Exam Feedback FRM Part 2 (May 2014) Exam Feedback

[Diranim]

There was the question regarding the maturities of two loans one that has collateral and one that has no collateral. I had no idea what to answer. I just thought that the collateral cannot affect the maturity to included in the calculation of losses related to those loses, so I answered that both loans have the same maturity.

 

[asdf]

There was the question regarding the maturities of two loans one that has collateral and one that has no collateral. I had no idea what to answer. I just thought that the collateral cannot affect the maturity to included in the calculation of losses related to those loses, so I answered that both loans have the same maturity.

i hardly remember anything on this one do you have more details ?

 

[Diranim]

i hardly remember anything on this one do you have more details ?

I vaguely remember the options that were given:

A) both have the same maturity
B) the uncollaterized one has a higher maturity
C) the collaterized one has ahigher maturity
I dont remember D).

Again, this is just a blurry memory of the question.

 

[Alex_1]

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?

Hi @Johnson , I remember struggling a bit with this question but somehow I located the exact page in my mind from the corresponding text (Ashcroft) and I have marked option a.

In hindsight I think this is correct, as I looked in the text and found the following (on page 14):


Seven signs of predatory loan
1. Excessive fees (points and other fees >= 5% )
2. Abusive prepayment penalties
3. Kickbacks to brokers
4. Loan flipping (repeated refinancing to get fee income)
5. Unnecessary products
6. Mandatory arbitration requires a borrower to waive legal remedies in the event that
loan terms are later determined to be abusive
7. Steering and targeting borrowers into subprime products when they would qualify for
prime products.

Notice the 4th sign (which is pretty much the same as option a from the exam question) and sign 7 which is actually "the other way around". That is if the answer options were indeed formulated as such (I am not 100% sure).

 

[asdf]

I vaguely remember the options that were given:

A) both have the same maturity
B) the uncollaterized one has a higher maturity
C) the collaterized one has ahigher maturity
I dont remember D).

Again, this is just a blurry memory of the question.

no i remember it was how to account for some factor for both loans or something like that. so either both same factor or the one backed by collateral has shorter risk factor dont remember as well

 

[Diranim]

no i remember it was how to account for some factor for both loans or something like that. so either both same factor or the one backed by collateral has shorter risk factor dont remember as well

You're probably right. There were 3 questions that I had no idea what the answer was. I just filled the first thing that came to my mind.

 

[asdf]

its fine 3 questions is marginal, hope we all pass

 

[Diranim]

its fine 3 questions is marginal, hope we all pass

What I'm doing is trying to remember as many questions as I can and try to determine the worst case scenario of wrong answers. I think well all be fine eventually.

 

[asdf]

You're probably right. There were 3 questions that I had no idea what the answer was. I just filled the first thing that came to my mind.

actually remembered that question. it was about remargining period for both collateralized and un-collateralized positions. so it was take same period or shorter for collateralized one

 

[Royden Pereira]

Few questions i remember over and above the questions posted..

1. Expected loss from lowest to highest
2. Calculate the RWA from the data mentioned
3. Calculate the VAR for the 2 options and one forward

 

[joacogimeno]

I found it a bit harder than expected, and indeed at least faced 10 50/50 questions and 4 or 5 that I am sure I got wrong. If I had to blindly guess, I would say I probably got around 60 +- 2 answers right, and would be terribly surprised if they were less than 55. However, being so qualitative, I could be wrong.

Other than the questions posted above, there was also one RN vs RW default probabily, where the right answer was that RN is based on the no-arbitrage argument.

@chouchouc, I believe that relative to implied vol, the lognormal out-of-the-money stock option would be over priced and the out of the money currency option would be under priced. The rational being that the equity option shows a volatily skew and it decreases as the option gets out-of-the-money.

 

[mongooseny23]

Hi @Johnson , I remember struggling a bit with this question but somehow I located the exact page in my mind from the corresponding text (Ashcroft) and I have marked option a.

In hindsight I think this is correct, as I looked in the text and found the following (on page 14):


Seven signs of predatory loan
1. Excessive fees (points and other fees >= 5% )
2. Abusive prepayment penalties
3. Kickbacks to brokers
4. Loan flipping (repeated refinancing to get fee income)
5. Unnecessary products
6. Mandatory arbitration requires a borrower to waive legal remedies in the event that
loan terms are later determined to be abusive
7. Steering and targeting borrowers into subprime products when they would qualify for
prime products.

Notice the 4th sign (which is pretty much the same as option a from the exam question) and sign 7 which is actually "the other way around". That is if the answer options were indeed formulated as such (I am not 100% sure).

yep they got me on this one. i poured over these 2 choices for a long while. i mixed up the prime and subprime in the ? ... not good

 

[asdf]

yep they got me on this one. i poured over these 2 choices for a long while. i mixed up the prime and subprime in the ? ... not good

i thought the prime subprime is right, why will they induce some prime borrower into subprime loans? the contrary is true, the can induce a sub prime borrower to thinking they could borrow as if they were prime borrowers

 

[belle6631]

The reason the 'subprime borrowers get prime loans' is incorrect is because prime loans have better terms and rates than subprime. If you gave a subprime borrower prime rates that would be the opposite of predatory lending (ie they should be paying 800bps but only pay 450bps for a prime loan)

 

[rodrigovs]

Does anyone remeber the alternatives in the backtest hypothesis test question, two hypothesis below 2,58 and two greater 2,58. What were the values ?

Tk you!

 

[asdf]

The reason the 'subprime borrowers get prime loans' is incorrect is because prime loans have better terms and rates than subprime. If you gave a subprime borrower prime rates that would be the opposite of predatory lending (ie they should be paying 800bps but only pay 450bps for a prime loan)

but its not only about the rate. its about the LTV ratio so I can also say that even if the rate is lower the amount could be bigger and the creditworthiness of the borrowers worse. you know what I think there are a lot of issues that are very subjective and thats too bad

 

[Alex_1]

I tend to agree with what @belle6631 said, it didn't make any sense to me, I mean how would a lender get any advantage (and this would be assumed by the term "predatory") in providing borrowers with better (i.e. lower) interest rates? This would mean they would have to pay less interest on their loans as their creditwothiness is better than of that of the subprime borrowers. Hope I am not mixing anything up though...

 

[asdf]

I tend to agree with what @belle6631 said, it didn't make any sense to me, I mean how would a lender get any advantage (and this would be assumed by the term "predatory") in providing borrowers with better (i.e. lower) interest rates? This would mean they would have to pay less interest on their loans as their creditwothiness is better than of that of the subprime borrowers. Hope I am not mixing anything up though...

i understand your views and I hope you're right. Still predatory lending as I see it is lending someone without them meeting the necessary requirements, its not just about the rate. If you lend 1000,000 USD for 6% ( sub prime) or 4 million dollars for 2% ( prime ) what will be the interest paid ? the 2% are higher and thats what the sub prime borrower is paying because they borrowed 4 million when their income only justifies 1 million

 

[Johnson]

Hi @Johnson , I remember struggling a bit with this question but somehow I located the exact page in my mind from the corresponding text (Ashcroft) and I have marked option a.

In hindsight I think this is correct, as I looked in the text and found the following (on page 14):


Seven signs of predatory loan
1. Excessive fees (points and other fees >= 5% )
2. Abusive prepayment penalties
3. Kickbacks to brokers
4. Loan flipping (repeated refinancing to get fee income)
5. Unnecessary products
6. Mandatory arbitration requires a borrower to waive legal remedies in the event that
loan terms are later determined to be abusive
7. Steering and targeting borrowers into subprime products when they would qualify for
prime products.

Notice the 4th sign (which is pretty much the same as option a from the exam question) and sign 7 which is actually "the other way around". That is if the answer options were indeed formulated as such (I am not 100% sure).

Hey@Alex_1,
U have got awesome memory...even I struggled n located the page but thought the other one was correct..
I got dis also wrong.I hate this forum...increasing my chances of failing with each post
U really have gone to minute details. What answer u had given for the question on basel ratio 133% or 140%.its also tricky one..

 

[mongooseny23]

you guys have great memories ... but w/ each post you increase my chances of having to crush this in november ... lol. GL to all