H = p/(1-p). In this case the odds are 1:5, or 1/5, therefore the correct answer is Choice 'a', equal to (1/5)/(1 + 1/5) = 1/6 = 16.67%. All other choices are incorrect.