Exam Feedback FRM Part 2 (May 2015) Exam Feedback

[robin3301]

There was also a question on credit lines and CVA. I chose the one saying that CVA can be calculated in advance and therefore fully hedged.

I dont think CVA can be perfectly hedged but I forget other choices

 

[nyccc1641]

It was for severity and most certainly lognormal.

Can the answer possibly be 'exponential'? I debated between Lognormal and Exponential and picked "Exponential".

 

[xenatr]

I dont think CVA can be perfectly hedged but I forget other choices

CVA aims at minimizing the number of counterparty in order to maximize the netting benefit. In contrast, credit limit aims at maximizing the number of counterparty

Another one on FVA

FVA is related to funding cost adjustment. It is controversial for traders to account for the funding value adjustment in their P&L

Some others coming to mind, apologies for the vagueness but maybe others can extend more detail:

• CHF/EUR de-peg from January event and a complimentary graph I think I chose the answer where one currency will be more volatile going forward.
• Something regarding an OAS spread above the treasury curve +30 and below the Securities spot curve -30 bps, and the implications on security value or market perception.
• A question where you had to distinguish and/or choose between age/volatility/filtered/correlation weighted approaches.
• Four hedge fund strategies with similar market conviction, which would be least likely to be correlated with the others. For me it came down to short bias or market neutral, I chose the latter.
• Pick the answer which best describes "Pillar 3"
• I recall performing the ROE calculation for some reason, or I am imagining this lol.

And unless I am just forgetting about it, I was surprised to not see any Merton / contingent claim questions...

There are others going through my head, but I am not sure if I am just blending them with past practice questions, it's becoming hazy at this point.

I will refrain from adding more questions I recall to this discussion, for my own sanity. The analysis I'm doing at this point is slightly driving me up the wall. I need to let go and know that worst case I did not make the cut, I can continue studies and be even more prepared and a better risk manager with deeper knowledge of the subject matter, which I found quite interesting especially for part 2. It would not be the worst fate. However, if I pass I will certainly miss all the learning and challenges that come with this curriculum. It can be an incredibly frustrating and painful journey, yet so uplifting and totally worth it when you experience each "Ah hah" moment and small victory along the way. Best investment of my time I ever made.

Thank you David and BT team, and I wish you all the very best of luck!

Ryan

The market price is lower than the model price given the OAS is positive over the treasury spot curve

Pillar three is related to independent oversight and review on bank's corporate governance

Volatility historical simulation can incorporate GARCH model but i am not sure if correlation one can do so. Filtered HS was not provided as one of the answers

Currency restriction on CHF and Hedge fund strategy no idea

 

[robin3301]

Can the answer possibly be 'exponential'? I debated between Lognormal and Exponential and picked "Exponential".

I think lognormal will be more appropriate

 

[xenatr]

Liquidity adjusted VaR was around 35k or sth? (really can't remember but straightforward question)

1. VaR = 37k
2. Ask = 30.25
3. Bid = 29.75
4. Current price = 30
5. number of shares = 50000
Use constant spread approach
LVaR = 37000+0.5*50000*30*0.5/30
=49500

 

[mary_ful]

I believe your solution is correct. I think though that the the spread was 420 basis points, therefore hazard rate 0.07 and right answer is 13%. I think the rest of the answers were significantly smaller percentages (i.e. less than 8%). Can you remember? (As your answer gives 14.2%)

add me, I did do this, good luck to us

 

[mary_ful]

I think lognormal will be more appropriate

I don't know when to study that Basel used for exponential log ??????? however I answered lognormal (imaged on certain wordings of Basel used lognormal better than ....) good luck to us

 

[xenatr]

add me, I did do this, good luck to us

i faced the same problem as well and was doubting if the none of the answers was correct because i obtained:
1- e ^ (-0.042*2/0.6) = 13.05%

However, the answer provided in the question was 13.5% and the rests were much lower than this percentage....
Either GARP made a typo or I worked in a wrong way.

 

[vsism]

i faced the same problem as well and was doubting if the none of the answers was correct because i obtained:
1- e ^ (-0.042*2/0.6) = 13.05%

However, the answer provided in the question was 13.5% and the rests were much lower than this percentage....
Either GARP made a typo or I worked in a wrong way.

I think all the answers were wrong. Everyone should get the same credit for this question.

 

[Goldfish3]

I don't know when to study that Basel used for exponential log ??????? however I answered lognormal (imaged on certain wordings of Basel used lognormal better than ....) good luck to us

I remember Basel saying that Exponential is appropriate above high thresholds in a severity distribution where the losses are independent of that high threshold where risk factors are not easily identifiable or data available. Lognormal can model such amalgamated parameters so is appropriate, in general, for severity. Not that I know the exact science behind all of this, but thats what i read anyway.

 

[mary_ful]

The first question was copied from GARP 2013 about QQ plot

Nope its not steeper as opposed direction , I just know this is not steeper

 

[mary_ful]

which are the most challenging for bank to model interest rate risk and funding liquidity risk?
MBS, covered bond, commercial check acc, retail deposit

I forgot which one I selected but I thought this is not mbs caused no funding liquidity issue

 

[mary_ful]

i was stumbled.. whether to consider BB- as investment grade or non investment grade when answering the risky loans question (X,Y,Z).. i used the formula Expected loss = (1-RR) * PD* Exposure and arranged the loans with respect to their Expected loss values.. did any one solve that question?

I got the answer using the same formula but bb_ I used pd of non investment grade (above bbb_ rated investment grade)

 

[Alberto G]

the question states that the marginal VaR will be the lowest AS LONG AS Treynor ratio is greater than 0.1
and you have no way out in calculating the marginal VaR by using those inputs provided by the question

well, as the formula for marginal VaR is MVaR = (DVaR/W)*beta and DVaR/W is constant, you do not need to calculate it, it is enough to choose the lowest beta among the ones with Traynor > 0.1
So did I.

 

[saran11]

how many questions could we gather until now? there is also a question on hedge fund strategy. which of the strategies has the lowest correlation with its (strategies) index.
And another question on "if correlation of the of assets in the pool increases what could result" I chose the CVAR decreases. I might be wrong.

 

[robin3301]

Some others coming to mind, apologies for the vagueness but maybe others can extend more detail:

• CHF/EUR de-peg from January event and a complimentary graph I think I chose the answer where one currency will be more volatile going forward.
• Something regarding an OAS spread above the treasury curve +30 and below the Securities spot curve -30 bps, and the implications on security value or market perception.
• A question where you had to distinguish and/or choose between age/volatility/filtered/correlation weighted approaches.
• Four hedge fund strategies with similar market conviction, which would be least likely to be correlated with the others. For me it came down to short bias or market neutral, I chose the latter.
• Pick the answer which best describes "Pillar 3"
• I recall performing the ROE calculation for some reason, or I am imagining this lol.

And unless I am just forgetting about it, I was surprised to not see any Merton / contingent claim questions...

There are others going through my head, but I am not sure if I am just blending them with past practice questions, it's becoming hazy at this point.

I will refrain from adding more questions I recall to this discussion, for my own sanity. The analysis I'm doing at this point is slightly driving me up the wall. I need to let go and know that worst case I did not make the cut, I can continue studies and be even more prepared and a better risk manager with deeper knowledge of the subject matter, which I found quite interesting especially for part 2. It would not be the worst fate. However, if I pass I will certainly miss all the learning and challenges that come with this curriculum. It can be an incredibly frustrating and painful journey, yet so uplifting and totally worth it when you experience each "Ah hah" moment and small victory along the way. Best investment of my time I ever made.

Thank you David and BT team, and I wish you all the very best of luck!

Ryan

for depeg, i choose bank with CHF deposit & GBP loan will suffer as CHF depreciate

 

[robin3301]

how many questions could we gather until now? there is also a question on hedge fund strategy. which of the strategies has the lowest correlation with its (strategies) index.
And another question on "if correlation of the of assets in the pool increases what could result" I chose the CVAR decreases. I might be wrong.

for first question, i choose market neutral

 

[robin3301]

add two more
1. consultant recommendation on trading desk
2. cause of subprime mortgage

 

[Alberto G]

among the answers
will decrease diversified var; decrease RAROC; decrease Sharpe Ratio; have 14 PC to account for 85% of variance

I remember the text specified something like the new stock had the same variance and same expected return of the others in the portfolio. So SR does not change, RAROC either, 14 PC might be - but why not 15 then?
The fact that 12 PC now explain only for 65% instead of 85% means to me that the stock has a lower correlation with the portfolio's incumbent risk factors, so it is likely to reduce the amount of the diversified VaR, once added to it.
So I went for a DVaR decrease. Anyone agrees?

 

[saran11]

for first question, i choose market neutral

Me too. I dont have a concrete reasoning. To me rest of the strategies seemed to have similar strategies except for market neutral, I assume has high idiosyncratic factor. Might be wrong though.