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# Exam FeedbackMay 2019 Part 2 Exam Feedback

#### kylian.mbappe

##### Member
Hi @AHoekstra @AnnaM @amit.m.sharma @a_ishrat1973 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 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.
• The joint (aka, unconditional) PD is year 2 is 10.03% (see blue below). This would be the answer

my xls is here https://www.dropbox.com/s/vfyw2xs0n8dblhm/052019-hazard.xlsx?dl=0
The question was : what is the probability of default in the second year given survival in first year

#### David Harper CFA FRM

##### David Harper CFA FRM
Staff member
Subscriber
@kylian.mbappe Thank you, then that's looking for a conditional probability, "given" refers to conditional, although we had asked GARP to use the word "conditional" to avoid any confusion with the joint (aka, unconditional) probability. Is it so hard to use the word "conditional" when conditional is meant? In that case, as above, constant λ = 0.12 --> conditional PD of 11.31% regardless of the year, but I sure hope there wasn't confusion with joint or unconditional ... @Anibal86 above calculated a valid joint/unconditional PD during year 2 ...

In case anybody's confused about the difference:
• conditional is from the perspective of the beginning of year 2; i.e., survival through year 1 is "given."
• unconditional or joint is from the perspective of today, before year 1 has started; i.e., we don't assume survival in the first year

#### Anibal86

##### New Member
The question was : what is the probability of default in the second year given survival in first year
Correct, and I didn’t remember to see 11.3% in the options...

#### amit.m.sharma

##### Member
Fairly confident the passing score would be no more 48/80 (i.e. 60%). Remember, on average, 55% of candidates will pass. I have a hard time believing 55% of candidates can score some two thirds of the paper correct. In fact I won't be surprised the eventual passing score is in the 42-46/80 range.

My anecdotal experience from Part 1, where I scored no more than 65/100 but got a rather comfortable 2-2-1-1. In fact for FMP I knew for certain I had 11 mistakes yet I still got a 1st quartile for it.

All I can say is if you get 48/80 you should already be feeling good!
@nikic - I hope everyone clears the exam. Would your estimate change given majority of the test takers are not taking the part 2 exam for the first time?

#### nansverma

##### Member
My feedback : The exam tried to trick by giving too much information and some of it also irrelevant information in at least few questions. I think it required reading the question carefully and then picking the relevant information from it. There were questions on SOFR and machine learning, fintech which might not have been part of GARP practise questions or other mock exams. So, I recommend reading everything.

#### budiman90

##### New Member
My feedback : The exam tried to trick by giving too much information and some of it also irrelevant information in at least few questions. I think it required reading the question carefully and then picking the relevant information from it. There were questions on SOFR and machine learning, fintech which might not have been part of GARP practise questions or other mock exams. So, I recommend reading everything.

Yes, the practice exams do not contain the question on the Current Issues topic (fintech, big data, AI & finance, machine learning, SOFR, cyber risk). I see that a lot of questions for the practice exams 2019 and 2018 are simply copied from previous years'. But the CI questions are really basic though, you can answer them by reading the papers' abstract and conclusion. The SOFR question basically just asks for the definition of SOFR, which you probably will be able to answer if you remember the acronym

#### nansverma

##### Member
Yes, the practice exams do not contain the question on the Current Issues topic (fintech, big data, AI & finance, machine learning, SOFR, cyber risk). I see that a lot of questions for the practice exams 2019 and 2018 are simply copied from previous years'. But the CI questions are really basic though, you can answer them by reading the papers' abstract and conclusion. The SOFR question basically just asks for the definition of SOFR, which you probably will be able to answer if you remember the acronym
I agree they were easy.

#### budiman90

##### New Member
[...] the majority of the test takers are not taking the part 2 exam for the first time?

is this really the case? any references?

#### budiman90

##### New Member
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

At my exam site, everything was in order and quiet, as it was in Nov 2018 for Part II. The proctors were very professional. About 1,5 hours in, a guy in front of me was asked to seal his exam book and leave the room. Didn't know what happened and didn't ask after the exam, I was hurrying to catch my train.

If I remember correctly, there were at least 1 or 2 persons who were asked to leave too when I participated in Nov 2018.

#### budiman90

##### New Member
During this May 2019 Part II exam, I managed with just the two pink pencils that GARP provided. But in Nov 2018 for Part I, I had to ask for at least two extra pencils, due to the much higher number of quantitative questions. Did anyone experience the same?

Also, I hope GARP will provide better pencils in the future, surely the cost is a minor portion of the total administration cost. These pencils are probably the cheapest looking I've known in my life At least provide ones that are not cylinder in shape that would roll off the desk so easily.

#### tigeryellow

##### New Member
My experience is that some questions were pretty easy while some are pretty hard and some are out of my learning scope. I generally believe that it is easier than I think and I hope the result will be happy.

Quantitative questions were generally easier than i thought. No complex scenarios. But some traps there were, be aware. Understand and remember Exactly the formula. You know what I mean, right?

Qualitative questions are integrated that it is common for one questions content knowledge all of MR, CR, OR....

Then some commonly known key points appear in questions but they could only help you kick out one option, but you might have no idea for other three.

#### christylee

##### New Member
anyone know the answer for comparing bootstrapping and basic historical simulation?
is it d) bootstrapping is more accurate than historical simulation
or is it something different?

#### nikic

##### Active Member
@kylian.mbappe Thank you, then that's looking for a conditional probability, "given" refers to conditional, although we had asked GARP to use the word "conditional" to avoid any confusion with the joint (aka, unconditional) probability. Is it so hard to use the word "conditional" when conditional is meant? In that case, as above, constant λ = 0.12 --> conditional PD of 11.31% regardless of the year, but I sure hope there wasn't confusion with joint or unconditional ... @Anibal86 above calculated a valid joint/unconditional PD during year 2 ...

In case anybody's confused about the difference:
• conditional is from the perspective of the beginning of year 2; i.e., survival through year 1 is "given."
• unconditional or joint is from the perspective of today, before year 1 has started; i.e., we don't assume survival in the first year

But this question has appeared exactly the same in the GARP samples and the answer was 10.0% there?

I honestly thought this was a free and easy mark...

Memory is hazy now....but wasn’t the question worded EXACTLY as above? Or was it worded differently?

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#### amit.m.sharma

##### Member
is this really the case? any references?
No idea. Consider the question as a way to get a ‘stressed’ estimate

##### Active Member
Subscriber
I feel what mapping question was asking is
how can we map a currency forward rate agreement of 6*12 month and the correct answer is by using two forward rates of 6 months and 12 months other options were delta normal something , by incorporating convenience yield etc.

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#### nikic

##### Active Member
For the friction question between the arranger and asset manager, does anyone recall the answers? Were two "adverse selection" and two more "moral hazard"? I can't recall what I marked but I just eliminated what didn't make sense.

#### amit.m.sharma

##### Member
Yes, the practice exams do not contain the question on the Current Issues topic (fintech, big data, AI & finance, machine learning, SOFR, cyber risk). I see that a lot of questions for the practice exams 2019 and 2018 are simply copied from previous years'. But the CI questions are really basic though, you can answer them by reading the papers' abstract and conclusion. The SOFR question basically just asks for the definition of SOFR, which you probably will be able to answer if you remember the acronym
Looks like I got stumped in the SOFR question...I chose the option that said transactions with affiliated entries are removed. Overall CI questions were straightforward.

##### Active 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.
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.
There was operation risk question something like this

There is a company XYZ that has operations in Africa. There Africa location is hit by a cyclone. Under what name this cost will company put on its balance sheet?

options were
Insurance cost from initiation till cyclone hit
The opportunity cost of losing the business due to a cyclone and needed to rebuild the business.
other two were clearly wrong

I am 100% sure the legal risk word was not there because once I saw this question one this that comes to my mind was legal risk is part of operation risk but strategic and reputation risk is not so I just check if in any option legal risk word is there.. Pretty lame i know hahaha

#### you5135

##### Active Member
Subscriber
For the friction question between the arranger and asset manager, does anyone recall the answers? Were two "adverse selection" and two more "moral hazard"? I can't recall what I marked but I just eliminated what didn't make sense.
This one i remember i did adverse selection between arranger and asset manager and that can be reduced/eliminated if arranger keeps some underlying loans on his balance sheet basically there should be arrangers skin in the game as well.

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