Feedback on Level 2 May 2010 Exam

[agolus]

Hi David,
Just a few thoughts regarding Today's exam:
- qualitative rather than quantitative,
- difficulty - medium,
- plenty of time (in contrast to 2009 Level I),
- felt 1-2 questions were actually level I AIMS (like the chi-squared test - wasn't prepared ...

Anyway, thank you for the smart choice of webinar topics - you got it all right!
...and your video tutorials are absolutely brilliant!

Don't know if I passed, but I am greatful for your assisstance.

Cheers from Warsaw.
Andrzej

 

[amvantagev8]

Hi David,

I just got back from the FRM 2 exam in Toronto. Not that many people there. Together with the ERP exam, maybe 40 people.
I agree with Andrzej, it was a very qualitative exam. Few calculations needed.
I finished the exam in 3 hours, so lots of time to spare. Unlike the 2009 FRM 1, where I ran out of time near the end.

No clue how I did on this one. Last time I thought I failed and I passed. It's hard to tell.

Thanks for all our tutorials, notes and spreadsheets! They're immensely helpful.
I'll write a testimonial as well in the coming days.

regards from "The Great White North"
Melle

 

[David Harper CFA FRM]

Hi Andrzej & Melle,

THANK YOU for the feedback(!). I am very interested (and surprised) by your joint observation that L2/P2 was "very qualitative."
If you get a chance, could I trouble you to convey whether your L2 exam asked about (or emphasized) the topics listed below.
(I like to know b/c, as you know, some of these demand quite a bit of study time from candidates but I don't have a fix on testability. The hardest thing is trying to improve our guidance on *where* to focus among a broad set of considerations)

I listed a few topics of acute interest in this regard, if you have any specifics, I would be grateful:

* Fixed income: binomial term structure
* VaR mapping
* Extreme value theory (EVT) - really interested if this was quizzed
* Liquidity value at risk (LVaR) - anyting like the detail that was assigned?
* Counterparty risk (e.g., CVA? PFE? wrong way)
* Analytical VaR (which are normally quantitative, so it sounds like you didn't see this much); e.g., marginal VaR, component VaR
* Pension (surplus at risk)?
* Anything from the advanced (difficult) Grindold on performance attribution

* Basel II - did they inquire about recent pronouncements, specifically: IRC, market risk, fair value (anything on fair value?)?

* Crisis Cases: Madoff? Lehman? UBS?

* Hedge (fund of) funds and hedge fund strategies?
* Structured finance
* Credit derivatives (cds? cdo?)
* Subprime

* Generally on current issues (topic 9)? Gorton (e.g., repos)?
* Interested if any questions from Rienhart & Rogoff (This time is different) because it is deep and could imply a lot of prep but i frankly wasn't expecting them to quiz here on first round

Thanks for any feedback! David

 

[uiterdijk]

Dear David,

Some feedback on Part 2. I hope I get it right.

* VaR mapping
A question on fixed income. Something like "what is not a VaR mapping":
Principal mapping
Duration mapping
....
Cash flow mapping
I thought principal mapping... (I had not read this paper :-()

* Extreme value theory (EVT) - really interested if this was quizzed
Two theoretical questions; I forgot the question. Something about mu and sigma.

* Liquidity value at risk (LVaR) - anyting like the detail that was assigned?
One question about LVaR is spreads are narrowing. Also an other theory question; no calculations, I believe.

* Counterparty risk (e.g., CVA? PFE? wrong way)
I think something about wrong-way rick in relation with correlation between credit exposure en credit quality counterparty

* Analytical VaR (which are normally quantitative, so it sounds like you didn’t see this much); e.g., marginal VaR, component VaR
A couple of questions in which you had to calculate VaR. In one question you had to give a range for VaR depending on the unknown correlation. I took correlation between -1 and 1. In one answer correlation ranged from 0 to 1.

* Pension (surplus at risk)?
A simple question: Given a surplus calculate the decrease given a equity shock of -50% and a interest rate shock of (-2%) duration liabilities 14; assets all in equities.

* Anything from the advanced (difficult) Grindold on performance attribution
Not really quantitative. One question puzzled me very much.
True / false: there is never alpha is markets are efficient.
There was no specification of efficiency (strong or weak). I think you can reason both ways. I gave true (being a Bogle-fan).

* Basel II - did they inquire about recent pronouncements, specifically: IRC, market risk, fair value (anything on fair value?)?
Some Basel-stuff and something about IRC. Not sure about precise questions.

* Crisis Cases: Madoff? Lehman? UBS?
Madoff: question something like: "which is inversely related to fraud?"
* having interest in the trading of the client
* servicing big accounts
* soft dollars
* ....
I thought servicing big accounts, since they will do better due dilligence

UBS: one question. Something like which did not cause the subprime problems.

* Hedge (fund of) funds and hedge fund strategies?
Couple of questions. Can't remember.

* Structured finance
I believe two questions about correlations:
If one believes that in a CDO the probability of defaults is going to decrease and the correlation is going to increase what can one do:
combinations of long/short senior and long/short equity.

* Credit derivatives (cds? cdo?)

* Subprime
Few questions; can't remenber

* Generally on current issues (topic 9)? Gorton (e.g., repos)?
??

* Interested if any questions from Rienhart & Rogoff (This time is different) because it is deep and could imply a lot of prep but i frankly wasn’t expecting them to quiz here on first round
Rienhart & Rogoff: nice question about Iceland. I thought the answer was the capital inflow bonanza.

 

[agolus]

David,

I hope this helps:

* Fixed income: binomial term structure – no question on that one
* VaR mapping – simple question – which one is not a mapping method
* Extreme value theory (EVT) - really interested if this was quizzed – twice, difficult but quantitative questions – one on parameters of GEV
* Liquidity value at risk (LVaR) - anyting like the detail that was assigned? – one qualitative (if spread narrows LVAR…) and one quantitative (best guess for time to liquidate a position given the following inputs: size of trade, not influencing the prices, and its excess curtosis?, size of position)
* Counterparty risk (e.g., CVA? PFE? wrong way) – two qualitative – one on basic terms and one on right way/wrong way exposure)
* Analytical VaR (which are normally quantitative, so it sounds like you didn’t see this much); e.g., marginal VaR, component VaR – one quantitative on component VAR
* Pension (surplus at risk)? – one qualitative question where we had to calculate the change in SaR based on change in assets (350 -50%) and change in liabilities (180) due to interest rate change (-200 bp) given their duration (14)
* Anything from the advanced (difficult) Grindold on performance attribution – one difficult quantitative question, I guess from Grindold – portfolio vol 25%, benchmark vol 30%, correlation 0,95, TE ?)
* Basel II - did they inquire about recent pronouncements, specifically: IRC, market risk, fair value (anything on fair value?)? – one question on IRC (which of the following is incorrect type) and one on fair value (probably also the which of the following is incorrect type)
* Crisis Cases: Madoff? Lehman? UBS?
One question on Madoff – what is inversely related to fraud risk
One question on UBS (which of the following is incorrect regarding the shortcomings in UBS’s risk reporting framework)
* Hedge (fund of) funds and hedge fund strategies? – at least two quantitative questions with one on sources of alfa
* Structured finance – I don’t remember any specific questions on this one
* Credit derivatives (cds? cdo?) – at least two questions on CDS, both qualitative
* Subprime – I don’t remember any specific questions on this one (only in connection with UBS)
* Generally on current issues (topic 9)? Gorton (e.g., repos) - one on negative basis in connection with liquidity (which of the following is correct type)
* Interested if any questions from Rienhart & Rogoff (This time is different) because it is deep and could imply a lot of prep but i frankly wasn’t expecting them to quiz here on first round – 1 qualitative question (crisis pattern for Iceland – where I think it was the sustained surge in capital inflows since 2000)

Additional comments:
- We have seen 3-4 questions from Ong! - 2 quantitative (EL & UL),
- 2 difficult model risk questions (chi-test & which of the following are model risk events where all seemed right, but there was no answer for that.

 

[hasan.mert]

Hi David,

Thanks for all your fantastic materials.

I would like to add another question; hedging with key rates (Tuckman) quantitative. I believe the level II exam was reasonably difficult; i would say 50 out of 80 were stright forward questions. They will probably apply a curve in which case passing the 2nd level would be very difficult as I think an average candidate would have at least 60 correct answers. We were 3 people in Melbourne.

Best Regards

 

[amvantagev8]

Hi David,

From the list of topics you listed, the only thing they didn't test was:

* Fixed income: binomial term structure

The only question that really surprised me, was the chi-square one. I don't remember the specifics and I had to guess the answer.

There were a few analytical VAR questions, which required calculations. One asked about component VAR.

I vaguely remember one of the GEV distribution questions. It was something like this: " If you know the mu and sigma for the GEV distribution, how do they relate to the distribution that's not in the tail" No quantitative questions on EVT.

There were a lot of "which of the following statements are correct" questions, where you're given 4 statements.

Still a very qualitative test in my opinion.

regards
Melle

 

[kasoker]

hi david

i think that it's importent to emphasize that the more you read - the more u r prepared!!!

i mean, they asked about UBS: WHICH OF THE FOLLOWING DIDN'T CAUSE THE UBS TO LOSE (4 STATMENTS

there was a quetion about the credimetrix, kmv, credit+ and another 2 others which i think were not on the aims reading!!

other then that there have been alot of question about the basel readings - i think the language barier is much more obvious in this part then the 1st part - much more qualitative!!

the guys who did it with me thought the exam was quite hard (we were 3) and i agree with them - i think that GARP should take into consideration the fact that this was the first time in this kind of exam


DAVID

THANKS FOR THE GREAT VIDEOS AND THE HELP IN THE QUESTIONS
IF I WANT PASS - ADLIST I LEARND....

 

[Peter-Paul Hoogbruin]

Hi, Peter here from Atlanta. My recollection of FRM Level 2 questions (will probably contain several memory distortions):
- Which is not a VaR mapping method: principal, duration, convexity, cash flow [principal?]
- EVT: Something about whether the shape and scale parameters of the EVT function embed information related to the characteristics of the original distribution in addition to the tail region [only tail region?]
- Counterparty risk: Question about sign of correlation with credit quality in case of wrong way exposure [negative?]
- SaR question, where info was given on the change in the surplus and the surplus vol
- Questions on alpha generation, where one question was whether alpha can be generated by changing the beta of the portfolio in a well-timed manner
- Question on IRC
- What action is inversely related to fraud in a hedge fund [having skin in the game?]
- Copula & correlations, where one of the questions was whether correlations are meaningful if the variances are not well defined
- CDOs questions:
Which tranche the originator should invest in to have skin in the game [equity tranche?]
Given a prediction that PDs will drop and correlations will go up, should you invest more or divest in the equity tranche and the senior tranche [invest in equity, divest sr?]
- Question on liquidity duration, where a lot of info is given, in addition to the expectation that 10% of the position can be sold per day without influencing the market price [liquidity duration = 10 days?]
- Question on which of the following would make both EL and UL go up: rising default probabilities; rating downgrades; decreasing recovery rate
- RAROC question with 9% interest rate, 5% funding cost, 3% capital rebate, 1% op. expenses, 1% EL and 8% EC [=(9%-5%+3%*8%-1%-1%)/8% ?]
- ARAROC question where two investment opportunities have to be compared to the market rate [Rm-Rf ?]
- Calculation of active return vol, given portfolio vol and benchmark vol [av = sqrt(pv^2+bv^2-2*corr*pv*bv) ?]
- Graph was given of the price development of the underlying of an exotic option, and pay-out had to be calculated
- Questions involving gamma trades, greeks of exotic options
- Which factor was not an issue for UBS in their sub-prime investments [quants did actually warn the sr managers of shortcoming models?]
- Question about key rates
- Question regarding calculation of 95% VaR confidence interval for a 20 day trade, where the chi-squared table was given [use 19 d.f.]
- Questions about Lehman, Iceland

 

[Peter-Paul Hoogbruin]

Re question on credit risk portfolio models, the question was which of the off-the-shelf models is based on actuarial math, and I thought it was Credit Risk Plus.

Peter, Atlanta

 

[David Harper CFA FRM]

@Marc: thank you for the helpful feedback! Regarding alpha & efficient markets, I agree that should be qualified by the particular form of EMH. Here is the source from Grinold Chapter 7:

"The efficient markets hypothesis suggests that active managers have no skill. In its strong form, the hypothesis states that all currently known information is already reflected in security prices. Since all information is already in the prices, no additional information is available to active managers to use in generating exceptional returns. Active returns are completely random. The semistrong version states that all publicly available information is already reflected in security prices. Active management skill is really insider trading! The weak form of the hypothesis claims only that all previous price-based information is contained in current prices. This rules out technical analysis as skilled active management, but would allow for skillful active management based on fundamental and economic analysis."

@Andyxz: Thank you, this is terrific information. It does appear GARP at least touched on most of the key new topics. The qualitative query on EVT is interesting; IMO, it's yet another case of where quantitative know-how is preferred to understanding qualitative questions (e.g., aren't GEV params sort of abstract without quantitative understanding?).
* Re: "We have seen 3-4 questions from Ong! - 2 quantitative (EL & UL)..." wow, it Ong remains significant
* Re: "2 difficult model risk questions" Very good to know. I didn't emphasize Dowd's chi-test, but clearly model risk is hot topic

@hasan: Thank you liking the materials and being a customer....
Re: key rate hedging: I am surprised, i almost thought GARP forgot about key rates given the lack of their appearance in samples/etc, very good to know.
Re: grading: they must apply a curve. I have not been specifically told the parameters, but they have not historical basis for calibration. I will ask them but i'd expect something similar to last November; i.e., x% of the top 5% pass (e.g., 70% of the top 5th percentile result ... a curve anchored on top percentile)

@Melle: thank you again. If you only perceived one of those topics untested (binomial term structure), then I am frankly impressed by the BREADTH of the L2/P2 exam. Re chi-square model risk, it's assigned in Dowd, I admit we didn't focus on it b/c we've generally treating model risk per the qualitative categories (implementation risk....), so this is good to know

@ktm:

Re: "i think that it’s important to emphasize that the more you read - the more u r prepared"
I personally am glad to hear this, isn't this how it should be? I would like to think we are learning substance not just techniques for passing a test....(!) ... I am delighted by this point!!

Re: "there was a question about the credimetrix, kmv, credit+ and another 2 others which i think were not on the aims reading!!"
Great point, this will be part of my feedback to GARP: I think they need to decide their depth re credit risk models; 2009 went deep on credit risk models (in terms of AIMS) and 2010 was superficial (as you imply ...)

ktm: since you had queried about it, can i ask: what about option-adjusted spread (OAS), did exam quiz OAS? (i was not expecting....)

@Peter: thank you, fantastic detail, very informative!


- David

 

[kasoker]

hi david

Re:Re: “i think that it’s importent to emphasize that the more you read - the more u r prepared”
I personally am glad to hear this, isn’t this how it should be? I would like to think we are learning substance not just techniques for passing a test….(!) ... I am delighted by this point!!

it is obvious that it should be that way but hey there were tons of reading!! i read some of the readings only once 2 month ago (u know - work , kids...)

anyway i think that it should be pointed out that there were alot of question (4-5) on exotic options - that is a topic that should be learned with a drill down (also the greeks - i think u should add an XLS on the puts too..), hull chapter is great on that topic

there was one question where u got 4 prices of exotic barier option, the price of the spot and u had to give the strike price (i think u could have add the 2 barrier calls into one europian call and the 2 puts into one europian put and with the put call parity to find the strike price)

 

[frm_daniel]

Hi David,

I personally think the ex post result will be on high cut off for I and II. Since this is graded on a relative bases, I don't have confident to pass. It is a must to go through all BT video/study notes and truly understands the concept and doing practice questions. BT's practice questions are very stimulating and should keep going. Btw, no OAS question!

Daniel

 

[David Harper CFA FRM]

@ktm: thanks for info on exotics (4 or 5 questions, wow!).
Can I trouble you to clarify: "Greeks - i think u should add an XLS on the puts too"
... because I have a Greek puts @ http://www.bionicturtle.com/premium/spreadsheet/4.b.7_greeks_put_option/
... but perhaps you have different in mind?

@frm_daniel: maybe high cutoff, maybe not. Your feeling is pretty typical and yet an upside surprise often ensues. In either case, I am grateful for your engagement here in the forum. Re: no OAS: I knew it (!), that is GARP's pattern; i.e., they seem to let a new difficult idea "season" for a cycle before quizzing....Thanks!

 

[frm_daniel]

Hi David,

I passed the FRM 2010 May Level I and Level II exams ! It is a surprise to me! I thought I have to come back again. Thank you for your movie tutorials and your forum. I recommend to take the practice questions from BT, which are particular tough but you can really learn the concepts. The excel spreadsheets are awesome which bring out the concepts visually. BT keeps materials up-to-date and catches up closely with the relevant issues to be tested in the blog. Thank you for all the hard work done.

Daniel

 

[David Harper CFA FRM]

Hi Daniel,

Fantastic! I am not really surprised. You obviously put in the work (look @ your forum contributions alone: http://trtl.bz/ccrsl7). This bit of news makes my day.
... thanks for appreciating the tough questions and the XLS. I admit i spend a lot of time on these, so it's super to hear they are helpful.

David

 

[agolus]

Hi David,

I Cleared FRM L2 and guess what... I am actually not suprised ;-) With BT failure is not an option. Special thanks for video tutorials, webinars and spreadsheets. These really allowed me to stay focused untill the exam day. With just the study notes I don't think I would make it.

Again, many thanks,
Andrzej

 

[David Harper CFA FRM]

@Andrzej: Brilliant, well done and thank you for reporting back! I am honestly *thrilled* if we can actually contribute to bona fide exam confidence like yours. I started BT on the premise that "more than notes" was needed, so .... well ... thanks for those kind words - David

 

[glenntanky]

Hi David,

Passed both levels at the same sitting and I couldn't have done it without the work you've put into your video lectures and study materials. BT is undoubtedly the number one option for FRM education, and if anything, your hard work deserves a higher price.

Cheers!

Glenn

 

[hasan.mert]

Hi David,

I passed Level II. I would like to thank you for all your quality materials and your guidance. For the exams, I studied and understood many difficult concepts; you made my studies very efficient and enjoyable. Now I teach accounting in Uni. I recommend my students your website as not only the best FRM preparation course but also a major hub for understanding financial risk concepts. All the best for yourself and for the Bionicturtle.com.

Best Regards

Hasan