Exam Feedback October 2020 Part 2 Exam Feedback

[sauce2k]

Yes, that's the second question I was referring to in my post; I can't get why the returns wouldn't be used in calculating the VaR.

Re the Vasicek: I remember getting an answer which matched one of the choices for once for that one though...

For the Vasicek, i got sth like 1.73? But the choice was 1.74? Or the reverse...

 

[goodbunny]

For the Vasicek, i got sth like 1.73? But the choice was 1.74? Or the reverse...

Yes I think I did get 1.73%. well remembered

 

[clement]

For the Vasicek, i got sth like 1.73? But the choice was 1.74? Or the reverse...

yes, got exactly that too

 

[VWJETTY]

I think they front-loaded this exam similar to the CFA exam. So basically they come out the gate trying to kill you with hard and time-consuming questions (i.e. Merton and Risk budgeting). I, too got like 9mm something when considering returns. I'm not sure why you wouldn't use returns when it's given but I skipped over those. And there were a number of those 1-pager questions where you read a novel and then answer a question at the bottom. I kinda just looked at the answers to see which I could eliminate but honestly it was a process of elimination for me as I was able to cross out one or maybe two and then pick the best one of the remaining.

Was it me or did the questions towards the end seem easier or was I just falling into traps? And also, what's up with all the numerous cyber risk questions? I felt like a rainfall and they just kept pouring it down. Especially that one with whether regulators needed cyber risk strategy separately. I didn't recall that they did, so I said the other option (forgot which it was).

I messed up on that one towards the end about security selection vs asset allocation relative to the benchmark. Bummer. Because I knew it too but after 4 hours it just started to get away from me.

There was a solid handful of questions I was super iffy on. Also what was the reason for the LIBOR transition to SOFR one? I think I picked answer A which was like LIBOR didn't capture....something like curve or something. But I don't think that's probably right.

A lot of the questions are now starting to escape me so this will be a helpful thread to keep watch to help recall those.

 

[goodbunny]

I think they front-loaded this exam similar to the CFA exam. So basically they come out the gate trying to kill you with hard and time-consuming questions (i.e. Merton and Risk budgeting). I, too got like 9mm something when considering returns. I'm not sure why you wouldn't use returns when it's given but I skipped over those. And there were a number of those 1-pager questions where you read a novel and then answer a question at the bottom. I kinda just looked at the answers to see which I could eliminate but honestly it was a process of elimination for me as I was able to cross out one or maybe two and then pick the best one of the remaining.

Was it me or did the questions towards the end seem easier or was I just falling into traps? And also, what's up with all the numerous cyber risk questions? I felt like a rainfall and they just kept pouring it down. Especially that one with whether regulators needed cyber risk strategy separately. I didn't recall that they did, so I said the other option (forgot which it was).

I messed up on that one towards the end about security selection vs asset allocation relative to the benchmark. Bummer. Because I knew it too but after 4 hours it just started to get away from me.

Oh I think it was 3.6% security selection and 0.87% asset allocation. As the manager had generated a greater return compared to benchmark and I did the calcs to be safe.

Speaking of front loading, there was a question about the investment strategy for a company that wanted to meet short term liabilities and maximizing return in long term etc, for which front/back load, barbell, ladder options were given?

I put the same answer for SOFR/Libor one i.e that Libor reflects the banks marginal funding cost but not the specific credit risk or something along those lines.

Wrt cyber risk question, are you referring to the answer about requiring a stand alone procedure?

 

[VWJETTY]

Oh I think it was 3.6% security selection and 0.87% asset allocation. As the manager had generated a greater return compared to benchmark and I did the calcs to be safe.

Speaking of front loading, there was a question about the investment strategy for a company that wanted to meet short term liabilities and maximizing return in long term etc, for which front/back load, barbell, ladder options were given?

Ahhh I said barbell but it might be back-loaded.

 

[randomname]

I said front-loaded but if the question was related to maximizing long term return then back-loaded actually sounds better.

I feel like I didn't focus properly anymore after all these issues with the calculation questions in the beginning...

 

[jtankx90]

Should be barbell as back load can’t meet short term needs

Ahhh I said barbell but it might be back-loaded.

 

[chintanmatalia]

For Libor I believe I put option D the one which was related to "increased variance of individual bank credit risk since 2007". Because A made half true statement as it was mentioned that it is based on actual transactions but it is not based on actual transactions. Anyone remembers answer for question related to Liquidity Risk (Marginal Cost Approach) I chose 6.1

 

[chintanmatalia]

Yes it should be barbell as the question also asked for Liquidity needs along with good long-term returns

 

[jtankx90]

Oh I think it was 3.6% security selection and 0.87% asset allocation. As the manager had generated a greater return compared to benchmark and I did the calcs to be safe.

Speaking of front loading, there was a question about the investment strategy for a company that wanted to meet short term liabilities and maximizing return in long term etc, for which front/back load, barbell, ladder options were given?

I put the same answer for SOFR/Libor one i.e that Libor reflects the banks marginal funding cost but not the specific credit risk or something along those lines.

Wrt cyber risk question, are you referring to the answer about requiring a stand alone procedure?

yes upon googling ... seems Basel don’t require a stand alone cyber security policy https://www.bis.org/bcbs/publ/d454.pdf

 

[goodbunny]

For Libor I believe I put option D the one which was related to "increased variance of individual bank credit risk since 2007". Because A made half true statement as it was mentioned that it is based on actual transactions but it is not based on actual transactions. Anyone remembers answer for question related to Liquidity Risk (Marginal Cost Approach) I chose 6.1

LIBOR is based on actual quotes but has been proven to be an unreliable. Was that the answer option?

 

[chintanmatalia]

In Libor question, the first choice said that Libor is based on actual transactions and the other half statement was true. But if you read schweser notes it says that Libor is not based on actual transactions and is one of the disadvantage as it is easy to manipulate

 

[chintanmatalia]

Ahh I made mistake in asset allocation and security selection question. I calculated asset allocation (0.87) but didn't bother to calculate security selection on assumption it is always low and selected wrong option wherein 0.13 was the contribution

 

[chintanmatalia]

I believe I applied default correlation formula wrongly and chose joint probability of default as around 0.02 or 0.04

 

[goodbunny]

I believe I applied default correlation formula wrongly and chose joint probability of default as around 0.02 or 0.04

Is that one where joint prob of default was given as 0.01?
Did we have to calculate correlation or joint prob of default?

 

[goodbunny]

yes upon googling ... seems Basel don’t require a stand alone cyber security policy https://www.bis.org/bcbs/publ/d454.pdf

Ahh I think I might have put it down. Feel silly now.

 

[chintanmatalia]

Is that one where joint prob of default was given as 0.01?
Did we have to calculate correlation or joint prob of default?

Oh okay it might be but whatever we were required to find I was unable to get any of the answer stated in options as I was applying formula wrongly. The closest one was 0.02 or 0.04

 

[mcrisk7]

Is that one where joint prob of default was given as 0.01?
Did we have to calculate correlation or joint prob of default?

I believe the (given) joint probability was about 0.01, yes. Don't remember what the answer was but I applied

correlation = [ PD_1_2 - PD_1 * PD_2 ] / [ SQRT(PD_1*(1-PD_1))*SQRT(PD_2*(1-PD_2)) ]

with PD_1_2 being joint probability and PD_1 and PD_2 the individual PDs.

 

[Lmgroves1]

I thought the exam was very challenging in all honesty, and I was exhausted by the end of it. I agree with what many people have said here in that some of the questions had so much text before eventually asking the question - and in some cases, there were potentially correct answers that had nothing to do with the text which was frustrating. I decided to go straight to the question and answers before trying to read and consume all the info. In most cases I could eliminate two answers quickly, but there were a lot of 50:50 calls between answers where neither was obviously incorrect.

The Merton-model question asking for the value of equity also stumped me. The only answer I could actually get was D, which was obtainable by using the current price of the debt as the strike price, but I'm pretty sure you need to discount the face value of the debt. Not for a lack of trying, I could not get any of the answers. From memory, the value of the firm was EUR60m, the face value of debt (which was zero coupon) was EUR40m with two years left to maturity (the current price was roughly 57 per EUR100 face), and the annual risk-free rate was 3%.

The other question (also mentioned a lot here) was the default correlation question. I used the formula correctly, and simply could not get one of the potential options. I think it was 0.01 for the joint PD, 0.03 and 0.06 for the individual PDs.

Interesting that both of these questions have been highlighted by numerous people. I thought these two should have been relatively straightforward, and neither I could get an answer to match the options so ended up putting whichever answer was closest.

With regards to the experience itself (I sat the exam in London), no major differences to part 1, other than the fact you had to wear a mask. Admittedly it was a bit more organised, but there were significantly fewer people taking the exam which must have made it easier.