PRMIA 8020 ORM Certificate - 2023 Update Exam Practice Test

Answer : C

Step 1: Role of a Risk Assessment Facilitator

The facilitator's main role is to guide discussions without bias, ensuring objective risk identification.

PRMIA's Risk Governance Framework highlights neutral facilitation as key to effective risk workshops.

Step 2: Why Option C Is Correct

Objectivity ensures unbiased risk assessment.

Expressing personal opinions can influence risk ratings, leading to distorted outcomes.

Step 3: Why the Other Options Are Incorrect

Option A ('Guide the workshop toward a pre-determined conclusion')

Incorrect because risk workshops should discover risks, not confirm pre-set beliefs.

Option B ('Attendees can override results')

Incorrect as risk results should be evidence-based, not subject to override.

Option D ('Attend via video connection')

Incorrect as facilitators must engage actively, making remote facilitation less effective.

PRMIA Risk Reference Used:

PRMIA Risk Governance Framework -- Stresses objectivity in risk assessment facilitation.

PRMIA Risk Identification Best Practices -- Encourages unbiased workshops.

Final Conclusion:

Facilitators must remain neutral and objective, making Option C 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 : 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 : C

Team supervisors play a critical role in shaping and maintaining an organization's risk culture. PRMIA's Risk Governance Framework and Risk Culture Principles emphasize that supervisors act as the link between risk policies and frontline employees, ensuring that risk-aware behaviors are consistently followed.

Step 1: Role of Supervisors in Risk Culture Development

Supervisors engage with employees daily, providing guidance on risk-based decision-making.

They reinforce risk policies, standards, and expectations set by senior management.

Supervisors identify behavioral trends that may indicate risk culture weaknesses.

Step 2: Supervisors as Enforcers of Risk Culture

PRMIA's Risk Culture Framework stresses that risk culture must be embedded into daily operations through supervisor-led enforcement.

Supervisors monitor, correct non-compliant behaviors, and provide ongoing risk awareness training.

Their proximity to employees allows them to detect early warning signs of risk issues.

Step 3: Why the Other Options Are Incorrect

Option A: 'More experienced than the employees that report to them.'

Experience alone does not establish or maintain a risk culture.

A risk culture is about behaviors and practices, not just expertise.

Option B: 'Visible to regulators and can describe the firm's risk culture to inspection teams.'

While supervisors may interact with regulators, their primary role is to engage with employees daily rather than acting as spokespersons.

Option D: 'Visible to regulators and can describe the firm's risk culture to their board.'

Boards typically rely on Chief Risk Officers (CROs) or senior executives to communicate risk culture, not direct supervisors.

PRMIA Risk Reference Used:

PRMIA Risk Culture Framework -- Highlights the role of supervisors in ensuring risk-aware behaviors.

PRMIA Risk Governance Framework -- Stresses that frontline supervisors must enforce risk management policies.

PRMIA Risk Awareness Guidelines -- Reinforces daily interaction as a key factor in maintaining a strong risk culture.

Final Conclusion:

Supervisors directly influence employees' behaviors and ensure that risk culture is consistently followed, making Option C 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 : 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 : D

Definition of Governance

Governance refers to the framework of policies, principles, and processes used to guide corporate decision-making and strategic direction.

It ensures accountability, transparency, and risk oversight within an organization.

Key Elements of Governance

Risk oversight -- Ensuring risks are properly identified and managed.

Accountability structures -- Defining roles and responsibilities.

Decision-making frameworks -- Establishing policies for long-term corporate success.

Why Other Answers Are Incorrect

Option

Explanation

A . Governance is a structure specifying the daily operation of a firm.

Incorrect -- Governance focuses on high-level corporate oversight, not day-to-day operations.

B . Governance is a structure specifying the ways in which reporting is made to the primary regulator.

Incorrect -- Governance is broader than just regulatory reporting.

C . Governance is being replaced by management in all firms that are regulated.

Incorrect -- Governance and management are separate but complementary; governance provides oversight, while management executes strategy.

PRMIA Reference for Verification

PRMIA 10 Principles of Good Governance