Level 2: Post what your remember here...

[LankyLint]

Yeah that is true - lot of sweets and chocolates in your mouth - last time I thought I will just pass --- but still got 1st quartitle on all sections - I guess lot of ppl get a huge portion of the paper wrong and ofcourse they are least interested to discuss - ppl over here are serious so I guess .. mistakes here and there should not matter -

I was reading somewhere that a person messed up on current issues section as he did not time to read anything - and u can't get that kind of thing right without reading the case study atleast once

Precisely. People make mistakes. We are flipping out over 1 question. And, historically, part 2 pass rates have been high. I don't think it will be a problem. If you had the presence of mind to be able to get 16% AND 20% means that you read everything, a little well maybe.

Let's celebrate our passing <your_name>, FRM.

 

[EIA]

I had .15 for Excess spread, 2.99 for the high water mark question.

The convertable arb question was another one where there seemed to be 2 answers. The bond payment was a cash flow but it was not an INCREASE to cash flows. In the hedge fund section it said that if the stock moves up or down we re-hedge and make $ so that was my answer. Any opinions?

I may sound lilke a nag but I really want to email GARP and tell them that if they expect people to spend a couple of hundred hours studying they should put in half that time re-reading all of their questions to make sure that there are no mistakes.

SHannon

Hi Shanlane,
I did not choose bond payment.
Like you said, it is an increase and not normal cash flow.
So I selected Decrease in Stock Price.
If you check the BT notes it was stated that the Fund can make more money if the price of the
stock decreases. In convertible arbitrage you long the bond and short the stock. And to increase cash a drop in put price will do that.
That's my take on that.

EIA

 

[ibrahim-1987]

hi everyone,
this thread is for Bionicturtle, suz, & david,
schweser materials are great, they mention every thing, lefting nothing to chance, but BT is superior to all competitors bks of these discussions.
suz, y r great in feedback,
david, y r amazing, i have to say that after about 4 months with BT, i had never felt that y r our teacher, all the time i felt that y r a colleague who will set for the exam just like us, even in our discussions, y always kept answering our Qs ( some time stupid Qs) in friendly way.

for its, notes, videos, spreadsheets, practice exams, forum, i do believe that BT is the best.
regradless of the result pass or fail ( although im sure of at least 65 Q, & frankly will be frustrated if i fail ) but, David, Suz,........ THANK YOU.

 

[EIA]

When I think about it again..I think you could be correct.

If risk-free rate would be 0, the default rate would have to be 20%.

Since the risk-free rate is 5%, we have to compare 80 to 100/(1 + 0.05) which is 95.2 something

80/95 = 84% So, in this case, risk-free default rate and the default rate are the same.

Hi All,

Dave is a great instructor no doubt about that.

But for this question the answer is 20%.
There is a prototype in Schweser. If you check Cannabaro and Duffie, there is a difference between

Risk neutral mean loss rate and mean loss rate.
See this from note 6a of credit risk

Define a risk-neutral mean loss rate.
• Mean loss rate is expected loss:
probability of default multiplied by expected loss given a default (LGD)
• For example,
– If the probability of default is 20% and the expected recovery
rate it 60%, then:
EL equals 20% * (1-60%) = 8%.
– If this applies to a short-term bond with a face value of
$100,000, then the EL is $8,000.
mean loss rate = PD(expected loss)
PD(1 - recovery rate)

However, investors are likely to attach a risk premium.
• For example, they may be willing to pay only $90,000
instead of $92,000.
• In this example, 10% is the risk-neutral mean loss rate.
The risk-neutral mean loss rate is implied by the true
risk-neutral preferences of investors.
mean loss rate = PD(expected loss)
PD(1 - recovery rate)
The highlighted statement is the key.

EIA

 

[FRM_Exam]

Hi Shanlane,
I did not choose bond payment.
Like you said, it is an increase and not normal cash flow.
So I selected Decrease in Stock Price.
If you check the BT notes it was stated that the Fund can make more money if the price of the
stock decreases. In convertible arbitrage you long the bond and short the stock. And to increase cash a drop in put price will do that.
That's my take on that.

EIA

Certainly - Decline in stock price provided an opportunity to increases the cash flow - Coupon is mere a static cash flow (not an increase)

http://www.barclayhedge.com/researc...edge-fund-strategy-convertible-arbitrage.html

The idea behind convertible arbitrage is that a company’s convertible bonds are sometimes priced inefficiently relative to the company’s stock. Convertible arbitrage attempts to profit from this pricing error.

To illustrate how convertible arbitrage works, a hedge fund using convertible arbitrage will buy a company’s convertible bonds at the same time as it shorts the company’s stock. If the company’s stock price falls, the hedge fund will benefit from its short position; it is also likely that the company’s convertible bonds will decline less than its stock, because they are protected by their value as fixed-income instruments. On the other hand, if the company’s stock price rises, the hedge fund can convert its convertible bonds into stock and sell that stock at market value, thereby benefiting from its long position, and ideally, compensating for any losses on its short position.

 

[FRM_Exam]

Hi All - does anyone remm the question regards to - Calculate VaR for bond transition matrix? I have blanked out on this one?

 

[FRM_Exam]

also does anyone know the answer to the factor that increased tier-1 capital. The wording was so confusing but from what I think the cross-holding option reduces the tier-1 capital - so I think C was the answer (but option C also looked like investment in own stock).

The options were really badly phrased

http://www.accenture.com/SiteCollectionDocuments/PDF/Accenture-Basel-III-Handbook.pdf

Deductions from Additional Tier 1 capital




Holdings of Additional Tier 1 items of entities with reciprocal cross holding - Holdings of the Additional Tier 1 instruments of relevant entities with which the institution has reciprocal cross holdings that the competent authority considers to have been designed to inflate artificially the own funds of the institution

 

[LankyLint]

Hi All - does anyone remm the question regards to - Calculate VaR for bond transition matrix? I have blanked out on this one?

It was simply the 9. We had to select the bond value at the lower 5% of the rating index.

I think the rating was BB was at a cumulative 6% and was the answer

 

[LankyLint]

also does anyone know the answer to the factor that increased tier-1 capital. The wording was so confusing but from what I think the cross-holding option reduces the tier-1 capital - so I think C was the answer (but option C also looked like investment in own stock).

The options were really badly phrased

http://www.accenture.com/SiteCollectionDocuments/PDF/Accenture-Basel-III-Handbook.pdf

Deductions from Additional Tier 1 capital




Holdings of Additional Tier 1 items of entities with reciprocal cross holding - Holdings of the Additional Tier 1 instruments of relevant entities with which the institution has reciprocal cross holdings that the competent authority considers to have been designed to inflate artificially the own funds of the institution

That answer was definitely cross-holding. The other options would have reduced tier 1 capital. (eg. deferred tax liabilities and good will)

 

[LankyLint]

Hi All,

Dave is a great instructor no doubt about that.

But for this question the answer is 20%.
There is a prototype in Schweser. If you check Cannabaro and Duffie, there is a difference between

Risk neutral mean loss rate and mean loss rate.
See this from note 6a of credit risk

Define a risk-neutral mean loss rate.
• Mean loss rate is expected loss:
probability of default multiplied by expected loss given a default (LGD)
• For example,
– If the probability of default is 20% and the expected recovery
rate it 60%, then:
EL equals 20% * (1-60%) = 8%.
– If this applies to a short-term bond with a face value of
$100,000, then the EL is $8,000.
mean loss rate = PD(expected loss)
PD(1 - recovery rate)

However, investors are likely to attach a risk premium.
• For example, they may be willing to pay only $90,000
instead of $92,000.
• In this example, 10% is the risk-neutral mean loss rate.
The risk-neutral mean loss rate is implied by the true
risk-neutral preferences of investors.
mean loss rate = PD(expected loss)
PD(1 - recovery rate)
The highlighted statement is the key.

EIA

Your logic is correct. However, I have a feeling that they asked for risk-neutral PROBABILITY OF DEFAULT and not risk-neutral mean loss rate.

 

[FRM_Exam]

That answer was definitely cross-holding. The other options would have reduced tier 1 capital. (eg. deferred tax liabilities and good will)

However, where I read - it says cross-holding tends to inflate the capital and hence should be deducted ?

 

[LankyLint]

However, where I read - it says cross-holding tends to inflate the capital and hence should be deducted ?

I didn't even read the option. I actually found the other options incorrect, that is why I marked crossholdings.

 

[FRM_Exam]

I didn't even read the option. I actually found the other options incorrect, that is why I marked crossholdings.

What I think is that the option C was not exactly about investment into own stock .. but there was some strange thing about the way it was written which confused me ( i.e - my perception only)


Also here - topic in one of the Fitch training course

REGULATORY CAPITAL
The goal of this section is to review the definitions of bank capital under the Accord and the key characteristics which determine the classification of capital. Particular focus will be given to the changing requirements for bank capital under Basel III.
Core capital

• Criteria: permanence and loss absorbing capability
• Types: ordinary shares, retained earnings
• Levels of Core capital required under Basel III: Minimum core capital, capital conservation buffer, G_SIFI requirements, counter-cyclical buffer
• Swiss finish, UK ICB and other expected enhancements to requirements
• Deductions from core capital in Basel II and Basel III e.g. cross holdings in other institutions, deferred tax, pension deficit; excess expected loss, retained interest etc

http://www.fitchtraining.com/en/course/1000/basel-ii-iii-bank-capital-adequacy.aspx

So this is one of the questions I am really confused about

 

[troubleshooter]

i have a question for M&A Arbitrage.
what i remeber is A will acquire B
they will exchange B holders who hold 20$ three stocks of B with 58$ A Stock

the answer is simply buying targeted firm and sell acquiring firm?

or considering price convergence 58 =/ 20*3
buy firm A stock and sell B stock

I thought this one was a bit confusing too... But I went with buy target sell acquirer. But I could be wrong as one should buy undervalude vs. overvalued. Here 3 target shares at 20 each is overvalued relative to 1 acquiring firm share at 58... Not really sure. Hope this is not a trick question...

 

[troubleshooter]

Thanks, David. Makes me feel a tad bit better. But just for my info... Would it be fair to make a generic statement that we would use risk free rate to discount expected value of future cash flows using risk neutral probability and we would use rate reflecting the riskiness of the cashflows when we use the real world probabilities?

 

[FRM_Exam]

What I think is that the option C was not exactly about investment into own stock .. but there was some strange thing about the way it was written which confused me ( i.e - my perception only)


Also here - topic in one of the Fitch training course

REGULATORY CAPITAL
The goal of this section is to review the definitions of bank capital under the Accord and the key characteristics which determine the classification of capital. Particular focus will be given to the changing requirements for bank capital under Basel III.
Core capital

• Criteria: permanence and loss absorbing capability
• Types: ordinary shares, retained earnings
• Levels of Core capital required under Basel III: Minimum core capital, capital conservation buffer, G_SIFI requirements, counter-cyclical buffer
• Swiss finish, UK ICB and other expected enhancements to requirements
• Deductions from core capital in Basel II and Basel III e.g. cross holdings in other institutions, deferred tax, pension deficit; excess expected loss, retained interest etc

http://www.fitchtraining.com/en/course/1000/basel-ii-iii-bank-capital-adequacy.aspx


So this is one of the questions I am really confused about

Can anyone pls confirm this one - I think this might be worth an input?

Most of the ppl chose cross holding in other institution - but upon some search I see it should be deducted from core capital? isn't it the case

 

[troubleshooter]

What I think is that the option C was not exactly about investment into own stock .. but there was some strange thing about the way it was written which confused me ( i.e - my perception only)


Also here - topic in one of the Fitch training course

REGULATORY CAPITAL
The goal of this section is to review the definitions of bank capital under the Accord and the key characteristics which determine the classification of capital. Particular focus will be given to the changing requirements for bank capital under Basel III.
Core capital

• Criteria: permanence and loss absorbing capability
• Types: ordinary shares, retained earnings
• Levels of Core capital required under Basel III: Minimum core capital, capital conservation buffer, G_SIFI requirements, counter-cyclical buffer
• Swiss finish, UK ICB and other expected enhancements to requirements
• Deductions from core capital in Basel II and Basel III e.g. cross holdings in other institutions, deferred tax, pension deficit; excess expected loss, retained interest etc

http://www.fitchtraining.com/en/course/1000/basel-ii-iii-bank-capital-adequacy.aspx


So this is one of the questions I am really confused about

I'm too confused about this one as none of the choices made sense. I chose investment in own stock only because it does not specify whether that investment by the bank itself (in which case it not the right answer) or it is by outside party... I think this one was confusing.

 

[troubleshooter]

However, I do think this time as the paper was relatively easier - one needs to score atleast 60 / 80 (75%) to pass - so maybe 4 questions wrong each section allowed .. and hence 1st quartile I believe would probably be 1 - 2 mistakes at the max per section.

I thought paper was too easy at the beginning as well. But it actually it was not. There was so many traps and tricks... But majority here will pass...

 

[troubleshooter]

Hi Shanlane,
I did not choose bond payment.
Like you said, it is an increase and not normal cash flow.
So I selected Decrease in Stock Price.
If you check the BT notes it was stated that the Fund can make more money if the price of the
stock decreases. In convertible arbitrage you long the bond and short the stock. And to increase cash a drop in put price will do that.
That's my take on that.

EIA

Looks like I screwed this one up too... It really should be share price going down as you are short on it... I chose bond price... One more time kicking myself...

 

[FRM_Exam]

I thought paper was too easy at the beginning as well. But it actually it was not. There was so many traps and tricks... But majority here will pass...

Yes I believe so - I am pretty confident on atleast 80% of my paper - but still by nature become restless . The 5 questions which I was most concerned about

- Implied volatility one (chose in the money call - but if we just only look at the answers only one choice is possible - i.e Out of the money Calls)

- TBA - I think I have got this right? - chose underperform when interest rate decrease (convexity) and but same / overperformance when interest rate increase (as some prepayments exist at higher interest rates - sub-optimal prepayments due to housing turnover (favorable to the investor).

- A manager wants to hedge his fixed income portfolio with an instrument which has negative duration? - I chose the put option on IO - which I believe is wrong.

- Calculate PD -chose 16% but then changed it to 20 % .. so am kicking myself

- Increasing Tier 1 Capital - went for C and not for cross-deposit .. am still not sure .. probably am wrong