8008 Exam Dumps | When doing stress tests based on historical scenarios, if no appropriate historical scenarios exist for

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PRM Certification - Exam III: Risk Management Frameworks, Operational Risk, Credit Risk, Counterparty Risk, Market Risk, ALM, FTP - 2015 Edition
PRMIA.8008.v2021-08-28.q125
Question 83

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Question 83/125

When doing stress tests based on historical scenarios, if no appropriate historical scenarios exist for a security, it is most INAPPROPRIATE to:

A. Estimate a shock factor based on other instruments that might be considered as proxies for such a security

B. Leave the position unshocked

C. Estimate a shock factor based upon extrapolation

D. Estimate a shock factor based upon interpolation

Correct Answer: B

Explanation
Where a historical shock factor does not exist for a security, for example because the security is new or was only thinly traded earlier, or because a particular emerging market was immature at the time of the historical scenario being considered, it is inappropriate to leave the position unshocked. By and large, the general rule to be followed when carrying out stress testing is to leave no position unshocked. Therefore Choice 'b' is the correct answer.
Choice 'd', Choice 'a' and Choice 'c' all represent valid approaches to estimating a shock factor in such cases.

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