FRM Exam

[braxxus]

I only took part 1, but let me say that I am happy it is over. It involved a lot more calculation than I expected and very little of it straightforward. The exam was much more difficult than any of the 3 CFA parts. In those exams you might have 10 calculation questions, while the FRM was well over 50% calculation. Hope others do well, but I am not confident. If anything, I think taking the CFA previously was a disadvantage. The more in-depth questions that David asks are definitely the way to go. I will know it for the future.

I spoke to some guys from work that did the FRM 5-7 years ago, they said the exam was a complete joke back then, they keep ramping up the difficulty and making it more difficult it seems.

 

[T.Flockert]

took part 2 in Frankfurt today.

i have to say i had realy big problems. very few basic or standard questions. extremely hard exam from my point of view.

so, everything to for today is to get a nice chilled vodka cranberry and start waiting for 4th of january :>

 

[braxxus]

Sounds pretty similar to Level 1 in that case. A lot of the questions involved calculating other values to put into the answer to solve the answer. You would need to calculate necessary inputs first. Enjoy your evening, I am going to head out also and wait for January 4th like you said. I can only guess that others had problems as well (it is my hope for passing as I am sure it is for many others).

 

[mdecav]

Level 2 was the toughest exam I've ever taken, and that includes CFA L1 and 2 so far. I thought FRM L1 last year was easier than the CFA exams. I was at Jacob Javits in NYC and saw two people walk out in the middle of the exam, one about an hour into it.

I have few regrets about how much and what I've studied since June. I highly doubt anyone that tried both L1 and L2 today could pass L2.

Dave - if you get a chance to see the exam questions you'll have to revise what you consider to be "testable".

 

[alexjr]

Here is my 2 cents from Madrid. In my opinion GARP has gone mad and I have a very strong feeling that it is not long time left until we will see level 3 added to FRM certification programme. It’s now all about cash coming in and fighting market share taken historically by CFA folks. Having taken CFA L1 just about over 5 months ago I can conclude that what I have had today was just a pure resemblance of GARP assigned readings: no structure, no order, no logic, – just a bunch “cut and paste” questions. Some questions in my opinion were above medium level in terms of time required for solving them. Almost over 4 of them used exactly the same problem type with numbers which were different. Basically all you needed to do was to write a formula once and then plug numbers 4 times. Ethics questions were very poorly designed (I am saying this because I did hundreds of those for my CFA L1). Overall, I am very disappointed with what GARP calls Level 1. IF they want to be different from CFA and have a good reputation then they need to change a strategy. For example: 2 hours + 2 hours exam with break in between and 40 QUALITY (well thought and designed) questions in each session. To succeed in current exam student don’t have to “think” all he has to do is to practice 1000+ questions for patterns and master his calculator technique. I give GARP for Level 1 November 20, 2010 exam – 3 out 10 mark.

 

[[email protected]]

I wrote level 2 yesterday and I have to agree that the level of FRM has shot up. The FRM sample questions were an extremely poor indication of the exam. The actual exams questions are longer have many mathematical steps and not straightforward. The material that was not tested was fair (because it was all in the core reading) but the way they asked the questions required a lot of time just to understand them. I knew the material really well so i was expecting an easy exam but I was shocked when I started to see how many tough the questions were. I have seen a lot of comments of people comparing FRM to CFA. Lets not waste time comparing, there is No comparison. FRM requires much more mathematical understanding of financial instruments.

 

[mdecav]

I agree yes there were a number of questions that required two or three steps of calculations. That didn't bother me so much - after all if you expect to pass this exam you should know how to do them.

I think the comparison to the CFA is very relevant, if you've done those exams. CFA questions are not about rote memorization of a single formula - you have to understand the concepts behind the topic, much what Dave teaches on this website. Yes you have to have mathematical knowledge, but you're not doing PhD-level work here.

Last year's L1 exam I actually had a problem with some of the simpleness to the questions, and how basic logic (with little knowledge of FRM topics) can answer a few questions. Only on a few questions where there "conceptual" type of questions. This year L2 took it to another level.

Preceding each exam I count the number of questions that I'm not sure of the answer and gauge how I do on them; for the ones I think I know, I get them right about 80% of the time. For those I questions I am not sure, I'm right about 50% of the time. Going into this exam - to get about a 70% pass rate - my magic number of questions where I wasn't sure of the answer was 27 out of 80. I ended up with 42 questions where I wasn't 100% sure - I must have randomly guessed at ~10 out of the 80 questions. This was worse than at any point during the practice questions, including Schweser's exams, which are considered tougher than the real exam (before this year).

 

[chessykcherian]

Hi David
I was 1 amongst the 5 who took L2 in Kuwait yesterday. For Qs 1-40,it was OK(not straigh-forward though) and from there on... the going got tough.Was short of time for 4-5 questions. In my opinion, most of the calculation questions were hard to crack( time-wise and concept wise). On the subjective questions, it was a mix of some basic and some confusing options(deliberately twisted, I guess).


Below are some tested concepts as much as I can recall :

- 3 to 4 questions on Expected Shortfall. Question provided VAR at different(95.5 to 99) confidence levels and was

asked to calculate ES at 95 c level.

- Provided choices for different tranches viz. senior, mez, equity , all . Bank exposed to highest moral hazard by

holding which CDO tranch?

- Provided chart of Price movements and asked to calculate the pay-out at expiration for a Look back put.

- Calculate the value of European Option from a set Knockout options and Barrier options.

- Provided the Frequency Distribution( Times X Prob) and Severity Distribution (Prob X Loss) and asked to calculate

the expected OPR (loss or VAR??)

- To arrive at Opr Risk Charge using Standard Approach provided with a table given Risk wts for different business lines for 4 years gross income. basically to test the treatment of negatives( for loss years)

- To arrive at Market Risk Charge provided most recent 10day VARs & SVARs along with average 10 day VARs & SVARs.

I gave my L1 in May and this one was definitely tougher. I used your videos/ practice questions and they were really handy to get a in-depth understanding into the concepts. As a suggestion, could you develop some tool for a final revision( flash cards / key concept notes) which we could use during the last couple of days prior to the exam.

Finally, a Big Thankyou to you guys at BT... definitely is the best!
Chessy

 

[johnccarter]

I agree - L2 was much harder than L1 last year! There were several calculation-based questions that were very involved.

As before, GARP had at least four different versions of the exam paper to stop cheating (so you can't really compare exact answers very easily).

From what I remember:

Option Questions:

- Valuation at expiry of a lookback put option (did not specify fixed or floating!) with a chart showing the price history of the underlying asset).

- Value a vanilla call based on the prices of some barrier options

- Equate a Chooser option (choice in 1 year for a 1 year call or put) to a combination of vanilla calls

- If volatility skew slopes down to the right what does that imply for the returns distribution

Duration-based Questions:

- Given the desired maturity sensitivity choose between a barbell and a bullet portfolio. Also state which has the greatest convexity.

- Given the key-rate duration for two portfolios specify which one would benefit from a drop in 10 year rates and why (is it a barbell or a bullet)

- Given a portfolio with sensitivities to the 3 and 5 yr, find the combination of two supplied bonds to neutralise the sensitivity. (I think this was just a case of solving a simultaneous equation).

VaR/Expected Shortfall/EVT Questions:

- Given the parameters for the EVT generalised pareto, and the VaR value, calculate the ES (you were given the formula for the mean and stdev of the EVT distribution).

- If distribution changes from a normal to a distribution that has a volatility skew sloping down to the right, does ES increase or decrease?

- VaR given from 0.5% intervals from 95.5% to 99.5%. Calculate ES.

- A question about what happens as the cut-off value of u increases in POT.

- Calculate component VaR

- Backtesting a VaR model, over a 600 day horizon how many exceptions can you tolerate before you reject the model at 95% confidence.

- Question on VaR mapping to factors. Does this cover systematic or idiosyncratic risk? Or Both? Or neither?

Expected and Unexpected Loss Questions:

- Given details of two assets equally weighted but with a non-zero correlation, calculate the risk contribution of one of the assets.

- Calculate the EL of writing a 2nd-to-default based on 100 assets with a set PD, Recovery, and asset value.

- Given the Frequency and Severity distributions. Asked to calculate EL.

- Given EL and UL for two assets. True/False style answer that expected you to know how to add these to get portfolio EL and UL. Weren't given correlation - but the answers were basically asking you to use correlation of 1 (e.g. is maximum UL of portfolio less than X, or greater than X?).

RAROC/ARAROC questions

- Straight forward calculate RAROC

- Straight forward calculate ARAROC

Distance to Default

- Calculate the standardised DD given ST debt, LT debt, and that 1M shares were trading at X USD. Also given the volatility of these shares. (I'm not sure this question was worded quite right).

A lot (~6-8) questions on hedge funds - all wordy questions where your being asked to describe some characteristic. I can't remember all of them!

- Given the regression parameters (alpha, beta, r-squared) of four FI-arbitrage funds to the hedge fund peer benchmark, identify which one employs the highest leverage.

- Describe why hedge funds are difficult to assess performance of

- Choose the correct description of an equity MN strategy

- Choose the correct problems to be aware of for a convertible arbitrage strategy

Mean-Variance Question:

- We were given 4 asset groups, their weights, volatility, correlation matrix and overall portfolio volatility. Choose which asset group had the lowest risk budget.

Liquidity Adjusted VaR:

- Given the price elasticity, and some other details about the holding of a particular stock, give the impact on VaR if liquidity adjusted.

BASEL II questions:

- Given the Tier 1 and 2 capital for 4 companies and the RWA, Market Risk Charge, Ops Risk Charge show which one satisfies the min requirements. (T3 assumed 0). This was a twofold question on solving for total capital and also on knowing the max ratios of T1 and T2 allowed.

- Calculate the operation charge using standardised method and given the last four years of GI for about 6 business lines (beta was given).

- A question on the introduction of Stressed VaR. For both VaR and stressed VaR we were given the last value and the average 60day values. Also given multiplier, K. Calculate the market risk charge.

- From a list, choose what is not covered by Pillar II

Correlation/Copula Question:

- Choose the correct statements about correlation/copulas

Other misc questions

- Told that certain banking practices increased risk during the crisis - which one of the answers wasn't one of these practices (e.g. they gave things like banks being able to withdraw overdraft facilities at short notice)

- Question on run-on-the-bank style problems.

- Asked what will increase likelihood of prepayment of 30 year fixed rate mortgages.

- Question on risk-neutral probabilities. Using tree pricing and a prob of an up movement and a down movement of rates in 6 months time calculate the basis points increase in 6mth rates implied by these probabilities (over risk-neutral probabilities).

- Given the risk free rate, Return, Sharpe, Treynor and Tracking Error of a benchmark and 4 funds. Find the fund that had volatility < X and information ratio > Y.

- Couple of questions where we were given the PD and LGD and asked to calculate the spread. One question asked for this in a roundabout way by also giving the future value of the asset (and risk free rate) and asking what we would expect the asset to currently trade for.


Overall I think they really did manage to cover a lot of the assigned readings. I agree with others that flash cards are very helpful - having said that I personally think that flash cards should not be provided. We (as the students) should write these ourselves.

One thing I did feel was missing during my revision was practice exams. I know GARP provided one, but a) it was too short and b) I preferred to go through your super-annotated version. What that meant though was that I never had a practice of a FULL exam under exam conditions. As a result I was very conscious during the exam of not spending too much time on a question. Luckily I ended up with 10 minutes to spare - but it could equally have gone the other way!

Thanks for the all the help! Have to keep my fingers crossed till January!

John

 

[alvaro]

I gave Level II yesterday in Madrid. In my opinion, I was better prepared than in May and, even that, I found it more difficult. I don't want to repeat what people have already said above, just underline two things:

- GARP Practice Questions are too few and too easy. They should improve this.

- Maybe it's a language issue but I did find two or three questions that could be misinterpreted. That shouldn't happen in a multiple-choice exam. Period.

I didnt find anything new in questions that you need to go through two or three intermediate steps in order to get the final answer, maybe I'm wrong but I think that happened before. It's true that, at least on 1 question, you have to get - at least that was what I did - two UL's, and the portfolio UL and then the Risk contribution. But I'm OK with that. The FRM exam shouldn't be a bed of roses.

Also I think - not 100% sure - that there were less quantitative questions. Maybe I'm wrong here too. It is just a feeling...maybe it's that I was better prepared to those kind of questions.

I'm definitely not sure at all that I'm passing this exam. I get around 55 questions sure or pretty sure (not guesses). Then around 15/20 that were educated guesses. The last 5/10 were "flagrant" guesses (more close to 5 than to 10, though).

Cheers

 

[[email protected]]

Wow, you got a good memory ugli-stix! I took L2 yesterday too and it was quite hard. I had a couple of calculations were I got stuck. I didn't arrive at one of the possible answers.

- Valuation at expiry of a lookback put option (did not specify fixed or floating!) with a chart showing the price history of the underlying asset).
I think they meant a floating lookback put since no strike price was given. Then the payoff is max(S_0, ..., S_T) - S_T

- Value a vanilla call based on the prices of some barrier options
I thought it was a vanilla put you had to value. Price of two call barrier options were given and 1 put barrier option. Furthermore the price of a forward contract was given on the underlying. The risk free rate was also given (5%). You first had to compute the price of the call based on the two barrier calls. Then you had to use put call parity:
c - p = forward price? I guessed you didn't have to use the risk free rate, but I'm not sure.

- Equate a Chooser option (choice in 1 year for a 1 year call or put) to a combination of vanilla calls
The chooser option would provide the right to choose between a 1 year call or put with strike price 100, 1 year from now. Risk free rate is 1% (annual). Then the chooser option is equivalent to having a call @ 99 (100/1.01) + put @ 99 right now?

- Backtesting a VaR model, over a 600 day horizon how many exceptions can you tolerate before you reject the model at 95% confidence.
VaR was calculated at 99%, but the question didn't state whether a 1 or 2 tailed test should be used.
I had n=600, p=0.01, so expected number of exceptions = 600*0.01=6 and sigma is sqrt(600*0.1*0.99)=2.4372.
Then I calculated 6+1.645*2.4372 = 10, which was one of the answers.

- Calculate the EL of writing a 2nd-to-default based on 100 assets with a set PD, Recovery, and asset value.
This was one the the questions I got stuck. I figured, the chance the 2nd-to-default basket has to pay out is the when two or more assets default. PD was 3%, recovery rate 30%, each asset represented $100,000.
P(X >= 2) = 1 - P(X=0) - P(X=1) = 1 - 0.97^100 - 100*0.03*0.97^99 = 0.8054.
So E(Loss) = 0.8054 * (1-0.3) * 100,000 = $56376, but this was not one of the answers http://www.xs4all.nl/~ernstmul/images/msn60/smile005.gif.

- We were given 4 asset groups, their weights, volatility, correlation matrix and overall portfolio volatility. Choose which asset group had the lowest risk budget.
This was question was quite a calculation! Don't know if I solved it correctly.
I calculated the risk contribution for every asset group, http://img98.imageshack.us/img98/5862/eq1.png, where I ignored the division by UL_P, since this is the same for every asset group. I used http://img228.imageshack.us/img228/7458/eq2s.png.

- Calculate the operation charge using standardised method and given the last four years of GI for about 6 business lines (beta was given).
Another question I got stuck. 4 business lines were given, but some busines lines had negative gross income in some years. What to do with that?

- Question on risk-neutral probabilities. Using tree pricing and a prob of an up movement and a down movement of rates in 6 months time calculate the basis points increase in 6mth rates implied by these probabilities (over risk-neutral probabilities).
Didn't know this one either. 6 month interest rate now was 3%. Interest team believed that the 6 month rate would be either 2.5% (50% probabiltity) or 3.5% (50% probabiltity).

Furthermore, there was a question about economic capital. A company had a EAST part and a WEST part. From the question I had understood that EAST had a risk contribution of 7 and WEST a risk contribution of 3. We were asked to calculate the increase in economic capital if the correlation went up from 0.4 to 0.6.
We could assume the normal distribution and INDEPENDENT risks. What do you mean independent, if you're talking about correlation?

Anyway, if thought RC_EAST was 7 and RC_WEST was 3, which would make it quite a hard calculation. But now I guess they meant UL_EAST was 7 and UL_WEST was 3. In other words the amounts of 7 and 3 were not yet the diversified amounts.

 

[[email protected]]

I felt quite prepared due to my studies and GARP practice exams for Level II. However, I thought the exam was extremely difficult and comprehensive. Leaving a lot of interpretation and assumptionos in terms of answers and the questions.

The bar is without question getting raised with each exam peroid. I just wish there was more direction and sample questions that actually represented the exam. In terms of score - I have not a clue as to how I did but will expect to sit again.

 

[[email protected]]

Did anyone solve the question about the 2-nd to default swap, where n=100, PD = 3%, recovery rate = 30%, each asset value = $100,000?

Or the question about the calculation of operational VaR with the standardized approach?

 

[[email protected]]

Did anyone solve the question about the 2-nd to default swap, where n=100, PD = 3%, recovery rate = 30%, each asset value = $100,000?

Or the question about the calculation of operational VaR with the standardized approach?​

for first question

p(x>=2)*LGD*100,000=fair value for 2nd-to-default swap

p(x>=2) = 1-p(x=0)-p(x=1)
so
(1-1* (0.97^100) - 100* (0.97^99) *0.03)*0.7*100,000=56,376.45215

 

[chessykcherian]

.(JavaScript must be enabled to view this email address) - 22 November 2010 02:14 AM

- Valuation at expiry of a lookback put option (did not specify fixed or floating!) with a chart showing the price history of the underlying asset).
I think they meant a floating lookback put since no strike price was given. Then the payoff is max(S_0, ..., S_T) - S_T
< I too assumed the same... asnwer was i guess (4-2) X 100K= 200K

- Value a vanilla call based on the prices of some barrier options
I thought it was a vanilla put you had to value. Price of two call barrier options were given and 1 put barrier option. Furthermore the price of a forward contract was given on the underlying. The risk free rate was also given (5%). You first had to compute the price of the call based on the two barrier calls. Then you had to use put call parity:
c - p = forward price? I guessed you didn’t have to use the risk free rate, but I’m not sure.

< Yes, I think it was a European Option which I remember reading something is the sum of a Call + Put Barrier option equates to a Eur Op>


- Another question I got stuck. 4 business lines were given, but some busines lines had negative gross income in some years. What to do with that?

<You arrive at sum of (Business lines Income X beta) for each year.Under Std approach, the GI for 3 years are averaged(negatives are treated as zero as opposed to being dropped under the BI approach)>

 

[mdecav]

The put with barrier options question was the following:

What is the value of a put (forget if European or American) with a strike of 100, given the following barrier options, and continuous risk free rate of 5%:

Up and in call with strike at 105: $5.xx
Up and in call with strike at 105: $1.xx
Down and in put with strike at 95: $4.xx

Answers were $2.xx, ~$5/6.xx, $7.xx, $9.xx

 

[[email protected]]

I assumed the answer for the option question was the $6.61, because all of the barrier options mentioned should be cheaper than a vanilla option. The price of one barrier option with the same strike price was higher than all of the possible answers except for one. The problem was that it was a call, not a put, implying that you couldn't compare it directly without some form of p-c parity or BSM, neither of which were really useable for barriers. However, I didn't see any other way to come at this problem.

I am not a Bionic Turtle member - I used Schweser only to prepare, with supplemental help from the FRM Handbook, which might just be the most poorly written textbook I've ever seen. Using only Schweser worked well for me for level 1, but this part 2 exam was a rude awakening. It was certainly the hardest exam I've ever taken, and I've written CFA 1 and 2.

I may be signing up for BT next year because I definitely expect a fail. This exam had several questions that I had NO idea how to approach, and I thought that I was well-prepared. I probably made "educated guesses" (just using reasoning to eliminate 2/4 answers) on 10-15 questions and flat-out random guesses on another 10. I am definitely feeling very frustrated.

 

[braxxus]

Level 2 seems very difficult as well. I didn't take it and am glad that I didn't try to do both. Listening to you guys makes me even less confident about my Level 1 results.

Wish everyone luck and I am sure there are shortcuts to answering some questions that can save a lot of time, the hard part is figuring them out.

 

[porsche911]

Hmmm, I took level 2 now in November too. My feeling was that it was easier than the level 1 that I took in November last year. But ok I had been preparing some more this time. I took 1 week of vacation before the exam and was more aware of the amount of time that has to be spent on preparing the weeks before. Last time when I took level 1 I was working the whole week before the exam... I passed but was totally exausted after the exam.

Generally I think that the two tests are hard but test your intuitive understanding in a good way. Intuition is much better gauge of knowledge than beeing able to memorize stuff.

The Bionic turtle is very good at explaining difficult concepts and also saves a lot of time when preparing.

Thank you

Robert

 

[Suzanne Evans]

I would like to thank everyone for their feedback. Any and all feedback helps with next years curriculum. Best wishes to everyone and I hope you passed!

chessykcherian - David & I had briefly discussed flash cards previously. It's an excellent idea and we also had another customer request the same. I will continue my flashcard research then David & I will discuss again in more detail. Hopefully we can add this in the near future. Excellent idea, again thanks!