FRM L2 Feedback

Discussion in 'About FRM' started by Jiew Kwang, Nov 19, 2011.

  1. Jiew Kwang

    Jiew Kwang Member

    I'm just done with the exam in Singapore. Can't reveal much since there are other candidates who have yet to take the exam. But to sum it up, I thought it was a hell paper..
  2. New Member

    Hi Jiew, I took the paper in Singapore too. Kind of have to agree with you - was a bit of a surprise.
  3. Quest4FRM

    Quest4FRM Member

    Yea! I took L2 in Singapore too...and by no means was it an easy paper! I barely managed to finish the exam on time!!
  4. Jiew Kwang

    Jiew Kwang Member

    The easy concepts were given difficult treatment and the options were carefully crafted. No easy guessing. There were only a few straight forward questions. Just a handful. Most tested us to understand the concepts deeply and apply them to a problem. Never expected anything close to this..
  5. Djamshid

    Djamshid New Member

    Indeed, I feel the exam was tough in terms of conceptual questions. Too many questions, which asked details of the concepts, not the concept itself. More, I found that many topics were not covered at all. This is my first impression.
    I expected more quantitative questions, which were too broad, not covering many topics again like conceptual questions.
  6. FRM Candidate 2011

    FRM Candidate 2011 New Member

    Just finished exam in London. Exam was pretty difficult but due to the excellent docs from BT I felt well prepared. Especially since these exams are marked relative to other candidates and since there have been a lot of candidates, I am confident to have passed.

    David - IMO there was at least 1 question which had no correct answer. Is this something to tell to GARP or does it only get you into troubles?

  7. David Harper CFA FRM

    David Harper CFA FRM David Harper CFA FRM (test) Staff Member

    Hi FRM Candidate,

    (thanks for you nice words). Re: "IMO there was at least 1 question which had no correct answer. Is this something to tell to GARP or does it only get you into troubles?"
    I send GARP errors often, but only if it's a concrete question. In fairness to them, they can't do anything with a non-specific observation. In general, as the exam won't be published (anytime soon, the questions will eventually land in future handbooks, but that's piecemeal and a long time coming), it's very difficult to critique the latest exam questions because it's based on recollection. Thanks, David
  8. Zack87

    Zack87 Member

    Yeah, recently finished L2. It was for sure harder than I thought it would be. I dare even say that it was equally as difficult as L1.
    I felt like GARP was going out of their way to ask round-about questions. Oh well, we'll see. I'm just glad to be done studying!!!
  9. Zack87

    Zack87 Member

    Oh and one more thing. There was this one question asking about the Basel Committee's opinion of the Herfindahl–Hirschman Index (about its usefulness). I was like "are you serious?" So needless to say, I guessed on that one lol
  10. de

    de New Member

    I was pretty aggressive in skipping difficult questions; left 26 out of 80 on the first pass. Of the ones I remember struggling with on the second pass:

    - 2 MBS, low yield but 30% CPR (price 104), 2'nd high yield by 15% CPR (price 90): what change in CPR would increase prices on each bond. 4 choices; both up/down or one up/one down
    - Surplus at risk @95%: (Assets: 250mm, expected return 4%, vol x%), Liabilities(220mm, expected return 3%, vol y%); all answers <= 0
    - expected loss on 2-bond portfolio where correlation was -0.5 (individual bond PDs give, but details hazy)
    - Basel III: does it include specific requirements on the amount of Level 2 capital
    - Several questions on Hedge Fund Strategies

    One I struggled with but think I got in the end was a question on (implicitly) MVaR (drop 1 from 3-asset portfolio, what is new VaR) which required computation of beta based on position correlation to portfolio and position vol and portfolio vol (which was hidden away in the verbage and difficult to spot...).

    Also, for those on L I who missed BS; we had several option questions in L II on vol smiles etc., so any learning won't have gone to waste next time. Ditto for regression questions of which there were also a couple which didn't look anything like the readings but were doable based on L I content.

    Overall I'd say harder than the sample exams... and, as warned (by David) less computation, and much more willing to question on the details of the readings (like what did the Lehamns' bankruptcy review say about some specific point, what did Basel say, etc.).

    Anyway that's it for me. Thanks all and, thanks to David, Suzanne, and the rest of the BT team.
  11. de

    de New Member

    I did smile when I saw that one; in my work we do regularly review Herfindahl-based risk measures (as a measure of risk concentration) but hadn't remembered seeing it in the Basel readings... so I also guessed.
  12. Jiew Kwang

    Jiew Kwang Member

    I agree. The exam tested out of the aims several times. If not for economics class, i would not know what HHI was. Knowing that it measures firm concentration, I intuitively guessed it was the concentration of credit risk.

    Some of the other questions include:
    -Valuation of CDS spread(Hull) with accrual payments at mid year and defaults at year end paying 75% face. (You heard that right)
    - Want high kurtosis, negative skew. Expects credit spread to narrow. What hedge fund strategy should be employed?
    - QQ plot diagram of t-dist asking to be identified; fat tails of course (Thanks David, your simulation totally helped)
    - Which BASEL approach accounts for diversification?
    - 2 or 3 BASEL III (asked about tier 1 capital, equity etc); about 6 to 8 BASEL questions in total.
    - BIA Approach
    - IRC (tough qualitative options)
    - Hedge fund manager goes long for 3 months and then withdraws parking his money in a money market fund. Then goes long again blah blah.. What strategy is he employing?
    - Manager uses at the money implied volatility to value his company option. Given a typical volatility skew for equities, which of following options undervalued.
    - Correlations when used in ERM.
    - VaR question was long and required a few steps. (Messy!)
    - RAROC, ARAROC questions. (perhaps the simplest questions)
    - EL, UL questions.
    - Lehman, Flash Crash, Ireland vs US Subprime
    - Credit Call spread question (i read 3x for this)
    - TRS payment at default
    - CDS question (one of the options had liquidity put on master agreement shortening the length of contract...)
    - VaR backtesting (minimize type 1, type 2 errors: tough and long options! plays around with 95% vs 99% VaR, backtest at 90% confidence etc..)
    - Performance attribution / portfolio construction questions
    (that's all for now. i had too little time to remember question details this time round. too many words and too many difficult questions.)

    Some questions gave a lot of redundant information and all in all, I think it was a well written exam, except for many concepts not appearing. Most of what is in formula sheets did not come out at all.

  13. Quest4FRM

    Quest4FRM Member

    Let me try to put in a few answers which I marked to the above discussed questions...dnt knw how many of those are correct ;)

    1. HHI index - no idea, i dnt even remember what I guessed :O
    2. MBS prepayment speeds - this one i was quite certain (i think ;))
    the tranche priced at premium will decrease in value when prepayment speed is increased and the tranche priced at discount will increase in value when prepayment speed is increased
    3. Expected loss on 2 bond portfolio where correlation between the bonds was 0.5 - EL is simply the sum of individual expected losses, hence no need of correlation...if i remember correctly the answer was 70,000
    4. Incorrect option onBasel 3 - i marked it doesnt specify any min requirement on Tier 2 capital...I remember having read somewhere that Basel 3 maintains minimum tier 2 at 8% (same as basel 2)...but not sure abt this one
    5. Hedge fund strategy (shifts to money market instruments every few days) - this was equity timing strategy
    6. Hedge fund (high kurtosis, negative skew) - was confused between distressed equityand convertible arbitrage (since narrowing of credit spreads was also given) distressed as answer
    7. QQ plot diagram - fat tails indeed
    8. Which basel approach accounts for diversification - not sure what i was one out of IMA market risk or IRB credit risk
    9. Incorrect IRC option - everything seemed correct to me at first glance...but i marked the option which stated something about the bank can net long and short exposures across obligors...
    10. 1 year ATM option to be issued in 6 months time - had no clue and marked it is equivalent to 6 months ATM european call + 1 year ATM european call
    11. Volatility skew given and asked which option will have understated volatility if lognormal distn is used - i think i marked short in the money put...not sure
    12. TRS payment at default - i marked 0 since i didnt have time to calculate ;)

    Some other questions were
    13. Expected shortfall at 95.5 when VaR at 96 to 99 was given
    14. Something on leverage ratio for which i marked it is not a risk based measure
    15., 16. There were 2 questions on regression based data...alpha and beta given and asked which will outperform/underperform in market downturn etc.
    17. Key rate exposure...2 yr and 10 yr had exposure to 2 yr key rate...was quite straightforward i guess
    18. Option valuation using risk neutral prob
    19. Credit VaR at migration data was given...ithink i marked 20 as the answer since i got an answer very close to it...but dnt knw if i followed the right approach
    20. Capital structure data of 4 companies given...which will have the lowest LGD if we hold subordinate tranche of each of the 4 bonds...i think i marked answer as company A
    21. Think there was 1 on default intensity of bond... Quite straight forward
    22. What happens to dist of default when we increase ST and LT debt...various options were given
  14. Jiew Kwang

    Jiew Kwang Member

    Hi Ravitosh! Yes, I had most of the answers the same as yours, with the exception of prepayment of mortgage which i had no clue..
  15. Quest4FRM

    Quest4FRM Member

    Few more questions that I can remember...
    23. There was 1 on LVaR...exogenous and endogeneous formula given...just needed to put in the values
    24. 1 question on LAR (Liquidity at Risk)...cant recall the exact question
    25. Barbell and Bullet portfolio...equal duration, higher convexity..something of this sort..
    26. Why Merton model cant be applied to bonds - I remember only 1 answer option which was it is so bcoz bond price doesnt follow lognormal diffusion process, I guess..
    27. There was another on Merton model which asked which of the below is correct...and I think the answer was equity is a call option on assets...
  16. AG

    AG Member

    Sorry for a late reply saince I was so exhausted after the exam, I had to take a break and party...

    It's amazing how JK and Quest4FRM remembered so many questions... I'll just sum those up in more details, provide some of the options if i rem....
    1) Barbell and Bullet portfolio...equal duration, higher convexity..Correct option barbell
    2) Regarding PD calculation two questions
    2a) Marginal PDs given for 1 yr, 2 yr, 3 yr, 4 yr, so on.. What is the prob that default occurs exactly at the end of the 3rd yr... best answer i had was 18%=(1-MargPD(1))*(1-MargPD(2))*MargPD(3), another option was 54%. Ideally it should be zero (not among the options) since the measure (ppl with measure theory background would know) of the event defaulting on one single day is very small.
    2b) Cumulative PDs given for 1,2,3,4,5 yrs etc. Default intensity for yr 3. I guess the answer was CumPD(3)-CumPD(2)
    3) Valuation of 1yr CDS spread where on default 75% of face would be paid, PD =5%.. I answered 380 bp. Other options were 390 bp, 400 bp etc..Did not get the time to recheck the calculation.
    4) Want high kurtosis, negative skew. Expects credit spread to narrow. What hedge fund strategy should be employed?
    - Answered distressed credit.
    5) QQ plot - fat tailed
    6) Which BASEL approach explicitly accounts for diversification? IMA, IRB, and two basic approaches... Basic approaches do not account for diversification. IRB and IMA does. But IRB does it implicitly. So i went wid IMA
    7) Basel II capital ratios. A table of four banks and the various asset types kept as capital with corresponding weights were given. Which bank did not comply with basel 2 given all had 8% of RWA as capital. The answer was the bank with Tier 1 capital was less than 50%
    8) Changes in Basel III regarding capital. Answered the elimination of Tier 3 capital.
    9) Standard BIA Approach Last three months gross revenue were given with one negative. Some extra info were given as well, i guess to confuse.

    10) IRC (tough qualitative options)
    11) Hedge fund manager goes long for 3 months and then withdraws parking his money in a money market fund. Then goes long again blah blah.. What strategy is he employing?- Equity market timing

    12) 1 year ATM option to be issued in 6 months time on stock paying no dividend. Wat's the price? Answer is same as the current 1 yr ATM.

    13) Volatility skew given. Firm uses at the money implied volatility to value all options. Which one is undervalued/overvalued... I also marked short in the money put

    14) Another question based on the same skew. If a large jump is expected how does it compare with lognormal distro...

    15) Project RAROC given, market return, rf given. The frim's beta was given (Not the project beta, thanks David for ur clarification there). So it was a easy one. Accept/Reject project.

    16) Summation of Risk contributions add up to total unexpected loss. Straightforward.

    17) Occurence of originate an distribute model seen for which of the following: US, Irish. Answer was US only.

    18) Triggering event for flash crash. - Large fundamental trader executing sell algo, cross market arbitragers and two more options.

    19) Commission report on Lehman's bankruptcy.

    20) TRS payment given the 60 mil bond defaults and 30% of its face was recovered. Wat is the pmt. Regular payments were asked to be ignored. Answered 42 mil.

    21) Call option on credit spread. I think the question was which of the below spreads had maximum counterparty exposure. Had to find the deep in the money one/one with max spread. Answered 250 bp - 150 bp

    22) Three asset portfolio given with a lot of info and total VAR 500,000. Asked to calculate the incremental VAR due to the third position. Using full reval, the problem was impossible to solve. So I went for a reasonable approximation by component VAR and the answer came 495,000

    23) Fund return = insignificant alpha(resulted from t-statistic from table) + 1.2 benchmark return. In downward market, fund underperforms.

    24) fund return = 0.002 + 1.2 benchmark return - 0.4 max(0,benchmark return) Answered fund underperforms in both upward and downward markets.

    25) Asset, Liability info given including correlation and vols. Asked to compute SAR. Standard one. Answer was not among the options. So i went wid -17 since it was the lowest and the answer was around -23.

    26) HHI index. How does Basel use it. - to complement other concentration risk metrics - it's not used at all etc. I answered it's used as a complimentary measure.

    27) VAR, LVAR(exo) and LVAR(endo) were given or could be computed directly from formula. Wat is the combined LVAR. Answered LVAR(exo)*LVAR(endo)/VAR

    28) Merton model assumes equity as a call option on firm's assets

    28a) Why Merton model cant be applied to bonds - I think I also answered it doesnt follow lognormal diffusion process..
    29) KMV's distance to default measure: the increases due to increase in long term liabilities is less than the increease due to increase in short term liabilities.

    30) Leverage Ratio - four options, three involving to tier 1 / capital etc. one was "not a risk based approach"(my ans as well). I think to confuse the unprepared candidate.

    31) Simple heding using key rate exposures. Answer was long 125,000 USD 2 yr.

    32) Credit VaR at priced at 104.something. Migration data was given into various ratings... Need to add up the migration probabilties from the worst rating until the sum is 1%, which was a BB rated priced 97. So my answer was 104-97=7

    33) One step bond option pricing. Risk neutral probabilities had to be calculated from the given prices. Though real probabilities were given to confuse. Answer was 3.33
    34) Question on compensation practices.a) CRO's compensation should be based primarily on returns b) CEO's compensation etc. I answered the option on paying out deferred stocks as incentive.

    35) Correct option regarding EC - It should be linked to compensation but not many firms follow this ... or something like tht.

    36) Exposure into AA rating bonds issued by four firms. Their Capital structure data given (eg. for company X, AAA -25%, AA-25%, A-40%,BBB-10%)...which will have the lowest LGD. I also marked company A since the subordination was max for its AA rated issues.

    37) Two tranche issues. One paying LIBOR+40 bp, with given %age thickness. Total pool earns LIBOR+80 bp, 10 bp is paid out as servicing fees. What is the return on the subordinate issue. answered LIBOR+160 bp.

    38) Four counterparties A,B,C,D and their exposure to each other given. What will be the impact of introducing a CCP. Marked option D. Since, exposures cannot be netted across obligors, however, due to introducing a CCP all exposure can be netted since the counterparty is one - the CCP.

    39) Two assets with individual VARs 3 mil and 4 mil. Wat is the VAR range for correlation between 0 and 1. Answer 5 - 7 mil.

    40) Motivation for securitization and subsequently selling those assts. Answered reduction in capital requirement.

    Tht's all for now.

    Will try to figure out more questions.


  17. mcarthur724

    mcarthur724 Member

    A few others not mentioned yet...

    1) A question asking about the characteristics of volatility weighted historical simulation - the correct choice was that it is based upon the current volatility. There was another choice saying that it is based upon forcasted volatility, but I think that was wrong.

    2) Which distribution is used for frequency. Answer was negative binomial. Straightforward.

    I agree with the majority of the answers that AG mentioned. In response to question mentioned by AG "2b) Cumulative PDs given for 1,2,3,4,5 yrs etc. Default intensity for yr 3. I guess the answer was CumPD(3)-CumPD(2)". That was my initial answer, but then I decided that you need to take that initial answer and divide it by the survival rate (2). The answer that I got from doing was also listed as a choice so I went with it.
  18. New Member

    I'll continue:
    41) Gross incomes for previous 3 years , outsoursing commisions for previous 3 years, and profit from equity sale in last year are given. What is the ORC(BIA). The problem is there is no answer if we use only gross income data. So we should use another data somehow. Pls explain.

    42) Calculate liquidity duration. We have position, avg trading volume and we don't exceed 10% of this.

    43) Long CDS with one rating and short CDS with another rating. What rating change will increase the position value.

    44) Which bond has negative duration. (OMG I choosed inverse! Of course it's IO!)

    45) The question about piece-wise distribution for modelling operational losses. I answered that under this approach we can combine closed-form distribution for "body" with empirical distribution for tail (but don't sure).
  19. mcarthur724

    mcarthur724 Member

    A couple that I'm still not sure about...

    13. Expected shortfall at 95.5 when VaR at 96 to 99 was given - So does this end up just being the same as ES at 95, which is taking the average of the last 4 VARs? That's what I went with. I tried taking away half of the 4th lowest VAR, but there was no answer choice for doing it that way. Anyone know how to handle the .5?

    15., 16. There were 2 questions on regression based data...alpha and beta given and asked which will outperform/underperform in market downturn etc. - I just focused on the beta for both of these which were higher than 1 betas for both questions, which resulted in the answer choices that I selected just being over/under performance. I expect that there was something more to these that you needed to look for other than just the betas for both of these questions. However, the other choices didn't seem to be good choices. One alternative choice was that R=squared of 97 should be the focus.
  20. New Member

    AG, where did you find formulat LVAR(exo)*LVAR(endo)/VAR?

    Level 1 for me was pretty simple. I was done before 30 minutes and finally was graded 3 first-quartile and 1 second. For level 2 I prepaired much more time, but for me it was much more difficult. The computational questions were straightforward but needed a lot of time. At the end of exam I have to guess 2 questions,coz there was not time.

    We can't get exactly answer. We supposed to choose the best approximation. I took the avg of four V@Rs with 96-99%%.

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