Level 1: Post what you can remember here

Discussion in 'About FRM' started by browniandynamics, May 21, 2012.

  1. browniandynamics

    browniandynamics New Member

    Note that first the order here does not correspond to that in the exam, but that in my memory. Second my memory is fading quickly, so all the questions are only approximate and many are incomplete. Nonetheless, I hope it'll a reminder for others to come up with more complete questions.

    1. expected loss using directly the formula
    2. unexpected loss using directly the formula
    3. GARCH model: gives four options and asks you to choose the one with the heaviest weight on long-term average
    4. Monte Carlo simulation (GMC): gives you a random number following uniform distribution and anything else needed and asks you the stock price after one step. There is a z-table so that you can look up the corresponding normal random number there
    5. Commodity forward/futures pricing formula
    6. Two or three questions regarding Binomial tree model: first one to price an American put; second is to calculate the moving up probability
    7. How can risk management increase firm value?
    8. In September, Moonbucks coffee is planning to buy one million pounds coffee in November. In order to hedge the price rising, it enters a long call option of one million pounds coffee at 2.15, maturing in December. In November, it needs to decide what to do with the option position. The answers are: a) exercise immediately; b) Wait and buy coffee at spot; c) ??? d) ???
    9. Credit ratings transit matrix: there is a bank deciding to invest next year. The rule is that the company must have 95% or chance to stay at B- or above next year (note the ratings scale is neither Moody's not S&P)
    10. There is one question that gives you the price of a one-year zero-coupon bond, the price of a two-year coupon bond, and asks you the price of a three-year coupon bond
    11. There is a VAR question very confusing: an investor is long a stock of company A and short a stock of company B, the stdev of A stock is 20% and that of B is 30%, the correlation is 0.7. What is the VAR of his portfolio?
    12. Difference between top-down and bottom up approaches for operational risk management:
    13 Enterprise risk management:
    14: Kidder Peabody case: why Kidder Peabody dismantled?
    15: Calculation of information ratio, using directly the definition
    16. The futures trading mechanism: the question gives a table about the futures price movement in several days, and asks the margin balance on a particular day.
    17. Bank's role as a market maker
    18. There are one or two question regarding the cash flows of swaps.
    19. Impact of increase of dividend on a put option
    20. There is a question regarding the price difference between forward and futures: if the futures price is lower than the corresponding forward price, what could be the reason? I chose: the underlying asset is strongly negatively correlated to interest rate.
    21. There seem to be two questions regarding interest rate parity: one tests directly the definition and the other one I cannot recall now.
    22. There is a typical question about the cheapest-to-delivery bond
    23. There is a question about the role of a trustee for a corporate bonds. This is a hard one!!!

    So much for now!
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  2. Tom77

    Tom77 New Member

    Hi, wow you realy have a photo realisitc memory capacitiy of the questions :)
    What did you answer on the Questions...

    3. The one with the highest w (Omega) Actually you didnt have to calculeat anything here right ?
    4. Did you have to use the z-table here? I thought everything needed to fill into the formula was given, but now i think i could be wrong with the answer i came up to.
    6. What did you get at the Binomial Tree question ..., if the stock moves down to 40 ? I think it was 10 ? The questione here was about the value of the option but not today but after the first step if the stock moves down to the calculated stock value.
    9. I think i came to A+ here but i`m not sure.
    14. The answers at the Kidder case were a little confusing to me at first sight since i thought before the exam that the case studies had to be a 100%er . Cant remember my answer.
    18. I was very surprise that they were asking 2 times about the CF`s of Swaps. Not a single Swap Value Calculation as i can remeber. Wow !!!!!!!
    17. Do you mean the question about market-if-touched order? To be honest i didnt expect such a question before the exam, it just seemed "too normal" for me. What did you choose here? I think i choose the only answer that came close to the definition in the learning sheets. The other answer was about if some spreads are reached or something like that.
    20. I did also choose the neg. correlation answer since we`ve learend that usually Forward prices are below the prices of corresponding forwards. And of course they are asking the "and if not" case.
  3. varun34by02

    varun34by02 Member

    Refering question numbers from above -

    1 and 2 - Were correct i hope :)

    3. Was about finding gamma ... Omega = Gamma*Long Term Volatility. And we know that Alpha+Beta+Gamma = 1. So, in short, we needed to calculate the option with highest Alpha+Beta (both given)

    4. Is SAD to know it was not the random number which we plug in formula.. they always keep an option ready to fool you :(

    6. I think it was down-prob which was asked --- P-down = 1-P-up.
    Also, the 1st question of Exam on binomial tree was very tricky... I took S=X(50) as it was ATM, but what they meant by question - "if price falls to 40, what is put's price 6-months " .. the upper node gave ~1.6 while the bottom ~8.35 ..Since the bottom one was with 50*.8=40 , i chose 8.35 as answer ..don't knw if thats correct way ?

    9- credit rating - the correct one would be the 2nd best rating (if that was A-.. dont rem that exactly..but it was 2nd best)

    11 - I think be it long or short, VaR remain on both of them, so i clubbed the Principle and solved for VaR on that with the portfolio sigma

    14 - Kidder peadboy - can some1 tell the correct answer, i think it was trading system issue which was exploited by a rogue trader.. there were 2 option catering to it.. dont knw if i chose correct

    18 - In Swap question , they asked Cash flow after 6 months - was 750 correct option ?

    19. Increase in which of the following wont increase a price of put option - 1st 3 option were - X,T and Volatility - which are not correct.

    21 - IRP is based on what - I was confused between sovreign spread and Inflation... but chose inflation because - (1+Real rate)= (1+Nominal)/(1 + Inflation)

    22 - CTD was a sitter/standard FRM question

    23 - Trustee ROLE - No idea whatsoever :O :O

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  4. browniandynamics

    browniandynamics New Member

    6. What did you get at the Binomial Tree question ..., if the stock moves down to 40 ? I think it was 10 ? The questione here was about the value of the option but not today but after the first step if the stock moves down to the calculated stock value.

    My answer was also 10! It's an in the money put option!

    9. I think i came to A+ here but i`m not sure.

    My answer was A-,but I might be wrong!

    Hope this will be of help! And good luck!
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  5. varun34by02

    varun34by02 Member

    Thanks browniandynamics ..... I get a -1 in my 1t question itself ;) but considering the general view about level of difficulty, i am still hopeful
  6. Aleksander Hansen

    Aleksander Hansen Well-Known Member

    23) Trustee role (roughly paraphrasing what I remember)
    a) the trustee is hired/paid for by the bond holders
    b) the trustee has the authority to declare default
    c) the trustee can do more to protect the bond holders than what is stipulated by the indenture
    d) hm.. Don't remember
  7. browniandynamics

    browniandynamics New Member


    I think d) is roughly: the trustee must act upon request of majority of bondholders
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  8. browniandynamics

    browniandynamics New Member

    Good luck!
  9. browniandynamics

    browniandynamics New Member

    24. there is a question regarding the power law in operational risk management. The question is roughly:what can the power law do to operational risk management?

    My answer was something like to extend the VAR to high confidence level. (cannot recall clearly, hopefully someone else can add more details)
  10. browniandynamics

    browniandynamics New Member

    25. there is a question regarding the KRI (key risk indicator), asking which is (or is NOT) an example of KRI.
  11. Aleksander Hansen

    Aleksander Hansen Well-Known Member

    Wasn't there a question about a key performance indicator as well?
  12. Aleksander Hansen

    Aleksander Hansen Well-Known Member

    That's it, you're right..
  13. browniandynamics

    browniandynamics New Member

    26. There is a GARP code question, which I think is exactly the same as Question 10 in 2012 GARP practice exam.
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  14. varun34by02

    varun34by02 Member

    It was KPI only...though i dont rem options and i had just guessed it :p

    Also for the power law..i remember power law has alpha as a function and as alpha decreases you have higher confidence interval..

    1 question was for Type I/II error - i think it was reducing alpha and also increasing the smaple size (to double) .. what's the answer ?

    1 was about which arbitrage startegy to be used - i remember both the cases had arbotrage opportunity (F>S and F<S) rt ?
  15. @browniandynamics: awesome feedback, thank you. Can i follow-up on one of your points, as this is always of intense interest. You wrote:
    So they gave you a full Z-table (like in the Appendix of most statistics book)?
  16. browniandynamics

    browniandynamics New Member


    Hi David, just for your information, yes, they indeed provided a z-table (I think that's the first page of the question manual), like in the Appendix of most stats books.
    • Like Like x 1
  17. BioNerd

    BioNerd New Member

    I remember one question on exchange rate: According to Purchasing Power Parity, the real exchange rate is based on what: two options I remembered: Inflation Rate, GDP. Anyone knows the correct answer? I think I picked GDP.
  18. BioNerd

    BioNerd New Member

    I think the options are: a. ROE, b. VaR, c. volatility and d. stddev. c and d I'm not quite sure if remember correctly.
  19. Aleksander Hansen

    Aleksander Hansen Well-Known Member

    Inflation would be the way to go
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  20. Aleksander Hansen

    Aleksander Hansen Well-Known Member

    That's right, and the answer was a)
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