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    Short Option Skewness

    I was recently going over chapter four of the FRM handbook when I came across the statement, "Relative to a symmetric distribution, a short option position has negative skewness, or a long left tail," on page 100. Example 4.9 also states matter of fact, that "short option positions have long...
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    Good resource on construction models for Volatility Surface

    I was wondering if you have a good resource on basic model(s) for constructing a volatility surface. Hopefully something not too complex but with real world use. I've found quite a few online articles on Volatility Surfaces/ Cap Volatility Surfaces, etc., but so far all are a bit too technical...
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    Capital Tiers revisited and in one place

    At first I was going to ask about the maturity stipulations on Tier 3 (i.e. that short term subordinated debt with original maturity > 2 years) but I decided against it because the more you read this stuff the more confused you get. As asja said in one of the postings below, what is the...
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    FRM 2008 P1 q17 - Delta

    You are given the following information about a call option: • Time to maturity = 2 years • Continuous risk-free rate = 4% • Continuous dividend yield = 1% • N(d1) = 0.64 Calculate the delta of this option. a. -0.64 b. 0.36 c. 0.63 d. 0.64 Answer: c The delta of a...
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    Volatility mean reversion

    I ran into the following question and think it is not fully worded. Would anyone care to comment? Volatility is mean reverting daily. How does the daily volatility compare to weekly volatility? How does the daily volatility compare to weekly volatility in annualized terms?
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    Credit Exposure Scenario

    I am not sure this is the question in its entirety... I think I have the answer although it would be good to double check. You have a 5 year FX contract where you buy CAD and sell GBP. Calculate and determine the worst case scenario: a. counterparty defaults in 1 yr & CAD depreciates to its...
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    FRM 2006 PII q90 - Currency put option

    If the current USD/AUD rate is 0.6650 (1 AUD=0.6650USD) and the risk-free rates for the USD and AUD are 1.0% and 4.5% respectively, what is the lower bound of a 5-month European put option on the AUD with a strike price of 0.6880? a. 0.0135 b. 0.0245 c. 0.0325 d. 0.0455...
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    FRM 2006 PI q35 - American opiton and path dependence

    Which of the following options is strongly path-dependent? a. An Asian option b. A binary option c. An American option d. A European call option ANSWER: A ‘A’ is correct. The payoff of an Asian option depends on the average price of the underlying asset. ‘B’...
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    FRM 2006 PI q22 - Volatility smile vs. constant volatility

    With all other things being equal, a risk monitoring system that assumes constant volatility for equity returns will understate the implied volatility for which of the following positions by the largest amount: a. Short position in an at-the-money call b. Long position in an...
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    FRM 2009 Full II q39 - LVaR

    Please see attached for question 39. In the answer, then they calculate VaR they subtract the mean from the st. dev. When they calculate the liquidity adjustment or spread, they add the mean to the st. dev. Is this correct? Any insight much appreciated.
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    FRM 2008 PII q39 - Commercial Banking

    This question is phrased incorrectly. It is asking for the incorrect statement... Actually, the answer is incorrect, all three statements should be correct. Anyway, I simply care to understand better what 'Commercial Banking' refers to. I have not found a good description for commercial...
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    FRM 2008 PII q21 - Delta of long forward

    The dividend yield of an asset is 10% per annum. What is the delta of a long forward contract on the asset with 6-month to maturity? a. 0.95 b. 1.00 c. 1.05 d. Can not be determined without further information. Answer: a Calculation: The value of a long forward contract f =...
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    FRM 2007 PII q74 - Repo, bond and max exposure

    Hong Kong Shanghi Bank has entered into a repurchase agreement with a client where the client will sell a 10-year US treasury bond to the bank and repurchase it in 10 days. The bond has a notional value of USD 10m, trades at par with the yield volatility for a 10- year US treasury 0.074%...
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    FRM 2007 PII q45 - PD calculation (Mental fart, please help)

    Company ABC was incorporated on January 1, 2004. It has an expected annual default rate of 10%. Assuming a constant quarterly default rate, what is the probability that company ABC will not have defaulted by April 1, 2004? a. 2.40% b. 2.50% c. 97.40% d. 97.50%...
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    FRM 2009 Full II q20 - Uniform vs. Normal Operational Losses

    Consider the following potential operational risks. Due to a rogue trader, we estimate that over a 1 year period there is a 10% chance we could lose anywhere between € 0 and € 100MM (equal probability for all points within that range and 0 probability of any losses outside that range)...
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    FRM 2009 Full I q37 - DV01 of par, premium and zero bonds

    See the attached pdf for the question. I understand the explanation although they left out the dollar duration for the DV01 calculation. If that is the case, wouldn't the answer be less straightforward?
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    FRM 2007 PI q34 - Analysing ABS

    QUESTION When evaluating asset-backed securitization issues, which of following would be least important during the investor’s analysis process? a. The liability concentration levels of the asset originator. b. The structure of the underlying securitization transaction. c. The...
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    FRM 2007 PI q16 - Interest Rate Floor

    QUESTION The payoff to a swap where the investor receives fixed and pays floating can be replicated by all of the following except: a. A short position in a portfolio of FRAs. b. A long position in a fixed rate bond and a short position in a floating rate bond. c. A short...
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    FRM 2008 Practice PIII question 31 - Foreign Bonds

    QUESTION Wallace, an emerging market bond trader, is holding a USD 5 year Malaysian corporate bond in his book. He has made enough profit from this bond position and wishes to lock in the profit (full hedge) without selling it. Which is the best option for Wallace below? a. Buy...
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    FRM 2008 Practice PIII question 20 - Bond option adjusted spreads

    This question is mostly related to verbage. Please have a look at the attached pdf for a better formatted question. Could someone confirm if the option cost is in fact provided by the 'Nominal Spread' row or by the 'option free nominal spread' row? GIVEN: The OAS of Y is higher than that of...