FRM Advanced Topics 5

Question 1

A copula function is used in risk modeling primarily to:

Accepted Answer

Model the dependence structure between variables separately from their marginals

Answer

Copulas link marginal distributions into a joint distribution, allowing dependence to be modeled independently of the margins.

Question 2

The Gaussian copula was widely criticized after the 2008 crisis mainly because it:

Accepted Answer

Underestimated tail dependence among defaults

Answer

The Gaussian copula has zero tail dependence, so it understated the probability of joint extreme defaults in structured products.

Question 3

In extreme value theory (EVT), the peaks-over-threshold (POT) method models exceedances using which distribution?

Accepted Answer

Generalized Pareto distribution

Answer

The POT approach fits the generalized Pareto distribution to losses exceeding a high threshold.

Question 4

Marginal VaR for a position in a portfolio measures:

Accepted Answer

The change in portfolio VaR from a small change in that position

Answer

Marginal VaR is the partial derivative of portfolio VaR with respect to the size of a given position.

Question 5

The credit valuation adjustment (CVA) represents:

Accepted Answer

The expected loss due to counterparty default

Answer

CVA is the difference between the risk-free derivative value and its value accounting for counterparty default risk.

FRM Practice Test