Exam Feedback May 2021 Part 2 Exam Feedback

[badbunny]

Option A?

Can’t recall the letter sorry

 

[Rhim0001]

Any feedback on below?

12 : BCVA question ...ans D ? -5K something ? - - > i subtracted the DVA from CVA as i recall, answer was 1,000 something - not sure if right.


14 : some predatory trading , model risk , moral hazard question , was A or D the answer ? guess i selected A --> the frictions question? Not sure if it was adverse selection

15 UL component , correlation was given and total portfolio split as 16K and 24K , guess i selected 131 as answer

14. Picked D as well, but wasn’t certain
15. Adverse selection for sure
16. Cannot recall but if you remember the formula then should have no problem

 

[Rhim0001]

I think the question was stress loss, not stress EL, which is stress EL - EL..I at least hit one answer possibility doing this

You’re correct
Brain just stuck have no idea how to calculate wcl of that question in the exam

ah
Also there’s one question which they have given the buy cost and sale cost and the risk factor something like that, and asked should the investor/ bank sell the equity/bond or increase the holding of it
Anyone know the answer? I have no idea how to do this as well

 

[broan]

14: I think it was friction between originator and assigner. I chose adverse as originator has more knowledge on the mortgager than the assigner

friction between arranger and originator is a predatory borrowing and lending problem. (it on the pre study Garp question)

 

[FRMNinjaLeonardo]

Intial picked up B, Correlation swap as answer.
Then after reading C , Value of cds goes down with increase of correlation. Went with C , with some doubt in mind. Just thinking they didnt mention the direction of correlation swap

Choice C: default correlation of the originator (Bank xxx) of the mortgage and the CDO protection (CDS) seller increase.
I think the originator has nothing to do with the CDO here, as it already transferred the credit risk to the SPV. It would be the default correlation between the underwriter of the CDO and the protection seller that matters. So I chose B as my answer.

 

[ThomasHuang]

Anyone recall the problem about a portfolio of assets starting at 120 with a decreasing number of assets surviving?

Also there was a question about a firm's asset value being close to the level of senior debt (firm also had equity and mezzanine debt).

 

[Rhim0001]

Anyone recall the problem about a portfolio of assets starting at 120 with a decreasing number of assets surviving?

Also there was a question about a firm's asset value being close to the level of senior debt (firm also had equity and mezzanine debt).

Got D, 15.xx% for the first one

 

[ThomasHuang]

Got D, 15.xx% for the first one

Yeah that sounds familiar

 

[ThomasHuang]

Anyone recall the problem about a portfolio of assets starting at 120 with a decreasing number of assets surviving?

Also there was a question about a firm's asset value being close to the level of senior debt (firm also had equity and mezzanine debt).

For the second question there was some mention of the firm having an equal chance of failure or being acquired

 

[FRMNinjaLeonardo]

Anyone recall the problem about a portfolio of assets starting at 120 with a decreasing number of assets surviving?

Also there was a question about a firm's asset value being close to the level of senior debt (firm also had equity and mezzanine debt).

first one, I remember the question was asking "time-weighted discrete default rate", which I calculated using geometric average and get the answer D.

The second one, is the question saying someone observed the market volatility is increasing, and asking the direction (increase/decrease) of senior debt, mezzanine debt and equity's value?

 

[ThomasHuang]

first one, I remember the question was asking "time-weighted discrete default rate", which I calculated using geometric average and get the answer D.

The second one, is the question saying someone observed the market volatility is increasing, and asking the direction (increase/decrease) of senior debt, mezzanine debt and equity's value?

Yes I also got D for the first question.

And that does sound like the premise of the question for the second question.

 

[ThomasHuang]

Yes I also got D for the first question.

And that does sound like the premise of the question for the second question.

I actually think it was asset volatility. But I assumed because there was a potential acquisition it would give the equity upside

 

[Rhim0001]

I actually think it was asset volatility. But I assumed because there was a potential acquisition it would give the equity upside

I remember when the firm is not doing very well
Mezzanine would have the same property as equity
Which both will go up in value in financial distress, while senior debt will fall in value

 

[Ullaskarkera]

Choice C: default correlation of the originator (Bank xxx) of the mortgage and the CDO protection (CDS) seller increase.
I think the originator has nothing to do with the CDO here, as it already transferred the credit risk to the SPV. It would be the default correlation between the underwriter of the CDO and the protection seller that matters. So I chose B as my answer.

oops..silly mistake then ;(

 

[Ullaskarkera]

I remember when the firm is not doing very well
Mezzanine would have the same property as equity
Which both will go up in value in financial distress, while senior debt will fall in value

I also went with equity and subordinate increases...C or D

 

[badbunny]

friction between arranger and originator is a predatory borrowing and lending problem. (it on the pre study Garp question)

You are correct, I got that wrong lol

 

[badbunny]

first one, I remember the question was asking "time-weighted discrete default rate", which I calculated using geometric average and get the answer D.

The second one, is the question saying someone observed the market volatility is increasing, and asking the direction (increase/decrease) of senior debt, mezzanine debt and equity's value?

Yeah time weight average default rate, got like 15,39%.

I remember when the firm is not doing very well
Mezzanine would have the same property as equity
Which both will go up in value in financial distress, while senior debt will fall in value

same here, mezzanine behaved like equity

 

[mariomansour]

You are correct, I got that wrong lol

Originator and arranger. The arranger (issuer) purchases the loans from the originators for the purpose of resale through securitized products. The arranger will perform due diligence but still operates at an information disadvantage to the originator. That is, the originator has superior knowledge about the borrower (adverse selection problem). In addition, the originator may falsify or stretch the bounds of the application resulting in larger than optimal lending (predatory lending or predatory borrowing).

So both? Lol

 

[badbunny]

Originator and arranger. The arranger (issuer) purchases the loans from the originators for the purpose of resale through securitized products. The arranger will perform due diligence but still operates at an information disadvantage to the originator. That is, the originator has superior knowledge about the borrower (adverse selection problem). In addition, the originator may falsify or stretch the bounds of the application resulting in larger than optimal lending (predatory lending or predatory borrowing).

So both? Lol

I got your thinking and that’s how I proceed, but GARP practice exercises
says is predatory lending/borrowing. See bellow:

 

[badbunny]

Originator and arranger. The arranger (issuer) purchases the loans from the originators for the purpose of resale through securitized products. The arranger will perform due diligence but still operates at an information disadvantage to the originator. That is, the originator has superior knowledge about the borrower (adverse selection problem). In addition, the originator may falsify or stretch the bounds of the application resulting in larger than optimal lending (predatory lending or predatory borrowing).

So both? Lol

On the other side, the only answer that said “the arranger should perform due diligence on the originator” was the adverse selection choice I believe; anyone recall?