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Level 2: Post what your remember here...
- Thread starter troubleshooter
- Start date
It was 4 NAVs. Hence 3 periods.The NAV of how many years was given in the table? I think it was 4? Or was it 3?
Emer, one more NAV was given in the question (35 something for 2007)It was 4 NAVs. Hence 3 periods.
ibrahim-1987
Active Member
Wrong way risk - Selling put options on own stock[/quote]
in my opinion, this is a wrong risk, from B perspective NOT A,,,,, the q was asking about A.
in my opinion, this is a wrong risk, from B perspective NOT A,,,,, the q was asking about A.
Ok, than I took the wrong one, I did only see the 4 NAVs in the table. But at least my logic has been correct :-(Emer, one more NAV was given in the question (35 something for 2007)
Back to the volatility smile question:
If the volatility of the ATM option was used to price the options, but in actuality there was a skew, this means that the ITM calls and OTM puts are both undervalued because the volatility used to price them was lower than the actual volatilities.
Am I missing something?
If the volatility of the ATM option was used to price the options, but in actuality there was a skew, this means that the ITM calls and OTM puts are both undervalued because the volatility used to price them was lower than the actual volatilities.
Am I missing something?
Wrong way risk - Selling put options on own stock
in my opinion, this is a wrong risk, from B perspective NOT A,,,,, the q was asking about A.[/quote]
Even from A's perspective, it is wrong-way risk. A has an interest in the financial strength of B. If B's stock decreases in value, B will go down further because of it's put position.
troubleshooter
Active Member
In response to Lanky:
1) Implied volatility is assumed to be the center. What will be the effect? (in-the-money call value understated?)
I chose out of the money put but I think I screwed up.
2) What did John Rusnak do? (made fake transactions)
There was two similar question on Rusnak. One was fake options and the other was VAR manipulation I thought.
3) What will the Q-Q plot look like? (I marked the one which was straight below 1 and then upward sloping for +ve values)
I did the same.
4) Backtesting, outcome (I marked C, was very confused)
I don't remember details of this.
5) Calculate ES for 96.5% confidence (straight-forward)
I thought the question asked 95.5... If not I screwed it up.
6) Netting arrangements, calculate exposure (straight-forward)
Yes. Three transactions +100 -75 and +50 MTMs. Obviously, +75 is the asnwer.
7) Suggest measure for specific exposure profile (Ans: collateral arrangements because all exposures were positive)
Yes. I did the same.
8) Calculate implied risk-free rate [using (1+rfr) = (1-PD)* (1+yield)]
I think I got this one too.
9) What will be the common strike for 4 barrier options (no idea personally, I marked 40)
I think the answer is $39 based on suggestion above. But I am way off at my guess of 42.
10) Calculate VaR for bond transition matrix (it was 9)
Yes... I got it but not before some struggle.
11) Calculate default rate for 3rd year [(1 - year 2 default rate) * ( 1 - year 3 default rate) = (1 - 0.1051)]
Yes. I think I got this one... default intensity = Prob of Default in year 3/probaility of survival for first 2 years = cumulative default for year 3 minus the same for year 2 divided by (1 - cumulative default upto year 2)...
12) Which of the following statements related to correlation are wrong (Ans: correlation is stable for short periods)
Yes. Got it.
13) What is true about the ratios net stable and liquidy (answer was A, other options were ratio should be > 150% and 250% and that horizon is 0.5 years)
Yes. Got it too.
14) Which is the most liquid hedging option? (Eurodollar futures?)
Yes. I chose the same. Only other viable choice would have been option on Eurodollar futures but from what I remember from Level 1 readings, such options either do not exist or is not liquid.
15) What is true about ring fencing assets (allows SPE to issue debt at lower interest rates)
Yes. did the same.
16) Calculate probability of default (I was able to get both 16% and 20% using different formulas, I choose 20% in the end)
I think I did 16%. You would get 20% with rfr = 0 but rfr was given as a value > 0, hence it could not have been 20.
17) Calculate option value (I didn't know that we had to calculate the probabilities of up and down moves. I marked B 0.5 something)
I don't remember having to calculate option value. There may have been multiple versions of question papers.
18) Calculate component VaR (disguised as a trader-to-firm capital contribution problem)
I think I got this one...
19) Calculate hedge using keyrates (30k short and 3.5k short)
Yes. Bond B was short and Bond A was long for hedging.
20) 5k short out-of-the-money calls, 5k ITM calls, some 8k forwards, calculate VaR (25% volatility, 252 days, daily at 99%), I got D (19,000 something)
Yes. We exlude the out of the money call as delta = 0 for them... I think I got the same.
21) Calculate payment for Total Return Swap (Ans was 31.5, -40 mil and +8.5)
I thought it was 32.5, -40 and 5.7 but my memory may have been wrong.
Will add the rest later...
22) Which approach does not require correlation estimates (Historical simulation)
Same here.
23) What is true about weighting schemes (I marked C, something about correlation-weighted and a time-weighted correlation-matrix)
Did the same.
24) Hedge using negative duration (Short put on IO mortgage strip?)
I thought this was tricky. It was rather short maturity put on IO strip, which will have +ve durarion. I put down A I think, the one that would have -ve duration.
25) Enhancement required so that senior tranche has 90% protection (5 mil)
Yes. yes. yes.
26) Calculate the amount of duration mismatch (700, D(liab) * liab - D(assets) * assets)
700 yes. but there was a mistake by GARP, I suspect this question will be thrown out from the markings.
27) Which asset should be pledged as collateral? (given correlation matrix, I choose C because it had the lowest correlation with the asset being bought)
Yes... I did the same... so that the asset value and collateral does not dip at the same time...
28) Which asset to add to the portfolio? (Nix, because it had the highest information ratio)
Yes... Thank God.. Almost had it wrong.
29) What amount of alpha is attributable to the benchmark? (0.18% found it after a lot of trial-and-error)
I guessed it after a long trial and error... I think I used D with 5.xx which is the total alpha... Honestly I had no idea how to do this one so I just screwed around with it.
30) What will make it more beneficial to make an investment based on ARAROC? (Reducing the equity beta)
That's it.
31) What is true about capital requirements under basel III? (Equity capital tier 1 must be 4.5%)
4.5 is right.
32) Which of the following will add to equity tier 1 capital under basel 3(or 2, forgot)? (cross-bank deposits or something. all other options seemed to reduce tier 1 capital)
This was confusing. I did not do cross holding as I don't think cross holding would be considered true capital. I think I chose the one that said would increase common equity capital thought that had some verbage that makes it sound like investment is being made by the bank itself... so don't know honestly
33) What are the most frequently used distributions for severity prob of default? (poisson and lognormal)
yes.
34) Which of the following is true? (no matter what the correlations are, total operational VaR (or some measure) cannot be greater than the sum of the individual business sections)
I chose something else. Not sure about this one.
35) Which of the following is true? (Total risk = sum of risk contributions)
Can't remember.
36) What is the capital requirement? (capital factor was 3, and a table of various confidence levels and VaR and SVaR was given, had to use 10 day 99% VaR, I got 340 something)
Yes.
37) Difference between capital requirements based on drawdown if loan-equivalent is 0.6 something (difference was 20-30? I don't remember).
yes. I think this is quite straight forward. UGD goes up from .5 to .6 and were supposed to caculate increase in economic capital which is 3% of the increase.
38) Something about assumptions changing (Ans: Operating risk increases/decreases) [don't remember this question properly]
My memory fails me here too...
39) 3 VaRs were given, Delta-normal, Monte Carlo and Historical, historical was off by 25k, other two were same, what model risk? (Data problems?)
I did assumptions... But it could be anything really to be honest... A bit vague this quesiton. I would have thought the difference was valid as you would not expect to get the same VAR from different approches unless you cook it up.
40) Some big question with 2 custom formulas for calculating exposure to loans. We had to find the value of b and g? (b < 0, g >= 0)
I thought this was both b<0 and g<0. Some other poster has details on this one ... need to go through that.
41) Which of the following accounts for diversification? (internal models approach?)
Yes.
1) Implied volatility is assumed to be the center. What will be the effect? (in-the-money call value understated?)
I chose out of the money put but I think I screwed up.
2) What did John Rusnak do? (made fake transactions)
There was two similar question on Rusnak. One was fake options and the other was VAR manipulation I thought.
3) What will the Q-Q plot look like? (I marked the one which was straight below 1 and then upward sloping for +ve values)
I did the same.
4) Backtesting, outcome (I marked C, was very confused)
I don't remember details of this.
5) Calculate ES for 96.5% confidence (straight-forward)
I thought the question asked 95.5... If not I screwed it up.
6) Netting arrangements, calculate exposure (straight-forward)
Yes. Three transactions +100 -75 and +50 MTMs. Obviously, +75 is the asnwer.
7) Suggest measure for specific exposure profile (Ans: collateral arrangements because all exposures were positive)
Yes. I did the same.
8) Calculate implied risk-free rate [using (1+rfr) = (1-PD)* (1+yield)]
I think I got this one too.
9) What will be the common strike for 4 barrier options (no idea personally, I marked 40)
I think the answer is $39 based on suggestion above. But I am way off at my guess of 42.
10) Calculate VaR for bond transition matrix (it was 9)
Yes... I got it but not before some struggle.
11) Calculate default rate for 3rd year [(1 - year 2 default rate) * ( 1 - year 3 default rate) = (1 - 0.1051)]
Yes. I think I got this one... default intensity = Prob of Default in year 3/probaility of survival for first 2 years = cumulative default for year 3 minus the same for year 2 divided by (1 - cumulative default upto year 2)...
12) Which of the following statements related to correlation are wrong (Ans: correlation is stable for short periods)
Yes. Got it.
13) What is true about the ratios net stable and liquidy (answer was A, other options were ratio should be > 150% and 250% and that horizon is 0.5 years)
Yes. Got it too.
14) Which is the most liquid hedging option? (Eurodollar futures?)
Yes. I chose the same. Only other viable choice would have been option on Eurodollar futures but from what I remember from Level 1 readings, such options either do not exist or is not liquid.
15) What is true about ring fencing assets (allows SPE to issue debt at lower interest rates)
Yes. did the same.
16) Calculate probability of default (I was able to get both 16% and 20% using different formulas, I choose 20% in the end)
I think I did 16%. You would get 20% with rfr = 0 but rfr was given as a value > 0, hence it could not have been 20.
17) Calculate option value (I didn't know that we had to calculate the probabilities of up and down moves. I marked B 0.5 something)
I don't remember having to calculate option value. There may have been multiple versions of question papers.
18) Calculate component VaR (disguised as a trader-to-firm capital contribution problem)
I think I got this one...
19) Calculate hedge using keyrates (30k short and 3.5k short)
Yes. Bond B was short and Bond A was long for hedging.
20) 5k short out-of-the-money calls, 5k ITM calls, some 8k forwards, calculate VaR (25% volatility, 252 days, daily at 99%), I got D (19,000 something)
Yes. We exlude the out of the money call as delta = 0 for them... I think I got the same.
21) Calculate payment for Total Return Swap (Ans was 31.5, -40 mil and +8.5)
I thought it was 32.5, -40 and 5.7 but my memory may have been wrong.
Will add the rest later...
22) Which approach does not require correlation estimates (Historical simulation)
Same here.
23) What is true about weighting schemes (I marked C, something about correlation-weighted and a time-weighted correlation-matrix)
Did the same.
24) Hedge using negative duration (Short put on IO mortgage strip?)
I thought this was tricky. It was rather short maturity put on IO strip, which will have +ve durarion. I put down A I think, the one that would have -ve duration.
25) Enhancement required so that senior tranche has 90% protection (5 mil)
Yes. yes. yes.
26) Calculate the amount of duration mismatch (700, D(liab) * liab - D(assets) * assets)
700 yes. but there was a mistake by GARP, I suspect this question will be thrown out from the markings.
27) Which asset should be pledged as collateral? (given correlation matrix, I choose C because it had the lowest correlation with the asset being bought)
Yes... I did the same... so that the asset value and collateral does not dip at the same time...
28) Which asset to add to the portfolio? (Nix, because it had the highest information ratio)
Yes... Thank God.. Almost had it wrong.
29) What amount of alpha is attributable to the benchmark? (0.18% found it after a lot of trial-and-error)
I guessed it after a long trial and error... I think I used D with 5.xx which is the total alpha... Honestly I had no idea how to do this one so I just screwed around with it.
30) What will make it more beneficial to make an investment based on ARAROC? (Reducing the equity beta)
That's it.
31) What is true about capital requirements under basel III? (Equity capital tier 1 must be 4.5%)
4.5 is right.
32) Which of the following will add to equity tier 1 capital under basel 3(or 2, forgot)? (cross-bank deposits or something. all other options seemed to reduce tier 1 capital)
This was confusing. I did not do cross holding as I don't think cross holding would be considered true capital. I think I chose the one that said would increase common equity capital thought that had some verbage that makes it sound like investment is being made by the bank itself... so don't know honestly
33) What are the most frequently used distributions for severity prob of default? (poisson and lognormal)
yes.
34) Which of the following is true? (no matter what the correlations are, total operational VaR (or some measure) cannot be greater than the sum of the individual business sections)
I chose something else. Not sure about this one.
35) Which of the following is true? (Total risk = sum of risk contributions)
Can't remember.
36) What is the capital requirement? (capital factor was 3, and a table of various confidence levels and VaR and SVaR was given, had to use 10 day 99% VaR, I got 340 something)
Yes.
37) Difference between capital requirements based on drawdown if loan-equivalent is 0.6 something (difference was 20-30? I don't remember).
yes. I think this is quite straight forward. UGD goes up from .5 to .6 and were supposed to caculate increase in economic capital which is 3% of the increase.
38) Something about assumptions changing (Ans: Operating risk increases/decreases) [don't remember this question properly]
My memory fails me here too...
39) 3 VaRs were given, Delta-normal, Monte Carlo and Historical, historical was off by 25k, other two were same, what model risk? (Data problems?)
I did assumptions... But it could be anything really to be honest... A bit vague this quesiton. I would have thought the difference was valid as you would not expect to get the same VAR from different approches unless you cook it up.
40) Some big question with 2 custom formulas for calculating exposure to loans. We had to find the value of b and g? (b < 0, g >= 0)
I thought this was both b<0 and g<0. Some other poster has details on this one ... need to go through that.
41) Which of the following accounts for diversification? (internal models approach?)
Yes.
ibrahim-1987
Active Member
@1: No, it was bank B offering selling puts on its own shares. Take into account, that question was asking from Bank A perspective. If bank A takes a debt from B and secures it with bonds of B, it will be a wrong-way risk for B.
.
there is no if!!!
bank A has a debt on B already, not A taking from b.
the q was " not strictly ", B is detriorating in quality, and A have adebt on B, what action will make wrong way risk from A perspective
ibrahim-1987
Active Member
Back to the volatility smile question:
If the volatility of the ATM option was used to price the options, but in actuality there was a skew, this means that the ITM calls and OTM puts are both undervalued because the volatility used to price them was lower than the actual volatilities.
Am I missing something?
hi shanon, y r right
but the q was: if the pricing was using implied volatility, then compared to volatility used, which one will be undervalued.
in short, it is reversed q, assume y use implied volatility, then which will be undervalued using historical volatility?
also, as i said before, this q can be answered without looking at the q, as y said, ITM call & OTM put are in the same area.
In response to Lanky:
5) Calculate ES for 96.5% confidence (straight-forward)
I thought the question asked 95.5... If not I screwed it up.
6) Netting arrangements, calculate exposure (straight-forward)
Yes. Three transactions +100 -75 and +50 MTMs. Obviously, +75 is the asnwer.
7) Suggest measure for specific exposure profile (Ans: collateral arrangements because all exposures were positive)
Yes. I did the same.
8) Calculate implied risk-free rate [using (1+rfr) = (1-PD)* (1+yield)]
I think I got this one too.
9) What will be the common strike for 4 barrier options (no idea personally, I marked 40)
I think the answer is $39 based on suggestion above. But I am way off at my guess of 42.
10) Calculate VaR for bond transition matrix (it was 9)
Yes... I got it but not before some struggle.
11) Calculate default rate for 3rd year [(1 - year 2 default rate) * ( 1 - year 3 default rate) = (1 - 0.1051)]
Yes. I think I got this one... default intensity = Prob of Default in year 3/probaility of survival for first 2 years = cumulative default for year 3 minus the same for year 2 divided by (1 - cumulative default upto year 2)...
12) Which of the following statements related to correlation are wrong (Ans: correlation is stable for short periods)
Yes. Got it.
13) What is true about the ratios net stable and liquidy (answer was A, other options were ratio should be > 150% and 250% and that horizon is 0.5 years)
Yes. Got it too.
14) Which is the most liquid hedging option? (Eurodollar futures?)
Yes. I chose the same. Only other viable choice would have been option on Eurodollar futures but from what I remember from Level 1 readings, such options either do not exist or is not liquid.
15) What is true about ring fencing assets (allows SPE to issue debt at lower interest rates)
Yes. did the same.
16) Calculate probability of default (I was able to get both 16% and 20% using different formulas, I choose 20% in the end)
I think I did 16%. You would get 20% with rfr = 0 but rfr was given as a value > 0, hence it could not have been 20.
17) Calculate option value (I didn't know that we had to calculate the probabilities of up and down moves. I marked B 0.5 something)
I don't remember having to calculate option value. There may have been multiple versions of question papers.
18) Calculate component VaR (disguised as a trader-to-firm capital contribution problem)
I think I got this one...
19) Calculate hedge using keyrates (30k short and 3.5k short)
Yes. Bond B was short and Bond A was long for hedging.
20) 5k short out-of-the-money calls, 5k ITM calls, some 8k forwards, calculate VaR (25% volatility, 252 days, daily at 99%), I got D (19,000 something)
Yes. We exlude the out of the money call as delta = 0 for them... I think I got the same.
21) Calculate payment for Total Return Swap (Ans was 31.5, -40 mil and +8.5)
I thought it was 32.5, -40 and 5.7 but my memory may have been wrong.
@ES - It was 95.5, I just wrote the questions in a hurry
@Probability of default - I remember getting 20% with another formula. Frankly, I don't even remember the formulas anymore!
@Option value - Based on what others have said, I think it was 0.52 (not sure)
@Hedge using keyrates - Sorry I meant one long one short* Only one option had the correct numerical values (d?)
@Total return swap - Two libor rates were given, we had to use the one at the start of the year, not the end.
there is no if!!!
bank A has a debt on B already, not A taking from b.
the q was " not strictly ", B is detriorating in quality, and A have adebt on B, what action will make wrong way risk from A perspective
First, do not care about that A already has positions with B - this was only said for confusion. Actually it was asked what kind of trade would create wrong-way risk for Bank A (on a stand alone basis).
No matter, if using collateral from Bank B for its debt with bank B it will create wrong-way risk for B, not for A: Think, what happens it credit quality of B goes down? Then the value of its (B's) collateral received from A goes down, increasing the risk for B
I have a question for David:
Is it worth writing GARP about inconsistencies or errors? With the amount of studying that I put in, if I fail because of all of the errors I will be beyond furious.
For instance the cash flow problem. If the question was "what leads to a positive cash flow?" the answer would have been obvious if you know what is going on. Asking about an "increase" in cash flows is just flat out not correct. The coupon is obviously a positive cash flow but it certainly is not an increase in cash flows.
Same thing I mentioned earlier about the whole continuous vs discrete on #4. The If we used yield = PD*LGD + r we get one answer and if we use 1+r=(1-PD*LGD)(1+y) we get another. The intro said to use continuous so I did it but seeing all of the other mistakes they made I can picture them forgetting what they actually told us to do.
I would really like to give some of them at GARP a piece of my mind.
Anyone else who thinks there were lots of errors should join me in being mad.
We deserve better.
Is it worth writing GARP about inconsistencies or errors? With the amount of studying that I put in, if I fail because of all of the errors I will be beyond furious.
For instance the cash flow problem. If the question was "what leads to a positive cash flow?" the answer would have been obvious if you know what is going on. Asking about an "increase" in cash flows is just flat out not correct. The coupon is obviously a positive cash flow but it certainly is not an increase in cash flows.
Same thing I mentioned earlier about the whole continuous vs discrete on #4. The If we used yield = PD*LGD + r we get one answer and if we use 1+r=(1-PD*LGD)(1+y) we get another. The intro said to use continuous so I did it but seeing all of the other mistakes they made I can picture them forgetting what they actually told us to do.
I would really like to give some of them at GARP a piece of my mind.
Anyone else who thinks there were lots of errors should join me in being mad.
We deserve better.
I have a question for David:
Is it worth writing GARP about inconsistencies or errors? With the amount of studying that I put in, if I fail because of all of the errors I will be beyond furious.
For instance the cash flow problem. If the question was "what leads to a positive cash flow?" the answer would have been obvious if you know what is going on. Asking about an "increase" in cash flows is just flat out not correct. The coupon is obviously a positive cash flow but it certainly is not an increase in cash flows.
Same thing I mentioned earlier about the whole continuous vs discrete on #4. The If we used yield = PD*LGD + r we get one answer and if we use 1+r=(1-PD*LGD)(1+y) we get another. The intro said to use continuous so I did it but seeing all of the other mistakes they made I can picture them forgetting what they actually told us to do.
I would really like to give some of them at GARP a piece of my mind.
Anyone else who thinks there were lots of errors should join me in being mad.
We deserve better.
The quality of the paper could have definitely been better. I did put a lot of effort into it. If I can stay up 20 nights to prepare, why can't GARP stay up for 2 and make sure the questions are correct? We all found most of the mistakes in solving the question paper once! GARP had half a year to make it.
And the option other than the put was?Hy LankyLint,
It said: A has debt with B and is worried about credit quality of B. What kind of action will cause wrong way risk from the perspective of A. All other options created wrong-way risk for B.
B offered to sell put options (to A) on it's own debt. That means that if A's bond position weakens in terms of market value, so will the put options that B sold. Both A and B face wrongway risk.
I have a question for David:
Is it worth writing GARP about inconsistencies or errors? With the amount of studying that I put in, if I fail because of all of the errors I will be beyond furious.
For instance the cash flow problem. If the question was "what leads to a positive cash flow?" the answer would have been obvious if you know what is going on. Asking about an "increase" in cash flows is just flat out not correct. The coupon is obviously a positive cash flow but it certainly is not an increase in cash flows.
Same thing I mentioned earlier about the whole continuous vs discrete on #4. The If we used yield = PD*LGD + r we get one answer and if we use 1+r=(1-PD*LGD)(1+y) we get another. The intro said to use continuous so I did it but seeing all of the other mistakes they made I can picture them forgetting what they actually told us to do.
I would really like to give some of them at GARP a piece of my mind.
Anyone else who thinks there were lots of errors should join me in being mad.
We deserve better.
Hi shanelane, do not worry, it's not said that you did not pass yet. From the effort you put in (as I see from the questions you raised), you definitely should have.
ibrahim-1987
Active Member
frankly, GARP must start to enhance its work, and strat to publish exams!!!
if we found 4 Qs in its practice exam were wrong, how can i trust that the exam is correct 100% !!!!!!?
if we found 4 Qs in its practice exam were wrong, how can i trust that the exam is correct 100% !!!!!!?
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