Explanation
The beta distribution is commonly used to model recovery rates. It is a distribution for variables whose values lie between 0 & 1, and the parameters of the distribution can be estimated using the mean and standard deviation of the data. Therefore Choice 'a' is correct and the others are wrong.
Refer to the tutorial on distributions for an Excel model of the beta distribution.

Explanation
Exposure for derivative instruments can vary significantly over the lifetime of the instrument, depending upon how the market moves. The potential future exposure represents the extremes, not the most likely outcome.
The expected exposure is the most suitable measure for pricing the credit risk. Over time, as multiple transactions are entered into, the expectation (or the mean) will be realized - though individual transactions may have more or less by way of exposure.
The notional amount may not be relevant, though for loans it may be the most important contributor to the expected exposure. Mark-to-market will represent the exposure at a given point in time, but cannot be predicted nor be used to price the credit risk.

Explanation
According to the first principle set out by the BCBS paper on stress testing, the Board has ultimate responsibility for the overall stress testing programme. Senior management is accountable for the implementation, management and oversight of the programme, but the overall responsibility stays with the Board of Directors of the institution. Therefore Choice 'c' is the correct answer.
Additionally, this principle lays down that stress testing should be a part of the overall governance, ie support the strategic choices made as part of business planning; and be integrated with the risk management culture of the bank, ie stress tests should be used as an input for setting the risk appetite, exposure limits, and the capital and liquidity planning processes of the bank.

Explanation
Credit reserves are created in respect of expected losses, which are considered the cost of doing business.
Unexpected losses are borne by economic credit capital, which is a part of economic capital. This question is a bit nuanced - and 'economic capital' would generally be a good answer as well. However, taking a rather beady eyed view of the terminology and distinguishing between 'economic credit capital' which is a subset of
'economic capital', we can say that 'economic credit capital' is a more appropriate Choice 'a's the question relates to credit losses.

Explanation
Basel II proposes three approaches to compute operational risk capital - the basic indicator approach (BIA), the standardized approach (SIA) and the advanced measurement approach (AMA). There is no operational risk approach called the factor based approach.