Exam Feedback FRM Part 2 (May 2014) Exam Feedback
- Thread starter David Harper CFA FRM
- Start date
Related to the "great memory" - well not really, I have just mapped in my mind the fact that predatory lending was a topic from the "Ashcroft" reading and I have just looked up today at which exact spot this was described. 
If I really had that kind of a photographic memory, I think I would have had higher chances of passing the exam...
@Johnson : well so much for my good memory, I really don't remember what I have answered for that Basel question...
If I really had that kind of a photographic memory, I think I would have had higher chances of passing the exam...@Johnson : well so much for my good memory, I really don't remember what I have answered for that Basel question...
joacogimeno
Member
There seem to be different opinions on what was the right answer to the LCR question. Personally, I answered that it changed to 140%, given the following:
For the numerator:
- The bank took 2B in deposits (a liability) and invested it in High Quality Liquid Assets (this much it said). It did not specify what kind of HQLA it invested it into, so I just assumed that there was a 0% haircut for these. Therefore, the numerator must increase from 12B to 14B.
For the denominator:
- The deposits, being a liability for the Bank, count as possible cash outflows, but Basel gives them a multiplication factor of 0%, 5% or 10%, depending on the nature of the deposits (look here). Again, as it did not specify, and given that the only 3 possible answers were 1,37=14/(10+2*0,1), 1,386=14/(10+2*0,05) or 1,4 =(14/10+0), I chose the latter, as it was the only possibility given in the 4 answers.
Furthermore, It did not sit right with me that an instution takes deposits (a safe liability), it invests them in HQLA (great for liquidity purposes), and the ratio gets worse! Let's remember that the LCR is a 30 day liquidity measure, and we are talking of deposits here. This argument made me think that there were only two possible right answers: 140% or 130% (or something of the sort)
I have no idea if I got it right, but it looked good to me at the moment!
For the numerator:
- The bank took 2B in deposits (a liability) and invested it in High Quality Liquid Assets (this much it said). It did not specify what kind of HQLA it invested it into, so I just assumed that there was a 0% haircut for these. Therefore, the numerator must increase from 12B to 14B.
For the denominator:
- The deposits, being a liability for the Bank, count as possible cash outflows, but Basel gives them a multiplication factor of 0%, 5% or 10%, depending on the nature of the deposits (look here). Again, as it did not specify, and given that the only 3 possible answers were 1,37=14/(10+2*0,1), 1,386=14/(10+2*0,05) or 1,4 =(14/10+0), I chose the latter, as it was the only possibility given in the 4 answers.
Furthermore, It did not sit right with me that an instution takes deposits (a safe liability), it invests them in HQLA (great for liquidity purposes), and the ratio gets worse! Let's remember that the LCR is a 30 day liquidity measure, and we are talking of deposits here. This argument made me think that there were only two possible right answers: 140% or 130% (or something of the sort)
I have no idea if I got it right, but it looked good to me at the moment!
joacogimeno
Member
I chose the other one, because of one (key) word: it said "sustained decrease"or something of the sort. The question was about stress scenarios, and in one of the possible answers it just said "a drop in oil prices" (and the currency thing), which happens very frequently, and in the other it said "a sustained decrease in gas prices" (and the equity thing), which looks more like a stress scenario to me.
Abhinav Agrawal
New Member
There was one which compared the yield of mbs and treasury bond both without default risk, I marked the convexity option in the answer coz even though mbs might have higher yield it also has a call option.
I
I answered that MBs yields are higher simply because they are riskier. I don't think the negative convexity is related to the DIFFERENCE between the MBS yield and the treasury yield. Negative convexity affects only the level of price due to interest rate volatility.
In the MBS question, yields are definitely higher because of negative convexity due to the short call option embedded in MBS. As rates fall, borrowers are more likely to prepay so the MBS does not profit as much as a similar treasury security (where there is no prepayment option).
I just thought of it. You're probably right. Its such a stupid mistake. Also for the Basel vs Solvency II question. What did you answer?
My answer too
Hi guys,
Few other questions I remember:
1. the right way risk...buying oil from a large oil producers
- the hedge fund questions:
2. beta+ 0.2 / beta- 1.2 = I went for the asymmetrical option and not for the phase locking event
3. another one with asymmetrical where you have HWM, high incentive fees (I chose the high fees)
4. there was also something about illiquidity and I chose the option with smoothing returns
-current issues
5. SCDS prohibition, I chose the option with Hedge fund cannot longer do the CDS negative basis trade
6. MF: before Joe Corzine low interest rate environment, select that their revenues decrease as they could not get high interest on client funds
7 re Caruana: crisis because governments spent freely...the last option said that mid 2008 rating agencies downgraded some sovereigns, but i was much later...
and I think few straight ones (I hope so)
8. treasuries being mapped to zero coupon bond
9. the libor one, OIS is the most suitable discount factor
10. after the crisis, unsecure lending decreased and secure lending increased
Few other questions I remember:
1. the right way risk...buying oil from a large oil producers
- the hedge fund questions:
2. beta+ 0.2 / beta- 1.2 = I went for the asymmetrical option and not for the phase locking event
3. another one with asymmetrical where you have HWM, high incentive fees (I chose the high fees)
4. there was also something about illiquidity and I chose the option with smoothing returns
-current issues
5. SCDS prohibition, I chose the option with Hedge fund cannot longer do the CDS negative basis trade
6. MF: before Joe Corzine low interest rate environment, select that their revenues decrease as they could not get high interest on client funds
7 re Caruana: crisis because governments spent freely...the last option said that mid 2008 rating agencies downgraded some sovereigns, but i was much later...
and I think few straight ones (I hope so)
8. treasuries being mapped to zero coupon bond
9. the libor one, OIS is the most suitable discount factor
10. after the crisis, unsecure lending decreased and secure lending increased
joacogimeno
Member
I think the right answer to the SCDS ban question was that it hinders price discovery. I know that something like that is said in the reading.
Yeah for scds it hinders liquidity, negative basis trades were still possible when naked shorts were banned. Negative basis is long the bond and buying protection. Naked short ban only eliminated buying protection without owning the bond...in a negative basis trade you own the bond so it's ok.
yes, it is not that straightforward...I found what you said about hindering in the reading "Bans on short selling in equity markets are generally viewed as merely reducing market liquidity, hindering price discovery, and increasing price volatility (Beber and Pagano, 2013)" but it seems it is for equity markets and i think it is just an opinion...after reading the SCDS before the exam (just once due to lack of time so do not take this as granted) I got the impression that there were a lot of opinions and not that many facts...thats why I chose the fact that hedge funds could not perform fixed income arbitrage any longer (long credit with the CDS and short credit selling the sovereing)...anyway, not straight answer on this one.
Hi,
just remembered a question which hasn't popped up yet.
What adds more to excessive risk taking by hedge fund managers.
a) high water mark
b) incentive fees
c and d were not relevant from my point of view. I chose (better:guessed) the high water mark solution. Any ideas?
Regards
just remembered a question which hasn't popped up yet.
What adds more to excessive risk taking by hedge fund managers.
a) high water mark
b) incentive fees
c and d were not relevant from my point of view. I chose (better:guessed) the high water mark solution. Any ideas?
Regards
I spent a little while on this one, as in theory, HWM is a benefit for the investors but if the fund net asset value is too far from the HWM the manager may take risky bets trying to be over the HWM and charge performance fee again.
However the high incentive fees (I remember they noted "high") also adds excessive risk taking as the managers are rewarded when the make gains but they did not get penalized whenever they incurr in losses so again it adds excessive risk. I was not positive but I chose the incentive fees.
However the high incentive fees (I remember they noted "high") also adds excessive risk taking as the managers are rewarded when the make gains but they did not get penalized whenever they incurr in losses so again it adds excessive risk. I was not positive but I chose the incentive fees.
I remember the question...and also remember definitely not choosing any of these 2 choices..had chose one from the other two..
Chances of clearing looking slimmer n slimmer with each new question posted..
Chances of clearing looking slimmer n slimmer with each new question posted
-> Same with me
The question on portfolio construction has already been mentioned, but not cleared:
a linear programming
b quadratic
c and d the other two techniques.
I went for linear programming because it mentioned that active risk is minimized. Thoughts?
-> Same with me
The question on portfolio construction has already been mentioned, but not cleared:
a linear programming
b quadratic
c and d the other two techniques.
I went for linear programming because it mentioned that active risk is minimized. Thoughts?
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