2010 Live Webinar Review (Level 2, 1 of 2): Saturday October 2nd at 9 AM US EST

[Suzanne Evans]

David is going to conduct our 2010 FRM Level 2 (1 of 2) review webinar on Saturday October 2nd at 9 AM U.S. EST.

Agenda:

* Market Risk (T5)
* Credit Risk (T6)
* Operational Risk (T7)

Preview case study questions: see below.
Preview draft of presentation: Go here to download preview presentation (PDF on right sidebar). This is the same page that will subsequently be updated with the recording and the single (master) spreadsheet.

Logistics

When: Saturday October 2nd at 9 AM U.S. EST. What time is that for you? Click here for your local time.

You MUST be a paid member in order to access the live webinar. If you are not, please do not register as your registration will be denied. For those of you who are unable to attend, don’t worry! The webinar will be recorded and published to the premium section ASAP.

Go here to register.

Please be sure to register for the webinar with the same email that you use for bionicturtle.com!

We are allocating 2+ hours (similar to the webinars that were conducted in early 2010). Because the FRM has so much material, of course everything cannot be covered. Rather, David is going to share his view of the most critical ideas. So this webinar is merely a supplement to your regular plan. Please do not defer/delay your study plan in favor of this review; it can only give you a small “boost.” His goal is to keep you on track.

Finally, perhaps you have identified a difficult question? If you have a particular issue or question that you’d like us to cover, please let us know in the forum thread or email .(JavaScript must be enabled to view this email address).

HERE are the case-study practice QUESTIONS I will use to "anchor" the review
(these intentionally compound and meander to maximize topical "footprint" and our limited time):

#1. VaR backtest (Jorion Chapter 6)
UBS conducts a backtest of its daily 99% VaR, which is $10 million, using a binomial test:
In 2008, zero (0) exceedances (assume each year has T = 250 trading days)
In 2009, nine (9) exceedances.

After the backtest, they decide to re-calibrate the 99% daily VaR using two-year historical simulation (HS based on all 500 trading days for both 2008 and 2009). The worst losses ordered in loss/profit (L/P) format are: {…, $14 million, $15, $16, $17, $18, $19, $20}

Questions:
1a. With 95% confidence (i.e., 5% significance), can we reject the VaR as unbiased in 2008 (T=250)
1b. With 95% confidence, can we reject the 99% VaR in 2009? (T=250)? In the two-year period 2008 and 2009? (T=500)
1c. What is the 99% HS VaR, based simply on trailing 500 days?
1d. (To contemplate only, no right/wrong answer here) What adjustments/extensions can we make to HS VaR? hint: Dowd Chapter 4.

#2. Liquidity-adjusted Value at Risk (LVaR)
Assume the following:
* Portfolio wealth (W) = $1 million
* Annual volatility = 30%
* Expected annual return = 10%
* Actual spread / bid-ask spread midpoint = 0.02
* Standard Deviation (spread) = 1.0%

Questions:
* What is the 95% confident daily liquidity-adjust value at risk (LVaR), assuming constant spread?
* What is the 95% daily LVaR, assuming exogenous spread, if k=3?
* (For contemplation) How else can liquidity be incorporated into VaR?

#3. Bond probability of default (PD)
Assume:
* Zero-coupon bond with 2-year maturity
* Bond has $100.00 face value and market price of $90.48
* Risk-free rate is 2.0%,

Questions:
* What is implied credit spread (S) (continuous discounting)?
* Assume flat zero (spot rate) curves: riskfree/Treasury at 2.0% and risky/Corporate at 2.0% + spread (S). If zero recovery (LGD = 100%), what is 2-year cumulative probability of default (2 year cumulative PD)?
* Now introduce recovery of 40% (LGD = 60%). What is an approximation for the default intensity (DI) (hazard rate)?
* Use the default intensity (DI) to estimate 2-year cumulative PD.
* Bonus: Answer the first two above with annual/semiannual compounding instead

#4. RAROC and unexpected loss (UL)
Assumptions about a loan:
* $10 million loan outstanding (OS) pays an annual rate of 7.0%
* Funded with $10 million in deposits that earn (a deposit charge of) 5.0%
* Economic capital of 5.0% is invested at a rate of 6.0%
* Allocated operating cost = 0.8% of loan
* Probability of default (PD) = 2.0%
* Loss given default (LGD) = 50%
* Standard deviation of LGD = 40%.

Questions:
* What is the loan's RAROC?
* The bank has an additional unused commitment of $10 million (i.e., $20 MM COM - $10 MM OS) with usage given default (UGD) of 50%. What is the unexpected loss (UL) of the adjusted exposure (AE)?

 

[[email protected]]

Comment on the last webinar - very professional and well put together but very difficult in time allotted.

I found the material to be a Lot to be covered in the time provided. Thought I was reasonably familiar with Black Scholes, but the example blew me away.

I love the stuff that allows you to look at a previously anonymous formula and causes that Eureka moment, taking it off the memorize list and into absorbed material territory.

I recognize that David is already fantastic at this type of approach.

Long live the turtle.

B.

 

[David Harper CFA FRM]

Brian,

Thanks, I am always eager for feedback. Frankly, I think (I agree) the last webinar was maybe too dense; it may have drifted away from its earlier, easier incarnations. (Or, hopefully, that regards more the BSM example than the others?). The first issue is, of course, there is too much material to fit into a 2 hr webinar (we had a separate request coming out of the last webinar, probably related, that we conduct once per week instead of once per month; but as we provide multi-modal resources, I cannot do that without either raising the price or eliminating something else...weekly webinars implies an entirely different resource plan).

The other unavoidable issue is that the audience is disperse. When I go too slow, I invariably get frustrations from more experienced candidates. All in, my view is best is a tilt toward the "aggressive pacing" b/c beginners can at least re-view/pause the recording, etc. FWIW, I seem to get a less relative pushback when I error in favor of over-reaching ("ambition"), than when I go too slow, b/c some (at least) seem to appreciate the tactic which tries to get high bang-for-buck in term of their participation time…

Finally, I am glad you raised this because the one thing that can help is: work the practice questions before the webinar (we dole those out one week beforehand, and I post the presentation deck prior to webinar also). I think few candidates do this, but IMO it makes a huge difference (e.g., BSM) if you've tried it yourself before I talk it through. This will remain true in the upcoming two L2/Part 2 webinars: they will be dense, so serious candidates can enable better comprehension by doing the pre-work beforehand.

But sincerely thanks for your f/back

David

 

[turtle2]

Hi,
2010 Live Webinar Review (Level I): Saturday October 2nd at 9 AM US EST is for Level I. When is Level 2 Webinar ?

 

[David Harper CFA FRM]

Hi turtle2 - Next Saturday is Level 2. Apologies for typo (fixed now) in the entry above. Thanks, David

 

[turtle2]

David,

I did not receive any email confirmation yet ? I have registered for this.

Turtle2

 

[David Harper CFA FRM]

Hi Tutle2, Yes, I definitely see you are listed in "waiting for approval." I think maybe Suzanne will approve Monday, when newsletter goes out, but you will surely be approved.
@Suzanne: is that about right?

 

[turtle2]

David,
Thanks.
Turtle2

 

[Suzanne Evans]

Hi Turtle2!

Yes, I will begin approving the registrants this weekend through Monday. If you are waiting for approval, it should be in your email by EOD Monday.

Thanks,
Suzanne

 

[turtle2]

David,
I received email that I have been denied the request to join the webinar.
Can you please reconsider ?
Thanks.
Turtle2

 

[Suzanne Evans]

Turtle2,

Can you please email me directly @ .(JavaScript must be enabled to view this email address) so I can provide you the exact information as to why the webinar was denied for you. The email address that you registered with is slightly different from the email address in our system that you registered with @ bionicturtle.com. I believe there may be an error in the email address in our system that you registered with @ bionicturtle.com. I don't want to publish this information on the forum without your permission.

Thanks,
Suzanne

 

[turtle2]

Suzanne,
I just replied to one of your email from my gmail account which I used to register both for webinar and paid membership.
Turtle2

 

[David Harper CFA FRM]

Turtle2 - thank you for your patience with our process that requires matching emails. We found it must be done or a bunch of people who don't pay end up attending, and you know how economics works I am sure, we sort of need to get paid to continue the service. I regret any inconvenience to paying customers like yourself, who are dear to us. thanks, David

 

[Suzanne Evans]

Turtle,

I responded to your email as to what needs to be done for you to be approved. Please let me know when you receive the approval email.

Thanks again for your patience.

Suzanne