Level 2: Post what your remember here...

Discussion in 'About FRM' started by troubleshooter, May 19, 2012.

  1. troubleshooter

    troubleshooter Active Member

    I will be posting the questions that I remember from the exam. But I wanna make sure that it would not violate GARP ethical guidelines... David, would it be ok?
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  2. LankyLint

    LankyLint Member

    1) Implied volatility is assumed to be the center. What will be the effect? (in-the-money call value understated?)
    2) What did John Rusnak do? (made fake transactions)
    3) What will the Q-Q plot look like? (I marked the one which was straight below 1 and then upward sloping for +ve values)
    4) Backtesting, outcome (I marked C, was very confused)
    5) Calculate ES for 96.5% confidence (straight-forward)
    6) Netting arrangements, calculate exposure (straight-forward)
    7) Suggest measure for specific exposure profile (Ans: collateral arrangements because all exposures were positive)
    8) Calculate implied risk-free rate [using (1+rfr) = (1-PD)* (1+yield)]
    9) What will be the common strike for 4 barrier options (no idea personally, I marked 40)
    10) Calculate VaR for bond transition matrix (it was 9)
    11) Calculate default rate for 3rd year [(1 - year 2 default rate) * ( 1 - year 3 default rate) = (1 - 0.1051)]
    12) Which of the following statements related to correlation are wrong (Ans: correlation is stable for short periods)
    13) What is true about the ratios net stable and liquidy (answer was A, other options were ratio should be > 150% and 250% and that horizon is 0.5 years)
    14) Which is the most liquid hedging option? (Eurodollar futures?)
    15) What is true about ring fencing assets (allows SPE to issue debt at lower interest rates)
    16) Calculate probability of default (I was able to get both 16% and 20% using different formulas, I choose 20% in the end)
    17) Calculate option value (I didn't know that we had to calculate the probabilities of up and down moves. I marked B 0.5 something)
    18) Calculate component VaR (disguised as a trader-to-firm capital contribution problem)
    19) Calculate hedge using keyrates (30k short and 3.5k short)
    20) 5k short out-of-the-money calls, 5k ITM calls, some 8k forwards, calculate VaR (25% volatility, 252 days, daily at 99%), I got D (19,000 something)
    21) Calculate payment for Total Return Swap (Ans was 31.5, -40 mil and +8.5)
    22) Which approach does not require correlation estimates (Historical simulation)
    23) What is true about weighting schemes (I marked C, something about correlation-weighted and a time-weighted correlation-matrix)
    24) Hedge using negative duration (Short put on IO mortgage strip?)
    25) Enhancement required so that senior tranche has 90% protection (5 mil)
    26) Calculate the amount of duration mismatch (700, D(liab) * liab - D(assets) * assets)
    27) Which asset should be pledged as collateral? (given correlation matrix, I choose C because it had the lowest correlation with the asset being bought)
    28) Which asset to add to the portfolio? (Nix, because it had the highest information ratio)
    29) What amount of alpha is attributable to the benchmark? (0.18% found it after a lot of trial-and-error)
    30) What will make it more beneficial to make an investment based on ARAROC? (Reducing the equity beta)
    31) What is true about capital requirements under basel III? (Equity capital tier 1 must be 4.5%)
    32) Which of the following will add to equity tier 1 capital under basel 3(or 2, forgot)? (cross-bank deposits or something. all other options seemed to reduce tier 1 capital)
    33) What are the most frequently used distributions for severity prob of default? (poisson and lognormal)
    34) Which of the following is true? (no matter what the correlations are, total operational VaR (or some measure) cannot be greater than the sum of the individual business sections)
    35) Which of the following is true? (Total risk = sum of risk contributions)
    36) What is the capital requirement? (capital factor was 3, and a table of various confidence levels and VaR and SVaR was given, had to use 10 day 99% VaR, I got 340 something)
    37) Difference between capital requirements based on drawdown if loan-equivalent is 0.6 something (difference was 20-30? I don't remember)
    38) Something about assumptions changing (Ans: Operating risk increases/decreases) [don't remember this question properly]
    39) 3 VaRs were given, Delta-normal, Monte Carlo and Historical, historical was off by 25k, other two were same, what model risk? (Data problems?)
    40) Some big question with 2 custom formulas for calculating exposure to loans. We had to find the value of b and g? (b < 0, g >= 0)
    41) Which of the following accounts for diversification? (internal models approach?)
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  3. David Harper CFA FRM

    David Harper CFA FRM David Harper CFA FRM (test) Staff Member

    Hi troubleshooter: Thanks for asking, I hope it's okay (lankylint is not even nearly duplicating the entire questions, but merely paraphrasing the concept). I personally find this extremely helpful ... but I will check with Kristina for some guidance. It's really really useful to know which topics were queried, so in the meantime, thank you!
  4. David Harper CFA FRM

    David Harper CFA FRM David Harper CFA FRM (test) Staff Member

  5. Ehanif

    Ehanif New Member


    As most of the questions are mentioned above, i do remember some of them not mentioned above.

    1) There was a question on Irish and US credit crisis, it asked for what was a factor in Irish crisis but not in US.
    2) There was a question on Icelandic banking system.
    3) What factor should have raised red flag regarding the fraud by Bernie Madoff.
    4) There was also a question regarding manipulation of Var calculations by John Rusnak.
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  6. Ehanif

    Ehanif New Member

    5) A question on net excess spread.
  7. troubleshooter

    troubleshooter Active Member

    Lanky bro, that's awesome memory...

    The question on barrier option I thought was a killer, though the exam was unexpectedly easy. Not that I am complaining. Here's how that went. The stock price currently is 40.96. Risk free rate is 2 percent.

    Up and in option threshold 50 dollars, at 3.15 dollars
    Up and out option threshold 50 dollars, at 1.04
    Down and in put option threshold 30 dollars at 1.90
    Down and out put option threshold 30 dollars at 1.04

    All of the options have the same exercise price which is:

    A. 39
    B. 40
    C. 41
    D. 42
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  8. Ehanif

    Ehanif New Member

    Yes, it was the toughest. I guessed it 40. Lanky also guessed it 40.
  9. qin841121

    qin841121 Member

    Confirm $40. This is a simple question
  10. shanlane

    shanlane Active Member

    Question 4 could have gone two ways, At the beginning of te test it said that unless stated otherwise all interest rates were we continuous. If we said that spread was PD*LGD it was one answer (this was what the reading said we should use for continuous so this was my answer) but if we used 1-r=(1-PD*LGD)(1+y) we got a different answer.

    Both answers were possible solutions.

    SInce they said everything was continuous I really hope they used my answer, but it is very frsutrating that both answers were possible solutions.

    Another bad questions was the one about the volatility skew. There were 2 correct answers. In the money calls and out of the money puts were both under-valued.

    A third bad question was the credit enhancement question. It mentioned 90% CE, but none of the answers would have given us 90% CE. with 15MM in sentior debt, we would have needed 135MM in CE and none of the answers provided this for us.

    besides that, I think the test was fair. A couple of interesting questions, but too many mistakes to judge anyone on. The people that wrote it should actually be embarassesd.

    THat is my 2 cents.

    I hope everyone did well and hopefully we will NOT still be talking in July!!

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  11. qin841121

    qin841121 Member

    My answers are to lankylint.

    But I think I have asked question 1 before (1) Implied volatility is assumed to be the center. What will be the effect? (in-the-money call value understated?)). <=There is also out of money put which is equally understated.....

    40) Some big question with 2 custom formulas for calculating exposure to loans. We had to find the value of b and g? (b < 0, g >= 0) . I quite positive it is b<0, g<0 as the debt service ratio is the higher the better. If you have very high debt service ratio, the x will be large and the probability of default will be high <=which does not make sense

    6) Netting arrangements, calculate exposure (straight-forward). Question 6 become so straight forward that I was so afraid to get it wrong.
  12. JP2932

    JP2932 New Member

    I thought the exam was fair but really not straightforward in several places. I felt like there were a lot of places to make mistakes and answers that were not so straight forward.

    1) The barrier question becomes straightforward when you recognize that the 2 barrier call premiums will sum to a Euro call premium and the same goes for the puts. Then you can use put-call parity to solve for K. I don't remember what answer that comes out to be.
    2) I think for Lanky's question #40, I put b>0 since the loan to value ratio is in the denominator of the middle term in the equation. I def put debt to service as negative.

    Questions I remember but which are not yet included here:

    1) Question with 2 bonds, each 100m, and they both form a pool that backs a senior/sub structure. Prob default of each bond is equal to p.
    Then they have some answers that represent prob of default of the equity tranche or the senior tranche.
    2) There was a market value of credit risk question. It gave an exposure of 100k and then a risk free bond with MV of maybe 980 or 970. I don't remember the answers.
    3) Hedge fund fee question that gave you a 2 and 20% fee structure and return numbers (?). There was a high watermark but no hurdle rate in place. I think I put down answer D...2.99?
    4) Merger acquisition question - gave 2 stocks and asked what positions you'd take.
    5) PE fund question about the Mezz Capital strategy - sub and pref stock with no change in control
    6) One question on through the cycle credit ratings and how they relate to asset appreciation and depreciation - possible solutions were along the lines of "...tightens credit when home prices depreciate..." Something like that.
    7) Question on what signs show that an increase in lending (I think) isn't leading into an asset bubble (or something like that).
    8) Convert arb question about cash inflow - answer was bond coupon

    Re : volatility skew question - I think I selected the OTM put because the question was speaking about equity index options...I think.
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  13. syaiful

    syaiful Member

    Let me add after Lanky & Ehanif ;)

    46. High threshold (converge to GEP)
    47. Backtesting (95% vs 99 %)
    48. TBA (MBS)
    49. KMV
    50. Credit Portfolio Model
    51. Through the cycle
    52. impact concentration to UL and EL
    53. Which one is example of Wrong Way risk
    54. Delay in Valuation (Model Risk)
    55. Liquidity Duration 2 stocks (my ans: 10 days)
    56. Highest beta line in SA Approach (Payment & Settlement)
    57. High watermark question (NAV data is given)
    58. Merger Arbitrage
    59. Convertible arbitrage
    60. what is Mezzanine capital
    61. Liquidity (my ans : spread between short term & Treasury rates)
    62. impact survivorship bias to Hedge Fund performance
    63. how shock subprime spread to other asset? Repo market Increase haircut
    64. 3 shocks (my ans : increase in Credit to GDP ratio)
    65. Asian Options
    66. Impact Using trader Var model
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  14. Ehanif

    Ehanif New Member

    So guyz what did u answer to question 57 mentioned above by syaiful? I guess the answer is 2.99. Am i correct?
  15. Ehanif

    Ehanif New Member

    And regarding question 57 mentioned above by syaiful which was regarding the liquidy duration.My asnwer to that question was 5. I calculated the liquidity duration of both the individual bonds and took the average (21000/0.15*3000 & 20000/0.15*25000). I believe the answer had to be less then ten.
    What was the answer to question 1 on probability (2 bonds each of 100) mentioned above by ji.park1234? The question asked for the correct statement
  16. Ehanif

    Ehanif New Member

    What was the answer to Net excess spread question? Was it 0.4 or 0.15? Do we need to deduct the service fee of 0.25?
  17. qin841121

    qin841121 Member

    You don't have to. Remember seeing it in one question
  18. qin841121

    qin841121 Member

    I was thinking duration as a sum of weighted and my answer is also 5.1.
  19. Ehanif

    Ehanif New Member

    And what about the answer to question 1 mentioned above by ji.park1234? Does anyone remember the answer to that question?
  20. Leli

    Leli Member

    Wow great memory all,
    i remember one more, about frequency/loss distribution when we use Monte Carlo model (we had to choose binomial or poisson for frequency and norma or lognormal for severity)


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