Exam Feedback FRM Part 2 (May 2014) Exam Feedback

[asdf]

asian option is indeed 0, because the average will not much significantly during the last 10 days and volatility is 10% a year.
increase in default correlation should be increase in unexpected loss
portfolio construction i think screening but could be wrong, these are the annoying questions

 

[Kush Sonigara]

One Qtn where I marked ans as 2bps..Don't remember Qtn..

 

[asdf]

Good Morning,

I'm sitting for P2 in Nov. Looking back at your P2 experience yesterday, how would you have changed the concentrations in your prep work? Would you have supplemented BT w/ more deep-dive into the GARP reads? In certain areas of the curriculum (ie Basel), you'd understandably have to cull your focus, but I'm interested in your thoughts on this.

In Nov 2013, I sat for L1. I did the GARP reads and used BT and I was very impressed by the way the BT question bank makes you keen to the curveballs on the exam.

hi, i think you shouldn't wast time on all this comparison, just make sure you understand qualitative aspects more than anything and master the important quantitative assessment tools that you will encounter and will be easily recognizable. i think should be enough and good luck!

 

[Hope]

One Qtn where I marked ans as 2bps..Don't remember Qtn..

value CVA = Spread * EE

 

[jeff-1984]

value CVA = Spread * EE

is the 2 BP answer correct? i think i also multiplied it by PD

 

[Abhinav Agrawal]

is the 2 BP answer correct? i think i also multiplied it by PD

The catch was to take exposure as 0 where mtm was negative

 

[Abhinav Agrawal]

If I was not wrong for Backtesting
with 8 exceptions in a 99% VAR model, if we use 99% confidence level

t = (8 - np)/sqrt (np*(1-p)
( 8 -252*0.01)/(sqrt(252*0.01*0.99))= 3.47 something

I calculated prob of 8 exceptions and then found the z score from the table given, was getting around 2.7 something, not sure what is wrong with this approach

 

[chouchouc]

for

I think I went for Quadratic..
Anyone on what to use ..MVAR(3 Option) CVAR(4th Option)?

For MVAR, you had to make sure that you take 99% and not 99.9%
I could not figure out the CVAR but it has been answered somewhere else in the forum
so far, based on what i read, I got wrong 5 questions (plus all the others that have not been mentioned), I am getting nervous
Asian Option delta, option price on the option, distance to default, credit var and another one is what I got wrong for sure...

 

[belle6631]

Chouchouc: another question about Lognormal and B&S and IMplied volatility. I marked that "both the equity option and the currency option will be underpriced when we use Lognormal". Is that correct ?

The question said that both an equity call and ccy option were OTM. Equity call out of the money implies a high strike price which means that the vol would be lower than the vol implied by lognormal (thus lognormal would overprice the equity call)

The currency option would be underpriced because OTM ccy options have higher vol than lognormal.

So I think it's equity option is overpriced but ccy option is underpriced.

 

[belle6631]

Also I think the exam had a few mistakes from the question developers (someone correct me if they see a problem in the logic below):

1. The MVaR question -- when calculating MVaR as VaR/P * Beta for A and for B, the VaR (which should be portfolio VaR) was different when using A and using B -- they should be exactly the same. Unless, the Beta provided was a beta to an index rather than to the portfolio itself (but this was not clear). Anyway, if you use CVaR = MVaR * P * w and add them you get to an answer that is available on the test, but I think the question is flawed.

2. CVA question. The 5Y spread on the counterparty was given as 500bps and the cumulative probability of default as 10% -- using P(D) = 1-exp(-h*t) to solve for h, => .10 = 1-exp(-h*5) => h = ~2%
This means that the constant flat hazard rate (instantaneous P(D)) is about 2%. The spread cannot be 500bps in this case because S = (1-R)*P(D) and even if you assume 0 recovery, the spread is 5% (500bps). No one would pay 5% for protection when the annual probability of default is 2%

Anyway, these 2 things tripped me up a bit on the exam.

 

[tdo]

Hi, on the prob of default for two years, giving spread 325 bps and lgd 0.4, did you get 15%?

0.0325/0,4= 0.08125 so 1 - e exp -0.08125 * 2= 0.149984

Actually as far as I remember the question is abt the PD through next two years and NOT after two years, hence more inclined to the hazard rate

 

[mongooseny23]

Chouchouc: another question about Lognormal and B&S and IMplied volatility. I marked that "both the equity option and the currency option will be underpriced when we use Lognormal". Is that correct ?

The question said that both an equity call and ccy option were OTM. Equity call out of the money implies a high strike price which means that the vol would be lower than the vol implied by lognormal (thus lognormal would overprice the equity call)

The currency option would be underpriced because OTM ccy options have higher vol than lognormal.

So I think it's equity option is overpriced but ccy option is underpriced.

i believe the question asked what would be the result if you priced it using lognormal instead of the true smiles / skew ... so i think it's the opposite of what you have above ... but i don't remember too clearly anymore

 

[FRMCAND]

Hi,

• Option Pricing: I do not remember exactly question on pricing option with lognormal instead of implied volatility but I think that the answer was that you get lower prices for both equity and ccy option
• CVA running estimate: I calculated it as EE * spread.
• On the PD for two years I get 8%.

A lot of qualitative questions very far from than expected.

In general I feel really disappointed about my exam.
After months of hard studies I would have liked to leave exam room with more confidence.

 

[belle6631]

i believe the question asked what would be the result if you priced it using lognormal instead of the true smiles / skew ... so i think it's the opposite of what you have above ... but i don't remember too clearly anymore

It did say if you priced using log normal. The vol on the equity option would be overstated in log normal vol surface (remember it is a high strike option so market imp vol would be lower) thus I think log normal would overstate the option price because it would use a higher vol than market imp vol would suggest.

 

[mongooseny23]

It did say if you priced using log normal. The vol on the equity option would be overstated in log normal vol surface (remember it is a high strike option so market imp vol would be lower) thus I think log normal would overstate the option price because it would use a higher vol than market imp vol would suggest.

i thought it was a call option on the equity and on the currency. perhaps i got it wrong then ... i thought ITM call was the same as OTM put --> higher implied vol --> underpriced by BSM for call option on equity.

 

[belle6631]

You are right ITM call = OTM put, but I think both options were said to be OTM (call and ccy
).

I could have misread it, but think I checked it a couple of times.

 

[mongooseny23]

You are right ITM call = OTM put, but I think both options were said to be OTM (call and ccy
).

I could have misread it, but think I checked it a couple of times.

ahh in that case you're right ... i only remember saying they were long options ... but i didn't read whether they were in the money or not. thanks. not looking good for my paper

 

[belle6631]

Only one question, from my experience with level 1 most people on this board passed/did fine -- I am sure you did ok. Besides, nothing we can do now I am just glad it's over (pass or fail).

 

[Pflik]

i just corrected a whole bunch of questions wrongly (hedge ratio, 15% default etc...) don't feel too good about the exam... also the room didn't have all the people (and very little amount compared to part 1

 

[Johnson]

1.there was a question on counterparty spread increase from 150 to 180 n the company from 20 to100 BP something.Asked who will ask for higher lower CVA..what was the ans?
2.question in which options were credit curve will b normal,total curve of credit opera market will b normal, there will b sufficient losses in tail of op curve..I marked this last1. nt sure.what was it?
3.question on difference between Basel n solvency..don't exactly remember it but marked 3 rd option
4.i agree with belle6631..that question was giving different Mvar when found with both separately.it wasted lot of my time as I kept trying using both individual var and then find diff using correlation 0 & 1 to get portfolio vars.
The volatility smile question it had mentioned equity in the money call n currency out of money call.quite positive about the question.(as it was 1 st question in my paper) bt answer I gave it wrong as both overpriced