PRMIA ORM Certificate - 2023 Update 8020 Exam Practice Test

Answer : D

Risk-sensitive pricing ensures that financial institutions and businesses properly account for risk in their pricing strategies to maintain stability and sustainability. PRMIA's Risk Pricing and Capital Adequacy Guidelines define the importance of risk-sensitive pricing in ensuring fair compensation for risk exposure and avoiding risk concentration issues.

Step 1: Why Risk-Sensitive Pricing Is Important

Aligns risk with return: Pricing should be designed to reflect the underlying risk and return trade-off.

Protects investors: Investors expect compensation for capital at risk (Option A is correct).

Reinforces risk-aware culture: PRMIA promotes linking incentives to risk-adjusted returns (Option B is correct).

Prevents adverse selection: Proper risk pricing prevents low-quality assets from accumulating (Option C is correct).

Step 2: Why Option D Is Incorrect

Income targets are business-driven, not risk-driven.

Risk-sensitive pricing aims to balance risk and reward, not just maximize revenue.

PRMIA discourages profit-seeking behavior at the expense of risk considerations.

PRMIA Risk Reference Used:

PRMIA Risk Pricing Guidelines -- Defines the principles of risk-sensitive pricing.

PRMIA Risk-Adjusted Return Standards -- Stresses linking incentives to risk-aware decisions.

PRMIA Capital Adequacy Framework -- Highlights the role of risk-sensitive pricing in portfolio management.

Final Conclusion:

Risk-sensitive pricing is designed to align returns with risk exposure, not simply to meet or exceed income targets, making Option D the correct answer.

Answer : C, C

Step 1: Key Elements of a Well-Designed Policy Document

A well-designed policy should include:

Scope -- Who the policy applies to.

Exception Handling -- How and where exceptions should be requested.

Accountability -- Who is responsible for enforcement.

Step 2: Why Option C is Correct

A policy must clearly define exceptions and the process for requesting them.

It should also define areas where the policy does not apply to avoid confusion.

Step 3: Why the Other Options Are Incorrect

Option A ('List of exceptions for board members' families') Incorrect because policies should apply consistently to all stakeholders.

Option B ('List of acceptable fonts and margin types') Incorrect because formatting is secondary to content clarity.

Option D ('To whom the policy applies and an additional management report') Incorrect because policy scope should not include unnecessary reports.

PRMIA Risk Reference Used:

PRMIA Policy Writing Guidelines -- Defines policy structure and exception handling.

ISO 19600 Compliance Management Standard -- Supports clear, well-documented policies.

Final Conclusion:

A well-designed policy clearly defines exceptions and their handling process, making Option C the correct answer.

Answer : C

Overview of the National Australia Bank (NAB) FX Options Case Study

Traders at National Australia Bank (NAB) engaged in unauthorized foreign exchange (FX) options trading.

They smoothed profits and concealed losses using fictitious transactions and manipulated reporting.

This led to a major financial scandal and loss of investor confidence.

Key Findings of the Investigation

Traders artificially smoothed profits to avoid drawing attention to large fluctuations.

Losses were concealed from internal risk controls by manipulating trade records.

The bank's risk management and governance controls failed to detect and prevent these activities.

Why Other Answers Are Incorrect

Option

Explanation

A . Currency traders were allowed access to the risk system by the CEO.

Incorrect -- No evidence suggests CEO involvement in granting system access.

B . Currency traders concealed losses using back-office knowledge.

Incorrect -- While they concealed losses, they also smoothed profits to manipulate earnings trends.

D . Currency traders were able to complete a Management Buy Out (MBO).

Incorrect -- This event was not related to a Management Buyout (MBO); it was a trading scandal.

PRMIA Reference for Verification

PRMIA Fraud and Risk Management Case Studies

Basel Principles on Market Risk and Internal Control Failures

Answer : B

Step 1: What Is a Risk Assessment Workshop?

A risk assessment workshop is a structured session where key stakeholders identify, evaluate, and prioritize risks.

Effective workshops require preparation, clear objectives, and structured discussions to ensure meaningful risk analysis.

Step 2: Why Option B is Correct

PRMIA and best practices recommend thorough preparation, including:

Setting objectives

Defining risk categories

Ensuring participation from risk, compliance, and business units

Providing risk assessment tools/templates

Step 3: Why the Other Options Are Incorrect

Option A ('Run spontaneously') Incorrect because lack of preparation leads to poor discussions and missed risks.

Option C ('Risk management should not attend') Incorrect because risk managers provide key expertise to guide discussions.

Option D ('Compliance experts should not attend') Incorrect because compliance provides regulatory insights essential to risk assessment.

PRMIA Risk Reference Used:

PRMIA Risk Assessment Framework -- Recommends structured, well-prepared workshops.

ISO 31000 Risk Management Standard -- Supports proactive workshop planning.

Final Conclusion:

Risk assessment workshops should be well-prepared to ensure meaningful discussions and effective risk identification, making Option B the correct answer.

Answer : B

Step 1: Role of a Risk Function

A Risk Function ensures that an organization follows best practices in risk governance, assessment, and control implementation.

It should be aligned with the board's risk strategy and ensure independent oversight.

Step 2: Why Option B is Correct

The board sets the overall risk strategy, and the risk function implements risk controls accordingly.

PRMIA emphasizes board oversight as the guiding force behind risk management.

Step 3: Why the Other Options Are Incorrect

Option A ('Implement management's direction') Incorrect because risk oversight should be board-driven, not solely management-driven.

Option C ('Ensure opinions are listened to') Incorrect because risk functions enforce policies, not just share opinions.

Option D ('Lower risk-taking to zero') Incorrect because risk-taking is necessary for growth---excessive risk aversion harms business.

PRMIA Risk Reference Used:

PRMIA Risk Governance Framework -- Highlights board oversight in risk management.

Basel III Risk Management Standards -- Emphasizes board-driven risk controls.

Final Conclusion:

The Risk Function must follow the board's direction in implementing risk controls, making Option B the correct answer.

Answer : A

Definition of an Effective Key Risk Indicator (KRI)

A KRI is a metric used to identify, measure, and monitor emerging risks.

To be effective, KRIs must be both quantitative and qualitative, allowing for a comprehensive risk view.

Key Characteristics of Effective KRIs

Quantitative -- Uses numerical data for trend analysis.

Qualitative -- Incorporates expert judgment and scenario-based insights.

Consistent -- Maintains uniform definitions across reporting periods.

Efficient & Repeatable -- Must be easily measured and consistently reported.

Why Other Answers Are Incorrect

Option

Explanation

B . Qualitative, Consistent, Efficient & Repeatable.

Incorrect -- Excludes quantitative aspects, which are essential for KRIs.

C . Quantitative, Consistent, Comparable, Efficient & Repeatable.

Incorrect -- While comparison is useful, qualitative factors are missing, making this answer incomplete.

D . Quantitative, Repeatable and Efficient.

Incorrect -- Lacks qualitative insights and consistency as key factors for KRIs.

PRMIA Reference for Verification

PRMIA Risk Indicator Guidelines

Basel Committee's Principles on Risk Data and KRI

Answer : D

Step 1: Understanding OFAC

OFAC (Office of Foreign Assets Control) is a U.S. Treasury Department agency responsible for enforcing economic and trade sanctions based on U.S. foreign policy and national security goals.

It prevents financial crime by restricting transactions with sanctioned individuals, entities, and countries.

Step 2: Role of OFAC in Financial Crime Prevention

OFAC administers sanctions to prevent money laundering, terrorism financing, and other illicit activities.

Financial institutions must comply with OFAC regulations to avoid heavy fines and reputational damage.

PRMIA's Financial Crime Risk Guidelines emphasize the importance of OFAC compliance in risk management.

Step 3: Why the Other Options Are Incorrect

Option A ('Office of Financial Asset Control') -- Incorrect wording; OFAC deals with foreign assets, not just financial assets.

Option B ('Office of Foreigner and Other Control') -- OFAC does not regulate foreigners broadly; it targets specific foreign assets and transactions.

Option C ('Office for Asset Control') -- Missing 'Foreign', which is critical to OFAC's function.

PRMIA Risk Reference Used:

PRMIA Financial Crime Risk Management Guidelines -- Emphasizes regulatory compliance with OFAC.

PRMIA Compliance and Sanctions Risk Standards -- Stresses the role of OFAC in preventing illicit financial activities.

Final Conclusion:

OFAC stands for the Office of Foreign Assets Control, making Option D the correct answer.