How to clear FRM part 2 exam? I have passed the FRM part 2 recently, and now I am a certifed FRM. Given the fact that I learned a lot from other members in FRM Vietnam group, now it is time for me to give back to the society. This note will focus mainly on Part 2. My background: working for Big 4 Audit for 2.5 years, 1 year in Internal Audit – Risk team for a bank. My results for 2016 November Part 2 FRM: 1, 2, 1, 1, 1 . I studied by myself for both parts. 1. Amount of time you need to prepare: 2-5 months The amount of time will depend greatly on how conversant you are with risk and Basel and how much time you can spend each day. It took me 3-4 months due to the fact that I majored in Auditing and did not have solid background in risk. Working in risk industry can reduce subtantially time and effort, though I strongly recommend at least 2 months. Do not underestimate the difficulty of the test. 2. Study Materials a) Schewser Note: For Part I, I only used Schweser Note. Needless to say, I was quite shocked by the lengthy and tricky questions during the exam. In my opinion, Schewser is useful in summarizing key ideas and good for warm-up reading, but it lacks the details needed to ace the test. For this reason, I suggest using this note for first time, warm-up reading. Questions at the end of each chapter are shallow and much easier than actual-test one. That said, you can still take advantage of these question sets by mixed-up strategy I will mention below. Schewser quick sheet is worth reading a couple of days before the test for revising purpose. b) Bionic Turtle: I strongly recommend using Bionic Turtle for those who wish to pass the test with flying colour. There are several points that make Bionic Turtle stand out, including:
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- a bunch of questions to practice, whose difficulty is commensurate with, or sometimes even harder than the real ones; - a number of videos, which you can easily find on youtube or more up-todate version if you purchase its tuition course; - an active forum where you can ask questions and discuss topics with some smart, experienced people. However, there are also some points that I wish David Harper can improve in the future: - Material is a bit messy and out-of-date compared with current curriculum. - Bionic does not cover all topics in the curriculum. c) GARP Official Guide: Garp official textbook is clearly the most important one, but you should read it wisely. Reading GARP takes a lot of time due to sheer amount of information provided in each chapter. Unless you want to be a risk expert in short period of time or pursue PhD in risk, I recommend focusing only on key topics or those topics you are still confused after reading Schweser Note and Bionic. You can easily find key topics by looking at GARP currciclum and identifying topics remained in curriculum for the past several years, for example, VAR methods, correlation and term stucture for market risk; counterparty risk, default probability and securitization for credit risk, etc. 3. Study Strategy a) Combining material: Depending on how much time you have, I suggest 2 following plans: 3-5 months: + First 1 month: warm up reading by Schweser, answer end-of-chapter question sets using mixed-up strategy + 2 month: Thorough GARP and Bionic note reading, answer Bionic question and watching videos on youtube as a way to relax and improve English
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+ Lastmonth: revising by Schweser quick sheet, take the practice exam test under simulation condition 2-3 month: + First 1 month: reading Schweser, answer end-of-chapter in Schweser and some keytopics in Bionic. + Last 1 month: based on performance on each topic, reinforce those topics you are still confused. Last 1 week: take the test under simulation condition. b) Mixed-up strategy: After studying for two weeks, I realized that reading a whole book, market risk and credit risk, was not only boring and tedious but also ineffective. I created my own studying strategy called mixed-up, which worked out really well for me. Firstly, you can download study schedule provided by GARP on its website and use it as a base. However, instead of following GARP schedule strictly, you should tailor your schedule based on your strengths and weaknesses. I started by reading the whole subsection of VAR method for 1 week (parametric, non-parametric, backtesting VAR) and leaving end-of-chapter questions intact. Then, I moved to the next subsection in credit risk for 1 week. After 2 week, I was back and answered the question in market. This method helped increase the difficulty of questions, even the shallow and basic one, significantly because most of the time, you had no idea about the topics you had studied earlier c) Track Performance Keep the excel file of all questions you already attempted to answer,so you are acutely aware of your performance in credit, market and operational risk and reinforce anything below 60%. Do the same thing when taking the mock exam. Note: For your comparison, I attained 70-80% for end-of-chapter questions and above 70% for mock exam.
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d) Link the topics If you research the curriculum carefully enough, you soon realize that there are some close relations between topics. For example, correlation is mentioned in market risk and it is also applied heavily in securitazation; LIBOR, stress testing is mentioned once in market risk and once in current issues; liquidity is mentioned in both operational risk and current issues. If you have ability to group topics together, it will shorten the time. Food for thought 1) Kendall T correlation calculation example in GARP official guide is actually wrong 2) There are 2 ways (old and new) to compute the Adjusted RAROC in GARP
Appendix 1: Real past exam questions: 1. We expect to see the lowest correlation among the returns of which type of hedge fund strategy (exogeneity in strategies): A. equity market neutral; B. short bias investment; C. stressed securities; D... 2. With a total of four asset classes (equity, bond, FX, commodity), Given the data of benchmark weight, benchmark return, and the return of allocated assets, tell the one asset that make the most part of contribution of active returns. 3. About measuring correlation: I only remember one answer says when there is large outlier data in returns, use Kendall’s Tau to generate a conservative measure of correlation. 4. Case analysis: XYZ is a bank in emerging market, which is planning to issue CDO and now considers to provide credit enhancement. out of the 3 questions I only remember two of them Q1.which of following alternative is most appropriate: A. XYZ provide a guarantee; B. XYZ buy USD cross currency swap; C. both . D. ...
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Q2. I only remember one answer says if XYZ reduces the total issuance amount from 180 million to 160 million, it will increase the credit quality of the whole issuance. 5. Case analysis: Bank ABC is the main lender for AMC, a MBS originator. The credit line given to AMC is structured to depend on its credit rating and average duration of the loans (currently 5 years) in its asset pool. The current credit limit is set at 60 million (60=300million/5 years). Recently rating agencies downgraded AMC from A to BBB, which led to the breach of its current credit limit. ABC don’t want to cut down its credit line to AMC directly to hurt the client relationship, so it considers to hedge the credit risk by buying CDS. Q1. the major consideration for ABC for the proposal by a CDS counterparty shall be: A. cost of the hedging; B. correlation between AMC and this counterparty Q2. the board of ABC should do want risk plan: A. revise its risk concentration limit B. allow more room to catch business opportunities with AMC if the situation later turn better, by adapting its current credit limit system. 6. The market spread and OAS model spread of a bond is given (where the market spread>OAS). Make judgement which statement is correct: A. the bond is over-valued; B. under-valued 7. Some European central banks pushed their benchmark interests to the negative zone. It indicates when modeling short term interest rate we shall A. use lognormal distribution B. use normal distribution but set the rate equal to zero whenever there is negative rate 8. Swiss central bank gave up its constraint put on CHF on date ??. See a plot of historical exchange rates between CHF/EUR, GBP/CHF, GBP/EUR, Q1. which of following statements is correct prediction: A. the correlation between EUR/CHF and between CHF/GBP will increase in the future. B… Q2. a Swiss exporter has CHF import from other European countries and sell domestically. It put CHF deposit to and have EUR loan from the bank. After the exchange rate constraint is removed, what’s the impact on the bank’s counterparty risk with the exporter? 9. Impact of using CVA vs credit limit: CVA encourages fewer trading counterparties. 10. See a plotted profile of potential future exposure, and tell what is the underlying derivatives for this exposure A. interest rate swap with collateral call requirement 11. choose the correct plot of the relation between CDS value and correlation between the default probabilities of the underlying asset and the protect supplier.
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12. see a plot of the volatility smirk of a stock, and indicate which plot correctly show the implied distribution of the stock price in the future as against a log normal distribution indicates. I chose the one that reflect fatter tail in the leftward. 1) variance swaps are easy to price. 2)We use internal data for body and distributions to model tail in measuring of loss severity. 3)Cvar came to be 8000 4)Leverage ratio was around 2.94% 5)73% was LCR 6)The Var for HW was higher than HS by 3.8..something for 1 day horizon. 7)RAF should be forward looking and include risk appetite. 8)PO strips have more duration than passthrough from which they are created. 9)I think there was a question on cash account/principal account with mbs/corporate bond..i think i selected that negative convexity of MBS is offset by positive convexity of corporate bond. 10)There was a question on CLN.I think answer was that CLN has a CDS with protection seller paying upfront or something like that. 11)A question on asset allocation where portfolio outperformed the benchmark due to asset allocation. 12)A question on trade repository where i selected that they are to protect unsophisticated investors from cheating. 13)A question on transaction liquidity where i selected the 1st option. 14)A question on WWR where i selected that OTM puts have higher WWR if purchased from oil producer. 15)Differnce between current and past market risk charges including SVAR/VAR i think the answer was 320. 16)Araroc where project should be rejected. 17)A question on minimum intrest for Raraoc where i selected 5% 18)Graph of IO strip..i think it should be D as interst component decreases over time. 19)A question where we had to use montecarlo to value MBS. 20)Diff between OAS/NS/ZS. 21)a question on EL where i think the answer was 60. 22)A question on tranches where the money paid to equity tranch was 0. 23)Hedge fund has high sharpe ratio than DJSI index. 24)Q stat was significant for a fund hence there was liquidity risk and perhaps data smoothing was done. 25)A question on versik model where i selected that they use long term value of short term interest rates.
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26)A question on convertible bond arbitrage..where it selected liquidity permium as a source of return. 27)Ban on naked SCDS will induce iliquidity and less price information. 28)PFE for Int swap with unequal payments. 29)A question on CRA where i think the answer was economic return on collateral. 30)Few questions on CSA where stronger party will want one CSA ...... 31)A question where answer would be weighted avg of betas. 32)A question on model calibration risk where wrong model was used to value derivatives..ie delta normal was used. 33)A question on volatality smrik kind of diagram where delta was greater than . 5. 34)A question on long/short equity.. 35)Housing market is procyclical so extra protection are required by banks during economic downturns. 36)SAR decreases with decreasing interest rates. 37)Declining transaction cost impacts dispersion. 38)A question on performance attribution. 39)A question on LDA where it was told that lognormal should be used for severity always as per basels and i thought it was false..as basel never says to use lognormal for severity... 40)A question on holee model..i am not sure about the answer. 41)risky debt=rf-put 42)finding var usiing BRW or hybrid..i can't remember but the answer was 6.8 something. 43)AMA wants scenario analysis to be included to model capital .. 44)A easy question on finding the RWA. 45)Solvency vs Basel..i think i got it correct. 46)question on ir/trenor/sharpe.. 47)A question on netting where the answer should be payment netting between for wards. 48)A question where the answer would be buying of SCDS to protect against soverign risk. 49)A question where answer will be that changes in reference rate may impact monetary policy beyond boundaries or something like that... 50)As default corre;ation increases VAR from senior tranches will increase dramatically as tail risk will increase.. 51)Question on backtesting where answer seems to be 35. 52)Lock in period of 18 for hedge fund will cause harm. 53)Where you don't need to rely on qualitative aspects only??1)Consumer
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2)Financial 3)Non financial 4)Soverign...i think it is Consumer.. 54)Why do we need trade repositories..i think i selected to prevent unsophisticated investors..but now i think the answer should be to reduce concentrations.. 55) .I think it was which has biggest intrest rate risk or something and i selected MBS and certificates of deposit.. 56)Ya got it MBS2 YC 2...I they had biggest difference between nominal and zspread. YC2 had steeper slope so more differnce between Z spread and Nominal spread. 57)quantile standard errors - I selected asymmetric confidence intervals 58)facts pertaining to bootstrap, age weighted & volatility weighted HS 59)The analyst may face problem to model balancesheet composition.. 60)Excess return/mvar1=excess return2/mvar2...is optimim,, 61)Undiversified Var is the upper bound.. 62)One more.. they gave the distribution of market, credit, op, firmwide. Investigators found something strange about a distribution.. Not sure of the answer i picked firmwide which is described as very close to normal.. want to hear your thoughts - Strikingly much questions on VaR backtesting - Quite some questions regarding CVA, both qualitatively and quantitatively - Multiple qualitative questions on wrong-way risk - Not so much questions on current topics - I only remember one on HFT and cybersecurity - Investment risk questions quite focused on VaR under different applications, both quantitatively and qualitative (VaR of portfolio before and after rebalancing, marginal var calculations but also qualitatively) - Some questions on Basel III but none which required to know the LCR and NSFR ratios, weights, haircuts etc by heart - On the other hand, Basel questions seemed to be more qualitative, i.e. given this context, which actions are most in line with guidelines - Q on Jenssens inequality - in line with BT practice Q - 2 quantitative questions on hazard rate / cumulative PD - No questions on PD / DD using merton model - nothing on volatility smiles
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- one question on netting factor - Some qualitative questions on VaR mapping - Some questions on copula (definition/whats wrong with copula model in crisis) - Questions on calculation payment on three tranches of CLO given CLO rate, overcollaterization amount, senior/mezzaine tranch interest, loan fixed interest, 100 loans 2 loans default - Spread based on Jensen inequality - Some questions related to calculated VaR, ES, one question given individuale VaR MaR beta, calculate differences between diversified and undiversified (guys how did you solve this one?) - Question on neutralized alpha (Which I was so stupid to to it wrong, neutralized alpha = 0 with benchmark method) - Quesion on mapping VaR (long 3x6 FRA equal to what, long USD/JPY equal to what) - 3-4 cases study, 2 which are very long, one related to investment strategy buying index/bond/FRA, 1 realted to China back react to devaluation in CNY and changes in their capital condition (my friends told me they were tired from reading and understanding the case only) - RAROC given orginal RAROC 14%, the elements, RAROC hurdle 9.5%, what cases make RAROC decrease below hurdlge (increase % operating expenses, expected lost, economic capital require). This one I did not have time to compute RAROC each case, just choose economic capital which have biggest dollar value change. How you guys did it? - Current readings: cyber security which is best practice (report to all BOD SM...), how to decrease "too-big-to fail" central clearing (Doubt between limit members and let members unwind part or total by themselves, how to do post-trade risk control for high frequency trading - Compare Var of historical simulation and boostrap ( I chose both are nonparametric) - One related to EVT (tradeoff between high/low threshold) - One relared to backtesting reject or accept model 95% confidence level (I chose reject as critical value is lower) - One related to netting benefit (decrease exposure and collateral required) - One related to use OIS to calulate LIBOR (I regretted doing this wrong) - Compute hazard rate based on credit spread contiuously for 2 years, RR 30% - Theory questions related to subordinated debt - Compute Credit VaR 1. Binomial Trees - Current Spot Rate is 5%. If there is 50% chance that the rate increases to 6% or decreases to 4% + OIS. (No clue.) 2. What is the VAR of portfolio: 15 mm GBP with 0.15 STD DEV and 6% mean at
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a 99% CI. 3. Portfolio of Asset X and Y - What happens to VAR if we rebalance 800k from Y to X. 4. 3 Questions series on a Chinese Bank - Effects of currency devaluation, purchase of a CDS for protection (Wrong-way risk), forgot the third one. 5. You are looking to reduce the VAR of a portfolio, what would you look at first? (Incremental Var, Component, Marginal). I think the answer was to first look at the component to get a general view of the portfolio and then look at the marginal var. 6. Default rate of 0.07 per year, what is the probability of default within 3 years? 7. Given credit Spread and recovery rate - What is the probability of default? 8. A junior risk analyst is writing a report, what would be the MOST appropriate. The answers included something along the lines "If the assumptions are wrong the model is invalid." but I feel that this answer was too obvious to be an appropriate answer. 9. 2-3 questions on FRAs (Completely forgot everything about FRAs from May P1 to November.) 10. Questions on CDO tranches - What happens when 2 loans default in a portfolio (where does the loss gets allocated?) 11. Delta Put Options? (Absolutely NO clue - Another thing from the May P1 that I completely forgot) 12. Alpha, Beta and Gamma firms dealing in Repos/Collateral - What risk is it facing? (I think its Beta facing Funding Liquidity Risk?) 13. Impact of Collateral with specific changes (The word IMPACT was a bit confusing in the context of the question) 14. Threshold and Minimum Margin transfers. 15. Calculation question on VAR, Spread, Spread volatility, k 16. Information Ratio/Tracking Error/Alpha (May P1.. It was in the notes for P2 as well, but I figured what are the odds of getting something so small tested which has been already covered in P1. Boy was I wrong.. There was a question on each of those and this was only 2-3 pages of T4. (Relatively easy points for anyone who took the time to cover these) -A floating rate note with 4 periods of time, ¿what was the period with highest exposure? -[ i guessed T/2 , not sure.] -Credit Link Note, Total Return Swap, ¿What is the safest to the protection buyer?- [CLN - the question was which party had the least counterparty risk] -ARAROC and systemic risk [ It will increase firm value ] -OIS vs LIBOR discounting [ 1100- Guessed ] -CDO for a car bussines [ 2 options were evidently incorrect..eg balance sheet
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increases & increased leverage. Dont remember the other two ] -VaR if correlation among collateral and the instrument changes. [ Dont remember the exact Q] -One about correlation of operational events and tails [ high frequency, small losses] -CVA Budget with a table with all the inputs (PD,LGD,EAD) [ Dont remember the answer options but one with the largest EL] -3rd pillar of Basel is about Market disclosure[/QUOTE]- [I marked the same ie Market Disclosure] 1. Ops gross loss, use what value for the counts. I choose replacement cost instead of book value 2. 4 million CVA maximum, i chose position 4.. seems to be easy [might be trapped] 3. change position, transfer USD800000 to other asset, i chose VaR decreasing USD2XXXXX 4. Jeasen inequality convexity, i chose 0.86 basis point
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