Errors Found in 2023 Study Materials P2.T8. Liquidity and Treasury Risk

[Nicole Seaman]

Please use this new thread to let usknow about any errors, missing/broken links, etc. that you find in the 2023 materials that are published in the study planner under P2.T8. Liquidity and Treasury Risk. This will keep our forum much more organized. We appreciate your cooperation!

PLEASE NOTE: Our Practice Question sets already have links to their specific forum threads where you can post about any errors that you find. This thread is for any other materials (notes, spreadsheets, videos, etc.) where you might find errors.

Information needed for us to correct errors:

• Reading or Chapter
• Page number (the page in vital source)
• Error

 

[Lu Shu Kai FRM]

Hi @Nicole Seaman cc @David Harper CFA FRM ,

Hope you are doing well.

Not sure if this is the right thread, but I believe there is some UI error on the liquidity risk section of FRM part II. There should be a review quiz at the end of the liquidity risk section?

 

[Nicole Seaman]

@lushukai We do not currently have a quiz for the Liquidity topic in the curriculum, so this is not an error in the study planner.

 

[enjofaes]

The table of chapter 2 LTR page 16 (pp45 vitalsource) is not really easy to follow in the study notes as the transactions are really close to each other and the table is something I stared to more than 30mins without full comprehension.

Is the following correct?

1. Transaction #1: Initial Investment Assets: $50 in cash Liabilities: $100 in equity (Equity)
2. Transaction #2: Currency Forward Assets: $100 equivalent in euros (€80 bank deposit) Liabilities: $100 broker loan (Debt)
3. Transaction #3: Call Option Assets: $50 long S&P 500 position Liabilities: $50 broker loan (Debt)
4. Transaction #4: Total Return Swap Assets: $100 due from broker (short sale proceeds) Liabilities: Borrowed 5 shares of INTC (worth $100) (Debt)
5. Transaction #5: Credit Default Swap Assets: $100 Ford FRN Liabilities: $100 term loan (Debt)

The margin requirement is also an asset. Here, it is accounted for within the $150 due from the broker but can be explicitly stated as such:

1. Margin Requirement Assets: $50 margin Liabilities: None

Considering these transactions, the balance sheet categorized into debt and equity would look like this:

Linked Transaction	Assets ($)	Debt ($)	Equity ($)
Initial Investment	50 (Cash)	0	100
Currency Forward (long)	100 (€80)	100	0
Call Option (long)	50	50	0
Total Return Swap (short)	100	100 (5 INTC shares)	0
Credit Default Swap (short protection so long credit risk)	100	100	0
Margin Requirement	50	0	0
Total	450	350	100

So the leverage calculation is: The fund controls $450 in assets with its $100 equity, achieving a leverage of 4.5x.
also the book & notes state that the leverage in its long positions is 3.5?? @David Harper CFA FRM can you help me understand this one?
I tried to compute it:
Long Positions (250):

1. Currency Forward: $100
2. Call Option: $50 (Since it's a 50-delta ATM option)
3. Ford Floating Rate Note (FRN): $100

would be 2.5 instead of 3.5, does he then consider the initial invstment and margin requirement a "long position"?

Also as for the statement "a short position with a magnitude equal to its NAV", this refers then to the total return swap on Intel stock. This short position is worth $100, which is the same as the initial NAV (=equity) of $100.

 

[enjofaes]

Ch7 Monitoring liquidity p147:

Liquidity options differ substantially in function compared to standard options. The main difference is that standard options are exercised for profit, independent of cash flow post-exercise, while liquidity options are exercised because of the post-exercise cash flow. For instance, an owner of a European option call option on a stock would exercise the option if the price of the stock strike price is lower than the market price of the stock on an exercise date. The owner can then immediately monetize the option by selling the stock at the market price. The cash flow is the difference between the price paid for the option and the selling price of the stock. The profit (net positive cash flow) realized is the difference between the strike price and the selling price of the stock. Of course, an owner of a European option may also keep the stock, incurring a negative cash flow situation because the owner may want to hold the stock in their portfolio (as it's "more convenient" to buy it at the strike instead of the prevailing market price). Should the owner opt to keep the stock, the exercise thereof is, therefore, independent of the cash flows post-exercise.

 

[enjofaes]

Ch 18 pp347: first sentence is a bit strange in terms of wording, not necessarily wrong but a more accurate sentence might be: "The dominant approach to management of changing interest rates is a funds management approach, which balances the management of both assets and liabilities."

 

[enjofaes]

Ch18 p348 - small one: Price Risk: Risk of rising interest rates

 

[enjofaes]

Ch19: p395: only part of the risks should be a separate bullet on the level of illiquidity biases, market index and managerial skills

 

[Elizabeth_Babalola]

Hi, Couldn't find the most recent thread for this.

I guess something is missing from this sentence "similarly, when the leverage is increased, if the increases the equity losses in case the asset returns are lower than the funding cost of debt"

Page number: 41

Chapter: 12

​

 

[Elizabeth_Babalola]

100*[(10.0% - (1-10.0%)* 5.5%)/10.0%] give 55% not 50.55

Page number: 43

Chapter: 12