2010 Live Webinar Review (Level 2, 2 of 2): Saturday November 6th at 9 AM US EST

[Suzanne Evans]

David is going to conduct our 2010 FRM Level 2 (2 of 2) review webinar on Saturday November 6th at 9 AM U.S. EST.

Logistics

When: Saturday November 6th at 9 AM U.S. EST. What time is that for you? Click here for your local time.

You MUST be a paid member (Level 2 or Full Exam) 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).

 

[David Harper CFA FRM]

I would like to anchor some of the webinar review topics in practice questions. Please try to work out these practice questions before the webinar (in this way, you can be less distracted by mechanics or tedious math, and more focused on testable themes).

Also, please note that my questions--on average--are more more difficult than you will see on the exam. For example, you are not likely to be asked to compute the IRB-based capital requirement, per the first question below. However, working the formula should put you in a much better position to answer the qualitative questions that certainly can be asked - David

Question #1. Assume a BBB-rated, subordinated $20 million bank loan with probability of default (PD) equal to 1.0%, asset correlation (rho) of 20% and one-year maturity; i.e., EAD = $20 MM, PD = 1.0%, rho = 20% and M = 1.0.
1.a. What is the capital requirement for the exposure under Basel II's standardized approach to credit risk?
1.b. What is the capital requirement under Basel II's internal ratings-based approach (IRB) to credit risk?

Related discussion question (source: GARP 2010 Practice Exam, Part II, Question #2):
Question: Which of the following is not a drawback of the Basel II Foundation Internal Ratings Based (IRB) approach?
a. Probabilities of default (PDs) and losses given default (LGDs) are assumed to be uncorrelated.
b. Asset correlations decrease with increasing PDs.
c. The portfolio of the financial institution is assumed to be infinitely granular .
d. The approach uses a single risk factor portfolio model instead of a multiple risk factor model.

Related discussion question (source: GARP 2010 Practice Exam, Part II, Question #3):
Question: The Basel II risk weight function for the Internal Ratings Based Approach (IRB) is based on the Asymptotic Single Risk Factor (ASRF) model, under which the system-wide risks that affect all obligors are modeled with only one systematic risk factor . The major reason for using the ASRF is:
a. The model should not depend on the granularity of the portfolio.
b. The model should be portfolio invariant so that the capital required for any given loan depends only on the risk of that loan and does not depend on the portfolio it is added to.
c. The model should not be portfolio invariant and the capital required for any given loan should not depend on the risk of other loans.
d. The model corresponds to the one-year Value at Risk at a 99.9% confidence level.

Question #2. Consider a $2 million portfolio with two currencies, the Canadian dollar (CAD) and the euro (EUR): $1 million is invested in CAD with (annual) volatility of 10%; and $1 million is invested in EUR with volatility of 20% (equally weighted). The correlation between the two currencies is 0.40.
2.a. What is one-year 95% diversified portfolio value at risk (VaR)?
2.b. What is one-year 95% un-diversified portfolio VaR?
2.c. What is one-year 95% marginal VaR of each position?
2.d. What is one-year 95% component VaR of each position?

Related discussion question (source: GARP 2010 Practice Exam, Part II, Question #23):
Consider the following two asset portfolios:
Asset A: position = $400,000, Return Std Dev = 3.60%, beta = 0.5
Asset B: position = $600,000, Return Std Dev = 8.63%, beta = 1.2
Portfolio: position = $1,000,000, Return Std Dev = 5.92%, beta = 1.0.

Calculate the component VaR of asset A and marginal VaR of asset B, respectively, at 95% confidence level?
a. USD 21,773 and 0.1306
b. USD 21,773 and 0.1169
c. USD 19,477 and 0.1169
d. USD 19,477 and 0.1306
(Answer: c)

Question #3. Key themes of the financial crisis
3.a. According to Gary Gorton (The Panic of 2007), what were the unique causes of the panic?
3.b In 2005, Raghuram Rajan (Has Financial Development Made the World Riskier?) perceived what threats and risks to the financial system?
3.c. According to Martin Hellwig (Systemic Risk in the Financial Sector: An Analysis of the Subprime-Mortgage Financial Crisis), why did a small subprime mortgage crisis morph into a worldwide financial crisis?
3.d. According to Darrell Duffie, what are the primary failure mechanics of dealer banks?