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Exam Feedback FRM Part 2 (May 2015) Exam Feedback

bebrave

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#81
I guessed on this one and went with the one selection below 100 (I recall something like 98.xx) as I thought the question was asking for the side that was required to make net payment therefore NPV below 100! Again I could have misinterpreted the question all along
OIS is lower than LIBOR, and if discounting based on LIBOR is 0 (fix leg at par) then based on OIS must be >0..I selected 100.95 = (6/1.05 + 106/1.055^2)..I may be wrong
 
#83
but the question is "find lowest MVar while having treynor ration greater than 1"
I think we should choose treynor ratio greater than 1 and lowest beta
the question states that the marginal VaR will be the lowest AS LONG AS Treynor ratio is greater than 0.1
and you have no way out in calculating the marginal VaR by using those inputs provided by the question
 

bebrave

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#84
Longing correlation is to either
1. receive floating rate in a variance swap with the index as an underlying and receive fixed in a variance swap with a stock in that index as an underlying,
2. Buy call option on index and buy call option on an individual component in that index OR
3. receive realized correlation in a correlation swap
in the exam, only 1 was shown

For the CCP, to avoid being failed
CCP need to:
1. ONLY intermediate derivative transactions
2. let the clearing member to unwind the trades in case there are defaults
3. have good practice in choosing members, valuing transactions and determining initial margins and default fund contributions
In the exam, only 2 was shown

Limitation of using BSM model to value bond
The answer is the volatility will go to zero at maturity as the model assumes the volatility is constant

CLN question (sth related to minimize counterpart risk)
The counterparty risk is the lowest in issuing credit link notes given the protection sellers, i.e. investors, have already paid the price to the buyers and hence no counterparty risks in case there is a default in a reference asset.

Net Stable Funding Ratio
The bank passes the test given the ratio, ASF divided by RSF, is greater than 1 (in fact, 1.3XX)
RSF is 5X.X & ASF is 72

Standardized vs Basic Indicator
The bank is of course paying 37million more under basic indicator approach because, in the latest 3 years, there is a negative gross income and hence you will divide the capital by 2 under basic indicator approach vs by 3 under standardized approach

QQ plot
Thinner tails for sure

95% Credit Var of 100 CDS with $1000, 2% PD and LGD 100% each
The answer is 3000
At 95% level, there will be five defaults so the value is 5*1000
the expected loss is 100*0.02*1000*1

Convexity
Convexity will of course increase the bond price comparing with simply using the expected value of interest rate

Square root rule
For time varying volatility, e.g. volatility estimated via GARCH, using square root rule will overestimate the VaR whereas underestimate in case the underlying process has a jump

Policy needs to be corrected
The senior bond is only subordinated to preference share

Rule of thumb
Correlation of zero does not imply independence
For NSFR, I vaguely recall one of asset marked as (not stable)..Didn't use it in calculation and ratio < 100%
QQ Plot, it looked similar to t-distribution vs normal distribution qq plot..went for fatter tail
 

bebrave

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#85
the question states that the marginal VaR will be the lowest AS LONG AS Treynor ratio is greater than 0.1
and you have no way out in calculating the marginal VaR by using those inputs provided by the question
MVAR = VAR/P * Beta...VAR/P as constant selected Treynor ratio > .1 and lowest Beta
 
#86
the question states that the marginal VaR will be the lowest AS LONG AS Treynor ratio is greater than 0.1
and you have no way out in calculating the marginal VaR by using those inputs provided by the question
can I use MVaR = VaR(portfolio)/Portfolio value x Bi?
with lowest Bi, MVaR is the lowest
 
#87
For NSFR, I vaguely recall one of asset marked as (not stable)..Didn't use it in calculation and ratio < 100%
QQ Plot, it looked similar to t-distribution vs normal distribution qq plot..went for fatter tail
1. Yes, one of the asset is unstable. so we have to applied discount on that asset ( shown on right column). and ratio is >1
 
#90
I cannot remember the question clearly. What I remember is to find the smallest MVaR with treynor ratio >1. Maybe I overlook the question
If the objectives of the question are choosing Trenyor ratio >0.1 AND lowest marginal VaR,
you should calculate Trenyor ratio by using index Beta but use Portfolio Beta in finding the lowest marginal VaR

If the question refers to minimizing Marginal VaR as long as Trenyor > 0.1
you should find the highest Trenyor ratio in order to maximize your return AND Trenyor ratio > 0.1 to minimize the Marginal VaR
 
#91
If the objectives of the question are choosing Trenyor ratio >0.1 AND lowest marginal VaR,
you should calculate Trenyor ratio by using index Beta but use Portfolio Beta in finding the lowest marginal VaR

If the question refers to minimizing Marginal VaR as long as Trenyor > 0.1
you should find the highest Trenyor ratio in order to maximize your return AND Trenyor ratio > 0.1 to minimize the Marginal VaR
btw do you remember one question about scoring model. Which can help during the process: SVM, merton, Area under the Curve or ROC?
 
#92
btw do you remember one question about scoring model. Which can help during the process: SVM, merton, Area under the Curve or ROC?
I can only recall the one comparing the credit analysis on consumers, financial institutions, corporate and sovereign....
The answer is consumer
since the lending amount to consumer is relatively smaller comparing with the amount to FI and Corporate, the process is automated by using credit scoring model and no qualitative analysis is used in the approval process as compared with FI and corporate.
 
#93
Since stdev is 10% each and they are uncorrelated. This implies portfolio stdev of 5.72% or thereabout. VaR = 100 = p * 5.72% * z. Solving for p = ~ 750. Since equally weighted divide by 3 ~ 248. Could be wrong but that was my solution.
Unfortunately don't agree with your answer
If you are to allocate $100 million VaR limit among 3 managers with UNCORRELATED portfolios, the VaR Limit on each manager should be
Sq root (VaR ^2 + VaR ^ 2 + VaR ^2 ) = 100
VaR Limit on each manager must be < 100
 
#94
There was one question with the Jensen's and convexity. I had some doubt between two answers because of the concexity part in the explanation.
An other one related to scoring model. Which can help during the process: SVM, merton, Area under the Curve or ROC.
Even for the smirk and the 4 graphs I had some doubt between two.
For Smirk, choose the graph indicating the market implied volatility distribution has a fatter tail on the left side than the one of lognormal and has a thinner tail on the right side than the lognormal one
 
#95
For Smirk, choose the graph indicating the market implied volatility distribution has a fatter tail on the left side than the one of lognormal and has a thinner tail on the right side than the lognormal one
you choose A or B? It seems that both have fat tail on the left side than the one of lognormal and has a thinner tail but B has a fatter tail than A
 
#97
Does anyone remember the question in which there were number of exceptions given at 95% and 99% C.I. In the options we were asked to reject a particular hypothesis based on these figures. Anyone knows the answer to this??
 

M.A.

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#98
Hi
Im not 100% sure, but i thought the whole budget was 100 Mio. And from the answers only one was below that. The others were 140 Mio. and above. So i choose the one below the total budget, because of no correlation, the seperate VaRs must be lower than portfolio VaR.
Hi,

They provide the portfolio var of 100m and ask for the portfolio size "p" for each manager.

My self i chose 143 m but i forget to calculate the portfolio std wrongly i toke it as 10% which is wrong as it was the manager std rather than the portfolio std.

Regards
 
Last edited:
Unfortunately don't agree with your answer
If you are to allocate $100 million VaR limit among 3 managers with UNCORRELATED portfolios, the VaR Limit on each manager should be
Sq root (VaR ^2 + VaR ^ 2 + VaR ^2 ) = 100
VaR Limit on each manager must be < 100
Was the question what is the VaR allocation of each manager or the capital allocation of each manager so that total VaR of 3 portfolios should not exceed 100 -> the VaR budget? Because if the latter, then 100/(0.1*2.33)=429 (which was answer D) and then 429/3=143, which was answer B (I think). Or I may be talking nonsense..
 
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