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# Exam FeedbackMay 2019 Part 2 Exam Feedback

#### AHoekstra

##### New Member
Subscriber
Thanks so much for adding with more stuff!

For Vasicek, what formula did you apply? Wasn’t the formula already provided?

On the hazard rate, yeah if it was conditional pd then I got it wrong.

Yes I marked the option which said spreading ops risk loss into 4 quarters.

For risk budgeting, my answer was 14mil.

Same answer as you for the fin tech question.
I used r*e (^-kT)+Theta (1-e (^-kT). My answer matched.

Damnit, I maked 16.6. I think i spend 10-15mins on this question. After 5 tries or so I found 16.6m. Probably still an error somewhere, cant believe I couldnt get this question right more easily.

Good to hear regarding the ops risk in 4 quarters.

#### AHoekstra

##### New Member
Subscriber
A risk analyst estimated hazard rate is 0.12 per year. Assuming a constant hazard rate model, what is the probability that the company will survive in the first year and default before end of second year. The answer was 10.03. Does anybody remember this! is the answer correct.
Yeah I recall but I believe they asked the conditional ,100% sure the word was there somewhere. I explicitly looked for the wording here (thanks to David stressing this point often on the forum) I believe 10% was joint PD, 11.3% conditional.

#### amit.m.sharma

##### New Member
Subscriber
A risk analyst estimated hazard rate is 0.12 per year. Assuming a constant hazard rate model, what is the probability that the company will survive in the first year and default before end of second year. The answer was 10.03. Does anybody remember this! is the answer correct.
I think I got 11.3 for this one

#### AHoekstra

##### New Member
Subscriber
There was a credit spread/PD calculation question where I marked 7.37%. Dont recall anything else than the 7.37% that I marked tbh though.

#### nikic

##### Active Member
A risk analyst estimated hazard rate is 0.12 per year. Assuming a constant hazard rate model, what is the probability that the company will survive in the first year and default before end of second year. The answer was 10.03. Does anybody remember this! is the answer correct.
@
I used r*e (^-kT)+Theta (1-e (^-kT). My answer matched.

Damnit, I maked 16.6. I think i spend 10-15mins on this question. After 5 tries or so I found 16.6m. Probably still an error somewhere, cant believe I couldnt get this question right more easily.

Good to hear regarding the ops risk in 4 quarters.
Why would you apply such a formula for Vasicek? And did you get an answer that was like 2.08 or something? (0.08 above the given initial rate)

I got 14.x which matched on my first try. Didn’t look at it any further.

#### nikic

##### Active Member
There was a credit spread/PD calculation question where I marked 7.37%. Dont recall anything else than the 7.37% that I marked tbh though.
Ah yes remember this. Another option was 7.5%. I marked 7.37% as well. Was this for the question that provided a constant credit spread of 480bps, or something else?

#### AHoekstra

##### New Member
Subscriber
Ah yes remember this. Another option was 7.5%. I marked 7.37% as well. Was this for the question that provided a constant credit spread of 480bps, or something else?
Ah yes now I recall. You are correct. 7.5% was the hazard rate I got derived from the s/(1-rr) and then calculate 1 year PD. Or something along those lines.

#### a_ishrat1973

##### New Member
Subscriber
Ah yes now I recall. You are correct. 7.5% was the hazard rate I got derived from the s/(1-rr) and then calculate 1 year PD. Or something along those lines.
How did you calculate PD from hazard rate can you please explain?

#### nikic

##### Active Member
Hi Nikic,

Thanks for the impressive recollection. Some additions/comments from my side which may help out

Market Risk

Similar answers, as I recall, as you. Some deviations; For Vasicek I applied formula 13.23 (page 217). Didnt spend much time on reading this question fully so maybe I got tricked on that somewhere.
On 11. Duration / Cash flow / Principal mapping -> I dont recall the answer, but I vaguely recall an option that stated that cash flow mapping had lower VaR than Principal mapping. I marked this one.
15. Mapping, where one of the answer was mapping long term to 6-months -> I believe this question provided 4 option types and asked which was mapped correctly. I marked something with a delta approach on short options? Pretty much just becaused I believed the other three to be misstated.

These are exactly the 15 questions I recalled, sorry no additions.

Credit Risk

Too boost your confidence a bit, I screwed up the first two questions as well

4. TRS swap - bank enters into a swap as the TRS payer to hedge counterparty risk -> Dont recall what I marked. Basically asked if you have a defaulted exposure that is still worth 20m; do you get par or par - 20m?
5. Believe the correct answer was that it necessarily decreases the value of senior debt. For subordinated debt this can be ambiguous.
7. I vaguely recall this. Why wouldnt a funding benefit be correct? I think it said somewhere that the assets in the SPV were of higher quality than the balance sheet of the bank. Hence, I think a funding benefit makes perfect sense.
11. I reread this one a couple of times but the question specifically stated a conditional PD under constant hazard rate I think. Answer I marked was 11.3
12. Group of 10 (G10) meeting following the financial crisis - Central risk repository for OTC trades.

+ There was a question on the friction between arranger and asset manager --> arranger has to add credit enhancement to overcome AS.
+ CVA/DVA question where two companies where shown (their CVA/DVA) in a table and there were some statements on what happened to them (e.g. credit Q decreased/increased)
+ Calculated a BCVA somwhere. Wasnt sure on it, recall marking 40,000.

Yes, there was a question on ARAROC. But this may have been integrated into another question (as part of a larger table) where it was only 1 or 2 of the options related to this? Anyways, believe that my calculated disproved the ARAROC answer and I went for something else.

++ I believe there was a question on best practices where a possible answer was spreading an annual operational risk losses charge in 4 equal parts over the year. Believe I marked this, havent actually checked if that is correct.
+++ There was an OpRisk question where the correct answer I think was legal payments required to rebuild a damaged office (or something like that?).

Operational Risk

++ I believe there was a question on best practices where a possible answer was spreading an annual operational risk losses charge in 4 equal parts over the year. Believe I marked this, havent actually checked if that is correct.
+++ There was an OpRisk question where the correct answer I think was legal payments required to rebuild a damaged office (or something like that?).

Investment Risk:

2. Portfolio construction techniques ->Fairly confident the answer was stratification.
5. Hedge fund, on the changes following institutional investors joined; Was there something along the lines of that larger HF remained (vaguely recall).
6. Risk budgeting, 80mil US equities portfolio -> Do you recall whether it was ~14 or ~16m?
8. I used E/(beta) like in the book Table 6-5 page 114. WHich were equal and hence I marked dont change anything. (not at all sure)
9. Yeah weird question. I marked Treynor ratio because it stated the pension fund was highly diversified.

Current Issues:

SOFR was something with Treasury repos the answer.
Agree with other 3.

+ A Fintech question where I believe the correct answer was that it really benefit (integration of) personal finances.
For investment risk

8. Didn’t the question specifically mention about maximising the sharpe ratio though?

9. But Treynor ratio looks at returns against Risk free rate. How does that help in evaluating performance? Plus the denominator would be the beta of their portfolios against market.

#### ziminli1228

##### Member
Subscriber
Hi Nikic,

Thanks for the impressive recollection. Some additions/comments from my side which may help out

Market Risk

Similar answers, as I recall, as you. Some deviations; For Vasicek I applied formula 13.23 (page 217). Didnt spend much time on reading this question fully so maybe I got tricked on that somewhere. I did 4.08%
On 11. Duration / Cash flow / Principal mapping -> I dont recall the answer, but I vaguely recall an option that stated that cash flow mapping had lower VaR than Principal mapping. I marked this one. Principal VaR> Duration VaR> CF VaR
15. Mapping, where one of the answer was mapping long term to 6-months -> I believe this question provided 4 option types and asked which was mapped correctly. I marked something with a delta approach on short options? Pretty much just becaused I believed the other three to be misstated.

These are exactly the 15 questions I recalled, sorry no additions.

Credit Risk

Too boost your confidence a bit, I screwed up the first two questions as well

4. TRS swap - bank enters into a swap as the TRS payer to hedge counterparty risk -> Dont recall what I marked. Basically asked if you have a defaulted exposure that is still worth 20m; do you get par or par - 20m?
5. Believe the correct answer was that it necessarily decreases the value of senior debt. For subordinated debt this can be ambiguous.
7. I vaguely recall this. Why wouldnt a funding benefit be correct? I think it said somewhere that the assets in the SPV were of higher quality than the balance sheet of the bank. Hence, I think a funding benefit makes perfect sense. same as mine, cheaper funding costs
11. I reread this one a couple of times but the question specifically stated a conditional PD under constant hazard rate I think. Answer I marked was 11.3
12. Group of 10 (G10) meeting following the financial crisis - Central risk repository for OTC trades.

+ There was a question on the friction between arranger and asset manager --> arranger has to add credit enhancement to overcome AS.
+ CVA/DVA question where two companies where shown (their CVA/DVA) in a table and there were some statements on what happened to them (e.g. credit Q decreased/increased)
+ Calculated a BCVA somwhere. Wasnt sure on it, recall marking 40,000. i calculated on 40k or 4k.

Yes, there was a question on ARAROC. But this may have been integrated into another question (as part of a larger table) where it was only 1 or 2 of the options related to this? Anyways, believe that my calculated disproved the ARAROC answer and I went for something else.

++ I believe there was a question on best practices where a possible answer was spreading an annual operational risk losses charge in 4 equal parts over the year. Believe I marked this, havent actually checked if that is correct.
+++ There was an OpRisk question where the correct answer I think was legal payments required to rebuild a damaged office (or something like that?).

Operational Risk

++ I believe there was a question on best practices where a possible answer was spreading an annual operational risk losses charge in 4 equal parts over the year. Believe I marked this, havent actually checked if that is correct.
+++ There was an OpRisk question where the correct answer I think was legal payments required to rebuild a damaged office (or something like that?). yes legal costs should be included

Investment Risk:

2. Portfolio construction techniques ->Fairly confident the answer was stratification. I'll say it's Quadratic programming...
5. Hedge fund, on the changes following institutional investors joined; Was there something along the lines of that larger HF remained (vaguely recall).
6. Risk budgeting, 80mil US equities portfolio -> Do you recall whether it was ~14 or ~16m? $50MM us equities$16.xxMM
8. I used E/(beta) like in the book Table 6-5 page 114. WHich were equal and hence I marked dont change anything. (not at all sure)
9. Yeah weird question. I marked Treynor ratio because it stated the pension fund was highly diversified.

Current Issues:

SOFR was something with Treasury repos the answer.
Agree with other 3.

+ A Fintech question where I believe the correct answer was that it really benefit (integration of) personal finances.

#### nikic

##### Active Member
For some reason I got the VAR to be 14.x. It’s just basic calculation of 130 * z * Stdev of USEQ with USBond. Or maybe it was 16.x and I misremembered. But I know the calculation fit like a glove.

#### ziminli1228

##### Member
Subscriber
For some reason I got the VAR to be 14.x. It’s just basic calculation of 130 * z * Stdev of USEQ with USBond. Or maybe it was 16.x and I misremembered. But I know the calculation fit like a glove.
Eu euqities exceeded 18m budget and 16.6 matches the US Var figure

#### nikic

##### Active Member
Anyone recall the backtesting questions? There were at least 3 of them in the exam...

#### JRB

##### New Member
Subscriber
Hello
I took the Exam in Amsterdam this Saturday.

I studied close to hundreds of hours and undertook the necessary expenses.
This was very enjoyable, if difficult. Certainly no guarantee of passing. But dedicated my best efforts - pretty muich like everyone else I suppose.

On the day, after stressing that I adhered to all the Garp rules - I pass through security and finally arrive at my desk. I was so afraid my phone would go off - even after checking it an imaginary 6 times that I did not even risk bringing it in the end and came with only my door keys, calculator and id.

I sit down to start the exam - and there was some expected noise from staff organizing boxes and papers. I anticipated this would calm down after some minutes so tried to settle into exam mode. 10 mins - 20min - 30mins - 40mins - the whispering goes on, is louder and even in a joint group. Like a Saturday night out.....

Two hours into the exam - I finally have the courage to raise my hand
The guy was plesant enough, said sorry and stopped. A short time later 4 exam attendants were sitting together whispering again. It was not a joke. 30 mins left with adrenaline running and you cannot concentrate..

I wanted to share my experience to see if anyone else had a similar experience. Or just get some feedback

To me, one central tennet of the FRM is about culture and behaviour and I find it hard to believe that Garp could support such behaviour

Thanks
Joya

#### Detective

##### Member
Subscriber
Hello
I took the Exam in Amsterdam this Saturday.

I studied close to hundreds of hours and undertook the necessary expenses.
This was very enjoyable, if difficult. Certainly no guarantee of passing. But dedicated my best efforts - pretty muich like everyone else I suppose.

On the day, after stressing that I adhered to all the Garp rules - I pass through security and finally arrive at my desk. I was so afraid my phone would go off - even after checking it an imaginary 6 times that I did not even risk bringing it in the end and came with only my door keys, calculator and id.

I sit down to start the exam - and there was some expected noise from staff organizing boxes and papers. I anticipated this would calm down after some minutes so tried to settle into exam mode. 10 mins - 20min - 30mins - 40mins - the whispering goes on, is louder and even in a joint group. Like a Saturday night out.....

Two hours into the exam - I finally have the courage to raise my hand
The guy was plesant enough, said sorry and stopped. A short time later 4 exam attendants were sitting together whispering again. It was not a joke. 30 mins left with adrenaline running and you cannot concentrate..

I wanted to share my experience to see if anyone else had a similar experience. Or just get some feedback

To me, one central tennet of the FRM is about culture and behaviour and I find it hard to believe that Garp could support such behaviour

Thanks
Joya
Sorry to hear that, I took it in New York, and thought proctors were mostly nice and kept quiet. I was seated in the first row too and only heard whispering near the last 30 minutes where the group leader essentially told them to mark down seat numbers of anyone who is still writing after time is called so their test can be invalidated.

You couldn't have been the only one experiencing this issue though? Did no one else in your test center raise anything, or it was just where you were seated?

#### JRB

##### New Member
Subscriber
Sorry to hear that, I took it in New York, and thought proctors were mostly nice and kept quiet. I was seated in the first row too and only heard whispering near the last 30 minutes where the group leader essentially told them to mark down seat numbers of anyone who is still writing after time is called so their test can be invalidated.

You couldn't have been the only one experiencing this issue though? Did no one else in your test center raise anything, or it was just where you were seated?
I was near the front.
I do not know if anyone else raised anything.

#### AnnaM

##### New Member
Subscriber
Yeah I recall but I believe they asked the conditional ,100% sure the word was there somewhere. I explicitly looked for the wording here (thanks to David stressing this point often on the forum) I believe 10% was joint PD, 11.3% conditional.
They said something like „conditional probabilty, that is probability of default in second year given survival in first year”, which left me pretty confused...

#### amit.m.sharma

##### New Member
Subscriber
Hello
I took the Exam in Amsterdam this Saturday.

I studied close to hundreds of hours and undertook the necessary expenses.
This was very enjoyable, if difficult. Certainly no guarantee of passing. But dedicated my best efforts - pretty muich like everyone else I suppose.

On the day, after stressing that I adhered to all the Garp rules - I pass through security and finally arrive at my desk. I was so afraid my phone would go off - even after checking it an imaginary 6 times that I did not even risk bringing it in the end and came with only my door keys, calculator and id.

I sit down to start the exam - and there was some expected noise from staff organizing boxes and papers. I anticipated this would calm down after some minutes so tried to settle into exam mode. 10 mins - 20min - 30mins - 40mins - the whispering goes on, is louder and even in a joint group. Like a Saturday night out.....

Two hours into the exam - I finally have the courage to raise my hand
The guy was plesant enough, said sorry and stopped. A short time later 4 exam attendants were sitting together whispering again. It was not a joke. 30 mins left with adrenaline running and you cannot concentrate..

I wanted to share my experience to see if anyone else had a similar experience. Or just get some feedback

To me, one central tennet of the FRM is about culture and behaviour and I find it hard to believe that Garp could support such behaviour

Thanks
Joya
I took the exam in Dubai. While the proctors were quiet and behaved professionally, there was a 5 min period where I kept hearing whispering between two proctors sitting right behind me. I was in the last row. Each time they would disturb me, I had to start reading the question all over again. I kept turning to let them know that I could hear them. Finally, I turned around and gestured them to keep quiet by putting my finger over my mouth. On the bright side, they had improved from last year - they had started talking and laughing in the middle of the exam.

#### Anibal86

##### New Member
Subscriber
I think I got 11.3 for this one
Hazard Rate = 0.12
Def 2nd year|Non-def 1st year = P(Def 2nd year) - P(Def 1st year) = 1-exp(-0.12*2) - (1-exp(-0.12*1)) = exp(-0.12) - exp(-0.24) = 0.8869 - 0.7866 = 0.1003 = 10.03%

That's the way I did it. How you can get 11.03%?

#### David Harper CFA FRM

##### David Harper CFA FRM
Staff member
Subscriber
Hi @AHoekstra @AnnaM @amit.m.sharma @a_ishrat1973 @Anibal86 The hazard rate is an instantaneous conditional PD. If the question gave the hazard rate, λ = 0.12 and if it is constant (see below), then:
• Each year's conditional PD is 11.31% which is also the Year 1 cumulative/unconditional PD = 1 - exp(-0.12*1) = 11.31%; when the hazard is constant, it will always be a little less than the hazard. They are both conditional, but hazard is the instantaneous version while "conditional PD" is the annual, conditional PD.
• The joint (aka, unconditional) PD during year 2 is 10.03% (see blue below). This would be the answer to a question like either:
• What is the unconditional default probability during the second year? (must be second year, as it declines with maturity), or
• What is the joint probability of survival through the first year and default during the second year?

my xls is here https://www.dropbox.com/s/vfyw2xs0n8dblhm/052019-hazard.xlsx?dl=0