Level 2: Post what your remember here...

[Dennis Choi]

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

http://www.shearman.com/files/Publi...k__Implications_for_banking_organizations.pdf

this pdf file also says that cross-holdings are gonna be deducted from common tier 1. If you look at the phrase with own investments there is a condition when its goin to be taken off CET1. Let's keep our fingers crossed. I went with C as well.

Does anyone have a correct answer for the model risk one.(monte carlo vs historical vs D-normal) I went with model assumptions and it's really buggin me now..

 

[LeeBrittain]

I chose the "share buyback" equivalent choice ( i think C) for the question on which would increase common equity tier 1 under basel III. As others have pointed out here, I think cross bank holdings are a deduction from capital and would not increase it.

Another question I had was on the TRS swap cash flows. Seller pays LIBOR + 3.5% (maybe 3.75% i forget??) on a reference portfolio of 200M. Someone earlier said 31.5 million net outflow was the correct answer, but that assumes that the buyer does not pay any interest. In the notes we had, the buyer pays LIBOR+ portfolio appreciation while the seller pays LIBOR+ spread + portfolio depreciation. The portfolio (200M) increased by 20% so there's a 40 M outflow for the buyer there, but LIBOR was at .25% at t=0 and .75% at t=1. Wasn't quite sure which one of those to use, but i got a net outflow of 32M or 33Mwhen using those different interest rates that the buyer pays. So I chose the 32.5M outflow answer as none of the answers matched exactly. BUT, if the buyer didn't pay any interest then the 31.5M answer was correct.

 

[troubleshooter]

I chose the "share buyback" equivalent choice ( i think C) for the question on which would increase common equity tier 1 under basel III. As others have pointed out here, I think cross bank holdings are a deduction from capital and would not increase it.

Another question I had was on the TRS swap cash flows. Seller pays LIBOR + 3.5% (maybe 3.75% i forget??) on a reference portfolio of 200M. Someone earlier said 31.5 million net outflow was the correct answer, but that assumes that the buyer does not pay any interest. In the notes we had, the buyer pays LIBOR+ portfolio appreciation while the seller pays LIBOR+ spread + portfolio depreciation. The portfolio (200M) increased by 20% so there's a 40 M outflow for the buyer there, but LIBOR was at .25% at t=0 and .75% at t=1. Wasn't quite sure which one of those to use, but i got a net outflow of 32M or 33Mwhen using those different interest rates that the buyer pays. So I chose the 32.5M outflow answer as none of the answers matched exactly. BUT, if the buyer didn't pay any interest then the 31.5M answer was correct.

I screwed this one up. Should have used the interest rate at time t=0 but I did t=1... Silly mistake... The answer is indeed 31.5...

 

[FRM_Exam]

yes this is a

http://www.shearman.com/files/Publi...k__Implications_for_banking_organizations.pdf

this pdf file also says that cross-holdings are gonna be deducted from common tier 1. If you look at the phrase with own investments there is a condition when its goin to be taken off CET1. Let's keep our fingers crossed. I went with C as well.

Does anyone have a correct answer for the model risk one.(monte carlo vs historical vs D-normal) I went with model assumptions and it's really buggin me now..

this is a tricky question as well - and answers will vary alot

For the model risk one - I used Model assumptions too

 

[Dennis Choi]

I chose the "share buyback" equivalent choice ( i think C) for the question on which would increase common equity tier 1 under basel III. As others have pointed out here, I think cross bank holdings are a deduction from capital and would not increase it.

Another question I had was on the TRS swap cash flows. Seller pays LIBOR + 3.5% (maybe 3.75% i forget??) on a reference portfolio of 200M. Someone earlier said 31.5 million net outflow was the correct answer, but that assumes that the buyer does not pay any interest. In the notes we had, the buyer pays LIBOR+ portfolio appreciation while the seller pays LIBOR+ spread + portfolio depreciation. The portfolio (200M) increased by 20% so there's a 40 M outflow for the buyer there, but LIBOR was at .25% at t=0 and .75% at t=1. Wasn't quite sure which one of those to use, but i got a net outflow of 32M or 33Mwhen using those different interest rates that the buyer pays. So I chose the 32.5M outflow answer as none of the answers matched exactly. BUT, if the buyer didn't pay any interest then the 31.5M answer was correct.

I just checked the schweser notes and found out that it should be 32.5M. I saw some say that we need to use the LIBOR at t=0 which is 0.25%. That's when the LIBOR remains flat. The question asked about the outflow at the scenario test time which is t=1(The LIBOR at that time is 0.75%) It's the 0.75% we must use when calculating outflows.
The guys who used the .25%, I'm wondering why they calculated the bond payoff at t=1 and use the LIBOR at t=0. A little bit of contradiction smelling here...?..

If it's about the difference 0.75%-0.25% then maybe makes sense. but that's when we compare the outflow with t=0 and t=1. I'm pretty positive that they asked about the outflow at the "scenario time"..uhh....big headache over here

 

[LeeBrittain]

After looking through all the questions, I think I got probably 70 questions right... so hopefully that's good enough to pass! I think my lowest quartile might be in market risk (sigh, that's what I consider myself to focus on in my job the most....)

 

[hanyongdok]

i have a question about liquidity duration.
when i calculated eack stock's LDuration
it says 4.4444 and 5.6...kind of.
i was confused whether the answer was 5days or 10days.

The answer is 10day ( just sum of duration assuming they will sell stock step by step.)>
Or 5day ( approximately average)?

I chose 5day,, i thought it doesn't matter sell both stocks simultaneously...

 

[Dennis Choi]

i have a question about liquidity duration.
when i calculate eack stock's LDuration
it says 4.4444 and 5.6...kind of.
i was confused whether the answer is 5days or 10day.

The answer is 10day ( just sum of duration assuming they will sell stock step by step.)>
or the answer is 5day ( approximately average)?

I chose 5day,, i thought it doesnt matte sell both stocks simutaneously...

If you calculate the L-duration based on selling them simultaneously(by combining all the positions into just one big chunk) then you will reach a calculation of 4.98xxxx or smthing. Which might shed some light on what should be the answer. I guess...

 

[browniandynamics]

I wish you pass.. I believe if a guy can score 70 percent den his chances to pass increases.. BTW u made a big blunder... Wish u all the best..

Hi Ehanif, thank you for your good wish! It's so nice of you! Yes, I made a big blunder, so I'm going to give it another try on Nov. Hope everybody else did well!

 

[hanyongdok]

If you calculate the L-duration based on selling them simultaneously(by combining all the positions into just one big chunk) then you will reach a calculation of 4.98xxxx or smthing. Which might shed some light on what should be the answer. I guess...

thank you..

do you happen to know is there any Q about credit enhacement...or kind of.."which one is not efficient for enhancement..?
i chose (d) because it said about buy call option. but i know we should buy put option to make enhancement.
i couldn't find this Q in this forum..

 

[shanlane]

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...

It says that at those prices the announcement is made, so my thougt was that the prices would change to reflect the news and we would buy the target and sell aquiring company.

 

[FRM_Exam]

It says that at those prices the announcement is made, so my thougt was that the prices would change to reflect the news and we would buy the target and sell aquiring company.

Hi Shanon, I see you have been really active on this forum - and thought I ask you about the Tier 1 Equity increase question? what option did you select? and why?

Your input would be really valuable to me

 

[shanlane]

I had no idea on that one. None really sounded right. I took a guess and put goodwill but I am pretty sure that is wrong.

 

[FRM_Exam]

argghhh .. yeah good will is deductable .. no one option seemed right to be honest - I selected C ( Investment in common stocks) .. no one has been able to give me the reasoning to which one has to be correct .. whoever selected Cross Holding Deposits say they selected it b/c all the other looked wrong - but Cross holding is also deductible .. there has to be some trick in this one

 

[shanlane]

I am not one do say and not do, so I emailed GARP about some of their errors. I do not know if it will go anywhere, but if other people are as angry as I am that there were so many baltant mistakes I encourage them to email GARP as well.

[email protected]

 

[shanlane]

I just checked the schweser notes and found out that it should be 32.5M. I saw some say that we need to use the LIBOR at t=0 which is 0.25%. That's when the LIBOR remains flat. The question asked about the outflow at the scenario test time which is t=1(The LIBOR at that time is 0.75%) It's the 0.75% we must use when calculating outflows.
The guys who used the .25%, I'm wondering why they calculated the bond payoff at t=1 and use the LIBOR at t=0. A little bit of contradiction smelling here...?..

If it's about the difference 0.75%-0.25% then maybe makes sense. but that's when we compare the outflow with t=0 and t=1. I'm pretty positive that they asked about the outflow at the "scenario time"..uhh....big headache over here

The payout at time 1 should be based off of the LIBOR at time 0 so I believe we should have used 0.25%.

 

[shanlane]

hi shanon, y r right
but the q was: if the pricing was using implied volatility, then compared to volatility used, which one will be undervalued.
in short, it is reversed q, assume y use implied volatility, then which will be undervalued using historical volatility?

also, as i said before, this q can be answered without looking at the q, as y said, ITM call & OTM put are in the same area.

If I read it wrong, then I will take the hit, but I still really think the way it was worded the answer could have been ITM call or OTM puts.

The point of this test was to see if we understood the concepts and how to apply the formulas. Being mind-readers and deciphering questions that read like they were translated from a dead language were not skills that we were supposed to have mastered.

Still very upset about the lack of effort on GARPs behalf.

 

[majesta]

Hi,
After reading almost all the comments, I have concluded that the exam wasn't so easy as some people assume. Sure there are at least 50 questions for which we can trust but 25 to 30 questions are more confusing.
Good luck everybody

 

[JP2932]

argghhh .. yeah good will is deductable .. no one option seemed right to be honest - I selected C ( Investment in common stocks) .. no one has been able to give me the reasoning to which one has to be correct .. whoever selected Cross Holding Deposits say they selected it b/c all the other looked wrong - but Cross holding is also deductible .. there has to be some trick in this one

I think it may be cross holding because it may not be deducted at 100%. Investment in own stock (i.e. Treasury Stock) is deducted fully, so that's not the right answer. I don't remember the other answers.

 

[David Harper CFA FRM]

@EIA: wrt PD = 16%, my solution is consistent with Canabarro's risk-neutral concept. Your highlighted portion is not the difference between solving for 16% and 20%. The difference is whether the time value of money is accounted for. Canabarro's solution includes the caveat "we will ignore the time value of money for this example, taking interest rates to be zero." So both the 16% and 20% are consistent with a risk-neutral idea, which reduces to justifying a PD that is based on the MV of $80.000 rather than inferring it from expected values. The difference is:

• 1 - (1.05)*80/100 = 16%; i.e., Rf = 5%
• 1 - (1 + 0)*80/100 = 20%; i.e., no TVM or count rate as zero

If the question gave a risk-free rate of 5% and indicated a face value in one year, I don't see how an FRM candidate can be expected to ignore TVM. Thanks,