I found this tricky as well to be honest, although it seemed easy. I went for 100... A floating rate note (which can be considered as the floating leg of the swap) would be valued at 100 on reset day or at initiation of the contract. Since it mentioned that the swap was valued at par, I thought I am in one of these situations. I was able to replicate the 100.95 answer but can't remember how.
Exam Feedback FRM Part 2 (May 2015) Exam Feedback
- Thread starter hamu4ok
- Start date
-
- Tags
- p2-exam-feedback
As for long correlation , Meissner in his 1st assigned reading mentions several strategies including options, variance swap and correlation swap. I chose correlation swap, but might be wrong as the question used a stock position vs index or something like that as now i don't remember the question clearly.Hello,
firstly, I found the exam to be fair both in terms of time to be used and difficulty of the questions, although there were again many "most appropriate" / "best practice"-questions. I find these highly irritating.
Here are a few thoughts on what has been mentioned above:
- For the OpRisk SA >> BIA question I realized you had to ignore the last column (year 2011), since both approaches only employ three years of data history. --> plus 37M
- QQ-Plot: I found it to have lighter tails and a POSITIVE mean (shifted upwards).
- I also chose the CDS-correlation graph that goes to zero, because I wouldn't pay for a protection that becomes worthless the moment the underlying defaults.
What I didn't get:
- Did anyone have any idea on the "long correlation" position? Also, there were some questions regarding the proper use of distributions that had me stumped.
- I am not quite sure what GARP's position is regarding clearinghouses.
Best luck to everyone!
Johannes
As for the CCP, the question was about how to prevent system risk, I chose to reduce the number of members. Other options didn't suit well.
the order was AAA, BB-, and BBB, answer d
Longing correlation is to either
1. receive floating rate in a variance swap with the index as an underlying and receive fixed in a variance swap with a stock in that index as an underlying,
2. Buy call option on index and buy call option on an individual component in that index OR
3. receive realized correlation in a correlation swap
in the exam, only 1 was shown
For the CCP, to avoid being failed
CCP need to:
1. ONLY intermediate derivative transactions
2. let the clearing member to unwind the trades in case there are defaults
3. have good practice in choosing members, valuing transactions and determining initial margins and default fund contributions
In the exam, only 2 was shown
Limitation of using BSM model to value bond
The answer is the volatility will go to zero at maturity as the model assumes the volatility is constant
CLN question (sth related to minimize counterpart risk)
The counterparty risk is the lowest in issuing credit link notes given the protection sellers, i.e. investors, have already paid the price to the buyers and hence no counterparty risks in case there is a default in a reference asset.
Net Stable Funding Ratio
The bank passes the test given the ratio, ASF divided by RSF, is greater than 1 (in fact, 1.3XX)
RSF is 5X.X & ASF is 72
Standardized vs Basic Indicator
The bank is of course paying 37million more under basic indicator approach because, in the latest 3 years, there is a negative gross income and hence you will divide the capital by 2 under basic indicator approach vs by 3 under standardized approach
QQ plot
Thinner tails for sure
95% Credit Var of 100 CDS with $1000, 2% PD and LGD 100% each
The answer is 3000
At 95% level, there will be five defaults so the value is 5*1000
the expected loss is 100*0.02*1000*1
Convexity
Convexity will of course increase the bond price comparing with simply using the expected value of interest rate
Square root rule
For time varying volatility, e.g. volatility estimated via GARCH, using square root rule will overestimate the VaR whereas underestimate in case the underlying process has a jump
Policy needs to be corrected
The senior bond is only subordinated to preference share
Rule of thumb
Correlation of zero does not imply independence
1. receive floating rate in a variance swap with the index as an underlying and receive fixed in a variance swap with a stock in that index as an underlying,
2. Buy call option on index and buy call option on an individual component in that index OR
3. receive realized correlation in a correlation swap
in the exam, only 1 was shown
For the CCP, to avoid being failed
CCP need to:
1. ONLY intermediate derivative transactions
2. let the clearing member to unwind the trades in case there are defaults
3. have good practice in choosing members, valuing transactions and determining initial margins and default fund contributions
In the exam, only 2 was shown
Limitation of using BSM model to value bond
The answer is the volatility will go to zero at maturity as the model assumes the volatility is constant
CLN question (sth related to minimize counterpart risk)
The counterparty risk is the lowest in issuing credit link notes given the protection sellers, i.e. investors, have already paid the price to the buyers and hence no counterparty risks in case there is a default in a reference asset.
Net Stable Funding Ratio
The bank passes the test given the ratio, ASF divided by RSF, is greater than 1 (in fact, 1.3XX)
RSF is 5X.X & ASF is 72
Standardized vs Basic Indicator
The bank is of course paying 37million more under basic indicator approach because, in the latest 3 years, there is a negative gross income and hence you will divide the capital by 2 under basic indicator approach vs by 3 under standardized approach
QQ plot
Thinner tails for sure
95% Credit Var of 100 CDS with $1000, 2% PD and LGD 100% each
The answer is 3000
At 95% level, there will be five defaults so the value is 5*1000
the expected loss is 100*0.02*1000*1
Convexity
Convexity will of course increase the bond price comparing with simply using the expected value of interest rate
Square root rule
For time varying volatility, e.g. volatility estimated via GARCH, using square root rule will overestimate the VaR whereas underestimate in case the underlying process has a jump
Policy needs to be corrected
The senior bond is only subordinated to preference share
Rule of thumb
Correlation of zero does not imply independence
Last edited:
I went for the variance swap
Went also for No 2 here. Pass on the losses to other members.
Limitation of BSM to value bond option, I went for the option saying that GBM is inconsistent or something like that.
One of the business lines had only one positive income so should it be 1 in the denominator when calculating BIA? I also chose 37 million, but only logicaly as i could't get the answer.
Understood, so I devided by 2 and 1 to check but neither showed the desired difference between the 2 approaches, so logicaly opted for higher amount and 37.
choose the highest Treynor ratio and use the index Beta
Operational Risk Gain Event
Surely not near miss
Near miss is a scenario that a bank has made a loss but is able to recover the loss (excluding the recoveries from insurance)
Stop Logic = kill button
Regarding the exchange's action, cancel on disconnect, message limit and order limit, i.e. number of orders, are irrelevant
Last edited:
Stop logic would have been fine, but the made money from this transaction, so if it was profitable there was no harm to the exchange.
This question only asks categorization and action to prevent from happening
Even if profit is made, it still needs to be categorized in operational risk database as operational risk gain event
Near miss is a scenario losses are made but a bank is able to recover the loss (excluding recoveries from insurance)
Yes that was a very tricky question. I first chose the zero volatility answer, but when I reread I saw about the BSM assumption that was violated, which is the lognormal assumption.
What do you guys think the cutoff score is for a pass. With all the discussion here I think I won't make 50.
Any derivative contacts value at initiation is 0 either it is swap, forward, future etc.. neither long nor short will be at advantage during the contact initiation because arbitrage neutralizes the advantage. Later one party may gain and other may loose because of change in market rates (Libor in case of swap) changing the value of contract. So value delivered to fixed leg party = value delivered to floating leg party only at the initiation of swap
It was stated in the question that the swap was valued at par. I think that means, that the value of floating and fixed leg cancel each other out, independent of the age if the swap.
I guessed on this one and went with the one selection below 100 (I recall something like 98.xx) as I thought the question was asking for the side that was required to make net payment therefore NPV below 100! Again I could have misinterpreted the question all along
Similar threads
