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Exam Feedback FRM Part 2 (May 2015) Exam Feedback

Ryan S

Member
Subscriber
NO idea about which bank the firm should choose in taking cross currency swap position.

Agreed, this one baffled me. I could not find rationale in choosing the bank with longer duration Assets, or the one with shorter duration Liabilities, as these should be flipped for a better credit counterparty, unless of course I am thinking of this all wrong. I hesitantly chose the one with less non-USD exposure in the final minutes.
 

robin3301

New Member
add one more
A company can forecast the percentage of companies default but not the specific company. Which derivative they should buy
 

BTO

New Member
Agreed, this one baffled me. I could not find rationale in choosing the bank with longer duration Assets, or the one with shorter duration Liabilities, as these should be flipped for a better credit counterparty, unless of course I am thinking of this all wrong. I hesitantly chose the one with less non-USD exposure in the final minutes.
Baffled as well but think in the end chose bank with smallest FX exposure. Could be argued it should bank with lowest duration assets
 

Salonica

Member

I sort of used this reasoning and chose the answer that said reject the 99% with 95% confidence.
I can't remember neither the questions nor the answers very well. But how can we reject the 99% VaR which only gave 1 exception, therefore z value = 0.3178 which is lower than 1.96?
The question includes the following information
A. 33 exceptions in 95% VaR
B. 11 exceptions in 99% VaR
C. Sample = 1000 days

Critical value of 95% VaR = (33-1000*0.05)/sq root(1000*0.95*0.05) = -2.46
Critical value of 99% VaR = (11-1000*0.01)/sq root(1000*0.99*0.01) = 0.3178
Critical Value of 99% confidence level = +- 2.56
To reject, absolute value of test statistics must be greater than absolute value of critical value at 99%
* This is a two tailed test

Choice
A. Statistics of 95% VaR = 0.3178
B. Statistics of 99% VaR = 0.3178
C. Reject 95% VaR at 99% confidence level
D. Reject 99% VaR at 99% confidence level
So, which one did you choose? I chose B actually, but I can't remember if the answer mentioned 'Statistics' or 'Critical value'. If the latter then B is not right.
 

Salonica

Member
There was also a question on credit lines and CVA. I chose the one saying that CVA can be calculated in advance and therefore fully hedged.
 

Salonica

Member
Question on the ordinal measures of correlation. I think answer was that they are not invariant to transformations of variables
 

andrewking

New Member
I found the exam pretty challenging, it seemed more focused on credit and the style of questions were quite different to practice question. I focused too much on the quantitative aspects. I found a lot of the questions I could narrow down to 2 answers but then it was a coin toss.

The question with the 340bp spread and 40% RR what is the probability of default within 2 years? I found that one particularly frustrating and couldn't work out the equation.
Any thoughts?

I was surprised by the lack of a term structure questions. I think the luck of the draw the exam focused on my weaker areas, I would be very lucky to hit a 50/80.
 

Salonica

Member
Question on stress testing. I answered bank needs to shock risk factors they are most sensitive to. That may be wrong.

Also question on external loss of Girling was on a company suffering damage to physical assets (some natural disaster I think).
 

Salonica

Member
Right, I've got 52 questions so far. I know it's sad making a spreadsheet list but I think I am going to die of anxiety if I wait until 23rd June. Any more please?
 

Ryan S

Member
Subscriber
Some others coming to mind, apologies for the vagueness but maybe others can extend more detail:
  • CHF/EUR de-peg from January event and a complimentary graph I think I chose the answer where one currency will be more volatile going forward.
  • Something regarding an OAS spread above the treasury curve +30 and below the Securities spot curve -30 bps, and the implications on security value or market perception.
  • A question where you had to distinguish and/or choose between age/volatility/filtered/correlation weighted approaches.
  • Four hedge fund strategies with similar market conviction, which would be least likely to be correlated with the others. For me it came down to short bias or market neutral, I chose the latter.
  • Pick the answer which best describes "Pillar 3"
  • I recall performing the ROE calculation for some reason, or I am imagining this lol.
And unless I am just forgetting about it, I was surprised to not see any Merton / contingent claim questions...

There are others going through my head, but I am not sure if I am just blending them with past practice questions, it's becoming hazy at this point.

I will refrain from adding more questions I recall to this discussion, for my own sanity. The analysis I'm doing at this point is slightly driving me up the wall. I need to let go and know that worst case I did not make the cut, I can continue studies and be even more prepared and a better risk manager with deeper knowledge of the subject matter, which I found quite interesting especially for part 2. It would not be the worst fate. However, if I pass I will certainly miss all the learning and challenges that come with this curriculum. It can be an incredibly frustrating and painful journey, yet so uplifting and totally worth it when you experience each "Ah hah" moment and small victory along the way. Best investment of my time I ever made.

Thank you David and BT team, and I wish you all the very best of luck!

Ryan
 

Salonica

Member
Some others coming to mind, apologies for the vagueness but maybe others can extend more detail:
  • CHF/EUR de-peg from January event and a complimentary graph I think I chose the answer where one currency will be more volatile going forward.
  • Something regarding an OAS spread above the treasury curve +30 and below the Securities spot curve -30 bps, and the implications on security value or market perception.
  • A question where you had to distinguish and/or choose between age/volatility/filtered/correlation weighted approaches.
  • Four hedge fund strategies with similar market conviction, which would be least likely to be correlated with the others. For me it came down to short bias or market neutral, I chose the latter.
  • Pick the answer which best describes "Pillar 3"
  • I recall performing the ROE calculation for some reason, or I am imagining this lol.
And unless I am just forgetting about it, I was surprised to not see any Merton / contingent claim questions...

There are others going through my head, but I am not sure if I am just blending them with past practice questions, it's becoming hazy at this point.

I will refrain from adding more questions I recall to this discussion, for my own sanity. The analysis I'm doing at this point is slightly driving me up the wall. I need to let go and know that worst case I did not make the cut, I can continue studies and be even more prepared and a better risk manager with deeper knowledge of the subject matter, which I found quite interesting especially for part 2. It would not be the worst fate. However, if I pass I will certainly miss all the learning and challenges that come with this curriculum. It can be an incredibly frustrating and painful journey, yet so uplifting and totally worth it when you experience each "Ah hah" moment and small victory along the way. Best investment of my time I ever made.

Thank you David and BT team, and I wish you all the very best of luck!

Ryan
I couldn't agree more with your conclusion.
 
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