Exam Feedback November 2015 Part 2 FRM Exam Feedback

[Twol84]

O/C limits are yearly. The Malz reading has an example of the sequential cash flows, and excess spread flowing to equity is definitely after reaching the O/C limit, but adding recoveries.

 

[HERO]

all accounts were allocated... you have to deduct 1.8 for OC before allocating CF to equity.

 

[babyik]

I've just remembered a question about modeling losses in stress testing - the answer was about LGD
we have around 60 questions revealed so far, can we get more ? come on

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There was a question on the probability of default and the credit spread was given as 350 bps and the RR as 30% . I chose the numerical answer 50 ..dont remember the decimals [ 350/70]

 

[William_Jose]

Shouldnt it be policy-mix risk, because the two analysts are actually talking about the right mix of emerging market exposure in the portfolio (if i remember correctly, one analyst says larger allocation to emerging markets and the other analyst says lesser allocation because of tail risk). If the analysts make an incorrect decision of higher emerging market allocation, then the policy mix itself will be a wrong decision. And I think sponsor risk is not likely, as the decision to invest or not invest in emerging markets will not impact the ability of the sponsor to contribute to the fund. I am not sure about funding risk though.

Yes, I went with policy-mix risk for this one. It is about allocating weights to different assets to the portfolio and why one is not good for high weightage relative to the other- so looks like policy-mix risk. Funding risk is about risks related to borrowing and getting funds at reasonable rates or maturities and does not seem to be the only risk here. Basically, while building a portfolio, there is the policy mix risk (related to the various betas) and the active management risk (the alpha). I think this question has tested on this very aspect.

 

[krenate]

Yes, I went with policy-mix risk for this one. It is about allocating weights to different assets to the portfolio and why one is not good for high weightage relative to the other- so looks like policy-mix risk.

I have marked sponsor risk for this one...the problem is, that the wording was completely misleading and the answers were too long and also ... I do not know....such a pity...

 

[William_Jose]

It is 0.035/0.7=0.05

 

[William_Jose]

I have marked sponsor risk for this one...the problem is, that the wording was completely misleading and the answers were too long and also ... I do not know....such a pity...

Yes, I agree with you. GARP wordings were quite misleading at times.

 

[William_Jose]

You know the question about mapping positions to derivatives just confirmed that the correct answer was the one with buying USD spot, long in us t bill and something wrt the JPY.It was option B.

Long USD spot, long US t-bill and short JPY. Basically, this goes by the forward rate formula we learnt in L-1.

 

[William_Jose]

I chose the option where senior and mezzaning got fully paid, but OC got nothing, with remaining going to equity. My reasoning was that if OC had not yet been used, there would be no need to replenish it (assuming it was already at 1.8 before the cash.)

i could be wrong though

Here, there was a limit given to the OC account- don't remember the value. So, after deducting for senior and mezzanine, the OC could get its limit and then the remaining could still go to equity.
But the confusion is whether L-B goes to equity first or OC first. I have seen both conventions being used in Schweser and I wasn't sure at that time. Since OC limit was given, I went ahead with giving OC first followed by equity.

 

[Esbringa]

Im not pretty sure but i think only the equity tranche gets full paid when the structure ends (last period).

At other period, the cash flows goes first to the OC and then the equity gets the remaining cash.

I marked the wrong option and realized when i was getting home.

 

[Paranoid Panda]

It was the option in which equity did get the amount post fulfilling the OC limit.

 

[Paranoid Panda]

Yes, I agree with you. GARP wordings were quite misleading at times.

We will never know like literally we will never know regarding which risk it was.

 

[William_Jose]

It was the option in which equity did get the amount post fulfilling the OC limit.

Yes, but there was also some example related to waterfall structure in Schweser and even in BT where the OC got funded after the equity and there was some equity limit mentioned in the question. Under which circumstance does that happen?

 

[Paranoid Panda]

Im not pretty sure but i think only the equity tranche gets full paid when the structure ends (last period).

At other period, the cash flows goes first to the OC and then the equity gets the remaining cash.

I marked the wrong option and realized when i was getting home.

did the question mention that these were the terminating cash flows?

 

[Esbringa]

did the question mention that these were the terminating cash flows?

No.


The real thing is that the equity / overcollateralized account can be structured on many different ways (The structuring agent can make it the way he wants)
So the question again is useless in my opinion.

 

[shlobb13]

I chose the option where senior and mezzaning got fully paid, but OC got nothing, with remaining going to equity. My reasoning was that if OC had not yet been used, there would be no need to replenish it (assuming it was already at 1.8 before the cash.)

i could be wrong though

I think the key here is on the assumption of the OC account, was it initially zero or 1.8m. i answered the question using the former but i'm not very confident i got it right.

 

[Ranjith21]

did the question mention that these were the terminating cash flows?

If the period was the terminal period, the cash flows would have included the principal amounts as well, but the sum of the cashflows summed to total interest amount. So, that was not terminal period.

 

[Ritchie_2014]

I want to discuss a lot of questions but I am afraid if we are allowed or supposed to do so. Could GARP suddenly come up and start taking penalty actions against people for disclosing questions?
Admin and others, please clarify!

 

[Tanya Vasileva]

Logically it appears to be sponsor risk coz sponsor risk refers to the company's ability to contribute if funding levels fall whereas funding risk is the inability to raise funds due to credit deterioration etc. Sponsor risk is the biggest risk fro DB plans. Dont know what GARP thinks but i went with Sponsor Risk.

I have checked some independent articles for fund management and emerging markets and it appears in most of them that the plan sponsor bears the risk that the returns from the investment portfolio may not be enough to cover the pension fund liabilities or funding gap risk.

 

[Tanya Vasileva]

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There was a question on the probability of default and the credit spread was given as 350 bps and the RR as 30% . I chose the numerical answer 50 ..dont remember the decimals [ 350/70]

that was an easy one with the simple formula you've wrote