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Exam Feedback FRM Part 2 (May 2014) Exam Feedback

Chances of clearing looking slimmer n slimmer with each new question posted
-> Same with me :(

The question on portfolio construction has already been mentioned, but not cleared:
a linear programming
b quadratic
c and d the other two techniques.
I went for linear programming because it mentioned that active risk is minimized. Thoughts?

quadratric as it needs more inputs
 

chouchouc

Member
i just corrected a whole bunch of questions wrongly (hedge ratio, 15% default etc...) don't feel too good about the exam... also the room didn't have all the people (and very little amount compared to part 1
is it a good thing or not ? I would have though that it is a good thing. I am talking about missing people, not the fact that your corrected wrongly ! In singapore same, quite a lot of candidates were missing
 

chouchouc

Member
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 ...
i see what you mean, only my reasonning was: if we have a threshold, all the small daily variation wont call a remarging of the collateral, therefore less volatility
 

chouchouc

Member
What is the criteria to be used when performing HF DD? best practice is to use 3rd party risk service provider or assess tail risk and funding risk
definitely not third party risk service provider. I read something in Schweser about that
 

chouchouc

Member
Hi,
just remembered a question which hasn't popped up yet.
What adds more to excessive risk taking by hedge fund managers.

a) high water mark
b) incentive fees
c and d were not relevant from my point of view. I chose (better:guessed) the high water mark solution. Any ideas?
Regards
Increase incentive fees increase the asymetrical risk. Allowing the fund manager to invest its own money is one way to counter it
 

Pflik

Active Member
is it a good thing or not ? I would have though that it is a good thing. I am talking about missing people, not the fact that your corrected wrongly ! In singapore same, quite a lot of candidates were missing
don't think it's good. Those people probably would have made the exam very badly... thus lowering the overal score.. lowering the scoring bar by increasing the volume of the 5 percentile.

Now the are excluded, thus the 5th will be smaller and will have higher marks.
 
i see what you mean, only my reasonning was: if we have a threshold, all the small daily variation wont call a remarging of the collateral, therefore less volatility

ha that makes sense too. those were the 2 that i was deciding between. i even marked in the book that they were both good answers. test was brutal in hindsight. What was the goal of their questions? lol
 
don't think it's good. Those people probably would have made the exam very badly... thus lowering the overal score.. lowering the scoring bar by increasing the volume of the 5 percentile.

Now the are excluded, thus the 5th will be smaller and will have higher marks.

yeh ... we needed those people to lower the bar ... well i can only speak for myself... not looking fwd to july 7th
 

tomko

New Member
ha that makes sense too. those were the 2 that i was deciding between. i even marked in the book that they were both good answers. test was brutal in hindsight. What was the goal of their questions? lol
I might be wrong but was this question not about Counterparty Credit Risk? Can both independent amt and threshold reduce this risk?
 

Pflik

Active Member
I might be wrong but was this question not about Counterparty Credit Risk? Can both independent amt and threshold reduce this risk?
the questions wasn't about lowering the volatility of the collateral, it was about reducing risk when you post a highly volatile collateral. Normally you would do that by taking a bigger haircut... however raising the threshold just increases the risk rather than reduces the risk (it reduces the operational costs though, because less posting of collateral is needed)

imho with the absence of the larger haircut the Independent amount acts as a buffer and lowers the risk. However it is the same as an inital margin... thus it doesn't give more protection once the initial margin has been used
 
I might be wrong but was this question not about Counterparty Credit Risk? Can both independent amt and threshold reduce this risk?

Independent Amount (I think) is another name for Initial Margin. Thus, the greater the IA, the smaller the LGD. The threshold is a non-collateralized exposure, i.e. a counterparty does not have to post collateral until the threshold amount has been breached. An increase of the threshold or the minimum transfer amount implies an increase in risk.
 

chouchouc

Member
Independent Amount (I think) is another name for Initial Margin. Thus, the greater the IA, the smaller the LGD. The threshold is a non-collateralized exposure, i.e. a counterparty does not have to post collateral until the threshold amount has been breached. An increase of the threshold or the minimum transfer amount implies an increase in risk.
I think we all agree on that but i believed that they were asking about how to reduce the volatility of the collateral amount that is posted. in this case a minimum transfer amount would reduce the volatility. I just thought over too much, if I am wrong.
 

asdf

Member
hi
I think we all agree on that but i believed that they were asking about how to reduce the volatility of the collateral amount that is posted. in this case a minimum transfer amount would reduce the volatility. I just thought over too much, if I am wrong.
hi, i think its independent amount, minimum transfer would not mitigate collateral volatility
 

Juan B.

Member
I think we all agree on that but i believed that they were asking about how to reduce the volatility of the collateral amount that is posted. in this case a minimum transfer amount would reduce the volatility. I just thought over too much, if I am wrong.

Hi, the way I see it...The independent amount is normally quite large, much larger that minimun transfer and tresholds. For example, I have seen 6% for 1-month eur/usd OTC forwards, 10% for 3-months fowards. If the MTM is against you, you do not have to post more collateral so often, simply because you rarely reach that 6% or 10% of the indenpendent amount, which has been "wisely" calculted by the higher-rated counterparty so they do not have much exposure.
 

wnguyen

New Member
OTM FX call follows a vol smile and OTM equity call follows a skew (higher demand for OTM put than OTM call), therefore compared to BSM, OTM FX call will be underpriced and OTM equity will be overpriced. Yes?

http://billiontrader.com/post/85

Question on better risk sharing between hedge funds and investors, it is to apply high-water mark, i.e. reduce hedge fund bonus in times of poor performance. Yes?

http://www.investopedia.com/terms/h/highwatermark.asp
 

Pflik

Active Member
I think we all agree on that but i believed that they were asking about how to reduce the volatility of the collateral amount that is posted. in this case a minimum transfer amount would reduce the volatility. I just thought over too much, if I am wrong.
upping the transferamount doesn't do anything for the volatility of the collateral, it'll still be volatile. It just reduces the operating cost of handling the amount of transfers... however if the transfer amount is high, you are open to alot of risk. i.e. if the collateral for example is 50% of the initial value, you would be open to 50% more risk, because the collateral doesn't cover everything.
 
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