I was busy with mugging for the FRM part 2 exams as well as a semester of undergraduate studies and an internship and hence was not able to post for a while back.
At last, exams are over and below is my general comments on the FRM part II exams which I posted in BionicTurtle here.
What i can recall after 1 day of lag :(( Mine was the orange paper, not blueDisclaimer: Most details below could be inaccurate. DYODD.1. TRS to hedge away both credit and market risk. TRS buyer eqv. to funded CLN seller2. LIBOR forward was 5% since y1=4%, y2=4.5%… an estimate, D.8% was too far off, A,B was below 4% so doesn’t make sense3. why banks not willing to adopt bitcoins? I think its that clearing/validation is done by miners, and because its decentralised and anonymous, banks wouldn’t want to shoot their own foot and get involved in future litigation issues by funding potential terrorism…4. NRP outcome was that banks did not passed on NR to retail depositers, shielding them so as to prevent bank runs when insured, stable retail deposits have a higher run-off to seek higher yields like insti does in riskier investment alternatives…5. KMV is empirical with a direct default threshold so problem faced could be lack of6. HFT intraday risk cannot be done by internal team like you will not make an accountant a cashier… so let an independent risk team to monitor and set intraday risk limits7. RAROC with qns on changing both EC and ROA testing on ratio consistency. so the answer that is not ambiguous is the option that’s ratio inconsistent… EC is in both numerator and denominator8. stats arb hedge fund worst case scenario would be its funding cost besides unprepared for blowouts9. distressed hedge fund worst case scenario would be an increase in default correlation among distressed securities, given that their strategy is investing in gone concern securities with much higher yield, betting on the unlikely scenario that they thought otherwise10. CDS-Bond basis is not due to higher funding cost as bond yields will get higher (since bonds are funded) but bond being priced over par11. NSFR deposits and loans weight need to be clear before you can balance the equation given making 5m loans to auto and the right funding option was clear12. For rebalancing portfolios, stratified screening is not free from bias was correct because the rest were wrong?13. CCS = IRS (fixed) payer + long FX fwd, all of similar maturities14. Outsourcing HR duties i think independent background checks is more important than the rest since HR is not a model so no priority for integration?15. Risk mapping for bonds from principal to cashflow necessary means a lower risk measurement because of weaker sensitivity (lower duration) for fledging maturities, even if correlation between KR01(i) are perfectly 1 such that KR01 is addictive… aka principal to duration (need not be cash flow)16. Ops risk: I think external audit of risk process was 3rd line of defence17. uptake of external debt from emerging economies increases when global liquidity is high is the correct ans?18. external debt is free from domestic market illiquidity risk is correct rather than trading corporate facing more fx risk than non-trading corporate since I believe FX derivatives are typically used to hedge translation risk?19. Change from BI to SMA… SMA can charge a higher ops capital charge than BI if there is significant correlation? Tricky and unlikely ans which i think is correct?20. Model risk: actual culprit in both 2008 Submprime and LTCM cases was because of overly optimistic forecast aka lower than actual default correlation21. risky debt value = risk free debt value – put option premium… NOT call option for equity valuation22. long term assets funded by short term debt. Which funding liquidity risk? Rollover of short term debts23. Rise in DVA caused when its own credit spread decrease along with an upgrade of its posted collateral quality24. Credit VaR, fortunately given the corresponding 95% number of defaults which is 5, and expected is 100 x 2% = 2, so LGD*notional*(5-2)25. Netting diversification benefit for a clearing member when it change from bilateral to CCP netting… I think it will not be effective as the MTM was negative27. Incremental CVA between 1-4 [1 = IRS payer, 4 = CCBS] favors execution sequence of the pair with the most inverse correlation to minimise CVA charge from cpty28. Regulatory arbitrage between loan book and trading book… No difference under Basel III IRC and that its CDS that hedge away its credit risk it not recognised under trading book29. 3x qns on correcting infrequent funds performance reporting with autocorrelation – one on mean reversion which is 1-autocorr, another is tricky… returns are unaffected and, lastly also another tricky one… (where managers arguing for unsmoothing of returns) PM’s sharpe ratio increases as volatility falls30. Electronification of fixed income market reduce dependence of dealers to provide liquidity31. Fama 3 factor model analysis on a fund’s performance where negative coefficient on HML means its portfolio low books value stocks are outperforming its high book value stocks32. A qns on right way risk… where A long put options on Z and B is cpty to A who is short Z.. so what happens when Z price falls, A experience Right Way risk33. A qns on Advanced IRB which uses a single factor (market) model and a multivariate coupla correlation input… credit risk capital charge increases when correlation or standard deviation (any 2nd moment variables) increases which increases the tail risk34. Stressed Loss for credit “derivatives” in loan book need both stressed PD and stressed EPE (since derivatives are “uncollaterised, leveraged exposures” and more sensitive to credit deterioration risk leading to higher PD and default risk leading to EAD) and not stressed current exposure to fix EAD to deterministic, with k multiplier and EL given35. RAF (Risk Appetite Framework) on business lines to be set by self assessments or independent analysis of that business line loss distribution from both internal and external data36. LIBOR (unsecured credit lines to AAA cpty) – OIS (can be terminated and reset easily without excessive credit risk) rather than LIBOR-FF (only for assets eligible to discount window) or FF-OIS as a monitor of potential funding liquidity risk37. When yield curve steepens, duration of debt increases resulting in higher credit risk on liabilities side of the balance sheet of a fund issuing debt to fund its asset acquisition… so if curve steepens after acquisition of new assets by issuing more debt, and fund change from principle to duration risk mapping, risk budget should increase38. qns on ISDA where its on break clauses as triggers to give bond holders the rights to terminate swaps before cpty risk migrates lower, but its weakness is the definition of a credit event might only materialise after news that point towards a credit deterioration being very likely39. Best practise of risk budgeting? Should stress those factors which business lines are most sensitive to?40. mVaR ~ Beta and excess return was given, but qns ask for optimal “ratio of alpha to portfolio risk contribution” so I trim lowest excess return / beta, vice versa for adding41. Why did 97.5% ES == 99% VaR when it started adoption of SMA for OpsRisk? I think he mistaken a normal distribution for severity of loss… loss should be skwed with a long tail?42. issuance of convertible bonds (CoCos) impact on balance sheet and ROE?43. Backtesting of VaR estimates is tricky since it should converge to 1 default not 2 exception failure rate as its a 99% hypothesis test on 99%,10-days VaR. So the better of 2 angels (incorrectly calibrated) was the answer?44. Vasicek was tricky as you need to update the MR effect on rate change step-by-step for 4x 6m steps for a 2y period, but difference is negligible45. Copulas curse of dimensionality rule most options out, leaving the brightest angle as accepting non-normal distributed inputs46. Replicating portfolio with long beta amount of single factor market exposure with the rest in risk free debt?Some easier qns (most starting from qns 50 onwards were manageable):– asset allocation returns– marginal PD given cumulative #defaults– netting and collateral balance– CDS spread / (1-RR) = PD, bond yield was irrelevant?– credit spread given discount factor and risk free rate– exogenous LC– regression single hedge– expected lee-ho model given annualised drift and rate volatility but no dw– calculation of incremental VaR from 1 asset to 2 assets, which is usually done with the help of computers so quite arghh…General comments:– most questions should not need a calculator, and could be approximated base on concept… (I could be wrong big time here… correct me if I’m wrong) E.g. Liquidity Cost cannot be >70% of VAR w/o LC (exo), incremental VaR with -0.2 corr cannot have >= individual, undiversified VaR… calculators are meant to burn away your precious time– many option set questions where its always a better of 2 “angels” decision for qns that tunes with “choose the correct option”…– Some questions were “resused” from May 2017 FRM Part II.. so I’m expecting the distribution to have a thicker right tail. E.g. vol term structure was a frown for expected bimodal return distribution in a binary event favoring strangle, LIBOR discounting to determine LIBOR forward rate, Bitcoins, NRP, marginal PD, wrong way risk has the highest CVA (producer NOT hedging), CoCos…– I expect the quantiles to be right skewed this time round… its hard!Cheers!