Exam Feedback November 2016 Part 2 Exam Feedback

[Johnkrause1]

Can anyone confirm if the following questions where in the exam:

- Question asking for CLN, CDS and TR Swap which provides most protection to buyer?
- Normal based DD for Merton

Many thanks

 

[Roopam]

Yes, qs had an error

Same here 8% .... question related to RAROC. Revenue - (60+x) - EL + EC revenue - Cost / EC = 15% that puts X% = 8%

Can anyone confirm bilateral netting problem ...I loosely chose C. 9 as the asnwer... I have doubt that it may be wrong.

For Bilateral Netting, as the question read, they wanted to calculate reduction in collateral in moving from bilateral to multilateral via ccp. In bilateral, the total collateral movement between 3 parties was adding up to 9 and with CCP multilateral, it reduced to 2. So I selected the difference of 2 i.e. 7. Let me know if anyone else also comprehended it like that.

Additionally, for RAROC, i also got 8%. My understanding, RAROC was 20%, but bank can reduce it to 15% i.e. additional capital of 5% of EC, which can be utilised as ...i dont remember for what....

There was another qs on Bond spread where PV of bond was given along with FV, rf & value of put with K=bond FV. Any clue how to answer this? Do we calculate the risky value of bond and then using dcf calculate the returns (rf+spread) and get the spread or we ignore the put values and just use PV?

 

[S666]

Anyone remember the question when they ask what percentage of contribution of the manager due to asset allocation? What is the answer you have for that one, is that 0.63 or -0.03?

I got exactly - 0.03% for my calculation, or rather I got - 0.027% which needed to be rounded

 

[Roopam]

Are u sure it was a 2 tails test? VaR is always a one tail test... Well the exact same exercise was on bt video on Youtube. We had to calculate the z value. Mean=5%*252 trading days. Vol =sqrt(nqp)=sqrt(5%*95%*252) and zvalue=(20-mean)/vol which was above critical t value

The question mis stated that bank backtested using 95% 1 tailed test, whereas backtesting is always 2 tailed test. VaR as u mentioned is always 1 tailed. But in both the cases , 1 tailed or 2 tailed 95%, the critical t is either 1.96 or 1.645, where as test statistics was ~ 2.13 or so it ended in rejection region.

 

[Trueman]

• Bank has a basket of 500 short CDS. Each CDS for $1.000.000 bond, which has a 4% probability of default. RR equals 0%. There is a 5% probability that at least 25 bonds go to default. Calculate credit VaR.

Anybody knows how to get 4.950.000 for this question?

 

[Ra10as12]

Correct
1. Cybersecurity- take the systems offline and then report problem
2. Non-quantifiable risks since the financial crises
3. 90%smm
4. Self control risk assessment
5. Post high quality bonds as collateral
6. Overcollateralization
7. Pricing of a two period bond
8. Liquidity Value at Risk 6.43
9. Calculate the expected loss
10. Libor manipulation happened when banks submitted low rates
11. Reduce moral hazard by letting arranger take stake
12. Other creditors do not have recourse to the SPV
13. Risks aggregated at the granular level
14. Enterprise risk management
15. Correlation Swap receives 0.4 more
16. Expected loss
17. Smoothing only impacts volatility
18. Collapse in ABCP and CP market following Lehman
19. Increasing sample size Expected loss
20. Add stock with lowest MVAR
21. Credit Value at Risk Calculation
22. Principal mapping
23. Reject 0 because critical value above
24. Historical does not rely on normal distirbution

Unsure

1. RAROC
2. Ho Lee calculation
3. Forward Rate Libor calculation
4. CCP multilaternal netting calculation
5. CVA
6. Beta hedge

Incorrect
1. Gumbel Frechet - selected wrong answer
2. Hedge Funds
3. Operational risk
4. 6x9 FRA
5. Implied Volatility Graph
6. Libor/ OIS calculating derivatives
7. Linear/Stratification/Quadratic Programming
8. Minimum transfer amount

This is an analysis of my questions. Bold weighted ones reflect uncertain answers currently in correct but might be incorrect. I can't remember any other questions at the moment and am hoping for 40 correct which I hope will be enough to clear the exam

Hey what was the answer of gumber frechet question ? and SMM ? was it 90% ?

 

[Johnkrause1]

Gumbel Frechet was the right answer and 0.9% SMM

 

[mghm]

Gumbel Frechet was the right answer and 0.9% SMM

I don't remember the question but it was talking about Thin tail...I selected something in option related to thin tail.

 

[mghm]

I am just recalling portfolio re-balancing / combination question for acheiving target VaR...I got answer as for combination portfolio as 62.xx

If anyone remembers that then pls confirm what was the correct choice?

 

[Eternity]

I am just recalling portfolio re-balancing / combination question for acheiving target VaR...I got answer as for combination portfolio as 62.xx

If anyone remembers that then pls confirm what was the correct choice?

Choose y (lower correlation but higher individual VaR), portfolio VaR should be 62.xx, another is 61.xx. I rmb the answer is D if I am not wrong

 

[Eternity]

I don't remember the question but it was talking about Thin tail...I selected something in option related to thin tail.

The answer is, when tail index = 0, Standardized Gumbel dist has lighter tail then Standardized Frechet dist. Choose A

 

[mghm]

One more question which was mentioning critical value, test statistics and total exceeding values "20"

What was the answer is it A) Reject Critical value exceeding / higher than Test statistics or B) Reject Test statistics greater than critical value?

 

[Rent23]

Yes, qs had an error



For Bilateral Netting, as the question read, they wanted to calculate reduction in collateral in moving from bilateral to multilateral via ccp. In bilateral, the total collateral movement between 3 parties was adding up to 9 and with CCP multilateral, it reduced to 2. So I selected the difference of 2 i.e. 7. Let me know if anyone else also comprehended it like that.

Additionally, for RAROC, i also got 8%. My understanding, RAROC was 20%, but bank can reduce it to 15% i.e. additional capital of 5% of EC, which can be utilised as ...i dont remember for what....

There was another qs on Bond spread where PV of bond was given along with FV, rf & value of put with K=bond FV. Any clue how to answer this? Do we calculate the risky value of bond and then using dcf calculate the returns (rf+spread) and get the spread or we ignore the put values and just use PV?

I got the same result for netting question: 9 bilateral - 2 multilateral = 7 reduction

The RAROC question was asking, starting from a RAROC of 20% what is the maximum acceptable interest on deposits in order to maintain a RAROC of at least 15%. The only option leading to exactly RAROC of 15% was 8% all the others were higher rates reducing the final RAROC below 15%.

 

[Eternity]

One more question which was mentioning critical value, test statistics and total exceeding values "20"

What was the answer is it A) Reject Critical value exceeding / higher than Test statistics or B) Reject Test statistics greater than critical value?

B, test stats(that one you calculated) > critical value (1.96, 95%) obviously

 

[Eternity]

I got the same result for netting question: 9 bilateral - 2 multilateral = 7 reduction

The RAROC question was asking, starting from a RAROC of 20% what is the maximum acceptable interest on deposits in order to maintain a RAROC of at least 15%. The only option leading to exactly RAROC of 15% was 8% all the others were higher rates reducing the final RAROC below 15%.

This question I feel so weird, because I think the numerator is revenue - expected loss - unexpected loss - loan * interest rate - ops expense + return on econ capital +/- some unknown, the unknown makes the RAROC 20%.. Otherwise i cannot reached 20% RAROC...

 

[Arnaudc]

Guys, do you know how were we supposed to give market price of 2y zc? (we had 1year rate and fwd up/dowm one year with no indication of risk premium expectation)..
I dumbly performed an expected dcf (which works only for risk neutral trees) because I did not know what else to do..

 

[Rent23]

This question I feel so weird, because I think the numerator is revenue - expected loss - unexpected loss - loan * interest rate - ops expense + return on econ capital +/- some unknown, the unknown makes the RAROC 20%.. Otherwise i cannot reached 20% RAROC...

Unexpected loss is not included in the RAROC formula, the 20% initial RAROC was quite straightforward to calculate. Then just replace the interest on loan to see which was giving the minimum acceptable 15%

 

[Eternity]

Unexpected loss is not included in the RAROC formula, the 20% initial RAROC was quite straightforward to calculate. Then just replace the interest on loan to see which was giving the minimum acceptable 15%

Lol, I am so lucky, the unknown part is + 20 for me, counteract the -20 that I added for unexpected loss

 

[Ra10as12]

Choose y (lower correlation but higher individual VaR), portfolio VaR should be 62.xx, another is 61.xx. I rmb the answer is D if I am not wrong

i think it was B wi 62.xx, option d was 63.XX in my question which was exceding the VaR target

 

[mghm]

i think it was B wi 62.xx, option d was 63.XX in my question which was exceding the VaR target

The crux is 62.xx ...