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Exam Feedback FRM Part 2 (May 2014) Exam Feedback

David Harper CFA FRM

David Harper CFA FRM
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A few have already commented here, but we'd love to hear how your Part 2 exam went today. For example, how difficult was it? What were the unexpected questions? Thank you in advance for any feedback!
 
#2
It was difficult as expected. I found it to be harder and written differently from the 2014 GARP practice exam. The coverage was sufficient. I language tripped me up quite a bit at times so i was in between answers. I don't think i cleared it. i don't have the best memory so i'm sure others will update this list and correct me.

There seemed to be a good 3 or 4 questions on the Golin readings if i remember correctly
There were 2 questions on MF Global
2 BHC questions
1 Question on CVaR
1 question on ORMF
1 question on CSA - highly volatile collateral, do you increase threshold amt, independent amt, etc
A few questions on models
  • Which item can introduce model risk 95 to 99 Var, etc...
1 questions on right way risk
1 question on Treynor
1 on JP Whale case
1 question about digital option payoff
1 on sovereign CDS
1 on LVaR
2 very specific questions on models (CIR, Vasicek, Kara, etc.)
at least 4 questions on Hedge Funds
  • one about auto correlation
  • one about due diligence
  • one where phase locking was a choice?
1 Basel III question similar to the 2014 GARP practice exam and ...
1 Basel III question on total RWA i think ... not too sure
1 calc on new liquidity ratios
1 detailed question on volatility smile / skew (asked the exact way it was explained in the videos)
1 question about Asian options
1 question about delta hedging
1 question about EE
1 question about solvency II/basel differences
1 questions about compression trades
1 question on OIS reading about collateral and no collateral
Several backtesting questions
1 question about portfolio construction
1 question about going from Merton to KMV
1 tricky question about predatory lending
Everything was covered regarding operational risk for the most part. It felt like there were even more questions than the weights indicated.


The focus reviews helped tie everything together at the end; however, the material is pretty outdated.
 
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#3
One question related to BSM/ KMV and I used Z-table to check the score. PD=N(-DD)--> DD~= 2.24 as I remember. Hopefully I have got the answer.
 
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#4
Below is what I have marked.
change in monthly payment of MBS - 20000(sumthng)
back testing there are 8 exceptions in a 99% VAR model - ~3.47
Pool of 15 assets with no correlation - I think 83333
Diff btwn diversified and diversification VAR - 353550
Option value of a bond(2nd Q) - 5.94
BSM/ KMV(Z table) - 1.6%
One Q on Treynor - I marked Tyenor is greater
Capital to be reported by Bank(Adding Credit Market and Ops.) - ~1439 or sumthng
New LCR - 140%
 
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#5
For the LCR question, if I remember right, didn't the 140% choice imply only a change in the numerator? But didn't the denominator (expected cash outflows) change too to reflect the new deposit? In which case, the answer would be something other than 140% (I think 117% might have been one of the choices)?
 
#6
For the LCR question, if I remember right, didn't the 140% choice imply only a change in the numerator? But didn't the denominator (expected cash outflows) change too to reflect the new deposit? In which case, the answer would be something other than 140% (I think 117% might have been one of the choices)?
The denominator should be total net cash outflow. I don't remember exactly, but the question had cash inflow and outflow, and turned out the denominator remained unchanged. I could be wrong though.
 
#7
It was quite tough..Most of the numerical questions sounded unfamiliar which made it almost impossible to crack them under exam pressure. For most of the theory question, i ended up with 2 answers..!!

As far as i can recall:
1 question from effective data management

2/3 calculation regarding calculating var- one for call and fwd portfolio and one from portfolio var

PD as per KMV model based upon merton model

New Credit spread after the compression of trades
One from Soverign debt

3 from MF global case studies - impact of change in short term interest on their net revenue and 2nd on future trade strategy

1 from LCR .. Sounded a new question
Existing LCR was given and after that 2 bn deposits were added to the portfolio and same was reinvested in level 1 assets. Calculate new LCR ratio

One from mortgage .. Change in monthly installememt due to refinancing.

1 from MVAR : calculate diversification effect based upon individual and MVAR VAR
One from constant spread..
One from loan rating : rank loan's expected loss based upon given rating grid. One need to know the rating of investment and non investment grade to resolve this
3/4 question from operation risk like responsibility of board of directors in forming risk management framework
Calculation of risk weighted assets : capital charge was given for differEnt component..CVA charge was also mentioned. Initially i tried to calculate rwa incorporting CVA component but could't find answers..after excluding it( only based upon credit , market and ops capital charge), i was able to find a answer out of 4 but not sure..
Calculation of market risk capital under stress As per the recommended confidence interval..it was suppose to be at 99% unfortunately i calculated it at 99.5% :(

And i think rest of the questions already has been covered
 
#8
I felt quite angry after sitting for Part 2 yesterday. I averaged above 70% in the practice exams the first time I took them. After doing the practice exams (GARP 2010-2014 and all the questions in the handbook) I learned quite a lot by studying my wrong answers to feel confident with most of what I got wrong the first time. So I thought I was well prepared. I really invested a lot of time. Many questions in the exam yesterday were quite unexpected and I felt that I often could rule out 2 wrong answers, but had a lot of 50%/50% situations (especially in some of the qualitative "what is the BEST answer" type of questions - I hate those! Please GARP, ask questions that are black or white, not some shade of grey as in a multiple choice we cannot justify why we chose one answer over the other!). For some of the new questions, like the question about the distance-to-default where you had to use the z table I was able to figure out the right answer, but a lot of those left me in doubt. I guess I got about 60-65% of the answers right and I fear that I will the below the cutoff. :mad:
 
#9
(Just according to my memory and those I am not >60% sure are not responded)

Diff btwn diversified and diversification VAR - 353550
I was confused here. I tried MVaR/Beta= Portfolio VaR and MVaR*Position=CVaR but the results were different. I finally chose $331,XXX using CVaRs and comparing them with the sum of individual VaRs.

BSM/ KMV(Z table) - 1.6%
Same here. Find the score in Z-table then compare the result in given KMV table.

One Q on Treynor - I marked Tyenor is greater
I estimated both Sharpe and Treynor and found SharpeA>SharpeB yet TreynorB>TreynorA which was confusing to me. It just said its a portfolio but not stated been well-diversified or not. I just assume that as well-diversified and choose Asset B for higher Treynor (Option D).

Capital to be reported by Bank(Adding Credit Market and Ops.) - ~1439 or sumthng
Only IRB + MRC + ORC included --> same answer (SA CRC not included).

New LCR - 140%
The question stated the deposit is from an "AA" (or AA-?) bank. It should be counted as well? Or else the answer should be 120% (no change).
Capital=12/1.2=10. Additional deposit is 2 --> New capital should be 12+2=14 --> 140%

Hopefully I have at least 40% luck hahahaaha.
Fingers-crossed~
 
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#10
Hi David am new to BT, but I hear a lot about you. Also hope everyone did well and thanks for posting what you remember of question.

on the LCR question the answer is 140% because inflows are limited to 75% of outflows.
 
#11
Below is what have marked.
change in monthly payment of MBS - 20000(sumthng)
back testing there are 8 exceptions in a 99% VAR model - ~3.47
Pool of 15 assets with no correlation - I think 83333
Diff btwn diversified and diversification VAR - 353550
Option value of a bond(2nd Q) - 5.94
BSM/ KMV(Z table) - 1.6%
One Q on Treynor - I marked Tyenor is greater
Capital to be reported by Bank(Adding Credit Market and Ops.) - ~1439 or sumthng
New LCR - 140%
I wasnt able to get the exact answers for below, any hints on how you solved them.
back testing there are 8 exceptions in a 99% VAR model - ~3.47
Pool of 15 assets with no correlation - I think 83333
Option value of a bond(2nd Q) - 5.94
 
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#12
I left the exam not feeling confident about passing simply because the questions i know i answered correctly are around 20-25. For the rest it wasnt about guessing, it was more about analyzing the scenarios given. I had to guess around 10 questions maybe.

A lot of concept that i expected to see in the exam were nowhere to be seen and what pissed me off even more is that i didnt know how to solve some questions about things i know like the Cvar , usually we divide the amount by number of credit and multiply by the multiplier except here we didnt have any multipliers. The refinancing monthly payment thing i couldnt get it right despite using the right formula and concerting years to months, the difference i was getting was around 30+K. The stressed var and the VaR with the options and forwards (70 call options and 20 forwards not sure about the number). if anyone can help me solve those i would feel really relieved :p

The LCR thing i remember adding the 2 Billion to the numerator since they were invested in HQLAs.
 
#13
about the same for me. Some of the questions were just...puzzling to me. But maybe to me only ! For example, the second question: the payoff on the option is 10, the discount factor is 1.01. So far so good. But where was the proba of the prices going down or up ?? If we assumed 50% each, we could not get the right answer...
One question that has not been addressed on this forum is the thing with Investment grade and non investment grade. Easy question if you remember that BB is Non investment grade (I got this one wrong).
Credit VaR: we needed the unexpected loss. Could not find it.
 
#14
hi chouchouc,

I think you should have used a formula for risk neutral up move and down move
U=1+r-D/U-D

when you get this you just multiply by 10 then discount back at risk free rate
 
#15
another question about Lognormal and B&S and IMplied volatility. I marked that "both the equity option and the currency option will be underpriced when we use Lognormal". Is that correct ?
We are all wondering whether we will pass on not. Although many questions pissed me off, I tend to think that these kind of exams, with so many questions and so many candidates are kind of "efficient". If you have put a lot of effort into the preparation and if you did not forget your brain when you went to the exam, you should be fine, if you have cut the edges on many topics, it is trickier. My point is that you cannot pass or fail by accident. If it is difficult, it is difficult for everyone. Thats really what I believe...and I hope it will apply to me because, gosh, I worked so hard on this part 2 !
 
#18
how much do you think is the minimum passing score, if we have 55% percent right is there a chance to pass ?
Frankly, I believe 55% should be fine but again, difficult to tell. One thing that I notice is that many expected people did not show up ! Numbered Seats were empty, which is, I believe, a good thing
 
#19
thanks for your answer, well I don't know in Lebanon we were 10 registered for part 2 and only 8 came. So I'd say those who didn't come are those who were unprepared.
 
#20
hi Abhinav, I solved the 95 cvar as follows, 1mm portfolio, 15 bonds, 5 pd, 0 RR:
Prob 0 defaults 0,95exp 15 = 0.463
Prob 1 default 15 * 0.95 exp 14 * 0.05 exp 1= 0.37
Prob 2 defaults 15*14/2*1 * 0.95 exp 13 * 0.05 exp 2 = 0.13

So to reach the 95 cvar we need 2 defaults, 100000/15 * 2= 133,333

I think somebody was also querying the hedge ratio, asset 100 gbp vol 0.3 which needs to be hedged shorting another asset with corr 0.6 and vol 0.2, so 100 * 0.6 * 0.3 /0.2 = 90
 
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