Exam Feedback May 2021 Part 2 Exam Feedback

[Rhim0001]

I can certainly empathize with your stance. However because Covid forced most companies to go to a full remote working situation, BCP/DR/Ops risk is top of mind of most risk practicioners today (certainly at risk committees we're talking about it endlessly these days) and plus with markets melting upwards a lot... the market risk side seems like its the "dull" one relatively speaking! Odd times indeed and definitely odd to make a test around just the recent events... the test I think was trying too hard to be relevant and forgot to bring it back to the fundamentals (that we all crammed for) lol... just my two cents!

Agreed, was so surprised when calculation for the term structure model is model 1. I have expected a Ho-Lee or a vasicek.
Merton and KMV also, was expecting they would at least test us debt = Risk free bond - put option of firm or the calculation of credit spread, but none of these appeared.

 

[Ullaskarkera]

libor still has more outstanding contracts --> I recall there is an article said existing contract can still use LIBORin 2025 something like that, but maybe I am wrong
Climate risk...something like mkt oper and liq risk are impacted -> Yes, the answer is climate risk has been proven to significantly impact mkt,ops and lqd risk
Covid times....spot and future oil price fell ->Didn't read this article but I recall crude oil spot price became negative in Mar2020, so should be correct I guess?
Cyberrisk....effected..independent of location, UNsupervised learning...clustering -->Got these same as you too

There is also a question regarding the internal audit department assessing the risk in the company, what is the best practice of CRO, I was struggling with 2 options
a. The CRO should ask business unit managers to challenge their own models before submitted to approval
b. Build a contingency plan...
Option a. sounds very reasonable but I have chosen option b, since a. should be done by risk managers instead of the business unit manager themselves, but again, maybe I am wrong

I went with A for this.

 

[Rhim0001]

I went with A for this.

Fair enough, maybe you're right. I have no idea

 

[badbunny]

I went with A for this.

It can't be A. By selecting A you are telling the owners to challenge their own performance which is a complete lack of independency. Correct one was B.

 

[mariomansour]

It can't be A. By selecting A you are telling the owners to challenge their own performance which is a complete lack of independency. Correct one was B.

Yep, went for B as well. Makes more sense.

 

[maartenvdz]

Yep, went for B as well. Makes more sense.

I also went for A.

In my view a CRO should not be making the contingency plan, this should be done by the business owners themselves, with support from CRO / Risk. But you could very well be right.

This question is a good example of how tricky the exam was.

 

[Ullaskarkera]

Anyone recollect ans for
1.UL component value question
2.IR ratio based portfolio construction .3 small values and the last was big totalling to 400+

 

[ajajaja12345]

libor still has more outstanding contracts --> I recall there is an article said existing contract can still use LIBORin 2025 something like that, but maybe I am wrong
Climate risk...something like mkt oper and liq risk are impacted -> Yes, the answer is climate risk has been proven to significantly impact mkt,ops and lqd risk
Covid times....spot and future oil price fell ->Didn't read this article but I recall crude oil spot price became negative in Mar2020, so should be correct I guess?
Cyberrisk....effected..independent of location, UNsupervised learning...clustering -->Got these same as you too

There is also a question regarding the internal audit department assessing the risk in the company, what is the best practice of CRO, I was struggling with 2 options
a. The CRO should ask business unit managers to challenge their own models before submitted to approval
b. Build a contingency plan...
Option a. sounds very reasonable but I have chosen option b, since a. should be done by risk managers instead of the business unit manager themselves, but again, maybe I am wrong

The Covid times ... spot and future oil price fell. Isn't the A also make sense? I was really confused because I clearly read A ( the all assets price dropped including T-Bond) that long term Treasury and investment grade bonds declined unlike 2008 before government policy and I also read B the oil price dropped too. I was really considering one of them for 5 min sigh.

 

[badbunny]

I also went for A.

In my view a CRO should not be making the contingency plan, this should be done by the business owners themselves, with support from CRO / Risk. But you could very well be right.

This question is a good example of how tricky the exam was.

The exam was tricky, totally agree.

In this case the question mentioned for choice B that the CRO should be responsible for the escalation levels on the contingency plan, not the contingency plan itself. Thats why its choice B, it is on BT notes.

 

[Rhim0001]

I also went for A.

In my view a CRO should not be making the contingency plan, this should be done by the business owners themselves, with support from CRO / Risk. But you could very well be right.

This question is a good example of how tricky the exam was.

If option a says risk managers instead of business managers I will definitely go for it. Agree that this is an example to show that garp makes this so tedious. In my view there is nothing wrong with the CRO to ask business managers to review their model or CRO making a contingency plan

 

[Rhim0001]

Anyone recollect ans for
1.UL component value question
2.IR ratio based portfolio construction .3 small values and the last was big totalling to 400+

IR that question I went for option d, which is the largest number (3 digits for both managers, other options were a lot smaller for the numbers)

 

[badbunny]

If option a says risk managers instead of business managers I will definitely go for it. Agree that this is an example to show that garp makes this so tedious. In my view there is nothing wrong with the CRO to ask business managers to review their model or CRO making a contingency plan

Exactly, First Line of Defence doesn't challenge their own models; its 2LoD which does that (Risk Managers / Validation Unit) and after their "Ok" it gets approval.

 

[frmcfaonego]

For libor seems they had 2 questions...1.sofr libor which is more volatilie....sofr is more volatile....but if we use 3m sofr compounding rate vs 3m libor...libor is more volatlie..not sure which ans they would consider,.....2.libor still has more outstanding contracts.




Climate risk...something like mkt oper and liq risk are impacted.

Covid times....spot and future oil price fell.

Cyberrisk....effected..independent of location

UNsupervised learning...clustering

AML TF....more complex and use of ML

small retail bank...loan..3rd party...something like backtesting black hole

I recollect above 8 from current issues

I also had a similar thought during the exam about how little I was using my calculator to answer questions....to me it felt like 60%-75% of the exam was qualitative with the rest being quantitative. I took the exam in SF where there were maybe 20 folks taking the exam but with 50 seats available. I think there was a massive no-show rate for my testing site... Did others notice that as well?
Here is a breakdown of what I recall being specifically tested...note these are from the GARP study guide on changes to the FRM materials for part 2 (https://www.garp.org/media/a1Z1W000005jGggUAE) :
1. Financial Crime in Times of COVID-19 – AML and Cyber Resilience Measures”, Financial Stability Institute, May 2020. -> 2 or 3 q's
2. Global Financial Stability Report: Markets in the Time of COVID-19, International Monetary Fund (IMF), May 2020. (Chapter 1 only) -> there were 2 questions on this I think. One specifically asking what happened to IG vs. HY spreads during March 2020/April 2020....does anyone remember the second question?
3. “Cyber Risk and the U.S. Financial System: A Pre-Mortem Analysis,” Federal Reserve Bank of New York Staff Reports, June 2020. -> there were a ton of cyber risk questions. These were all framed as "best practice" type questions where the process of elimination was hard against 2 or more.
4. Valentin Haddad, Alan Moreira, and Tyler Mui, “When Selling Becomes Viral: Disruptions in Debt Markets in the COVID-19 Crisis and the Fed’s Response.” -> I don't remember this article being tested
5. Patrick Bolton, Morgan Despres, Luiz Awazu, Pereira Da Silva, Frédéric Samama, Romain Svartzman, “The Green Swan – Central Banking and Financial Stability in the Age of Climate Change,” Bank for International Settlements (BIS), January 2020. (Chapters 1-3 only) -> annoyingly long material to read and worst podcaster ever.... also NOT TESTED SMH....
6. Climate Change: Physical Risk and Equity, Global Financial Stability Report: Markets in the Time of COVID-19, International Monetary Fund (IMF), May 2020. (Chapter 5 only) -> I dont think this was tested but feel free to correct me on this
7. Stephen Cecchetti, Kim Schoenholtz, “Replacing LIBOR” https://voxeu.org/article/replacing-libor. September 2019. -> one question on Libor vs. SOFR that drove me crazy. They asked something like.... "Given all of the recent updates on LIBOR vs. SOFR, Which of the following is correct" a.) US regulators are forcing the addition of fallback language to existing libor based contracts, b.) Libor's derivatives market is greater than SOFRs c.) SOFR's derivatives market is greater than LIBORs d.) I forget.... I spent a lot of time on this stupid question as you can tell... lol

Stephen G. Dimmock and William C. Gerken: Predicting Fraud by Investment Managers (2012) -> this was definitely asked about

Quantitative areas that I recalled:
1 LogNormal Var 95% -> 1 day 99% type question
1 constant hazard rate CDF question
1 model 1 constant vol no drift two month downrate scenario calc


That's all that is coming to my mind, but hopefully others can add for additional benefit! Cheers and good luck all!

-BCVA (2021)
- manager selection/portfolio construction regression question(alpha/beta)
-hurdle rate(with preferred stock):6.5%
- two questions on FRTB

if anyone recalls questions/answers, would be very helpful!

 

[frmcfaonego]

The exam was tricky, totally agree.

In this case the question mentioned for choice B that the CRO should be responsible for the escalation levels on the contingency plan, not the contingency plan itself. Thats why its choice B, it is on BT notes.

Chose B as well

 

[dorathy]

Proportion of qualitative questions to quantitative questions were approximately 70/30, more focus on Risk management and investment management part, GEV, Cybersecurity, resiliency and other contemporary issues topics. Questions were pretty complex in terms of wording (I am not a natives speaker), not because of unfamiliar words, but because of the structure of sentences. Most of the time, there were two options left to choose from, logically both were correct, but when I reread the question and background information, I could make the final choice. There was no long questions, there was not a negative affirmative questions (with word 'except' , 'not' or similar). Overall very mixed feeling, I was expecting more quantitative part and broader coverage.

 

[dorathy]

Chose B as well

Here based on background info I chose B as well

 

[mariomansour]

Some of the questions I partially recall:

1. ES at 97.5%
2- basel ii.5 capital requirement (answer was 27.3 - C?)
3- Liquidity stress scenario - think I went for switch from short to long term funding, don't think it's right.
4- question on RAF
5- Asset allocation and security selection
6- Securitization question on correlation and volatility i think; equity and subordinated increases and senior decreases?
7- liquidity asset buffer - answer 450?
8- Asset 1 contribution from total portfolio VAR, something like that.
9- stress loss question - answer is C i think, 1.7
10- question on LTP
11- bond price after 3 years question

All i can remember for now

 

[LucreziaB]

If option a says risk managers instead of business managers I will definitely go for it. Agree that this is an example to show that garp makes this so tedious. In my view there is nothing wrong with the CRO to ask business managers to review their model or CRO making a contingency plan

It's also quite arbitrary given how much the operational risk texts focus on how new and rapidly changing the concepts of ERM and the role of the CRO are (e.g. from more of a compliance type to an actual strategist). Like OK great you can mince the words of what one chosen author in the syllabus wrote on a particular topic...treat Black-Scholes, CAPM as canon (while explaining their deficiencies), totally fair...much of this ops risk stuff in my opinion is NOT.

 

[Seelmann]

You guys are stressing me out, I knew I shouldnt have come here to read the correct answers, lol. Anyone know the answer to one of the last questions about what changes if default probability of creditors in a securitizations increases? Or something like that

 

[adeex18]

Exactly, First Line of Defence doesn't challenge their own models; its 2LoD which does that (Risk Managers / Validation Unit) and after their "Ok" it gets approval.

Is this the model risk question? I reviewed all the options and I thought option A made the most sense. I think A was something along the lines of the CRO should challenge the model developers to document the model and manage its inventory. I mean these are 2 challenges with model risk management, shouldn't the people designing the model should be the ones documenting assumptions and managing inventory but they can be passive about this or disregard this part of the process, so isn't it up to model risk or CRO to call this out?

overall these question highlights the flaw of the exam, poorly structured answered choices that are up for different interpretation. I wouldn't fault anyone who picked A or B in this case. I can't even count how many questions I was torn between two close answers.