Nov 2013 FRM Part 2 Review

[timchimpski]

There is a vingette in the original GARP readings (Pricing Counterparty Credit Risk I) that speaks to an evolution of the CVA market in the wake of the finanical crisis, where most banks were downgraded and their credit spreads gapped out. The text eludes to the possibility of a counterparty pushing back against the bank in a situation where their credit ratings and spreads converge (which was the case in the exam question). I went with the answer that the institution demands a reduction in CVA.

 

[grasshopper1]

All - I actually answered "CVA no longer applies", reasoning that if dealers credit worsened by 130 bp vs only 30bp for the client, the dealer actually has to pay the client ! In other words, BCVA model is closer to what needs to happen. Since clients don't charge CVA and dealers do, my answer may be seen as incorrect. Hope not though.

 

[SoBeFla]

I don't know either, and I appreciate everyone's contributions to the thread, but after some reflection I tend to agree with timchimpski. He/she seems to have done a more thorough job of reading the base materials than I came close to, and knowing how GARP expects us to be on top of recent trends, I'm betting the right answer is that the end user requests a reduction in CVA. After all, we learned from the crisis that dealer banks aren't immune from downgrade and even default, so they should have lost some negotiating power with their counterparties when it comes to CVA for OTC swaps.
Tell me if I'm off base.
Hope everyone had a peaceful Thanksgiving. Best to all!

 

[Andrew Wedemier]

Very theoretical exam:
My annotations( I missed the bassel III tip (dropping Tier III, result was 8,4%):

12-Which of the following options would retrieve the largest LVar(constat spread) to Var ratio: smallest confidence level and holding period
13 - Regression: Beta when positive returns and negative. Asimmetry.
14. Impact on ES on economic capital
15. Which of the following would increase ARAROC the most: scenarios based on changes on operating cost, revenus, were given(guess it's Q number 5 above).
16: Liquitidy cost calculation: Assuming non-constant spread.
17: A set of options contracts were given plus a forward contract: One of the options deep in the money the other out of the money, derive the VaR, based on delta?.
18: Senior tranche: Is the one that has the highest duration of the tranches.
19: IO(negative duration).Not 100% sure about this one.
20: ZC Bond: yield=8% RR=0% Riskfree rate=3%. Derive the PD. Two correct options were given, 5% and 4,63%. I chose the latter(more accurate in my opinion).

Yea the answer to no. 20 is 4.63 or something like that. I almost got caught on that one....but there was a GARP practice question that was exactly like it....so I knew that one.

 

[Andrew Wedemier]

It was a good exam....I prefer calculations myself but I must say Part 1 was way harder than Part 2 to me. Then again I was so freaked out after Part 1 I took a militaristic approach to Part 2. So I might have just been better prepared.

I agree it was very theoretical even the quantitative questions were worked into a theoretical answer format.

Well we have 14 days before D-Day....Good Luck!

 

[Arcadio]

Esperemos resultados. Estoy muy ansioso , ya falta poco. Good Luck everyone!!!

 

[abh2013]

Finally the results are out. I passed FRM part2 as well! Please share your results.