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# Exam FeedbackNovember 2015 Part 2 FRM Exam Feedback

#### Esbringa

##### New Member
It's adjust CVA from what I gather here. In general, the CVA is simply whatever the PV of the expected credit loss is, to be deducted from trade value. If a counterparty's worthiness decreases, CVA increases. DVA is not adjusted because the worthiness of the company itself has not changed. The bilateral CVA adjustment is for the company's DVA, not the counterparty's.

On a side note, CVA to company does not necessarily = DVA of counterparty.

The method to calculate the CVA/DVA from the quoted market CDS spread is the same

#### a.lesnar

##### Member
I think it's CVA, this question was not elaborated in its structure, as far as I remember

#### Twol84

##### New Member
Subscriber

The method to calculate the CVA/DVA from the quoted market CDS spread is the same

Yes. For example, if you have a derivative where payoffs are not linear, like even a cds, DVA =/= CVA.

#### Paranoid Panda

##### New Member
Guys can someone explain to me the question regarding the shortcoming of BSM I had simply selected that the model assumes a constant interest rate because I remembered reading that as a drawback of the model...but the answer acc to the forum seems to be something about bond prices?

#### Esbringa

##### New Member
Guys can someone explain to me the question regarding the shortcoming of BSM I had simply selected that the model assumes a constant interest rate because I remembered reading that as a drawback of the model...but the answer acc to the forum seems to be something about bond prices?
I choose the same answer, interest rates are stochastic not deterministic. (Hull-White, Black-Karasinski, Ho-Lee....)

#### Jo_

##### Member
Subscriber
Guys can someone explain to me the question regarding the shortcoming of BSM I had simply selected that the model assumes a constant interest rate because I remembered reading that as a drawback of the model...but the answer acc to the forum seems to be something about bond prices?

BSM assumes constant volatility, which is not appropriate for bond valuation because bonds pull to par as they reach maturity (hence volatility becomes smaller and is not constant).

#### Twol84

##### New Member
Subscriber
Some of the answers in that document are debatable, I think. The answer the document has for this question is the same as what you have, though.

#### Sidewinder

##### Member
Subscriber
Guys can someone explain to me the question regarding the shortcoming of BSM I had simply selected that the model assumes a constant interest rate because I remembered reading that as a drawback of the model...but the answer acc to the forum seems to be something about bond prices?
BSM assumes constant volatility, which is not appropriate for bond valuation because bonds pull to par as they reach maturity (hence volatility becomes smaller and is not constant).

I dont really get it? Bond Valuation works in generally with Cash Flow Discounting. Bond Options instead works with BSM.

Btw: What have been the answeres? constant vola? constant interest rate?

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#### babyik

##### Member
I dont really get it? Bond Valuation works in generally with Cash Flow Discounting. Bond Options instead works with BSM.

Btw: What have been the answeres? constant vola? constant interest rate?
_
Some of the answers in that document are debatable, I think. The answer the document has for this question is the same as what you have, though.
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This is what a CFA Charterholder on a different site has responded on a similar question.

S2000magician Jun 4th, 2014 6:17pm
Boardmember United States CFA Charterholder 13,185 AF Points
With bonds, price changes are driven by interest rate changes, whereas with stocks they don’t have to be. The assumption of a constant risk-free rate is (much) less a problem with stocks than with bonds.

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#### Twol84

##### New Member
Subscriber
It's the same thing. Pull-to-par is the biggest reason BSM cannot be used to value bonds because BSM has a set of assumptions, including flat interest rates and constant vol, that allow it to be an arbitrage model. A bond pulling to par violates both assumptions, especially the former -- a flat interest rate structure is a fair short-term assumption for stocks but a bond's price pulling to par requires assumptions to be made across the entire term structure, which makes the constant rates assumption untenable and very difficult to model for.

#### babyik

##### Member
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same..around 50 on the optimistic side
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With 10 days gone and around 20 questions debatable, the score seems to dwindle with each passing day. Would like to believe chouchouc was right for all of us [ where he mentioned that he cleared with 41/80 ] in P-2

#### krenate

##### Member
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With 10 days gone and around 20 questions debatable, the score seems to dwindle with each passing day. Would like to believe chouchouc was right for all of us [ where he mentioned that he cleared with 41/80 ] in P-2
to babyik, you are not alone, however, I think that you have passed

#### Paranoid Panda

##### New Member
Guys what do you think the minimum passing score would be ..I find it hard to believe that 50 percent(based on previous pass rates ) of the people could score around 56 which would be 70 percent .seems a bit too high to me and I think I have reasonable instincts ..any thoughts ?

#### krenate

##### Member
I think the score is based on the performance of others, however, I think that in the best case you need to score at least 50% of the exam..which is why I think starting from 40 questions on...maybe with some exceptions.... like if you are not sitting for the exam first time....and some questions are debatable.....like IR and constant volatility, the both are correct, but constant volatility suits mostly....Anyway, I failed....

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#### a.lesnar

##### Member
Guys what do you think the minimum passing score would be ..I find it hard to believe that 50 percent(based on previous pass rates ) of the people could score around 56 which would be 70 percent .seems a bit too high to me and I think I have reasonable instincts ..any thoughts ?

in facts I also did your reasoning just after the exam and I have your same impression

#### Vishwa

##### New Member
Subscriber
Do we really have 60??? Its not adding up for me ...just remembered another question about the liquidity cost not adding up for 2 traders in singapore and hongkong ..it was about endogenous or exogenous liquidity and something cant recollect now

I think The correct answer is Endogenous.. Which was Option C in GARP exam.

#### nickyz

##### New Member
Subscriber
Hello everybody, hello David,
1) As for that question pertaining to deltas of call and put, when prices tumble down - I think that it was really ambiguous, cause if we look at call delta - it certainly diminishes and the same for put delta, but in absolute terms put delta rises - I mean you need more instruments to hedge - so to say delta times options = shares. If put becomes more in-the-money its delta strives to minus 1 and it means that now you have to hedge puts with more underlying or to keep position delta neutral - you have to sell options. You understand what I mean?!
2) As for the question with Jensens inequality - definitely the answer was 0,86 or something but there was also ambiguity present - there were two variants - one positive and the other one - negative? which to choose? can smb clarify?
There were a lot of questions formulated 50 / 50. And this was not easy to choose between sometimes
Continuing - about FRM - when I saw those who passed FRM in Moscow - I counted only 90 people on the honour roll! Its an extremely low quantity, cause it is for 10 years starting since 2005! So this expected shortfall methodology depicted by David (take 5% average among the best and then multiply on 0,75 crawling peg coefficient) they use when determining the cutoff point - is very very harsh. And the exam is really challenging! And too tricky I would say!
Also guys, someone can tell me what on earth is exceptions rate or somewhat they called it in the backtesting question? (the answer was definitely to reject the null as it was mentioned previously)
And by the way - this question about 95% ES what we were supposed to do - to take 5 worst outcomes and take equally weighted average or take 4 worst outcomes and divide by 4 I think the first variant cause the 6th is occupied with 0,05 percentage?

#### nickyz

##### New Member
Subscriber
As for endogenous- exogenous I marked exogenous cause there was difference in approaches they used for calculating liquidity - it was said that in hongkong they used constant spread approach and in singapore another approach or vice versa - dont remember now... someone has memories?

#### nickyz

##### New Member
Subscriber
Sorry - one more question - can smb help - what do they mean under historical pass rates in the table presented by GARP? Are these rates indicative of the percentage of people who passed among those who sit for the FRM or these rates are indicative of cutoff / threshold points?

#### nickyz

##### New Member
Subscriber
And by the way - if you receive this after exam (so called "please provide feedback") survey demand - is it logical to forward it to those who passed or it is received only by those who failed? What do you think? Or third variant - its automatic and is sent to everybody who attended the exam

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