Questions on quiz feedback - PRM-III

shubhankar.limaye
Good Student
Posts: 14
Joined: Thu Feb 05, 2015 9:29 am

Questions on quiz feedback - PRM-III

Postby shubhankar.limaye » Sun Feb 15, 2015 7:36 am

I have doubt in following question


bank overall loss at 1%worst case scenario is 10% of its assets of $100 million. If the cost of liabilities is 5%p.a, and return an assets 7%p.a, what is the economic capital required by the bank on one year horizon.
Select one:
a. 2.86 million
b. 12.57 million Correct
c. 14.29 million
d. 5.00 million

The solution given is

The correct answer is B
Spread ; 7%-5% = 2%
ECO= AO(1-(1+RA)(1-L)/(1+RD)
=100(1-(1.02)(.90)/1.05)
=100X(1-.8743) = 12.57.
The correct answer is: 12.57 million.

However as per the I am confused with the arithmetic of the solution as the spread is taken in numerator instead of return on asset. I think correct answer should be 8.2857

shubhankar.limaye
Good Student
Posts: 14
Joined: Thu Feb 05, 2015 9:29 am

Questions on quiz feedback - PRM-III

Postby shubhankar.limaye » Mon Feb 16, 2015 5:12 am

Answer not clear

then the VaR of the portfolio C = A + B (perhaps under non normal conditions):
Select one:
a. Will certainly be smaller than or equal to 300
b. Will be exactly equal to 300
c. Can be greater or smaller than 300 Incorrect
d. Will be greater than 300

Feedback is

The correct answer is A
Will certainly be smaller than or equal to 300.
You cannot just add tail observations without knowing the distribution, and even then it takes some work. VaR is subadditive only under normal dist. Under non-normal dist, VaR of A+B can be greater than 300
The correct answer is: Will certainly be smaller than or equal to 300.

Based on the feedback correct answer seems to be C

shubhankar.limaye
Good Student
Posts: 14
Joined: Thu Feb 05, 2015 9:29 am

Postby shubhankar.limaye » Mon Feb 16, 2015 5:13 am

Also pl explain the math in following question

The Westover Fund is a portfolio consisting of 42% fixed-income investments and 58% equity investments. The manager of the Westover Fund recently estimated that the annual VAR (5%), assuming a 250-day year, for the entire portfolio was $1,367,000 based on the portfolio's market value of $12,428,000 and a correlation coefficient between stocks and bonds of zero. If the annual loss in the equity position is only expected to exceed $1,153,000; 5% of the time, then the daily expected loss in the bond position that will be exceeded 5% of the time is closest to:
Select one:
a. $72 623 Incorrect
b. $46,445.
c. $21,163.
d. $55,171.

Feedback give is as under which is not clear

Feedback
The correct answer is B
$46,445.
The correct answer is: $46,445..

shubhankar.limaye
Good Student
Posts: 14
Joined: Thu Feb 05, 2015 9:29 am

Postby shubhankar.limaye » Mon Feb 16, 2015 7:27 am

Company EFG is a large derivative market-maker that has many contracts with counterparty JKL, some transacted in the same legal jurisdiction and others across different legal jurisdictions. As a result, EFG has some contracts with JKL covered under legally enforceable netting agreement A, some contracts with JKL covered under legally enforceable netting agreement B, and some contracts with JKL with no netting agreement. Ignoring the effect of margin, if the current value (i.e., market value of the contract minus collateral and recovery value) and the netting agreement status of each contract with JKL are as shown below, what is EFG’s current counterparty credit exposure to JKL?


Select one:
a. USD 6,914
b. USD 8,612
c. USD 2,341
d. USD 14,899 Incorrect

Feedback given is

The correct answer is C
USD 2,341.
Let PVi denote the EFG’s current value to JKL of contract i.e. Given the netting agreement coverage, current counterparty credit exposure to JKL (CE) is: CE = max(PV1 + PV2 + PV3, 0) + max(PV4 + PV5 + PV6 + PV7, 0) + max(PV8, 0)+max(PV9, 0) = max(USD 763, 0) + max(USD 6914, 0) + max(USD 2439, 0) + max(-USD 1504, 0) = USD 763 + USD 6914 + USD 2439 + 0 = USD10,116
The correct answer is:
USD 2,341

The explanation and answer are different

edupristine
Finance Junkie
Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

Questions on quiz feedback - PRM-III

Postby edupristine » Mon Feb 16, 2015 7:58 am

Hi, the formula for economic capital is A0[1-(RA)(1-L)/(1+RD). Where, A0 is assets at time 0, Ra is nominal returns on asset, L is worst case loss from all the sources and Rd is nominal returns on liabilities. Therefore according to the question, A0= $100mn, Ra= 2%, L=10%, rd=5%.Hence the calculations are correct and answer should be $12.57million.

edupristine
Finance Junkie
Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

Questions on quiz feedback - PRM-III

Postby edupristine » Mon Feb 16, 2015 9:20 am

Hi, answer to your query question : The Westover Fund is a portfolio consisting of 42% fixed-income investments and 58% equity investments. The manager of the Westover Fund recently estimated that the annual VAR (5%), assuming a 250-day year, for the entire portfolio was $1,367,000 based on the portfolio's market value of $12,428,000 and a correlation coefficient between stocks and bonds of zero. If the annual loss in the equity position is only expected to exceed $1,153,000; 5% of the time, then the daily expected loss in the bond position that will be exceeded 5% of the time is closest to:
Select one:
a. $72 623 Incorrect
b. $46,445.
c. $21,163.
d. $55,171.
Is "B"
Explanation: VAR^2(portfolio)= VAR^2(stocks)+VAR^2(Bonds)+2VAR(stocks)*VAR(Bonds)*correlation(stocks,bonds)
(1367000)^2= (1,153,000)^2 + VAR^2 Bonds +2(1,153,000)*VAR(bonds)*(0)
Therefore, VAR(bonds)= [(1,367,000)^2-(1,153,000)^2]^0.5
which is equal to, 7,34,357
Next we have to convert the annual $VAR(bonds) to Daily $VAR(bonds) : 734357/(250)^0.5
= $46,445


Return to “PRM Exam”



Disclaimer

Global Association of Risk Professionals, Inc. (GARP®) does not endorse, promote, review or warrant the accuracy of the products or services offered by EduPristine for FRM® related information, nor does it endorse any pass rates claimed by the provider. Further, GARP® is not responsible for any fees or costs paid by the user to EduPristine nor is GARP® responsible for any fees or costs of any person or entity providing any services to EduPristine Study Program. FRM®, GARP® and Global Association of Risk Professionals®, are trademarks owned by the Global Association of Risk Professionals, Inc

CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by EduPristine. CFA Institute, CFA®, Claritas® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

Utmost care has been taken to ensure that there is no copyright violation or infringement in any of our content. Still, in case you feel that there is any copyright violation of any kind please send a mail to abuse@edupristine.com and we will rectify it.