Exam Feedback November 2016 Part 2 Exam Feedback

[JVE]

From Kaplan's book 1, page 65, the buyer of correlation swap pays fixed and receives realized..

Aha. you're right. That makes it clearer. So answer would then be that the firm receives > 0.4m.

 

[JVE]

Should we include recovery from insurance in calculating op loss?

Not sure. I don't think so. Insurance can lower the capital charge for oprisk, but doubt it should effect the loss reporting.

 

[Eternity]

If so, that means that the he will be receiving 0.4 mil more?

Ya that's my hatch, but there might be a trap.. Everyone's answers diverge lol

 

[FRMPART2]

For op loss reporting insurance coverage will not be taken.it is mentiined in schweser book and loss event should not include any expected reimbursements or disposal of assests

 

[Moey]

There was also a question on the shape of the implied volatility curve for options on a stock which is in an M&A process and is therefore expected to either go up by 25% or go down by 20%. This puzzled me for a while. Price jumps cause volatility frowns... but how about expected price jumps? I figured they do, because logically all known information should already be incorporated in the curve. But not sure.

Pretty sure that's effectively a price jump. Almost like the current price is away from the money once expectations are priced in. Regardless here's another good example of how its wordiness turned a simple gimme into a "the world is upside-down" question, when under the time pressure of the exam.

 

[Moey]

For the netting question I picked 9 because net exposure after bilateral netting is 9

I answered 9 too but only because my full multi-netted answer wasn't there (and planned to revisit). I think "CCP novation" is multi, not just bilateral though.

 

[Diep Anh Ngo]

Aha. you're right. That makes it clearer. So answer would then be that the firm receives > 0.4m.

No, the bank will receive not pay, but amount is less than 0.4 million
Amount receive = (rho realized - rho fixed)* notional of contract
I remember that rho realized is ~ 41%
Fixed 40%
Amt 300

It's my answer, hope I did not get mistake

 

[intrepid86]

Pretty sure that's effectively a price jump. Almost like the current price is away from the money once expectations are priced in. Regardless here's another good example of how its wordiness turned a simple gimme into a "the world is upside-down" question, when under the time pressure of the exam.

I beg to differ on that, the question specifically mentioned later that market has started to factor demand fot OTM call which would imply higher price for OTM calls and thus higher implied volatility. And thus my choice was upward shaping implied volatility curve with heavy right tails and light left tails. Hope I have got it right.

 

[emilioalzamora1]

Should be a volatility Frown. See foreign currency options in Hull.
I agree with the vol. adjustment vor the LVaR: multiply the VaR with sqrt{(1+t)(1+2t)}/6t}.
Took CP Risk as well for the question with the pension fund.

 

[intrepid86]

Should be a volatility Frown (heavier right + left tails). See foreign currency options in Hull.
I agree with the vol. adjustment vor the LVaR: multiply the VaR with sqrt{(1+t)(1+2t)}/6t}.
Took CP Risk as well for the question with the pension fund.

Why there would be demand for ITM calls as question is clearly saying market has started factoring demand forOTM call. So for equilibrium to maintain logically demand would shift to OTM call from ITM call. So heavy left tail makes little sense to me. Anyone would like to throw insight on this?

 

[Diep Anh Ngo]

I answered 9 too but only because my full multi-netted answer wasn't there (and planned to revisit). I think "CCP novation" is multi, not just bilateral though.

I have just realized that i was wrong in this question, i can not remember the number but maybe answer is 5

 

[Eternity]

No, the bank will receive not pay, but amount is less than 0.4 million
Amount receive = (rho realized - rho fixed)* notional of contract
I remember that rho realized is ~ 41%
Fixed 40%
Amt 300

It's my answer, hope I did not get mistake

i think u memorized the figure wrongly, the notional is 400 i think.. Or is that possible our testing qns is different ?

 

[Diep Anh Ngo]

I am sure notional amount is 300

 

[frmpart2dan]

I have just realized that i was wrong in this question, i can not remember the number but maybe answer is 5

Found similar qns in a Chinese forum (unfortunately cannot post here as it is all in chinese). This is an extremely tricky qns, you need to count every billateral netting and reduce by the lower number X own Y 5 and Y own X 3 then net reduction through CPP is 3. Sum all these we got 7. Then due to novation we need to look at the X Y Z relationship and got another 2 reduction. So anwer is 9.

 

[frmpart2dan]

I am sure notional amount is 300

Notional amount is 400. The question said that the correlation in table 2 is understated so which mean in reality the correlation is higher which lead to higher realized correlation. So bank as a buyer of the correlation swap will receive higher than 0.4m which is what it will receive if correlation is not understated.

 

[frmpart2dan]

Anyone know what is the answer for the question about the percent of contribution of the asset manager by allocation of assets. There are 2 negative answer -0.69 and -0.3 and 2 positive answers, I got crazy by that qns, seem easy but no option is close to my answer!

 

[Moey]

... how were we expected to manage our time when w/ hindsight and knowledge of the questions, we still can't agree on some answers (i.e., price jump and pension "relevant" risk)!

 

[LizKO]

what was the answer to the cybersecurity question? so many questions seemed to have more than 1 possible answer.

 

[Johnkrause1]

what was the answer to the cybersecurity question? so many questions seemed to have more than 1 possible answer.

Take the systems offline and report the problem. That's what I put at least, I thought the other answers though plausible you would do in the next stage

 

[frmpart2dan]

Take the systems offline and report the problem. That's what I put at least, I thought the other answers though plausible you would do in the next stage

Yes that's exactly right, it was an example in the GARP note