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# FRM Level 2 , Nov 2012 : Post what you remember here

#### nageshtheone

##### Member
Hi

I just reached home after giving the FRM part 2 exam. I felt that the exam was a little difficult, unlike I had heard from experienced people.
The thing about Part 2 was that there was a lot of memorization needed. You could never be sure, which part from what chapter is gonna be asked in the exam. In this regard , I feel that the Part 1 exam gave a fair chance. The problems were closed ended and unambiguous.
Anyways, now that it is over, we could share our experiences and also post questions that we remember so that we could verify our answers.

#### M_FRM

##### New Member
price of 1st to default vs price of 2nd to default

##### New Member
Hi,

I am regular follower of this forum. David has really helped me do today's exam well. Thanks to shaktirathore, shanlane and others who discussed the concepts thoroughly. I will post what ever I remember before I start forgetting and btw, this is my first post in BT.

In today's exam around 20-30 questions are "Which of the following is correct" type question and for close to 10 out of 80 questions, the answers were ambiguous. I was able to eliminate the two. And I had to make an intelligent guess between the remaining two.

1. Price of 1st to default vs Price of 2nd to default. Correlation decreases and which of the following is correct?
Ans: value of 1st to default CDS increases.
2. Why BSM is not used to value fixed income securities?
Ans: It doesnt account for the fact price of FI secs becomes face value at maturity.
3. Spot rate for 2 years was given. and yield for 2 years was also given in a table. We are asked to find the PD over the 2 years?
Ans: I used (1+rfr)^2 = (1-PD) (1+ytm)^2 and got 9.4 as ans
4. Calculating credit spread given r.f.r, RR, Yield etc.
Ans: we need to first find PD using (1+rfr) = (1-PD*LGD)(1+ytm) and then use the multiply PD*LGD to get credit spread. Ans is 5.x
5. One question on Allied irish bank. which of the following is the major reason for collapse?
Ans: Inexperienced supervisor (I thought "he took adv of inexperienced control ppl" is also close)
6. Common cause for U.S and Irish crisis : Ans: performance related pay
7. A took 1000 long position in stock ABC and 1000 short position in XYZ and other details reqd for VAR calculation are given. Combined portfolio var was asked. But correlation between long positions was given as 0.75(??) So we should take it as -0.75. Ans: 86 M
8. Liquity Correction was asked as last question given mean spread and its volatility. Straight forward.
9. Total Market charge was asked given 60 day avg VAR and Stressed VAR and previous VAR and SVAR. Ans: 256 M
10: one question of Convertible arbitrage strategy. Two options are very close
11. Managing tail risk: again two options are close: Ans: invest in strategy which is negatively correlated with tail risk. But I marked move off the optimal frontier which is wrong.
12. CVA question Ans: A's credit exposure increases and its CVA will decrease
13. There are atleast two questions on Correlations and copula where two of the choices are very close
14. 2 questions (40 and 41) were asked on Merton based model given a table
1. One based on Value of equity can be replicated (or sth similar) Ans: D (dont remember the options)
2. DD is given and PD is asked. Ans: 1.25%
15. Two stocks and their holding details, daily volume, percentage they intended to sell daily were given. and liquidity duration was asked. Ans: 9 days
16. some question on up-and-out barrier option
17. 100 call long and 1oo more call and 300 long forwards were taken and VAR was asked. Similar to the one in the practise exam. Need to find delta of the portfolio and then find the answer.
18. KV01 for 2 yr rate is given and change per 100 is also given. What is the position that need to be taken was asked. Ans: -465.12
19. Duration of IO stip is asked indirectly.
20. Which of the following amounts to collateralization. I chose the answer "originators set aside cash for losses". I know it is CCA. but all other options are definitely false
21. One question on RAROC? Ans: Reject the project becoz ARAROC is lesser than market premium
22. why Sharpe Litner was rejected?
Ans: avg return is flat
23. Atleast two questions were there on dependence/correlation and copula.
24. One table with maturity, coupon, Compounding frequency were given and four options were given for us regarding macualays duration and DVo1 to choose the correct
Ans: Actually none seems to be correct. I marked ans D: DVo1
25. CVAR calculation was asked given all the details.
26. Atleast 3 questions were based on hedging concepts. For one question we needed to find beta using correlation, volatility of A, volatility of Portfolio etc. Ans: 120
27: Equity swap question was given. And the equity value increased and the net outflow was asked. Ans: -4.25 i think (not sure)
28: Mortage pool is structured into two tranches A and B. Coupon payments for mortgage pool and tranch A were given in a table. And Coupon payment for Tranch B was asked. Simple Math.
Ans: LIBOR + 88bp
29: 4 securities A, B, C , D were given with the value of the collateral.Which of them is more subject to liquidity risk or sth like that. Ans: C (by percentage wise, its was the one which was least collaterlalized)
30. One question on model risk. David's notes helped me here. There were few points like ignoring small errors etc., adding complexity etc..
31. CDS valuation. They made it tricky. But actually it was simple. They said the default occurs at the end of the year instead of half year through. While calculating I guess we just need to ignore pv of accrued payment in the event of default. I dont remember the answer though.
32. Option on Fixed income security. The probability of upmovement or downmovement was not given. So I assumed 0.5 each. and the price of 1-yr european call option was asked. My answer dint match any answer choice. So I choose a) 3.94
33. One question regarding tails of all distribution was asked.
34. One question on LCR. Ans: BASEL requirement is 100% and they dint meet the requirement.
35. What does PE do for financing?
Ans: They raised subordinate debt at higher yields.
36. One on Prepayments and Strips.
37. Question on EL and UL.
Ans: unexpected loss of the portfolio will always be lesser than or equal to sum of the individual portfolio
38. Similar concept was tested in operational risk too.
Ans: Total operational risk across various risks cant be greater than sum of all the risks in individual Business unit.
39. For modelling frequency, which distribution do u use?
Ans: negative binomial
40. One question on exception at 99% confidence interval for 2500 days. What is the maximum no of exceptions allowed without rejecting the model at 95% C.I?
Ans: I marked 35(??)
41. One on CLN. If the correlation between reference asset and CLN issuer changes, how will the value of CLN will be affected or sth like that?

Thats all I remember now. I will keep updating if I remember more. Btw after I marked all the answers, I just noticed that 40% of the answers esp in the latter half are D). Did you guys also feel the same.

#### [email protected]

##### New Member
Hi,
Thanks for all the info on this great site.
Some very tricky questions, many of which were easy to get to 50%-50% but it was hard to be certain of the definitive answer.
Other included:
1. Reasons for variance swap over volatility swap
2. 200 stocks regressed - 200 alphas, 25% residual risk, 8% information coefficient - How many alphas <-4%, >4%
3. Icelandic crisis - what happened after mini crisis at 2006
4. What would constitute high quality liquid asset for LCR - AA S&P 500 stock, unsecured A+ industrial bond, Some MBS ..
5. Which risks aren't treated under pillar 2 economic capital - CCR, IRRIBB, dependence in credit risks, liquidity risk - another one similar about funding liquidity risk (whether or not it's treated under pillar 2 if I remember correctly)
6. Signals for a financial crisis in the next 2 years - credit-to-GDP +5% and changes of -/+ 10% or none to equity prices

#### HopeToPassLvl2

##### New Member
Hi,

I am regular follower of this forum. David has really helped me do today's exam well. Thanks to shaktirathore, shanlane and others who discussed the concepts thoroughly. I will post what ever I remember before I start forgetting and btw, this is my first post in BT.

In today's exam around 20-30 questions are "Which of the following is correct" type question and for close to 10 out of 80 questions, the answers were ambiguous. I was able to eliminate the two. And I had to make an intelligent guess between the remaining two.

1. Price of 1st to default vs Price of 2nd to default. Correlation decreases and which of the following is correct?
Ans: value of 1st to default CDS increases.
2. Why BSM is not used to value fixed income securities?
Ans: It doesnt account for the fact price of FI secs becomes face value at maturity.

Non-constant variance?

3. Spot rate for 2 years was given. and yield for 2 years was also given in a table. We are asked to find the PD over the 2 years?
Ans: I used (1+rfr)^2 = (1-PD) (1+ytm)^2 and got 9.4 as ans
4. Calculating credit spread given r.f.r, RR, Yield etc.
Ans: we need to first find PD using (1+rfr) = (1-PD*LGD)(1+ytm) and then use the multiply PD*LGD to get credit spread. Ans is 5.x
5. One question on Allied irish bank. which of the following is the major reason for collapse?
Ans: Inexperienced supervisor (I thought "he took adv of inexperienced control ppl" is also close)

6. Common cause for U.S and Irish crisis : Ans: performance related pay

Gov't policy?

7. A took 1000 long position in stock ABC and 1000 short position in XYZ and other details reqd for VAR calculation are given. Combined portfolio var was asked. But correlation between long positions was given as 0.75(??) So we should take it as -0.75. Ans: 86 M
8. Liquity Correction was asked as last question given mean spread and its volatility. Straight forward.

The choices were 3.5m, 2.5m..

9. Total Market charge was asked given 60 day avg VAR and Stressed VAR and previous VAR and SVAR. Ans: 256 M
10: one question of Convertible arbitrage strategy. Two options are very close
11. Managing tail risk: again two options are close: Ans: invest in strategy which is negatively correlated with tail risk. But I marked move off the optimal frontier which is wrong.
12. CVA question Ans: A's credit exposure increases and its CVA will decrease
13. There are atleast two questions on Correlations and copula where two of the choices are very close
14. 2 questions (40 and 41) were asked on Merton based model given a table
1. One based on Value of equity can be replicated (or sth similar) Ans: D (dont remember the options)
2. DD is given and PD is asked. Ans: 1.25%

I remember this, this is correct

15. Two stocks and their holding details, daily volume, percentage they intended to sell daily were given. and liquidity duration was asked. Ans: 9 days

I remember this,yes, 9 days.

16. some question on up-and-out barrier option

Negative vega is the answer here

17. 100 call long and 1oo more call and 300 long forwards were taken and VAR was asked. Similar to the one in the practise exam. Need to find delta of the portfolio and then find the answer.
18. KV01 for 2 yr rate is given and change per 100 is also given. What is the position that need to be taken was asked. Ans: -465.12
19. Duration of IO stip is asked indirectly.

Negative duration

20. Which of the following amounts to collateralization. I chose the answer "originators set aside cash for losses". I know it is CCA. but all other options are definitely false
21. One question on RAROC? Ans: Reject the project becoz ARAROC is lesser than market premium

Yes, this remember this. We have same answer

22. why Sharpe Litner was rejected?
Ans: avg return is flat
23. Atleast two questions were there on dependence/correlation and copula.
24. One table with maturity, coupon, Compounding frequency were given and four options were given for us regarding macualays duration and DVo1 to choose the correct

I remember the answer here was letter C?

Ans: Actually none seems to be correct. I marked ans D: DVo1

25. CVAR calculation was asked given all the details.
26. Atleast 3 questions were based on hedging concepts. For one question we needed to find beta using correlation, volatility of A, volatility of Portfolio etc. Ans: 120

-120 to fully hedge the volatility.

27: Equity swap question was given. And the equity value increased and the net outflow was asked. Ans: -4.25 i think (not sure)

-4.25 because you will use the initial LIBOR given, not the future libor.

28: Mortage pool is structured into two tranches A and B. Coupon payments for mortgage pool and tranch A were given in a table. And Coupon payment for Tranch B was asked. Simple Math.
Ans: LIBOR + 88bp

Yeah, pretty straightforward

29: 4 securities A, B, C , D were given with the value of the collateral.Which of them is more subject to liquidity risk or sth like that. Ans: C (by percentage wise, its was the one which was least collaterlalized)
30. One question on model risk. David's notes helped me here. There were few points like ignoring small errors etc., adding complexity etc..
31. CDS valuation. They made it tricky. But actually it was simple. They said the default occurs at the end of the year instead of half year through. While calculating I guess we just need to ignore pv of accrued payment in the event of default. I dont remember the answer though.
32. Option on Fixed income security. The probability of upmovement or downmovement was not given. So I assumed 0.5 each. and the price of 1-yr european call option was asked. My answer dint match any answer choice. So I choose a) 3.94

You can compute for the risk neutral probability. Answer was 5.94

33. One question regarding tails of all distribution was asked.
34. One question on LCR. Ans: BASEL requirement is 100% and they dint meet the requirement.

35. What does PE do for financing?
Ans: They raised subordinate debt at higher yields.
36. One on Prepayments and Strips.
37. Question on EL and UL.
Ans: unexpected loss of the portfolio will always be lesser than or equal to sum of the individual portfolio

38. Similar concept was tested in operational risk too.
Ans: Total operational risk across various risks cant be greater than sum of all the risks in individual Business unit.

39. For modelling frequency, which distribution do u use?
Ans: negative binomial

Same

40. One question on exception at 99% confidence interval for 2500 days. What is the maximum no of exceptions allowed without rejecting the model at 95% C.I?
Ans: I marked 35(??)

Yeah. Same

41. One on CLN. If the correlation between reference asset and CLN issuer changes, how will the value of CLN will be affected or sth like that?

Thats all I remember now. I will keep updating if I remember more. Btw after I marked all the answers, I just noticed that 40% of the answers esp in the latter half are D). Did you guys also feel the same.

#### nageshtheone

##### Member
In Q no.29, dont you think that the bank with the most collateral by percentage would have the max expsosure. I chose B.

##### New Member
nageshtheone Collateral is a credit enhancer and reduces the risk....So I choose the one with the least collateral (by percentage not on absolute amount). I think the answer is C.

##### New Member
Hi,
Thanks for all the info on this great site.
Some very tricky questions, many of which were easy to get to 50%-50% but it was hard to be certain of the definitive answer.
Other included:
1. Reasons for variance swap over volatility swap

Ans: 2 options were very close. I still think both options are correct. A) Variance swap is easy to price. D) Variance swap can be replicated using call and put options..I chose the answer D though.

2. 200 stocks regressed - 200 alphas, 25% residual risk, 8% information coefficient - How many alphas <-4%, >4%.

Ans: This one was tricky. I choose Answer A as sharpe ratio, and other metrics were not matching.

3. Icelandic crisis - what happened after mini crisis at 2006

Ans: It was straight forward and the answer is "They shifted to US borrowings"

4. What would constitute high quality liquid asset for LCR - AA S&P 500 stock, unsecured A+ industrial bond, Some MBS ..
It was tricky. I had to choose between the last two.

5. Which risks aren't treated under pillar 2 economic capital - CCR, IRRIBB, dependence in credit risks, liquidity risk - another one similar about funding liquidity risk (whether or not it's treated under pillar 2 if I remember correctly)

Ans: I chose liquidity risk only.

6. Signals for a financial crisis in the next 2 years - credit-to-GDP +5% and changes of -/+ 10% or none to equity prices

Ans: Credit to GDP ratio increase by 5% and equity prices changes by 10%. (correct me If I am wrong)

##### New Member
David Harper, CFA, FRM, CIPM and Suzanne Evans,

Thank you so much guys. This forum is the best resource for FRM candidates. I wish I were active in the forums. I had to prepare within one month for FRM Part2. So had to read a lot of stuff and dint have enough time to post my query. When ever I had a doubt, I could see some one else posted the same and I would just read it.

Though I am confident that I will clear Part2, I should say that my depth of understanding the concepts is good enough and not great. Had I purchased BT practise exam etc, it would have been great and awesome. I really liked how David solves tough questions. Thanks to all forum members who were very active in discussing GARP practise exams too.

From the exam point of view, close to 30 questions were tested on the concepts given in previous FRM practise papers.

Thanks again David and suzanne. Now I will be active so that I can be in touch with the concepts always. Could you guys suggest any similar forum for CFA where they discuss the concept like BT.

##### New Member
HopeToPassLvl2

Thanks for your response. Request you to confirm the answers for the rest too. And my clarifications below

2. Why BSM is not used in Fixed income secs?
Ans: Price of FI sec becomes Face value at maturity because of decrease in volatility . so non-constant volatility is correct. But I guess non-constant volatility option is worded contrarily. so I dint choose it.

6. Performance-related pay is the common moral hazard and I am quite sure after I checked the notes again. Govt policy is close but the actual mechanism was different. In Ireland, central bank was lax and there was boom in construction companies and in US Freddie Mae promoted home ownership etc..

26. Yeah it was -120. I marked the same.

32. You are correct on this. Ans is 5.94. Silly me ...It was an easy question

#### Frm_Indonesia

##### New Member
Hi all, I thinks the paper was a pretty difficult...
I still remember some questions beside above
others include :
1. Which is the risk measure has criteria , Coherent and esay to interpret : Var/cov, Var , ES , Spectral
2. Compare 2 invesment, which is you will invest ,related with Information ratio, sharpe ratio or exceed return

##### New Member
Hi all, I thinks the paper was a pretty difficult...
I still remember some questions beside above
others include :
1. Which is the risk measure has criteria , Coherent and esay to interpret : Var/cov, Var , ES , Spectral
Ans: ES is a coherent risk measure.
2. Compare 2 invesment, which is you will invest ,related with Information ratio, sharpe ratio or exceed return
It was ambiguous. I chose A.

#### sleepybird

##### Active Member
I chose ES for the coherent risk measure question because it's the best answer but I specifically remember from my note that ES is NOT easy to interpret/communicate. Spectral/distorted is even hard to understand (only of academic interest) and obviously VaR and standard deviation are NOT coherent.

#### nageshtheone

##### Member
For the last one, I chose portfolio B , because it has a higher Information Ratio

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#### trabala38

##### Active Member
Hi everyone,

sleepybird @[email protected]

I also chose ES, despite I wasn't sure you can say it is an "easy to interpret". The thing that decided me was the fact that since VaR is easy to understand, because the VaR is just a "point" on a distribution, the ES is the average of the points beyond the VaR. In a nutshell, the ES is a complement to the VaR, and thus, both can be interpreted as concepts easy to interpret...

I also found the exam quite difficult because very very tricky, with often 2 answers that looked correct to me... Many times, my decision had to be based on the "most likely" answer, meaning the answer that had the largest explanatory power, if you know what I mean...

And yeah, for the question on the largest spread with the bonds having a 1year and 2 year maturity and 2 different yield curves => was completely lost and made a random guess for that one !

Cheers,

trabala38

#### catch2002

##### New Member
Subscriber
There was a question about component VaR similar to ones on this site. Don't recall the answer but recall that I calculated an answer that was a choice (A nice feeling)

A question about "new financial instruments" and their impact

A question about what kind of bond/fixed income would be valid tier II capital

A question about what would be valid tier I capital in basel III (I think)....I think it was whatever one was most equity like (A....something about Equity and AA+ or something)

#### sleepybird

##### Active Member
Trabala yea I struggle on that point too.
Also choice B for higher information ratio.
Chose MBS-2 and YC-1 on that spread question but I'm not too sure.

#### almsthere

##### New Member
Hi everyone,

I also thought the exam was very tricky. It was not a very difficult exam, but the wording of the questions made it appear very tricky. I wrote some practice exams that appeared to be more difficult and challenging, but the questions were not as ambiguous as some of the questions on yesterday's exam. I thought the questions were rather short to read, but you really had to think on what they were asking for at least 10-20 questions, which could mean a pass or a fail on the exam. I did narrow quite a few of the answers to one or two choices, but then it was a matter of making the right choice. I know for a fact that I went back and changed two right answers to incorrect answers because I was doubting the nature of the question..tg, I changed only two questions...I know that I should have stuck to my initial intuition, and I hope that those two questions do not prevent me from passing since there really is not too much error room with only 80 questions. In any case, I hope that everyone does well.

One other question that I remember,

1. asked to create a synthetic bond..ans. I think i chose b)..treasure bond plus short cds...similar to a synthetic cdo structure.

#### vedig

##### New Member
Hi all

I did the Part 2 in Zurich. English is not my first language and it was very hard to understand what was asked in some questions. In some exercises it was not clear for me who was short and long or if Counterparty A or B was exposed. I did 80% in the 2012 practice exam, but I found the exam very hard and much of the questions unclear.
Therefore I lost a lot of time in reading the questions. At least you had the same impression.

My general feedback to GARP:
- it was very unprofessional to have a 2012 part 2 practice exam with 4 questions releted to Reference documents that were not in FRM 2 Study Guide list (4 of 20)
- the exam was much harder that the practice exam, it should be the opposite.

Good luck to everyone and many thanks to David and the bionic turtle team.

Regards

Vedi

#### Maximus_FRM2012

##### New Member
Hi all,

I found the exam to be very tricky and challenging compared to the practice exams they gave for the same reason that for 10-20 questions, it was a matter of narrowing down answers to two that both looked right and selecting the one that was "more correct". I was mentally drained after the exam and definitely did not feel as good as I did coming out of the level 1 exam.

BT questions and this forum was a great help but I felt like the question caliber was on par to BT (except way more ambiguous) rather than being easier compared to all the GARP practice exams I had taken.

I think that since last year's level 2 feedback was that it was a relatively easy exam with a pass rate of 61%, GARP needed to make this year's exam a more challenging. I felt like the consensus out of my exam center was that it was a challenging and difficult exam. I just hope that was a constant across all exam centers.

Maximus

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