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# Exam FeedbackFRM Part 2 (November 2014) Exam Feedback

#### monumonumental

##### Member
Hi All,

Were any of you able to crack the below -

"bank xyz hedging long position in us gov bonds with SCDS. Prev model used average of bid prices, now considering moving to mid price. As the bank was the protection buyer it was paying, not receiving premiums, so one answer is ruled out."

I selected,....CP will start posting losses.
I am nt sure about this//i think i posted the same ans as you.........the options i didnt select in exam was 1)Basel guidelines not met 2)Receiving premiums..

#### Ank

##### Member
Hi All,

Were any of you able to crack the below -

"bank xyz hedging long position in us gov bonds with SCDS. Prev model used average of bid prices, now considering moving to mid price. As the bank was the protection buyer it was paying, not receiving premiums, so one answer is ruled out."

I selected,....CP will start posting losses.
I selected XYZ will pay big loss onetime........ option

#### Roshan Ramdas

##### Active Member
4)I think we are asked to use Basel 3 and i think we should use 10.5% of RWA instead of 8%in Basel 2.
12)I think you are correct...even i selected risk concentrations earlier but later changed the answer..a silly mistake.
13)I think in this question the options were like 1)new ipo had shares traded 10% premium....2)Hedge fund is closely guarded by portfolio managers etc..
18)We are on same page here.
20)We are on same page.
21)RR was 40%...PD i forgot
30)Bank will take one way CSA with hedgefund since bank is superior and would love to take advantage.,..there were 5 questions on CSA..i don't remember them all.
40)I did a mistake here ..i selected the option with non parallel shift..i think you are correct..
41)I think answer will be. the one in which Solvency looks at firm wide but basel does not..
The CSA's were all really difficult.

As for the Solvency / Basel,.....I've attached a small screenshot from the main GARP doc that seems to be supporting my earlier point,.....but I am may have misread the point and could be wrong.

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#### monumonumental

##### Member
The CSA's were all really difficult.

As for the Solvency / Basel,.....I've attached a small screenshot from the main GARP doc that seems to be supporting my earlier point,.....but I am may have misread the point and could be wrong.
I don't think i will make it this time...ie i may fail..

#### Ank

##### Member
For this "Solvency vs Basel..i think i got it correct....I selected the one which stated VAR came with varying confidence levels for different risk classes and Solvency had a single measure for company as whole ?"

I also checked this option. its option A for me i guess

#### Ank

##### Member
What you ppl checked for Bank having branches in North south west part. I choose option where centralized database and same data taxonomy was option

#### Roshan Ramdas

##### Active Member
I selected XYZ will pay big loss onetime........ option
Why would XYZ post a big loss ?
I was trying to built some kind of a strange logic for this one & here it is.
I am not very familiar with how the bid ask prices are quoted,....but I assume that it is going to be the CDS premium.
Lets assume that XYZ as a protection buyer is paying $100 a year. We are initially using a model that averages bid prices (buy prices). We then take up a decision to move on to a model that uses the midpoint of a bid ask spread. The ask prices are logically higher than the bid & so bid ask mid point (I think) should be logically higher than the bid price average themselves. So to me, we are effectively marking a CDS position to a higher price. As a protection buyer,....if the price to which my position is being marked moves up from X to Y, that would have the affect of increasing my profit / reducing my loss. As a protection seller,....if the price to which my position is being marked moves up from X to Y, that would have the affect of increasing my loss / reducing my profit. #### Roshan Ramdas ##### Active Member What you ppl checked for Bank having branches in North south west part. I choose option where centralized database and same data taxonomy was option This is what I selected. #### Ank ##### Member Why would XYZ post a big loss ? I was trying to built some kind of a strange logic for this one & here it is. I am not very familiar with how the bid ask prices are quoted,....but I assume that it is going to be the CDS premium. Lets assume that XYZ as a protection buyer is paying$100 a year. We are initially using a model that averages bid prices (buy prices). We then take up a decision to move on to a model that uses the midpoint of a bid ask spread. The ask prices are logically higher than the bid & so bid ask mid point (I think) should be logically higher than the bid price average themselves.
So to me, we are effectively marking a CDS position to a higher price.
As a protection buyer,....if the price to which my position is being marked moves up from X to Y, that would have the affect of increasing my profit / reducing my loss.
As a protection seller,....if the price to which my position is being marked moves up from X to Y, that would have the affect of increasing my loss / reducing my profit.
Fwiw bid price is less then ask price. So when rm goes for mid price then it will increase the amount which they have to pay as they are on the paying side of credit protection "already paid 20,000" . So it will post losses for then, but don't understand about logic of regulators showing up there as using bid-ask mid price is okay with them. I think they might be posting big amount of losses in there books

#### Roshan Ramdas

##### Active Member
Fwiw bid price is less then ask price. So when rm goes for mid price then it will increase the amount which they have to pay as they are on the paying side of credit protection "already paid 20,000" . So it will post losses for then, but don't understand about logic of regulators showing up there as using bid-ask mid price is okay with them. I think they might be posting big amount of losses in there books
My understanding is that the amount you pay in the form of CDS premium is fixed through the life of the contract,......it is what the protection buyer and seller agree upon at the time of inception. The next aspect is marking the position to markets which could result in a profit / loss depending upon the end of day price that you use. This is what I understood from the JPM (traders resorting to mismarking their positions). Anyway,....this is all very superficial at the moment and I could very well be wrong.

#### Roshan Ramdas

##### Active Member
4)I think we are asked to use Basel 3 and i think we should use 10.5% of RWA instead of 8%in Basel 2.
12)I think you are correct...even i selected risk concentrations earlier but later changed the answer..a silly mistake.
13)I think in this question the options were like 1)new ipo had shares traded 10% premium....2)Hedge fund is closely guarded by portfolio managers etc..
18)We are on same page here.
20)We are on same page.
21)RR was 40%...PD i forgot
30)Bank will take one way CSA with hedgefund since bank is superior and would love to take advantage.,..there were 5 questions on CSA..i don't remember them all.
40)I did a mistake here ..i selected the option with non parallel shift..i think you are correct..
41)I think answer will be. the one in which Solvency looks at firm wide but basel does not..
On question 4,.....the minimum requirement is still at 8% b/w Basel 2 and 3. The capital conservation buffer 2.5% introduced in Basel 3 is not a minimum in itself.
Nonetheless,....even if we assume that 10.5% is the way to go,....what change did you make to the numerator and / or denominator please ?
Just trying to understand how your formula was structured.

#### monumonumental

##### Member
On question 4,.....the minimum requirement is still at 8% b/w Basel 2 and 3. The capital conservation buffer 2.5% introduced in Basel 3 is not a minimum in itself.
Nonetheless,....even if we assume that 10.5% is the way to go,....what change did you make to the numerator and / or denominator please ?
Just trying to understand how your formula was structured.
I think i got answer of 2.7 something and 2.944 was the closest option to my answer..

#### Roshan Ramdas

##### Active Member
Guys,

How did you work out the below problem please ?

MBS 1 & 2 - Nominal & Z-spread difference.

Thank you

#### Ank

##### Member
Guys,

How did you work out the below problem please ?

MBS 1 & 2 - Nominal & Z-spread difference.

Thank you
I put MBS 2 and Yield curve 2