FRM May Part II

[cqbzxk]

the answer is Core Equity 4.5%, I think CCB is just buffer, but Tier1's core common equity is alwasy 4.5%
Tier 2 capital decrease from 4% to 2% to 2%

Total 8% 8% 10.5%
Tier1 4% 6% 8.5%
core 2% 4.5% 7%

when T1>=T2 at 8% level T1=4% T2=4%
but now T1=6% so T2=2% (decrease)

this just my guess, I double think at this point, but I couldn't persuade myself 4.5% has any problem

 

[Turner737]

I'm questioning my answer now...

 

[cqbzxk]

These stuff wrote by @RiskNoob really amazing memory

Market Risk

-Implied volatility: Given the skewed (equity) curve, which option is undervalued?

-Implied volatility: Similar to above, describe fatness of the right and left tails.

-Exotic option: which option has the large negative vega?

-Exotic option: Given plain vanilla option information (maturity, strike price, risk free rate etc.) what would be the value of the chooser option in term of sum of which plain options with which strike price?

-Find the right characteristics for GEV … might not be reliable in lower confidence intervals (e.g. 90%)

- VaR : given non-uniform weighted loss, find the approximation of 95% VaR

- Weakness of ES: cannot produce the value outside of the historical(?) value

-Copula & correlation (there were quite many of them)


-VaR Backtest: what is the max. number of exceeds of 98%VaR model beforeBasel add the penalty? Please note that binomial test is two-tailed 95% (1.96)

- Find the correct VaR Mapping description of Cash flow mapping ( to what?)

- Another Mapping: What would be the most appropriate mapping for government bond (can't remember the question precisely)

-No so much from new Tuckman’s chapters (interest rate model) – one question was simulation of model 1 (yes, the very basic model with no drift) given simulated value (GARP did not specify to find the inversed value).

-Interest model simulation: what needs to be done if it goes to the negative rate? Simply set to 0.


-(This is from Part 1… duh) Hedging – minimum variance portfolio (given std’s and correlation of portfolio and market)

-(Again, this is from Part 1) Given r(0, 1), r(1,2), r(2, 3) (one spot rate and two forward rate). Describe the shape of the spot curve rate.




Credit Risk



-Find Credit VaR, where Portfolio of iid 25 bonds (i.e. binomial dist), probability of default = 0.02

-(Continued from the above) if n = 25 is changed to n = 50 describe the impact of expected loss and unexpected loss

-Given CDS long and short positions of a trader, which scenario (credit transitions) would be most severe?


-Given two culmulative probability default function graphs (industry vs. particular company, in this case, distressd), interpret: it is more likely to default is the first 3 years.

-given lambda (cond. Default probability), find the probability when a company defaults in year two after surviving the first year


-No Merton question (DD), but single factor credit model in Malz - find the probability of default under severe market condition (k is given, and the market condition is -1). David’s new PQ cover this precisely.

-Netting, Given 4 institution’s MtM positions, rank them in the order of exposure with netting

-Given PFE graphs of various products, find the right one (I think it is FX, it is highest at maturity – exchange of Notional)

-BCVA running spread, very similar to David’s Canabarro’s CP question: EPE*CDS_cp_spread – ENE*CDS_fi_spread (I think it was 7 bps…)

-Which method is the most effective way to reduce CP exposure? I think it is collateralization (from my old memory in Gregory’s)

-Two random variables (Equity index and bond yield) are normally distributed with its mean and vol. Given high tailed dependence (what is this mean?) find the conditional probability (it was something like P(Y > 2.31% | X > 1800)

-given risk free rate and EL, PD (where LGD can be inferred), find the spread.

-Relevant credit card risk factor – I used my common sense: unemployment rate.




Operational & Integration Risk

-LDA Approach

-Given several inputs, including RAROC, find ARAROC

-Loan Equivalent Factor (Crouhy) RAROC charge: very similar to practice exam

Basel

-Basel III: Common equity tier 1 must be at least 4.5%

- There gotta be more onBasel… will update

Investment Risk

-Given Surplus status at year 0, find the surplus at risk at year 1: very similar questions are covered in practice exam & David’s PQ.

-Given asset allocation and returns table of benchmark and manager, analyze – it underperformed benchmark due to the asset allocation

-Finding Component VaR

-Risk Budgeting given bunch of information of different asset classes. Which one has the highest budget?

-Some portfolio VaR questions…


Current Issue

-Finding the right statement for Pillar 3 Disclosure for Basel II/III or Solvency II

-Flash Crash: what was the cause? (briefly, An order submitted but without limit)

-Flash Crash: finding the right statement for describing fragmentation (quote or volume) measure. It was highly fragmented (i.e. low measure) prior to the clash.

-Liability structure of Icelandic banks: after some criticism, back had funded largely from deposits (setup for the crisis)

-Sovereign & Finance system interconnectedness: not sure about this one, I think it was somewhat related to creditworthiness.

-Dog & Frizbee: Find the statement that correctly describes tradeoff between complexity and simplicity model.

-Stress testing??

@RiskNoob hi, dude you should come here we are discussing here right now

 

[AlokS]

the answer is Core Equity 4.5%, I think CCB is just buffer, but Tier1's core common equity is alwasy 4.5%
Tier 2 capital decrease from 4% to 2% to 2%

Total 8% 8% 10.5%
Tier1 4% 6% 8.5%
core 2% 4.5% 7%

when T1>=T2 at 8% level T1=4% T2=4%
but now T1=6% so T2=2% (decrease)

this just my guess, I double think at this point, but I couldn't persuade myself 4.5% has any problem

Though CCB is a buffer but it is required (not really optional) and would require Core Equity Tier1...so it would add up on 4.5% and make it 7%...that was my thinking

 

[cqbzxk]

Though CCB is a buffer but it is required (not really optional) and would require Core Equity Tier1...so it would add up on 4.5% and make it 7%...that was my thinking

so how could you explain Tier1 6% but Tier2 2% ?

 

[AlokS]

cqbzxk Are you sure GEV is not reliable at low confidence of 90%?

 

[AlokS]

so how could you explain Tier1 6% but Tier2 2% ?

I am not sure how you got T2 2% so can't comment on this.

 

[cqbzxk]

cqbzxk Are you sure GEV is not reliable at low confidence of 90%?

no, this is not my memory, I did not choose this one,

 

[cqbzxk]

I am not sure how you got T2 2% so can't comment on this.

this is BaselIII, T2 decrease..... T3 canceled, I really sure at this point

 

[SKnapp]

.

 

[Prajwala]

For MAX PFE question, if we check David's Practice Question: P2. Credit-Global Topic Drill, 207.3 - it says MAX PFE occurs approx 1/3rd of lifetime of. As I remember CDS graph was showing 5 year maturity and the graph peaked @ approx 1.67 years.. so would CDS be the right answer then..?

 

[monumonumental]

what was the answer for that "chooser option" question??? i went with buy call and buy put at exercise price of 792???what about all of u??

 

[Sachin_Shanbhag]

In addition to what has been posted...
-EL given 80 bps risk free rate-4%,pd 2%,find the excess spread above the risk free rate to make it equal to corporate bond.
options were 90,120,200,250(i guess).
I guess answer was 120 bps(what did u all get)?

-Worst 6 losses were given age weights were given,rough estimates of historical var was asked.
options 6000,7000,8000,9000.
I wrote 7000 as there was one(5th lowest) value corresponding to 2nd day loss by age weighting..

-market risk capital charge.i got 270 million max svar,var etc

-The graphical was cross currency swap.


-one on munimum variance portfolio i got -58 million .i giess it was rho*sigma portfolio/sigma ftse index.

-Highest risk budget was for international equity which had var of about 4.75..rest all had around 2..

-negative vega ans-at the money option with 2 yr maturity

-Hazart rate ans 9.52%.

-mapping.i chose cash flow based mapping has lower var than duration mapping due to imperfect correlation among zero rates.

-chooser option i choose buy a call and buy a put 1 yr maturity with strike 800.

basel-4.5%

-BCVA was 7%.

-GEV not reliable at 90% as its used for extreme value kind of distributions..

-Credit var for 25 assets i got cvar as 20000....not sure abt it...expected loss was 1,000,000*0.02=20,000.Worst case loss 40,000@95 % so i wrote 20000.is it correct?

Rest most of my answers were similar to earlier posts...

Overall exam was moderate - difficult level

Kindly give u r reviews...

 

[monumonumental]

i am expecting high cut off this time

 

[AlokS]

Any idea on Net excess spread outcome? I marked it as 25bps...

 

[monumonumental]

there was 1 question on hedge fund too......vhr i marked my answer as "side pocket"...

 

[Sachin_Shanbhag]

AlokS i also got 25 i think 40-15.....

 

[Turner737]

For the chooser I had buy 2 year call and buy 1 year put. I don't recall exactly but I think there was only one answer with that combo. I think call was @ 800 and put at 792. But I could be mistaken

 

[Turner737]

i am expecting high cut off this time

As in a low pass rate? If so, why?

 

[monumonumental]

As in a low pass rate? If so, why?

paper was easy this time around......