PRMIA 8020 ORM Certificate - 2023 Update Exam Practice Test

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Question 1

Under the previous Basel II approach, which was not an approach for operational risk?

ABasic Indicator Approach (BIA).

BThe Standardized Approach (TSA).

CAdvanced Measurement Approach (AMA).

DAlternative Measurement Approach (AMA).

Answer : D

Overview of Basel II Approaches for Operational Risk

Basel II introduced three main approaches to calculating capital requirements for operational risk:

Basic Indicator Approach (BIA)

The Standardized Approach (TSA)

Advanced Measurement Approach (AMA)

Why Answer D is Correct

Alternative Measurement Approach (AMA) is not a recognized Basel II approach.

The correct term under Basel II was Advanced Measurement Approach (AMA).

Why Other Answers Are Incorrect

Option

Explanation

A . Basic Indicator Approach (BIA).

Correct -- A simple approach where capital is set as a fixed percentage of gross income.

B . The Standardized Approach (TSA).

Correct -- Categorizes operational risk into business lines, each with assigned risk factors.

C . Advanced Measurement Approach (AMA).

Correct -- Uses internal models to calculate capital requirements based on loss data, scenario analysis, and risk controls.

PRMIA Reference for Verification

Basel II Framework for Operational Risk (2004)

PRMIA Risk Management Guidelines

Question 2

For the WorldCom case, what was one of the causes of the failure?

ARisk models that did not reflect loosened underwriting standards of mortgage originators.

BThe lack of a CRO during the final IPO.

CA rapid pace of acquisitions and poor integration of acquired companies.

DUnauthorized trading in derivatives.

Answer : C

Step 1: Understanding the WorldCom Case

WorldCom was one of the largest U.S. telecom companies before its collapse in 2002 due to fraudulent accounting practices and poor risk management.

The company expanded aggressively through acquisitions but failed to integrate them properly, leading to financial mismanagement and accounting fraud.

Step 2: Why Option C is Correct

WorldCom acquired over 60 companies in a short period without proper integration.

This masked financial problems and led to $11 billion in fraudulent accounting adjustments.

PRMIA and risk management frameworks stress that poor integration after rapid acquisitions increases operational and financial risks.

Step 3: Why the Other Options Are Incorrect

Option A ('Risk models and mortgage underwriting') Incorrect because this describes the 2008 financial crisis, not WorldCom.

Option B ('Lack of a CRO during IPO') Incorrect because WorldCom was well-established before its fraud---CRO absence was not the main issue.

Option D ('Unauthorized derivatives trading') Incorrect because WorldCom's failure was due to fraudulent accounting, not derivatives.

PRMIA Risk Reference Used:

PRMIA Corporate Governance Guidelines -- Discusses risks of poor post-merger integration.

SEC Investigation on WorldCom (2002) -- Identified fraudulent accounting due to failed acquisitions.

Question 3

Which of the following statements is best for inclusion in the values to be set for a Risk Function?

AWe prize the ability to implement the management team's direction on the control of risks.

BWe prize the ability to implement the board's direction on the implementation of controls for risks.

CWe prize the ability to ensure that the Risk Function's opinions are listened to and acted upon.

DWe prize the ability to lower risk-taking to an absolute minimum - zero if possible.

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.

Question 4

In relation to the template for writing policy documents, which one of the following pairings of requirements is correct? A well designed policy will include:

AA list of exceptions for the family of board members.

CA list of acceptable fonts and margin types.

CTo whom and in what form exceptions should be sought and the general exemptions e.g. areas to which the policy does not apply

DTo whom the policy applies to and how an additional management report should be allocated to.

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.

Question 5

Which of the below is accurate about a risk assessment workshop?

AThe workshop should be run spontaneously so that proper discussion can take place.

BAlthough workshops will take on their own form; it is best to prepare thoroughly ahead of time.

CRisk management should not attend the workshop so that proper discussion can take place.

DCompliance experts should not attend the workshop so that proper discussion can take place.

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.

Question 6

For the Barings case study, what external event may have accelerated the discovery of the loss event?

AThe collapse of Lehman Brothers into bankruptcy in 2002.

BThe Singapore earthquake of January 17th 1995.

CThe collapse of Lehman Brothers into bankruptcy m 2008.

DThe Kobe earthquake of January 17th 1995.

Answer : D

Background of the Barings Case Study

The Barings Bank collapse occurred due to unauthorized derivatives trading by Nick Leeson in Singapore.

Leeson concealed losses, and his trading positions became unmanageable.

How the Kobe Earthquake Affected Barings

On January 17, 1995, the Kobe earthquake caused extreme market volatility.

Leeson's unauthorized trades were highly exposed to the Nikkei 225 index, and the earthquake triggered heavy losses.

The event accelerated the exposure of Leeson's fraudulent activities, leading to Barings' collapse.

Why Answer D is Correct

The Kobe earthquake created market turmoil, forcing Barings to confront its financial position, ultimately revealing the hidden losses.

Why Other Answers Are Incorrect

Option

Explanation

A . The collapse of Lehman Brothers into bankruptcy in 2002.

Incorrect -- Lehman Brothers collapsed in 2008, not 2002.

B . The Singapore earthquake of January 17th, 1995.

Incorrect -- No significant earthquake occurred in Singapore on that date.

C . The collapse of Lehman Brothers into bankruptcy in 2008.

Incorrect -- Barings collapsed in 1995, not related to Lehman Brothers' 2008 failure.

PRMIA Reference for Verification

PRMIA Case Study on Barings Bank Collapse

Basel Committee Principles on Risk Oversight and Fraud Prevention

Question 7

Which of the following are the most relevant ways a firm can ensure they are in line with consumer protection?

AEngage with consumers once there are enough complaints.

BAdd a consumer protection section to all reports.

CTreat customers fairly, place customer interests ahead of its own and keep promises to customers

DThis risk cannot be managed.

Answer : C

Definition of Consumer Protection in Risk Management

Consumer protection ensures ethical business practices, transparency, and regulatory compliance.

It builds trust with customers and reduces legal and reputational risks.

Key Principles of Consumer Protection

Treating customers fairly Ensures honest and ethical financial services.

Prioritizing customer interests Prevents conflicts of interest and unfair treatment.

Honoring commitments Strengthens customer confidence and regulatory trust.

Why Answer C is Correct

Following these principles ensures regulatory compliance, customer satisfaction, and risk mitigation.

Why Other Answers Are Incorrect

Option

Explanation

A . Engage with consumers once there are enough complaints.

Incorrect -- Proactive engagement is essential; waiting for complaints is a reactive and poor risk management approach.

B . Add a consumer protection section to all reports.

Incorrect -- Documentation alone does not ensure fair treatment; actions matter more.

D . This risk cannot be managed.

Incorrect -- Consumer protection risks can and should be actively managed.

PRMIA Reference for Verification

PRMIA Consumer Protection & Fair Treatment Standards

Financial Conduct Authority (FCA) Consumer Duty Guidelines