I am also not sure but what made me choose incremental is that the question clearly mentioned the fact the portfolio contained only 1 position and that one new position was about to be added. Maybe I am wrong but I would use MVaR in case we want to increase the exposure to particular asset and not add a new one which is currently not in the portfolio.
Exam Feedback November 2016 Part 2 Exam Feedback
- Thread starter Nicole Seaman
- Start date
devdutt.21
New Member
You are correct if as it is only 1 position then I missed reading that part. Lost marks there
devdutt.21
New Member
About the Credit Spread. Short Put + Risk Free Bond = Position in Risky Bond. Therefore Credit Spread is derived accordingly.
MVAR, Incremental VAR confusing..
the question also mentioned minimizing risk of portfolio decision.
MVAR(i) = MVAR(j)... We can use marginal VARs to make decisions to lower of risk of the entire portfolio.
Correct answer is MVAR.
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I can agree with you with that but the fact that the position is not in the portfolio yet is key for me. As David wrote in the notes:
"Incremental VaR is change in VaR owing to a new position. Incremental VaR is a “before and after” comparison of the VaR: before and after the trade (new position)."
I can agree with you.
but
Incremental VAR is the change in VAR from the addition of a new position in a portfolio.
MVAR is the per unit change in a portfolio VAR that occurs from an additional investment in that position.
In addition, portfolio risk will be at a global minimum where all the marginal VARs are equal for all i and j
MVAR(i) = MVAR(j)
Diep Anh Ngo
New Member
I dont remember exactly but somewhere I read that for pricing we use incremental, for choosing new asset we use marginal
I am not sure, maybe I am wrong but I picked Marginal VaR
I am not sure, maybe I am wrong but I picked Marginal VaR
I remember thinking mvar was the "right wrong" answer and put down ivar.
But this was for the addition of a new position in a portfolio. Therefore iVAR should be applicable?
MVAR is for existing portfolio
Well, MVaR focuses on risk and ways to reduce risk.
This is a question of how to reduce the risk.
I chose MVaR.
frmpart2dan
Member
omg I missed that part too!You are correct if as it is only 1 position then I missed reading that part. Lost marks there
emilioalzamora1
Well-Known Member
it was definitely Incremental VaR as the position he wanted to add was quite large about ($25M). And Jorion says 'The change in VaR owing to a new position. It differs from marginal VaR in that the amount added/subtracted can be large, in which case VaR changes in a nonlinear fashion'.
frmpart2dan
Member
I hope everyone here passed, the fact that we know how to analyze the questions that much and agree on many things show how competent we are with the humongous syllabus of thd l2 FRM. Given the time and exposure to the knowledge, I think we all can make the right choice in real world
Que
We need to consider only marginal var as marginal var refers to contribution of risk per unit of position added
Question was also about that which factor to consider that will reduce the risk after addition of position.
We need to consider only marginal var as marginal var refers to contribution of risk per unit of position added
My 2 cents
The exam was very tough, 40% quantitative and 60 % theory. I would say.....about 30 questions were straight forward theory/ simple calculations and about 50 questions were difficult / double calculations. The item set questions (3 or 4) were very lengthy and the information (often page long) provided was not even used in the questions, it just provided background/context.
Areas / themes / Questions - I remember
- At-least 3 questions on Credit Var
- VAR (4-5 questions about marginal/incremental/component VAR / Hist Sim /non-parametric / Var Mapping)
- CVA (a couple of questions)
- LVAR (about 2-3 questions) (1 calculation exogenous using constant spread)
- Netting / CCP / systematic risk / operational risk / CCP default / loss waterfall / initial margin depends on market risk (2-3 questions)
- PD / Hazard rate / Spread / EL calculations (about 4-5 questions)
- Valuation of a 2 year option (extremely simplified question)
- Hoo Lee model (1 quantitative question)
- RAROC (calculation of RAROC and decision to go or not)
- Commercial Paper or Asset Backed Commercial Paper (I think 2 questions touched upon this area / CP roll over risk / conduits default)
- Var Back testing (I think 2 questions) (1 about accept / reject the model using bio-nomial)
- Smoothing (don't know what was that, but was asked in 2 questions - I think it is something to do with portfolio analysis)
- Portfolio construction techniques (screens, stratification, linear programing, quadratic programing) - 1 question
- Sponsor Risk - 1 question
- Tracking error
- Asset allocation / selection attribution (a similar question was there in garp practice exam, but I could not recall how to do it)
- Merger / Risk Arbitrage / Distressed Securities (Event Driven - again I could not recall)
- Money Market Fund (1 theory question about market disruption)
- A couple of questions from global financial markets liquidity study of PWC
- 1 question about why /how LIBOR was manipulated
- 1 question about stress testing convergence
- 2 questions about cyber security
- 1 question about co-relation swap
- 1 question about GPD - POT...something about tail measure / distribution
- 2 Structured products questions (1) how much the equity tranche will get after OC and (2) impact on equity tranche for increase in PD or default rate - don't remember
- 1 question about mean reversion (I think it was bond prices and something about default risk)
- 1 question about regression hedge (TIPS and nominal bonds)
-1 question about OIS and 1 question about volatility smiles
-1 question about Merton model (somehow I could not do that...we were required to value Debt i.e. F before default and we were the given the value of short put)
2-3 questions about capital i.e. tier 1 capital, CoCo, conversion buffer, cyclicality - written in very confusing ways
- 1 operational risk capital calculation (BIA / Standardized approach)
- 1 about RCSA / external data / internal data / KRI
- 1 about internal loss threshold
-1 calculation about internal loss even recording (gross, opportunity cost / insurance recovery etc.)
- 1 about friction between originator and arranger
- 1 about PSA / SMM
- 1 about total return swap and first to default puts
- 1 theoretical about WWR (using CDS and other exposure towards the same entity)
- 1 question about when to give a margin call (using independent amount/threshold / minimum transfer amount)
- 1 about model risk
- 2 options of a question covered LCR and NSFR
- 1 question about who owns RAF and who is responsible to implement it
- 1 about severity modeling distribution
- 1 question about special / general spreads for repo
-1 question from failure mechanics of dealer banks
- 1 about WCDR
All in all a very tough exam. I am hoping for about 50% correct answers.
The exam was very tough, 40% quantitative and 60 % theory. I would say.....about 30 questions were straight forward theory/ simple calculations and about 50 questions were difficult / double calculations. The item set questions (3 or 4) were very lengthy and the information (often page long) provided was not even used in the questions, it just provided background/context.
Areas / themes / Questions - I remember
- At-least 3 questions on Credit Var
- VAR (4-5 questions about marginal/incremental/component VAR / Hist Sim /non-parametric / Var Mapping)
- CVA (a couple of questions)
- LVAR (about 2-3 questions) (1 calculation exogenous using constant spread)
- Netting / CCP / systematic risk / operational risk / CCP default / loss waterfall / initial margin depends on market risk (2-3 questions)
- PD / Hazard rate / Spread / EL calculations (about 4-5 questions)
- Valuation of a 2 year option (extremely simplified question)
- Hoo Lee model (1 quantitative question)
- RAROC (calculation of RAROC and decision to go or not)
- Commercial Paper or Asset Backed Commercial Paper (I think 2 questions touched upon this area / CP roll over risk / conduits default)
- Var Back testing (I think 2 questions) (1 about accept / reject the model using bio-nomial)
- Smoothing (don't know what was that, but was asked in 2 questions - I think it is something to do with portfolio analysis)
- Portfolio construction techniques (screens, stratification, linear programing, quadratic programing) - 1 question
- Sponsor Risk - 1 question
- Tracking error
- Asset allocation / selection attribution (a similar question was there in garp practice exam, but I could not recall how to do it)
- Merger / Risk Arbitrage / Distressed Securities (Event Driven - again I could not recall)
- Money Market Fund (1 theory question about market disruption)
- A couple of questions from global financial markets liquidity study of PWC
- 1 question about why /how LIBOR was manipulated
- 1 question about stress testing convergence
- 2 questions about cyber security
- 1 question about co-relation swap
- 1 question about GPD - POT...something about tail measure / distribution
- 2 Structured products questions (1) how much the equity tranche will get after OC and (2) impact on equity tranche for increase in PD or default rate - don't remember
- 1 question about mean reversion (I think it was bond prices and something about default risk)
- 1 question about regression hedge (TIPS and nominal bonds)
-1 question about OIS and 1 question about volatility smiles
-1 question about Merton model (somehow I could not do that...we were required to value Debt i.e. F before default and we were the given the value of short put)
2-3 questions about capital i.e. tier 1 capital, CoCo, conversion buffer, cyclicality - written in very confusing ways
- 1 operational risk capital calculation (BIA / Standardized approach)
- 1 about RCSA / external data / internal data / KRI
- 1 about internal loss threshold
-1 calculation about internal loss even recording (gross, opportunity cost / insurance recovery etc.)
- 1 about friction between originator and arranger
- 1 about PSA / SMM
- 1 about total return swap and first to default puts
- 1 theoretical about WWR (using CDS and other exposure towards the same entity)
- 1 question about when to give a margin call (using independent amount/threshold / minimum transfer amount)
- 1 about model risk
- 2 options of a question covered LCR and NSFR
- 1 question about who owns RAF and who is responsible to implement it
- 1 about severity modeling distribution
- 1 question about special / general spreads for repo
-1 question from failure mechanics of dealer banks
- 1 about WCDR
All in all a very tough exam. I am hoping for about 50% correct answers.
emilioalzamora1
Well-Known Member
well, the overwhelming fact in favour of Incremental VaR is that it was a NEW trade (Jorion: 'evaluate the total impact of a proposed trade on portfolio p. The before and after comparison is informative. If VaR is decreased, the new trade is risk reducing and vice versa.
See Jorion Figure 7-3.
Incremental VaR accounts for risk reducing/increasing effects.
See Jorion Figure 7-3.
Incremental VaR accounts for risk reducing/increasing effects.
If portfolio P is isolated from A or B then answer should be incremental VaR ...but if A and B already in Portfolio P and question is asking to tell which will increase decrease or increase VaR then answer should be Marginal VaR. I hope this helps?
Bu
That can be true only if the question was talking about trade happening is set of existing portfolio balancing or rebalancing or additing more quantity weights ! If some independent trade was the point then surely incremental VaR is the answer. I chose Marginal VaR ... I am not remembering clearly what exactly the question was ! Not that good in memorizing.
That can be true only if the question was talking about trade happening is set of existing portfolio balancing or rebalancing or additing more quantity weights ! If some independent trade was the point then surely incremental VaR is the answer. I chose Marginal VaR ... I am not remembering clearly what exactly the question was ! Not that good in memorizing.
Q
Question was which factor to look when a new position is added so that risk is reduced or minimum
I'm a little concerned about this - hopefully GARP does some kind of statistical analysis of the likelihood that questions or topics may have been leaked beforehand. I can understand there being one COCO question... but a full item-set and another question's answer about it - that's 5% of the exam right there on COCOs!
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