FRM L2 Feedback
- Thread starter Jiew Kwang
- Start date
the Qs which I can remember for partII were:
Plz pardon me if I am wron in any of these:
Q1. What is the sum of risk contributions equals: ans unexpected losses strraightforward
Q2. first Q in exam asking for change in var with asset comp change was quite calculative my ans: 0
Q3. what is the motive for bank to grant more loans to clients ?
Q4. 2 Qs on RAROC calculation and adjusted RAROC for find. project feasibility?
Q5 find property in vesiveck model i went for option that mean reversion rate is assumed non negative
Q6 find formula for adjusted LVAR as LVAR*=(ER*/ER)xLR
Q7 find the LVAR for the Q given VAR and liquidity adjustment factors
Q8 merton model as that equity is treated as call option in covering debt
Q9 one more Q on merton model regarding reg. choosing option which is correct cose distance to default...option
Q10 one application Q asking on PD=CS/1-RR
Q11 what is the lowest surplus amount possible went for it and got ans -2.2 something
Q12 bullet and barbell needed to find which has greater convexity and duration: naturally bullet has greater duration
Q13 one on MBS needed to find principal paid in 61st month?
Q14 what country associated with originate & distribute model crisis ans:US not ireland
Q15 one on Lehman crisis as what led to it my ans: different perceptions of rating agencies,banks and others
Q16 what is there in Basel II?select one correct option
Q17 one asking on differnece b/w liquidity funding risk and liquidity risk
Q18 find operational capital reqd. using standarized approach?
Q19 what is the probability of default occuring in 3rd year of a bond my ans:18%
Q20 loss frequencies are model using model? negative binomial distbn
Q21 where is friction likely to occur among a set of options choose b/w originator of assets and arranger
Q22 defn of copula which is used to have joint distribution of correlations b/w two asset classes
Q23 find ES for a range of VARs given above a threshold of 95.5%
Q24 QQ plot on predicting among some options guessed it
Q25 EVT the distribution approached GPD above a certain threshold.
Q26 one on binomial model as to find something?
Q27 In valuing MBS what are considered ans is prepayment risk
Q28 to handle the risk of interest rates movements what can be used ans: IO strip bonds
Q29 finding the coupan rate for one of tranche in which the average MBS coupon rate was given? just equate the weighte average of coupon rates to MBS coupon rate
Q30 Find VAR variation for rho ranging from 0 to 1 ans: 5 to 7
Q31 one regarding a scenario given of a trader trading two positions at different times to capture mkt movements was timing strategy
Q32 ERM implementation Q
Q33
Plz pardon me if I am wron in any of these:
Q1. What is the sum of risk contributions equals: ans unexpected losses strraightforward
Q2. first Q in exam asking for change in var with asset comp change was quite calculative my ans: 0
Q3. what is the motive for bank to grant more loans to clients ?
Q4. 2 Qs on RAROC calculation and adjusted RAROC for find. project feasibility?
Q5 find property in vesiveck model i went for option that mean reversion rate is assumed non negative
Q6 find formula for adjusted LVAR as LVAR*=(ER*/ER)xLR
Q7 find the LVAR for the Q given VAR and liquidity adjustment factors
Q8 merton model as that equity is treated as call option in covering debt
Q9 one more Q on merton model regarding reg. choosing option which is correct cose distance to default...option
Q10 one application Q asking on PD=CS/1-RR
Q11 what is the lowest surplus amount possible went for it and got ans -2.2 something
Q12 bullet and barbell needed to find which has greater convexity and duration: naturally bullet has greater duration
Q13 one on MBS needed to find principal paid in 61st month?
Q14 what country associated with originate & distribute model crisis ans:US not ireland
Q15 one on Lehman crisis as what led to it my ans: different perceptions of rating agencies,banks and others
Q16 what is there in Basel II?select one correct option
Q17 one asking on differnece b/w liquidity funding risk and liquidity risk
Q18 find operational capital reqd. using standarized approach?
Q19 what is the probability of default occuring in 3rd year of a bond my ans:18%
Q20 loss frequencies are model using model? negative binomial distbn
Q21 where is friction likely to occur among a set of options choose b/w originator of assets and arranger
Q22 defn of copula which is used to have joint distribution of correlations b/w two asset classes
Q23 find ES for a range of VARs given above a threshold of 95.5%
Q24 QQ plot on predicting among some options guessed it
Q25 EVT the distribution approached GPD above a certain threshold.
Q26 one on binomial model as to find something?
Q27 In valuing MBS what are considered ans is prepayment risk
Q28 to handle the risk of interest rates movements what can be used ans: IO strip bonds
Q29 finding the coupan rate for one of tranche in which the average MBS coupon rate was given? just equate the weighte average of coupon rates to MBS coupon rate
Q30 Find VAR variation for rho ranging from 0 to 1 ans: 5 to 7
Q31 one regarding a scenario given of a trader trading two positions at different times to capture mkt movements was timing strategy
Q32 ERM implementation Q
Q33
For L1 last Nov, I scored approx 55/100 correct and my quartiles were Q2, Q2, Q3, Q4 - I failed...I think If I scored 60 I'd have just made it...
Based on the same scaling, 48/80 questions is just above the edge. However, L2 pass rate is quite higher than L1, so I'd revise 48 questions to 42/43. That would be just above the bar. A comfortable score would be 50.
But again these things are very difficult to predict.
Based on the same scaling, 48/80 questions is just above the edge. However, L2 pass rate is quite higher than L1, so I'd revise 48 questions to 42/43. That would be just above the bar. A comfortable score would be 50.
But again these things are very difficult to predict.
frm passing scores i think are not based on absolute scores got by the candidate. THey are actually bases upon relative performance of the candidates. THere is no absolute passing score say 60 or 70 but passing score is determined based on the relative performance of the candidates. take for example GARp first takes average of top 5 % performing candidates say its 75/100 and then a particular ratio say T is used to arrived at passing score say T=70% so that adequate candidates are selected. Hence passing score becomes in range of 70% of 75=49.5 so all in a range of 45-55.if paper is easy then it shoots up and if its difficult it goes down.
Normal distribution bifurcates teh candidates into top 50% performing and bottom 50% performing.so it is a relative thing not an absolute one.
I know Shaktisira, it's relative... However, since VDS asked in terms of absolute scores, I shared my views accordingly...
Definitely, it's a range based on relative grading, however, based on talking to various ppl who took the exam, you can come up with an absolute guess. Though you have come up with a relative grade, that's a guestimate too..
Definitely, it's a range based on relative grading, however, based on talking to various ppl who took the exam, you can come up with an absolute guess. Though you have come up with a relative grade, that's a guestimate too..
mcarthur724
Member
Regarding the questions where there have been different opinions
- I also calculated LVAR based upon exogenous only and used 3 for the “z” of the spread since this was given in the equation. I first used 1.65, but didn’t get an answer listed then used 3 and got an answer.
- I think that the correct answer was that expected loss will be small because risk premia makes up the largest portion of the spread.
- Answer for Bullet/Barbell was that duration is equal and convexity higher for Barbell. Both were zero-coupon so you could calculate that they both had duration of 32.
- Question about finding mortgage principal paid amount in 61st month – I answered this as if it was just principal in the first month since it was a floating rate mortgate for the first 5 years. So principal would be paid for the first time in month 61. So if was just a matter of using the standard calculation of mortgage payment and determining the portion of it that related to principal. Again, exactly the same way that you would do it for month 1 of a standard mortgage. The challenge was whether to use 30 years or just the 25 remaining years for the calculation.
- I was going back and forth between TRS and CLN. I think I went with CLN since this is the one that doesn’t have any counterpary risk (TRS does) and the question was focused on the firm not being able to get a loan because of the concern of their credit.
- I also calculated LVAR based upon exogenous only and used 3 for the “z” of the spread since this was given in the equation. I first used 1.65, but didn’t get an answer listed then used 3 and got an answer.
- I think that the correct answer was that expected loss will be small because risk premia makes up the largest portion of the spread.
- Answer for Bullet/Barbell was that duration is equal and convexity higher for Barbell. Both were zero-coupon so you could calculate that they both had duration of 32.
- Question about finding mortgage principal paid amount in 61st month – I answered this as if it was just principal in the first month since it was a floating rate mortgate for the first 5 years. So principal would be paid for the first time in month 61. So if was just a matter of using the standard calculation of mortgage payment and determining the portion of it that related to principal. Again, exactly the same way that you would do it for month 1 of a standard mortgage. The challenge was whether to use 30 years or just the 25 remaining years for the calculation.
- I was going back and forth between TRS and CLN. I think I went with CLN since this is the one that doesn’t have any counterpary risk (TRS does) and the question was focused on the firm not being able to get a loan because of the concern of their credit.
For the mortgage principal paid in 61st month, i went ahead with 25 years and then calculating the required payment to be made in the first month...didnt take 30 years since the first 5 years was the lockout period....
For TRS and CLN, i frankly dnt knw wat shud be the answer...thinking abt it, why wud the firm go for CLN if it has lower creditworthiness?? Infact that would require a much enhanced coupon to be paid by the firm (since anyways in CLN the firm is required to pay a higher coupon, and in this case it has a low creditworthiness also on top of it)... Now if the firm can not seek a bank loan, i dnt think it can seek a CLN loan on favourable terms too (i.e at lesser interest cost than bank loan)...
With TRS, the interest that the firm pays to the bank will be lesser than CLN or a simple loan from bank...this is so bcoz the bank will own the asset...just pass on the return to the firm...so i felt this shud be favourable for the firm...it still gets the return on the asset that it wants and at a lesser cost in spite of reduced creditworthiness...
For TRS and CLN, i frankly dnt knw wat shud be the answer...thinking abt it, why wud the firm go for CLN if it has lower creditworthiness?? Infact that would require a much enhanced coupon to be paid by the firm (since anyways in CLN the firm is required to pay a higher coupon, and in this case it has a low creditworthiness also on top of it)... Now if the firm can not seek a bank loan, i dnt think it can seek a CLN loan on favourable terms too (i.e at lesser interest cost than bank loan)...
With TRS, the interest that the firm pays to the bank will be lesser than CLN or a simple loan from bank...this is so bcoz the bank will own the asset...just pass on the return to the firm...so i felt this shud be favourable for the firm...it still gets the return on the asset that it wants and at a lesser cost in spite of reduced creditworthiness...
the Qs which I can remember for partII were:
Plz pardon me if I am wron in any of these:
Q1. What is the sum of risk contributions equals: ans unexpected losses strraightforward
Q2. first Q in exam asking for change in var with asset comp change was quite calculative my ans: 0
Q3. what is the motive for bank to grant more loans to clients ?
Q4. 2 Qs on RAROC calculation and adjusted RAROC for find. project feasibility?
Q5 find property in vesiveck model i went for option that mean reversion rate is assumed non negative
Q6 find formula for adjusted LVAR as LVAR*=(ER*/ER)xLR
Q7 find the LVAR for the Q given VAR and liquidity adjustment factors
Q8 merton model as that equity is treated as call option in covering debt
Q9 one more Q on merton model regarding reg. choosing option which is correct cose distance to default...option
Q10 one application Q asking on PD=CS/1-RR
Q11 what is the lowest surplus amount possible went for it and got ans -2.2 something
Q12 bullet and barbell needed to find which has greater convexity and duration: naturally bullet has greater duration
Q13 one on MBS needed to find principal paid in 61st month?
Q14 what country associated with originate & distribute model crisis ans:US not ireland
Q15 one on Lehman crisis as what led to it my ans: different perceptions of rating agencies,banks and others
Q16 what is there in Basel II?select one correct option
Q17 one asking on differnece b/w liquidity funding risk and liquidity risk
Q18 find operational capital reqd. using standarized approach?
Q19 what is the probability of default occuring in 3rd year of a bond my ans:18%
Q20 loss frequencies are model using model? negative binomial distbn
Q21 where is friction likely to occur among a set of options choose b/w originator of assets and arranger
Q22 defn of copula which is used to have joint distribution of correlations b/w two asset classes
Q23 find ES for a range of VARs given above a threshold of 95.5%
Q24 QQ plot on predicting among some options guessed it
Q25 EVT the distribution approached GPD above a certain threshold.
Q26 one on binomial model as to find something?
Q27 In valuing MBS what are considered ans is prepayment risk
Q28 to handle the risk of interest rates movements what can be used ans: IO strip bonds
Q29 finding the coupan rate for one of tranche in which the average MBS coupon rate was given? just equate the weighte average of coupon rates to MBS coupon rate
Q30 Find VAR variation for rho ranging from 0 to 1 ans: 5 to 7
Q31 one regarding a scenario given of a trader trading two positions at different times to capture mkt movements was timing strategy
Q32 ERM implementation Q
Q33
"What is the sum of risk contributions equals: ans unexpected losses strraightforward" - Can you please mention the question and other options for this... I dont even remember seeing this question...
Lol...i too dnt remember a few questions mentioned... Questions 3, 5, 6, 17 and 27 :O
What was the answer for that copula question? I marked it combines marginal correlations to arrive at joint correlations or something like that...
Dnt exactly remember my answer for the friction b/w arranger and originator...i vaguely remember having marked option b...it was very wordy...haha...close to 2 full lines...talked about originator having more knowledge than arranger...dnt remember the exact words...one of the options was that investors pay the credit rating agencies which was clearly wrong...dnt remember the other options..
What was the answer for that copula question? I marked it combines marginal correlations to arrive at joint correlations or something like that...
Dnt exactly remember my answer for the friction b/w arranger and originator...i vaguely remember having marked option b...it was very wordy...haha...close to 2 full lines...talked about originator having more knowledge than arranger...dnt remember the exact words...one of the options was that investors pay the credit rating agencies which was clearly wrong...dnt remember the other options..
Jiew Kwang
Member
Copula: Same as AG, marginal dist to form multivariate dist..
Mortgage: Same as both of you, used 25 years and got an exact answer..
Friction in Subprime: Same as Ravi, I'm pretty sure about this one. It's the friction between the originator and arranger. Because of the ability to securitize the mortgage, the originator has the incentive to collaborate with borrower (predatory lending).
Mortgage: Same as both of you, used 25 years and got an exact answer..
Friction in Subprime: Same as Ravi, I'm pretty sure about this one. It's the friction between the originator and arranger. Because of the ability to securitize the mortgage, the originator has the incentive to collaborate with borrower (predatory lending).
Hi All,
Here is 50 questions we have remembered, with known answer (If someone has the 30 remaining with known answer .... )
1) Barbell and Bullet portfolio...equal duration, higher convexity..Correct option barbell
2) Marginal PDs given for 1 yr, 2 yr, 3 yr, 4 yr, so on.. What is the prob that default occurs exactly at the end of the 3rd yr... best answer i had was 18%=(1-MargPD(1))*(1-MargPD(2))*MargPD(3), another option was 54%. Ideally it should be zero (not among the options) since the measure (ppl with measure theory background would know) of the event defaulting on one single day is very small.
3) Cumulative PDs given for 1,2,3,4,5 yrs etc. Default intensity for yr 3. I guess the answer was CumPD(3)-CumPD(2)
4) Valuation of 1yr CDS spread where on default 75% of face would be paid, PD =5%.. I answered 380 bp. Other options were 390 bp, 400 bp etc..Did not get the time to recheck the calculation.
5) Want high kurtosis, negative skew. Expects credit spread to narrow. What hedge fund strategy should be employed?
- Answered distressed credit
6) QQ plot - fat tailed
7) Which BASEL approach explicitly accounts for diversification? IMA, IRB, and two basic approaches... Basic approaches do not account for diversification. IRB and IMA does. But IRB does it implicitly. So i went wid IMA
8) Basel II capital ratios. A table of four banks and the various asset types kept as capital with corresponding weights were given. Which bank did not comply with basel 2 given all had 8% of RWA as capital. The answer was the bank with Tier 1 capital was less than 50%
9) Changes in Basel III regarding capital. Answered the elimination of Tier 3 capital.
10) Standard BIA Approach Last three months gross revenue were given with one negative. Some extra info were given as well, i guess to confuse
11) Hedge fund manager goes long for 3 months and then withdraws parking his money in a money market fund. Then goes long again blah blah.. What strategy is he employing?- Equity market timing
12) 1 year ATM option to be issued in 6 months time on stock paying no dividend. Wat's the price? Answer is same as the current 1 yr ATM
13) Volatility skew given. Firm uses at the money implied volatility to value all options. Which one is undervalued/overvalued... I also marked short in the money put
14) Project RAROC given, market return, rf given. The frim's beta was given (Not the project beta, thanks David for ur clarification there). So it was a easy one. Accept/Reject project.
15) Summation of Risk contributions add up to total unexpected loss. Straightforward.
16) Occurence of originate an distribute model seen for which of the following: US, Irish. Answer was US only.
17) Which distribution is used for frequency. Answer was negative binomial. Straightforward.
18) Triggering event for flash crash. - Large fundamental trader executing sell algo, cross market arbitragers and two more options.
19) TRS payment given the 60 mil bond defaults and 30% of its face was recovered. Wat is the pmt. Regular payments were asked to be ignored. Answered 42 mil.
20) Call option on credit spread. I think the question was which of the below spreads had maximum counterparty exposure. Had to find the deep in the money one/one with max spread. Answered 250 bp - 150 bp
21)Three asset portfolio given with a lot of info and total VAR 500,000. Asked to calculate the incremental VAR due to the third position. Using full reval, the problem was impossible to solve. So I went for a reasonable approximation by component VAR and the answer came 495,000
22) Fund return = insignificant alpha(resulted from t-statistic from table) + 1.2 benchmark return. In downward market, fund underperforms.
23) fund return = 0.002 + 1.2 benchmark return - 0.4 max(0,benchmark return) Answered fund underperforms in both upward and downward markets.
24) Asset, Liability info given including correlation and vols. Asked to compute SAR. Standard one. Answer was not among the options. So i went wid -17 since it was the lowest and the answer was around -23.
25) HHI index. How does Basel use it. - to complement other concentration risk metrics - it's not used at all etc. I answered it's used as a complimentary measure
26) VAR, LVAR(exo) and LVAR(endo) were given or could be computed directly from formula. Wat is the combined LVAR. Answered LVAR(exo)*LVAR(endo)/VAR
27) Merton model assumes equity as a call option on firm's assets
28) Why Merton model cant be applied to bonds - I think I also answered it doesnt follow lognormal diffusion process
29) KMV's distance to default measure: the increases due to increase in long term liabilities is less than the increease due to increase in short term liabilities
30) Leverage Ratio - four options, three involving to tier 1 / capital etc. one was "not a risk based approach"(my ans as well). I think to confuse the unprepared candidate
31) Simple heding using key rate exposures. Answer was long 125,000 USD 2 yr.
32) Credit VaR at 99%..bond priced at 104.something. Migration data was given into various ratings... Need to add up the migration probabilties from the worst rating until the sum is 1%, which was a BB rated priced 97. So my answer was 104-97=7
33) One step bond option pricing. Risk neutral probabilities had to be calculated from the given prices. Though real probabilities were given to confuse. Answer was 3.33
34) Question on compensation practices.a) CRO's compensation should be based primarily on returns b) CEO's compensation etc. I answered the option on paying out deferred stocks as incentive.
35) Exposure into AA rating bonds issued by four firms. Their Capital structure data given (eg. for company X, AAA -25%, AA-25%, A-40%,BBB-10%)...which will have the lowest LGD. I also marked company A since the subordination was max for its AA rated issues
36) Two tranche issues. One paying LIBOR+40 bp, with given %age thickness. Total pool earns LIBOR+80 bp, 10 bp is paid out as servicing fees. What is the return on the subordinate issue. answered LIBOR+160 bp.
37) Four counterparties A,B,C,D and their exposure to each other given. What will be the impact of introducing a CCP. Marked option D. Since, exposures cannot be netted across obligors, however, due to introducing a CCP all exposure can be netted since the counterparty is one - the CCP.
38) Two assets with individual VARs 3 mil and 4 mil. Wat is the VAR range for correlation between 0 and 1. Answer 5 - 7 mil.
39) Motivation for securitization and subsequently selling those assts. Answered reduction in capital requirement.
40) A question asking about the characteristics of volatility weighted historical simulation - the correct choice was that it is based upon the current volatility. There was another choice saying that it is based upon forcasted volatility, but I think that was wrong
41) Calculate liquidity duration. We have position, avg trading volume and we don't exceed 10% of this.
42) Which bond has negative duration. (OMG I choosed inverse! Of course it's IO!)
43). Expected shortfall at 95.5 when VaR at 96 to 99 was given - So does this end up just being the same as ES at 95, which is taking the average of the last 4 VARs? That's what I went with. I tried taking away half of the 4th lowest VAR, but there was no answer choice for doing it that way. Anyone know how to handle the .5
44)Quest4FRM, you are right about the impact of the trade was low (but not exactly 0). Otherwise the elasticity would have been zero. However, they put a non-zero value for elasticity. So i kinda included that.
+
45)Backtesting failed because of intraday activity.
46) Information ratio manager t.e
47) Question on CS = PD * LGD.
48) EVT POT converge to GPD
49) CLN or CDS as enhancement.
50) Copula from marginal to multivariate
Here is 50 questions we have remembered, with known answer (If someone has the 30 remaining with known answer ....
)1) Barbell and Bullet portfolio...equal duration, higher convexity..Correct option barbell
2) Marginal PDs given for 1 yr, 2 yr, 3 yr, 4 yr, so on.. What is the prob that default occurs exactly at the end of the 3rd yr... best answer i had was 18%=(1-MargPD(1))*(1-MargPD(2))*MargPD(3), another option was 54%. Ideally it should be zero (not among the options) since the measure (ppl with measure theory background would know) of the event defaulting on one single day is very small.
3) Cumulative PDs given for 1,2,3,4,5 yrs etc. Default intensity for yr 3. I guess the answer was CumPD(3)-CumPD(2)
4) Valuation of 1yr CDS spread where on default 75% of face would be paid, PD =5%.. I answered 380 bp. Other options were 390 bp, 400 bp etc..Did not get the time to recheck the calculation.
5) Want high kurtosis, negative skew. Expects credit spread to narrow. What hedge fund strategy should be employed?
- Answered distressed credit
6) QQ plot - fat tailed
7) Which BASEL approach explicitly accounts for diversification? IMA, IRB, and two basic approaches... Basic approaches do not account for diversification. IRB and IMA does. But IRB does it implicitly. So i went wid IMA
8) Basel II capital ratios. A table of four banks and the various asset types kept as capital with corresponding weights were given. Which bank did not comply with basel 2 given all had 8% of RWA as capital. The answer was the bank with Tier 1 capital was less than 50%
9) Changes in Basel III regarding capital. Answered the elimination of Tier 3 capital.
10) Standard BIA Approach Last three months gross revenue were given with one negative. Some extra info were given as well, i guess to confuse
11) Hedge fund manager goes long for 3 months and then withdraws parking his money in a money market fund. Then goes long again blah blah.. What strategy is he employing?- Equity market timing
12) 1 year ATM option to be issued in 6 months time on stock paying no dividend. Wat's the price? Answer is same as the current 1 yr ATM
13) Volatility skew given. Firm uses at the money implied volatility to value all options. Which one is undervalued/overvalued... I also marked short in the money put
14) Project RAROC given, market return, rf given. The frim's beta was given (Not the project beta, thanks David for ur clarification there). So it was a easy one. Accept/Reject project.
15) Summation of Risk contributions add up to total unexpected loss. Straightforward.
16) Occurence of originate an distribute model seen for which of the following: US, Irish. Answer was US only.
17) Which distribution is used for frequency. Answer was negative binomial. Straightforward.
18) Triggering event for flash crash. - Large fundamental trader executing sell algo, cross market arbitragers and two more options.
19) TRS payment given the 60 mil bond defaults and 30% of its face was recovered. Wat is the pmt. Regular payments were asked to be ignored. Answered 42 mil.
20) Call option on credit spread. I think the question was which of the below spreads had maximum counterparty exposure. Had to find the deep in the money one/one with max spread. Answered 250 bp - 150 bp
21)Three asset portfolio given with a lot of info and total VAR 500,000. Asked to calculate the incremental VAR due to the third position. Using full reval, the problem was impossible to solve. So I went for a reasonable approximation by component VAR and the answer came 495,000
22) Fund return = insignificant alpha(resulted from t-statistic from table) + 1.2 benchmark return. In downward market, fund underperforms.
23) fund return = 0.002 + 1.2 benchmark return - 0.4 max(0,benchmark return) Answered fund underperforms in both upward and downward markets.
24) Asset, Liability info given including correlation and vols. Asked to compute SAR. Standard one. Answer was not among the options. So i went wid -17 since it was the lowest and the answer was around -23.
25) HHI index. How does Basel use it. - to complement other concentration risk metrics - it's not used at all etc. I answered it's used as a complimentary measure
26) VAR, LVAR(exo) and LVAR(endo) were given or could be computed directly from formula. Wat is the combined LVAR. Answered LVAR(exo)*LVAR(endo)/VAR
27) Merton model assumes equity as a call option on firm's assets
28) Why Merton model cant be applied to bonds - I think I also answered it doesnt follow lognormal diffusion process
29) KMV's distance to default measure: the increases due to increase in long term liabilities is less than the increease due to increase in short term liabilities
30) Leverage Ratio - four options, three involving to tier 1 / capital etc. one was "not a risk based approach"(my ans as well). I think to confuse the unprepared candidate
31) Simple heding using key rate exposures. Answer was long 125,000 USD 2 yr.
32) Credit VaR at 99%..bond priced at 104.something. Migration data was given into various ratings... Need to add up the migration probabilties from the worst rating until the sum is 1%, which was a BB rated priced 97. So my answer was 104-97=7
33) One step bond option pricing. Risk neutral probabilities had to be calculated from the given prices. Though real probabilities were given to confuse. Answer was 3.33
34) Question on compensation practices.a) CRO's compensation should be based primarily on returns b) CEO's compensation etc. I answered the option on paying out deferred stocks as incentive.
35) Exposure into AA rating bonds issued by four firms. Their Capital structure data given (eg. for company X, AAA -25%, AA-25%, A-40%,BBB-10%)...which will have the lowest LGD. I also marked company A since the subordination was max for its AA rated issues
36) Two tranche issues. One paying LIBOR+40 bp, with given %age thickness. Total pool earns LIBOR+80 bp, 10 bp is paid out as servicing fees. What is the return on the subordinate issue. answered LIBOR+160 bp.
37) Four counterparties A,B,C,D and their exposure to each other given. What will be the impact of introducing a CCP. Marked option D. Since, exposures cannot be netted across obligors, however, due to introducing a CCP all exposure can be netted since the counterparty is one - the CCP.
38) Two assets with individual VARs 3 mil and 4 mil. Wat is the VAR range for correlation between 0 and 1. Answer 5 - 7 mil.
39) Motivation for securitization and subsequently selling those assts. Answered reduction in capital requirement.
40) A question asking about the characteristics of volatility weighted historical simulation - the correct choice was that it is based upon the current volatility. There was another choice saying that it is based upon forcasted volatility, but I think that was wrong
41) Calculate liquidity duration. We have position, avg trading volume and we don't exceed 10% of this.
42) Which bond has negative duration. (OMG I choosed inverse! Of course it's IO!)
43). Expected shortfall at 95.5 when VaR at 96 to 99 was given - So does this end up just being the same as ES at 95, which is taking the average of the last 4 VARs? That's what I went with. I tried taking away half of the 4th lowest VAR, but there was no answer choice for doing it that way. Anyone know how to handle the .5
44)Quest4FRM, you are right about the impact of the trade was low (but not exactly 0). Otherwise the elasticity would have been zero. However, they put a non-zero value for elasticity. So i kinda included that.
+
45)Backtesting failed because of intraday activity.
46) Information ratio manager t.e
47) Question on CS = PD * LGD.
48) EVT POT converge to GPD
49) CLN or CDS as enhancement.
50) Copula from marginal to multivariate
Jiew Kwang
Member
LOL. I think 50 out of 80 would be a decent sample of my results. Although I can remember those 2 statements questions asking to identify if
i. statement I correct ii. statement II correct etc. Those peskers... I just whacked.
i. statement I correct ii. statement II correct etc. Those peskers... I just whacked.
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