Part II Heat Off

I just rferred to a few of people in another forum. The general feeling was the Part II was quiet fair this time around. It was horrendous last November.

Few of the retakers were of the opinion that though GARP did not change the pattern (remaining focussed on Quli more heavily than Quant), but the qs. were on the fairer side as compared to the last yr.

So, those of you who are panicking- I say do not.

Few of the quotes from BT link, I reproducing from their forum(disclaimer: this is no cpyright infringement, mere reproduction of a open forum discussion thread)

“Longing correlation is to either 1. receive floating rate in a variance swap with the index as an underlying and receive fixed in a variance swap with a stock in that index as an underlying, 2. Buy call option on index and buy call option on an individual component in that index OR 3. receive realized correlation in a correlation swap in the exam, only 1 was shown For the CCP, to avoid being failed CCP need to: 1. ONLY intermediate derivative transactions 2. let the clearing member to unwind the trades in case there are defaults 3. have good practice in choosing members, valuing transactions and determining initial margins and default fund contributions In the exam, only 2 was shown Limitation of using BSM model to value bond The answer is the volatility will go to zero at maturity as the model assumes the volatility is constant CLN question (sth related to minimize counterpart risk) The counterparty risk is the lowest in issuing credit link notes given the protection sellers, i.e. investors, have already paid the price to the buyers and hence no counterparty risks in case there is a default in a reference asset. Net Stable Funding Ratio The bank passes the test given the ratio, ASF divided by RSF, is greater than 1 (in fact, 1.3XX) RSF is 5X.X & ASF is 72 Standardized vs Basic Indicator The bank is of course paying 37million more under basic indicator approach because, in the latest 3 years, there is a negative gross income and hence you will divide the capital by 2 under basic indicator approach vs by 3 under standardized approach QQ plot Thinner tails for sure 95% Credit Var of 100 CDS with $1000, 2% PD and LGD 100% each The answer is 3000 At 95% level, there will be five defaults so the value is 5*1000 the expected loss is 100*0.02*1000*1 Convexity Convexity will of course increase the bond price comparing with simply using the expected value of interest rate Square root rule For time varying volatility, e.g. volatility estimated via GARCH, using square root rule will overestimate the VaR whereas underestimate in case the underlying process has a jump Policy needs to be corrected The senior bond is only subordinated to preference share Rule of thumb The correlation of zero does not imply independence”

"Any derivative contacts value at initiation is 0 either it is swap, forward, future etc… neither long nor short will be at advantage during the contact initiation because arbitrage neutralizes the advantage. Later one party may gain and other may loose because of change in market rates (Libor in case of swap) changing the value of contract. So value delivered to fixed leg party = value delivered to floating leg party only at the initiation of swap

It was stated in the question that the swap was valued at par. I think that means, that the value of floating and fixed leg cancel each other out, independent of the age if the swap."

“The exam was fair in comparision with November 2014. Mostly qualitative questions. Only 5 problems required calculation. The thirst 3 or 4 questions required some hard thinking. The rest was done faster.”

“I found the exam pretty hard. I agree with ami44 that a lot of the material was not mentioned such as the Merton model, no SAR, not much on securitization and not much on IR models from Tuckman. A lot of tricky qualitative questions with no clear cut answers. Full coverage (I think possibly 8 questions) on current issues (albeit these questions were not difficult). Out of 80 questions, I think I am sure on 45, was between 2 answers on 34 and 1 was a wild guess. Doesn’t sound great, but not too bad either. I’ll have to wait and see.”

Anybody interested to discuss further, please refer https://www.bionicturtle.com/forum/threads/frm-part-2-may-2015-exam-feedback.8607/

“The exam was fair in comparision with November 2014. Mostly qualitative questions. Only 5 problems required calculation. The thirst 3 or 4 questions required some hard thinking. The rest was done faster.”

THis comment only makes me feel the cut off would be significantly higher than before and more might fail!

Well, I think doing questions faster is not an indication of whether the exam was easy or hard. Since most of the questions were qualitative in nature it is obvious that it will take lesser time. At the same time chances of getting them wrong also increases significantly since u can never be so sure of the exact theory! There is always more confusion involved.