PRMIA Exam 8010 Topic 1 Question 44 Discussion

Actual exam question for PRMIA's 8010 exam

Question #: 44
Topic #: 1

[All 8010 Questions]

In estimating credit exposure for a line of credit, it is usual to consider:

Aa fixed fraction of the line of credit to be the exposure at default even though the currently drawn amount is quite different from such a fraction.

Bthe full value of the credit line to be the exposure at default as the borrower has an informational advantage that will lead them to borrow fully against the credit line at the time of default.

Conly the value of credit exposure currently existing against the credit line as the exposure at default.

Dthe present value of the line of credit at the agreed rate of lending.

Show Suggested Answer

Suggested Answer: B

Volatility clustering leads to levels of current volatility that can be significantly different from long run averages. When volatility is running high, institutions need to shed risk, and when it is running low, they can afford to increase returns by taking on more risk for a given amount of capital. An institution's response to changes in volatility can be either to adjust risk, or capital, or both. Accounting for volatility clustering helps institutions manage their risk and capital and therefore statements I and II are correct.

Regulatory requirements do not require volatility clustering to be taken into account (at least not yet). Therefore statement III is not correct, and neither is IV which is completely unrelated to volatility clustering.

by Maryann at Apr 09, 2024, 10:08 PM

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Irving

1 months ago

Wait, did they mention anything about a magic 8-ball in the question? Cause that's the only way I'm picking an answer here.

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Dick

1 months ago

Option A is the way to go. It's a standard industry practice. Why reinvent the wheel?

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Emmanuel

12 days ago

Agreed, no need to complicate things when there's a proven method.

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Kami

14 days ago

It's important to stick to industry standards for consistency.

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Dalene

17 days ago

It simplifies the calculation and is widely accepted.

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Luz

27 days ago

I agree, using a fixed fraction is a common approach.

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Paris

2 months ago

Option D? Really? Calculating the present value of the entire credit line? That's overkill. This isn't a college finance exam, you know.

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Dana

26 days ago

Option D is definitely overkill. Stick with A or C for a more practical approach.

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Nada

29 days ago

C) only the value of credit exposure currently existing against the credit line as the exposure at default.

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Adelaide

1 months ago

A) a fixed fraction of the line of credit to be the exposure at default even though the currently drawn amount is quite different from such a fraction.

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Roosevelt

2 months ago

I'd go with option C. It's the most straightforward and realistic approach. Why overcomplicate things?

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Chau

21 days ago

I see your point, but I still think option D could be a more accurate way to estimate credit exposure.

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Cathern

29 days ago

I think option A could also be a valid approach, considering a fixed fraction of the line of credit.

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Ashleigh

2 months ago

I agree, option C seems like the simplest way to estimate credit exposure.

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Jordan

2 months ago

Option B seems a bit too extreme. I don't think we can assume the borrower will always max out the credit line at default. That's a bit of a stretch.

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Azzie

9 days ago

I see your point, but I still think option A is the most reasonable approach.

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Leontine

11 days ago

But what about option C, only considering the current credit exposure as the exposure at default?

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Zona

29 days ago

I think option A makes more sense, considering a fixed fraction of the line of credit as the exposure at default.

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Martin

1 months ago

I agree, option B does seem a bit extreme.

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Carole

3 months ago

I see both points, but I think the answer is D. We should consider the present value of the line of credit at the agreed rate of lending for a more accurate estimation.

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Janae

3 months ago

I disagree, I believe the answer is C. We should only consider the current value of credit exposure against the credit line.

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Eleonora

3 months ago

I think the answer is A, because it makes sense to consider a fixed fraction of the line of credit as the exposure at default.

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