troubleshooter
Active Member
I think RR was given as 0%.I am also sure - there was another value given?
Level 2: Post what your remember here...
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troubleshooter
Active Member
Actually, the quesiton on Iris vs. US crisis that said what was part of US but not Irish crisis. B and C was wrong. A was "Government encouraging real estate sector loans" and D was "Increase in mortgage securitization". I thought both was right but I put in D. Not sure.. Anyone has a better idea?
Hi,
i remember it was asked for the risk-neutral mean loss rate in this question, which is 20%. rfr did not matter at all, neither did loss given default; see one of the Cannabero assignments: The risk-neutral mean loss rate is the rate at which investors act as they are risk-neutral.
Regards,
J
troubleshooter
Active Member
The quesion on 2 bonds of the same value (100M I think) with PD = p on each and independent. They are securitized to issue 100 M senior and 100 M equity tranche. The question was what is the probability of default for the equity tranche.
Bond 1 Default Bond 2 Default: Prab = p^2
Bond 1 Default Bond 2 No Default=p(1-p)
Bond 1 No Default Bond 2 Default=p(1-p)
Bond 1 No Default Bond 2 No Default=(1-p)^2
It is equal to p^2 + 2p(1-p) = p^2 +2p -2p^2 = 2p(1-p) was the answer I Think. Anyone else remember this?
Bond 1 Default Bond 2 Default: Prab = p^2
Bond 1 Default Bond 2 No Default=p(1-p)
Bond 1 No Default Bond 2 Default=p(1-p)
Bond 1 No Default Bond 2 No Default=(1-p)^2
It is equal to p^2 + 2p(1-p) = p^2 +2p -2p^2 = 2p(1-p) was the answer I Think. Anyone else remember this?
However, my issue is with the wording of the question itself - before pointing to the choices itself
- it clearly said - "with an instrument which has negative duration"Surely going Long / Short can not constitute as an - instrument ?
troubleshooter
Active Member
But when you are in the risk neutral world, aren't you supposed to use the risk free rate to discount? If it was not risk neutral world, then you would use actual discount rate. This is getting confusing.
Precisely. I remember changing it for this reason.
No troubleshooter, risk-neutral simply means you have to make sure that there is no arbitrage. If we use 16%, the price should be 84% not 80%. Answer is 20%
Thanks troubleshooter.
- agreed, "dv01 gap" is awkward enough, but it cannot be $700 million in this question, it's $0.07
- agreed, this question looks to have a problem, assuming recollections are correct here (it is unclear why OTM put is not an option, if ITM call is).
- totally agree. It sounds like (I am just guessing) the question's intent is to query the most basic interpretation: IO strips have negative duration. Maybe the rest of the question is window dressing. But complication ensue only for those of us with a deeper understanding (ironically!): superficially, a zero-coupon bond has positive duration, and an IO strip has negative duration. However, the put (derivatives) go the other direction: a put on the same zero has negative duration; and the put on an IO strip has positive duration. So it's incumbent on the question to be precise, otherwise we are stuck trying to decipher the semantics (and intent) of the question. It's not an English language exam, after all.
I think there was an option in regards to - path dependence - i.e was the correct option I believe
Yes. It was like "Monte Carlo simulation takes into account the path that interest rate takes to get to where it is."
Hi David, however, my issue is with the wording of the question itself - before pointing to the choices itself
- it clearly said - "with an instrument which has negative duration"Surely going Long / Short can not constitute as an - instrument ?
troubleshooter
Active Member
Yes to that.
However, my issue is with the wording of the question itself - before pointing to the choices itself
Surely going Long / Short can not constitute as an - instrument ?
Yes, I agree with FRM_Exam. This is why the distinction between dollar/value/position duration versus modified duration (bond); and percentage delta/Greeks versus position delta/Greek (options); is so useful!
Specifically, the short is treated by negating the price or quantity (in the case of options). This avoids problems, for example:
- Short $10 million T-bonds with mod duration of +8.0 years = -10* +8 = -80 dollar (value) duration, yet underlying bond remains positive modified duration;
- Short 10 call options = negative position gamma = -10 * -(% gamma) = short position gamma yet per-option gamma is always positive
- In the case of the IO strip, the IO instrument is negative duration,
- The put on an IO strip is an instrument, too, a derivative instrument, with itself positive duration. So:
Long 10 IO puts = +10 * +D = positive +10*D position duration;
Short 10 IO puts = -10 * +D = negative -10*D position duration
I think OAS is an output not an input - shouldn't the answer be ?
Monte Carlo simulation takes into account the path that interest rate takes to get to where it is
troubleshooter
Active Member
Damn. Looks like I might have to concede here... Now I am beginning to worry how many questions you have to get right to pass...
As I said, silly mistakes happen. FRM gives you way too much time for the exam and you begin to over-think questions. I wrote 16% too initially! Don't worry, I think you should pass
troubleshooter
Active Member
1) Don't remember the answer exactly but I thought this was quite straightforward.
2) Yes. VAR underestimates as the Traders are doing trades that have more VAR (hence high returns) than what the model would calculate.
3) Yes. Right on.
4) I have posted above on the details on this one... Please verify if my account is correct.
5) Netting question was easy. There was one with collateral posting too...
6) uh.. huh... Don't remember what I did though.
7) yes. that's what I did but it's a bit of a guess.
8) Don't remember this one.
10) This one I think I did the same...
There was on on liquidity adjusted VAR with a constant bid as spread. It asks where the LVAR/VAR percent would increase... Answer was confidence level and horizon...
troubleshooter
Active Member
Path dependency was the answer. Sorry if I stated otherwise.
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