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# Exam FeedbackFRM Part 2 (May 2014) Exam Feedback

#### Su424

##### New Member
I think that some questions were fairly straight-forward and had clear choices. But as somebody mentioned, many questions had the 'best answer' condition and all one can do is use elimination technique to arrive at the 'optimum' choice. It gives a feeling of marking answers right/wrong when in fact they are wrong/right as per GARP.

#### tomko

##### New Member
One general remark: I think than on this exam there were no questions structured like "which of the following statements is/are correct" followed by, say, four statements (I,II,III, IV) and options using various combinations of these.
On the specific questions, I rememer one not menitoned here as I supppose, which was about mapping.

#### Pflik

##### Active Member
i'm atleast glad to hear that you guys here felt the same way i did... but still i already identified 4 questions i definitely did wrong which i could have had right... i have little hope i will make it... owell i'll guess the gruelling road to november will start... after holiday

i'm just a bit surprised how this exam could have been so different.

#### www173414www

##### New Member
[Just my "estimation" only and those I am not >60% sure are not responded.]

there was a question on counterparty spread increase from 150 to 180 n the company from 20 to100 BP something.Asked who will ask for higher lower CVA..what was the ans?
Something like that as I remember credit rating of LC drops from 1XXbps to 1XXbps while its counterparty drops from 30bps to 160bps and choose the most possible outcome. CVA is an adjustment based on exposures from LC to counterparty and vice versa so I basically compare the change of respective exposures. The choices are tricky as well. Option B is something like counterparty should request an increase in payment it RECEIVES and Option C is LC should request a decrease in payment it MAKES. I chose C.

The volatility smile question it had mentioned equity in the money call n currency out of money call.quite positive about the question.
The options given in this question are OTM equity call and OTM FX call. I think the question tries to examine the difference between "smile" & "smirk".
OTM equity call --> Spot <<<<<<<<< Strike (or high strike price) --> Overpriced if new model is lognormal.
OTM FX call -->... Underpriced if new model is lognormal. (That should be Option A if I am correct)

BTW so many candidates talk about binomial bond option pricing model. I cant find correct answer as the call given should be very deeply OTM at that time (Spot reference bond should be $952.48, K=960) and the probability of being$970 is around 12.4% [(952.48-950)/20]. Anyway one of the questions I have given up.

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#### belle6631

##### New Member
The bond option question you need to calculate the risk-neutral probs:

So solve 952.48 = [950 * p + 970 * (1-p)]*1/1.01

P = .4 (probability of ir up move)

Finally, solve for option price: 10 * .6 * 1/1.01 = 5.94

#### chouchouc

##### Member
Remember the question about volatility of the collateral ? I put that if we post a threshold, this will decrease the volatility...how about you ?

#### mongooseny23

##### Member
Remember the question about volatility of the collateral ? I put that if we post a threshold, this will decrease the volatility...how about you ?
i thought it was independent amt b/c of the heavy vol in the collateral. the independent amt is like negative threshold ... it's provides over collateralization ...

#### Palani

##### New Member
Denominator for LCR is

Total net cash outflows over the next 30 calendar days =
Total expected cash outflows – Min{total expected cash in flows; 75% of total expected cash outflows}

As per the question

HQLA = 12 M
Cash Outflow = 40 M
Cash Inflow = 30 M

So LCR = 12/ (40 - Min (30, 0.75 * 40))
LCR = 12/10 = 120% (this is given in the question)

Now the bank has secured 2 million deposit from customer and invested in Corporate Bond Rated AA+
So
HQLA = 14 (This is Level 1 asset with 0% haircut)
Denominator = 42 - Min (30, 0.75 * 42) = 10.5

LCR = 133%

#### Hope

##### New Member
Denominator for LCR is

Total net cash outflows over the next 30 calendar days =
Total expected cash outflows – Min{total expected cash in flows; 75% of total expected cash outflows}

As per the question

HQLA = 12 M
Cash Outflow = 40 M
Cash Inflow = 30 M

So LCR = 12/ (40 - Min (30, 0.75 * 40))
LCR = 12/10 = 120% (this is given in the question)

Now the bank has secured 2 million deposit from customer and invested in Corporate Bond Rated AA+
So
HQLA = 14 (This is Level 1 asset with 0% haircut)
Denominator = 42 - Min (30, 0.75 * 42) = 10.5

LCR = 133%

Denominator = 42-Min(30,0.75*42)=12

LCR = 14/12 = 117%... I thought

#### Johnson

##### New Member
I agree it should be 133%
It should be > initial 120%.anyways I marked 140%.so doesn't matter..wrong either way..

#### cdbsmith

##### Member
From reading through the various comments, it appears that everyone struggled with virtually the same questions, with a few odd ones here and there. From my estimation, the list of troublesome questions amount to ~15-20. Based on that, I don't think that's enough to start worrying. Now, if the number was ~30, I would definitely start worrying. In any case, its all in GARP's hands now.

For me, I actually got stuck on (worried about) ~15-20 questions. Of those, there were 5-8 questions that I spent more than 5 minutes pondering. On the other ~60-65 questions, I was able to mark an answer that I felt completely comfortable with (right or wrong).

Some of the questions I struggled with have been discussed in the thread, and based on feedback it appears I got some of them correct. If true, that means I have an improved chance of passing as I always assume the questions I guessed on are wrong. Since some of my guesses seem consistent with the answers other folks on the thread chose (albeit with higher certainty/greater conviction), I feel that I can move some of those questions into the correct column, which just improves my chances of passing from my perspective.

Anyway, I'm done with it now. I have to prepare for the upcoming monstrous CFA exam. It is now the beast that I have to tame.

I look forward to everyone's FRM 2 exam results. Hopefully, we all passed!

Good luck!

#### jeff-1984

##### Member
Denominator for LCR is

Total net cash outflows over the next 30 calendar days =
Total expected cash outflows – Min{total expected cash in flows; 75% of total expected cash outflows}

As per the question

HQLA = 12 M
Cash Outflow = 40 M
Cash Inflow = 30 M

So LCR = 12/ (40 - Min (30, 0.75 * 40))
LCR = 12/10 = 120% (this is given in the question)

Now the bank has secured 2 million deposit from customer and invested in Corporate Bond Rated AA+
So
HQLA = 14 (This is Level 1 asset with 0% haircut)
Denominator = 42 - Min (30, 0.75 * 42) = 10.5

LCR = 133%

Arent you double counting this way? the readings say if an item is included in the numerator as an HQLA then it cannot again be counted as an inflow

#### Diranim

##### New Member
I think the LCR should be 140%. The additional USD 2 million are included in the numerator as HQLA. The issue is in the denominator. This USD 2 million is a DEPOSIT therefore a liability, thus it is considered an outflow (not an inflow). But, because the net cash outflows are related to the ones happening in the next 30 calendar days I don't think this additional USD 2 million should be included in there because (1) its a corporate deposit and logically it won't be maturing in the next 30 days and (2) even if it was included, a run-off (or a haircut) factor should be included in the calculation, otherwise you are considering that the WHOLE deposit is being withdrawn in the 30 days.

#### Palani

##### New Member
Denominator = 42-Min(30,0.75*42)=12

LCR = 14/12 = 117%... I thought
Yeah you are right.

#### Palani

##### New Member
Arent you double counting this way? the readings say if an item is included in the numerator as an HQLA then it cannot again be counted as an inflow
The Double counting aspect is => you have bought 2 Million of HQLA => So you cannot take this as Inflow (positive cashflow in future) in denominator
But deposit is still an out flow in denominator from balance sheet perspective.

#### Palani

##### New Member
I think the LCR should be 140%. The additional USD 2 million are included in the numerator as HQLA. The issue is in the denominator. This USD 2 million is a DEPOSIT therefore a liability, thus it is considered an outflow (not an inflow). But, because the net cash outflows are related to the ones happening in the next 30 calendar days I don't think this additional USD 2 million should be included in there because (1) its a corporate deposit and logically it won't be maturing in the next 30 days and (2) even if it was included, a run-off (or a haircut) factor should be included in the calculation, otherwise you are considering that the WHOLE deposit is being withdrawn in the 30 days.

Yeah fair point for which many supervisor itself dont have answer.
BTW this is corporate deposit, could be CASA (Non Maturing) or Term Deposits (Maturing) or Unsecured Corporate Deposit
Its only conservative to assume 100% outflow.
So question is not complete enough to compute the exact LCR ratio

#### Diranim

##### New Member
Yes I think the question should have contained more details. However, considering the deposits entirely as an outflow would hinder the LCR figure (from 120% to 117%). The investment in HQLA should have brought higher coverage (140%). If every liability is always wholly entirely in the outflows then, there is no point of calculating the ratio, because even if you fully invest these liabilities in the HQLA it'll always be lower. A higher HQLA should be reflected somewhere, and in this case a higher LCR (not lower)

#### Johnson

##### New Member
Anyone remember question on predatory lending..it had 1.lure borrower to refinance many times to earn commission 2.to ask borrower to take prime loans even though he in position to take subprime loans..something on these lines..I marked option 2..
What was its answer?

#### Diranim

##### New Member
Anyone remember question on predatory lending..it had 1.lure borrower to refinance many times to earn commission 2.to ask borrower to take prime loans even though he in position to take subprime loans..something on these lines..I marked option 2..
What was its answer?

I answered 2. to ask borrower to take prime loans....

#### asdf

##### Member
Anyone remember question on predatory lending..it had 1.lure borrower to refinance many times to earn commission 2.to ask borrower to take prime loans even though he in position to take subprime loans..something on these lines..I marked option 2..
What was its answer?
tricky but sometimes feels like we need more details

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