2013 FRM Part 2 May Exam Feedback

[RiskNoob]

Hi BT folks who have taken P2 exam today,

How was the exam? There were some surprise/cheesy(i.e. minor details) questions, but I think overall difficulty was similar to GARP's practice exams. I think it was a fair exam. Needless to say, I want to repeat saying: BT materials (especially PQs) are excellent source to do well on the exam.

My memory is quickly fading again, so I will post what I remember (e.g. yes, there were some questions from Gregory/Malz chapters) soon today.

RiskNoob

 

[cqbzxk]

no, I don't like this exam, there is generally no too much calculate questions (I really like calculate question I hate reading), I spend a lot of time on calculating stuff, but like Merton model, CLN, CDS spread, Key rate, etc. didn't even mention

 

[RiskNoob]

Market Risk

-Implied volatility: Given the skewed (equity) curve, which option is undervalued?

-Implied volatility: Similar to above, describe fatness of the right and left tails.

-Exotic option: which option has the large negative vega?

-Exotic option: Given plain vanilla option information (maturity, strike price, risk free rate etc.) what would be the value of the chooser option in term of sum of which plain options with which strike price?

-Find the right characteristics for GEV … might not be reliable in lower confidence intervals (e.g. 90%)

- VaR : given non-uniform weighted loss, find the approximation of 95% VaR

- Weakness of ES: cannot produce the value outside of the historical(?) value

-Copula & correlation (there were quite many of them)


-VaR Backtest: what is the max. number of exceeds of 98%VaR model before Basel add the penalty? Please note that binomial test is two-tailed 95% (1.96)

- Find the correct VaR Mapping description of Cash flow mapping ( to what?)

- Another Mapping: What would be the most appropriate mapping for government bond (can't remember the question precisely)

-No so much from new Tuckman’s chapters (interest rate model) – one question was simulation of model 1 (yes, the very basic model with no drift) given simulated value (GARP did not specify to find the inversion value).

-Interest model simulation: what needs to be done if it goes to the negative rate? Simply set to 0.

- MBS: Finding right definition... Option cost = z-spread - OAS

- MBS: given some MBS input such as CPR (conditional prepayment rate, annual), find the principal payment of a 41th month.


-(This is from Part 1… duh) Hedging – minimum variance hedge (given std’s and correlation of portfolio and market)

-(Again, this is from Part 1) Given r(0, 1), r(1,2), r(2, 3) (one spot rate and two forward rates). Describe the shape of the spot curve rate: it is upward sloping curve.



Credit Risk

-Find Credit VaR, where Portfolio of iid 25 bonds (i.e. binomial dist), probability of default = 0.02

-(Continued from the above) if n = 25 is changed to n = 50 describe the impact of expected loss and unexpected loss (Note the portfolio value is unchanged from the above. I think the portfolio value was 1M)

-Given long CDS (of company 1) and short CDS (company 2) positions of a trader, which scenario (credit transitions) would be most severe?


-Given two culmulative probability default function graphs (industry vs. particular company, in this case, distressd), interpret: it is more likely to default (than the industry) in the first 3 years.

-given lambda (cond. Default probability), find the probability when a company defaults in year two after surviving the first year


-No Merton question (DD), but single factor credit model in Malz - find the probability of default under severe market condition (k is given, and the market condition is -1). David’s new PQ cover this precisely.

-Netting, Given 4 institution’s MtM positions, rank them in the order of exposure with netting

- Which position has the smallest exposure? A lot of wordings but the answer was shorting put option position...

-Given PFE graphs of various products, find the right one (I think it is FX, it is highest at maturity – exchange of Notional)

-BCVA running spread, very similar to David’s Canabarro’s CP question: EPE*CDS_cp_spread – ENE*CDS_fi_spread (I think it was 7 bps…)

-Which method is the most effective way to reduce CP exposure? I think it is collateralization (from my old memory in Gregory’s)

-Two random variables (Equity index and bond yield) are normally distributed with its own (given) mean and vol. Given high tailed dependence (what is this mean?) find the conditional probability (it was something like P(Y > 2.31% | X > 1800)

-given risk free rate and EL, PD (where LGD can be inferred), find the spread.

-Relevant credit card risk factor – I used my common sense: unemployment rate.

- tranche crisis (don't remember the exact case, it was somewhat long equity and short mezzanine bond): should have perform correlation stress testing

- Given tranche structure and coupon, find the excess spread


Operational & Integration Risk

-LDA Approach

-Given several inputs, including RAROC, find ARAROC

-Loan Equivalent Factor (Crouhy) RAROC charge: very similar to practice exam

- Finding wrong statement for Liquity stress test: 3 month is more than enough? (Sorry, don't remember the exact question)

Basel

-Basel III: Common equity tier 1 must be at least 4.5%

- Given Latest and 60day avg VaR, Stress VaR, (one with 99% and 99.9%) find the market risk charge

Investment Risk

-Given Surplus status at year 0, find the surplus at risk at year 1: very similar questions are covered in practice exam & David’s PQ.

-Given asset allocation and returns table of benchmark and manager, analyze – it underperformed benchmark due to the asset allocation

-Finding Component VaR

-Risk Budgeting given bunch of information of different asset classes. Which one has the highest budget?

-Some portfolio VaR questions…

- Main source of Funding of Private equity

- M&A strategy: the most severe condition for trader taking this strategy - when the acquire's share price goes up and the target company's share price goes down (i.e. when the merger does not go through)

- Hedge funds provisions: Side pocket

- Madoff: Why his fraud was not detected?

Current Issue

-Finding the right statement for Pillar 3 Disclosure for Basel II/III or Solvency II

-Flash Crash: what was the cause? (briefly, An order submitted but without limit)

-Flash Crash: finding the right statement for describing fragmentation (quote or volume) measure. It was highly fragmented (i.e. low measure) prior to the clash.

-Liability structure of Icelandic banks: after some criticism, back had funded largely from deposits (setup for the crisis)

-Sovereign & Finance system interconnectedness: not sure about this one, I think it was somewhat related to creditworthiness.

-Dog & Frizbee: Find the statement that correctly describes tradeoff between complexity and simplicity model.

-Stress testing??

 

[cqbzxk]

Oh, buddy you really remember a lot!

I think for Weakness of ES: the only difference between spectul and ES is diff weighting, so which mean spec take into account people's risk aversion


VaR Backtest: what is the max. number of exceeds of 1day 98%VaR model suit for 1yr 95% VaR 252days, my answer is 5%*252 = 12 (means 98% VaR failed in backtest but 95% VaR 1yr no fail)

 

[RiskNoob]

cqbzxk

For the backtest, mean of the exceeds is n*p = 252*0.02 (since it is 98%VaR) and the variance is sqrt(n*p*(1-p)) = sqrt(252*0.02*0.98)

so we need to find the biggest x s.t.

(x - n*p)/ sqrt(n*p*(1-p)) < 1.96 (95% conf interval, the test is two-tailed)

when I calculated this on the exam, I got 9.xxx so I chose 9...

For the ES (special case of spectral measure), I will need to take a look deeper on this, but we can use different weighting function from spectral measure to get the measure that is WORSE than any value in the sample. ES can't do this.

I am packing for a vacation trip now... gotta get prepared. but I hope I can post more before I leave...

RiskNoob

 

[cqbzxk]

cqbzxk

For the backtest, mean of the exceeds is n*p = 252*0.02 (since it is 98%VaR) and the variance is sqrt(n*p*(1-p)) = sqrt(252*0.02*0.98)

so we need to find the biggest x s.t.

(x - n*p)/ sqrt(n*p*(1-p)) < 1.96 (95% conf interval, since the test is two-tailed)

when I calculated this on the exam, I got 9.xxx so I chose 9...

For the ES (special case of spectral measure), I will need to take a look deeper on this, but we can use different weighting function from spectral measure to get the measure that is WORSE than any value in the sample.

I am packing for a vacation trip now... gotta get prepared. but I hope I can post more before I leave...

RiskNoob

n*p = 252*0.02 (since it is 98%VaR) and the variance is sqrt(n*p*(1-p)) = sqrt(252*0.02*0.98) for this one, I think you are right..... dam I did not think this deep, how suck these questions are......

 

[balajismz]

guys...the results are out...

My score

Op Risk - Q2
Remaining topics - Q1

My preparation strictly confined to Schweser notes

 

[chiyui]

#3 post is awesome. Very useful information by any means.