FRM PART 2 Exam - may 2011

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The trick in that question was that the vol figures were given ANNUALIZED and they were asking for the ONE DAY VaR, so you should scale both VaRs vols by the root of time. I think that's what they were really testing.​

I spent about 20 min total on this question (came back once I was done exam), read and re-read about 10 times, looking for the annual to daily conversion language or 95% to 99% etc. It was not there.

Also, since this question has bugged me so much I worked it to a daily var and it still doesnt come to one of the answers, even if thats what they meant to do.

I chose C also.

 

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Thank you .(JavaScript must be enabled to view this email address)!!!!!!!!!! Have been thinking about this a lot as well! It bugged me to no end because I knew the approaches to answering the questions (seemed pretty basic for the FRM) and looked for the annual to daily trick as well and did not see it either. PS - I also spent a good 20 minutes on this towards the end and was quite frustrated - haha. Thanks though for confirming - I picked C as well.

 

[braxxus]

I just guessed on the question as I couldn't remember for the life of me how to do lognormal VaR. I figuerd it would waste too much time. I am sure that I got it wrong.

 

[toofreak]

oh! ok, thanks ! I thought i could find the answer because of that trick. I also spent a lot of time with that question and as it was on the beggining it compromised a little bit my time schedule for the rest of the exam!

 

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@ .(JavaScript must be enabled to view this email address) ..
Thanx for confirming pass rate, the bars were a bit confusing which gave me a bitter feeling that FRM Levl 1 & 2 total was 54.9%. Glad that FRM 2 was 54.9%.
Also nice 2 know that I was not the only one who thought the question on Lognormal VAR was very tricky (thats y I initially posted the question). The other question that bugged me was the one on Duration Mapping. Spent lot of time and guess got that wrong but came 2 know from a friend.

 

[Yossarian]

There were lot of questions on BASEL norms mostly on BASEL III and they asked various figures also which I was expecting least.

Anyone remembers the question where options were Inverse Floaters, IO strips, PO strips

 

[the luncheon meat]

i really dun think the mean and vol in the question is given as annual.... pls correct if wrong ..
anyway assuming a wrong prinicpal amount of extra '0', then the answer would be correct

 

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@afarty...i agree, i somehow remeber marking 'C' on that basis
@Yossarian ... I think the answer was Interest Strips...PO strips, Inv Floater & Zero coupon bonds would hv similar yield curve and duration.

 

[Yossarian]

@Sharsh18.. Considering the when interest rates fall the discounting of PO Strips are done at lower Interest so there price increases.. I think this is the effect you are talking about and so answer should be PO..
But I have one more doubt if the interest rate falls there is reinvestment risk associated with POs when prepayment rates increases... correct me if am wrong

 

[the luncheon meat]

the questuon said -ve duration which i read from BT that only IO has -ve duration?

 

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@ Yossarian: I think the answer given by afarty cleared the confusion..
however, if not, please note that duration is always negative, but when the question specifically mentions -ve it means -ve of -ve.
PO, Inverse Floater and Zero coupon have similar characterists (inverse relationship between duration and yied). Only IO has oppostite. Thats what I feel.
Correct me if m not.

 

[Yossarian]

Thanks Sharsh, afarty I got it.... well anyone remembers any more questions which we can discuss and verify..

 

[[email protected]]

There was one question about the daily liquidation of the fund. The fund had 500,000 shares and they did not want to exceed the 10% daily volume on the instrument held. The average traded was 200,000. The answer should be 25 days to liquidate the position right?

 

[Yossarian]

@nadk08.. I think its right... even I got the same answer.. Does anyone remember the question where had verbose goes.. "Ms Sheila is a portfolio manager in India..."

 

[[email protected]]

What about the question of the netting with the arrows? With netting, without netting

 

[braxxus]

No clue on the netting question as I never saw mutlilateral netting before, but the I/O strips have the negative duration, it has to do with the prepayment involved.

Also, it does take 25 days to liquidate the position.

 

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There was this one question about the value of a call option that has been bugging me; if I remember correctly:
- 2 year bond with FV 1000 and PV 921.xx
- RF 5%
- If rates rise in 1 year, value of the bond will be 960
- if rates fall in 1 year, value of the bond will be 980

Q: what is the price of a 1 year call option with strike price 970?
a) 3.xx
b) 4.xx
c) 6.00
d) 9.xx

I have chosen C as a guess because I have no clue how to appraoch this problem.

 

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There was this one question about the value of a call option that has been bugging me; if I remember correctly:
- 2 year bond with FV 1000 and PV 921.xx
- RF 5%
- If rates rise in 1 year, value of the bond will be 960
- if rates fall in 1 year, value of the bond will be 980

Q: what is the price of a 1 year call option with strike price 970?
a) 3.xx
b) 4.xx
c) 6.00
d) 9.xx

I have chosen C as a guess because I have no clue how to appraoch this problem.​

You need to calculate the risk-neutral probability of an upmove.

so P*960/1+r +(1-p)*980/1+r = 970, after you find P, you can calculate the option price based on each node's payoff. I think the answer is B, which is 5.XX.

 

[[email protected]]

There was this one question about the value of a call option that has been bugging me; if I remember correctly:
- 2 year bond with FV 1000 and PV 921.xx
- RF 5%
- If rates rise in 1 year, value of the bond will be 960
- if rates fall in 1 year, value of the bond will be 980

Q: what is the price of a 1 year call option with strike price 970?
a) 3.xx
b) 4.xx
c) 6.00
d) 9.xx

I have chosen C as a guess because I have no clue how to appraoch this problem.


In this Q first you need to calculate the risk neutral probability, came .6 and .4 and then calculate the option value using these risk neutral probs. One option was I think 5.71 (disconted value of 6 over one year at 5%) which I marked correct.

 

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What about the question of the netting with the arrows? With netting, without netting​

I think w/o CCP is 8, and with CCP is 0?