FRM May Part II

[cwright]

I wrote down a few things immediately afterward which I wanted to review in case I don't pass...

1.) Coefficient of upper tail dependence.
2.) 2 flash crash questions, 1 question on bank stress tests
3.) GEV
4.) Surplus
5.) VAR with long/short positions.
6.) calculate with age weighting on historical simulations
7.confidence model is good if VAR is not exceeded how many days?
8.) Value of chooser option.

 

[cwright]

There was also one about concern over negative short term interest rates on models.

And there was one using a short term model.

 

[Remy D]

Two questions about smiles. The one I couldn't solve: implied volatility is determined for an equity option with K=30. This vol is used to value some options. Which option is undervalued while using this vol? a. out of money call, in the money put, at the money put, in the money call.

One question about Madoff, some basel questions, one about backtesting: when can regulator increase the multiplier, calculate historical weighted VaR, PFE shapes, calculation of BVA, netting between counterparties,

By the way, can we share this? If these were CFA questions we couldn't. In that case please let me know so I can delete them.

 

[cqbzxk]

oh,,,,, really tired, i just want to say fk up...... a lot of stuff they didn't cover,,,, the exam didn't have too much about calculate, but a lot of reading and operational, current issue, etc. there is no Merton model, no CLN, no Key rate. generally, the question was not really hard, but they want you to read, and change many many ways to ask you, they just want to make you unconfortable and waste your time.
by the way, i still don't understand how to calculate aged weighted VaR

1: 1,000,000 million portfolio, 25 asset inside, all iid, each of them LGD=1, PD=0.02,
what is the UL of this portfolio? a 5000 b 6000 c 7000 d 8000

2: BCVA very tricky trader expose 0.6% counterparty expose 0.4%, Trader's CDS 200bps
Counterparty 's CDS 250bps, what is CVA to Trader
a 2bps b 7bps c 23bps d 28bps (I guess)

3: Hazard rate 2 questions

4: Corporate bond and MBS difference (I thought the difference was repayment, but all answer is talking about sth I don't remember, I never saw those before)

5: risk free rate 4%, expected loss 80bps, PD=0.02, what is coupon spread of bond, that it can catch up with risk free rate? I guess, a b c d 65bps (totally no idea)

6: flash crush (HFT)

7: About sovereign II and basel II/III, which answer is correct about the main idea of those 2.

8: Hedge ratio calculate, Give you correlation of 2 assets, sigma S, sigma F, Value of S, fully hedge. ( did not give Value of F, I assume N*=1, I choose answer which equal to Value of F)

9: Mapping, National , Cash flow, duration, which one bigger or something?

 

[Turner737]

Remy I think it was the ITM call since the curve was downward sloping to the right and the mid point was used to value aka the actual ITM call had a higher vol and therefore the vol at 30 would undervalue it.

cqbzxk for 1 I think I got 80k, I forget my math but I thought it was the only one that made sense, could be wrong though

For 2 I got 7bps. I did 250bps x 6 and subtracted 200bps x 4% and treated it like a CVA by netting them to 7bps. Hopefully I matched the spreads with the appropriate party.

I too was surprised at how little calculations there were, had really prepared for that's and felt like it was under tested,

For the question with the 4 graphs and we had to choose the one that had the most accurate depiction of PFE. I chose C: interest rate swap. I was originally look at the fixed income bond then realized that wasn't a derivative and therefore no counterparts exposure. What'd you guys put?

 

[Remy D]

@Turner: EPE * counterparty's credit spread and subtract ENE * own spread

 

[Turner737]

Which are you referring to?

 

[cqbzxk]

for CVA I just want to say hell, who knows which is 250 which is 200, it just said Trader's CDS 200 who knows is short or long spread

 

[cqbzxk]

Remy I think it was the ITM call since the curve was downward sloping to the right and the mid point was used to value aka the actual ITM call had a higher vol and therefore the vol at 30 would undervalue it.

cqbzxk for 1 I think I got 80k, I forget my math but I thought it was the only one that made sense, could be wrong though

For 2 I got 7bps. I did 250bps x 6 and subtracted 200bps x 4% and treated it like a CVA by netting them to 7bps. Hopefully I matched the spreads with the appropriate party.

I too was surprised at how little calculations there were, had really prepared for that's and felt like it was under tested,

For the question with the 4 graphs and we had to choose the one that had the most accurate depiction of PFE. I chose C: interest rate swap. I was originally look at the fixed income bond then realized that wasn't a derivative and therefore no counterparts exposure. What'd you guys put?

I choose cross currency, I think for currency, the exposure is largest at the end of day, B/C they will switch total value

 

[Remy D]

2. to calculate the BVA.

 

[Turner737]

I took the question and spreads as meaning we had a spread for a company and an exposure to each company. By matching them appropriately (forget which way it was and I could have been wrong) it almost seemed like a neutral perspective of the difference between the products which was how ingot 7bps. What did you get. If it wasn't 7bps the I think it was 2.

 

[Remy D]

Oh, you mean it that way. Sorry

 

[cqbzxk]

I took the question and spreads as meaning we had a spread for a company and an exposure to each company. By matching them appropriately (forget which way it was and I could have been wrong) it almost seemed like a neutral perspective of the difference between the products which was how ingot 7bps. What did you get. If it wasn't 7bps the I think it was 2.

yeah 2bps I choose first time, then I change to 7bps b/c i think GARP want to screw me up, so I change to bps, hope we both right

 

[Turner737]

I choose IRS because it would just fluctuate up and down with the rates and notional isn't swapped. Yours makes sense to, any reason you didn't choose IRS?

 

[cqbzxk]

I choose IRS because it would just fluctuate up and down with the rates and notional isn't swapped. Yours makes sense to, any reason you didn't choose IRS?

I clearly remember 2 of pic is wrong, only IRS(seems correct) and Currency was correct, so I read question again, said largest exposure right(no sure)? but I think IRS pic is not correct should be like Reverse curve so I choose currency

 

[Turner737]

I don't think the question was on the largest exposure. It was which chart correctly matches what the PFE would be for the respective instrument over its life. Bond and cds were deaf both wrong. I guess between cross currency and IRS.

 

[cqbzxk]

I don't think the question was on the largest exposure. It was which chart correctly matches what the PFE would be for the respective instrument over its life. Bond and cds were deaf both wrong. I guess between cross currency and IRS.

Currency is abs right, I clearly remember currency swap pic, but it said cross currency swap so I am not sure, for IRS the picture is really wired,

 

[Turner737]

I chose IRS thinking it was because an IRS is just difference between 2 referenced rates so it would just move with that difference with no notional switching hands. So assuming relatively stable rates over the term it would be a squiggly straight line(small hills and valleys).

Hopefully well get some input from others too on this

 

[AlokS]

One qn on Basel 3: which is the right answer when Basel 3 would be fully implemented -
- Tier 2 can be at max 100% of Tier 1 (I went with this since Core Equity should be atleast 7% including CCB)
- Core Equity Tier 1 should be atleast 4.5% at all times

David Harper, CFA, FRM, CIPM Is my thinking correct on above answer? I know 2nd option is also correct but I thought it should have included CCB also

 

[Turner737]

I had tier 2 as max of 100% of tier 1 too