FRM MAY PART 1 2013 Feedback

[Spronkworks]

Zero correlation would show a roughly circular scattershot pattern... this one was definitely oval with a negative slope. An easy way to think of it is by quadrants of the Cartesian chart... I would say the 2nd (-/+) and 4th (+/-) quadrants easily had over 75% of the points, which my gut says is consistent with a -0.50-ish correlation.

 

[Spronkworks]

Guys on the GARP COC question the analyst did say he had little knowledge of the markets he was requested to build the model for as well as saying he couldnt promise when he could complete the model. Looks like he did his part and didnt violate COC to me.

My recollection of the CoC question is slightly different... his lack of knowledge was described in the problem set up, but the RM only asked for time in his response to the manager (or to whoever it was that asked him to build the model). The CoC has a positive requirement for disclosure of level of knowledge...

 

[pambansang]

My answer seems to be different from the rest here w/regars to the commonality bet barings aib and drysdale. It should be booking of false accounting entries/(or trade?). Didnt drysdale misstated the value of its collateral which constitute fraudulent accouting as much as entering anomalous trades by barings and aib traders.

 

[Spronkworks]

My answer seems to be different from the rest here w/regars to the commonality bet barings aib and drysdale. It should be booking of false accounting entries/(or trade?). Didnt drysdale misstated the value of its collateral which constitute fraudulent accouting as much as entering anomalous trades by barings and aib traders.

My memory is hazy (particularly since I took the second exam right after)... do you, or anyone else, remember the 4 choices re barings, drysdale and aib? I recall none of them seemed spot on...

 

[Juan B.]

hi, as far as I remember were something like these:

a) traders who incur in high losses become less risk adverse
b) they were head of Back office and trading desk
c) involvement of fake accounts
d) high leverage??? not sure about this option

I was not sure and went for fake accounts.

 

[pambansang]

for the question on the GARP Code re the indian market, i think he violated the code since he has totally no previous background on the indian market yet he plans on keeping the clients hanging until he could finish the model. Doesnt 4.3 of the coc apply to this also.

 

[pambansang]

My memory is hazy (particularly since I took the second exam right after)... do you, or anyone else, remember the 4 choices re barings, drysdale and aib? I recall none of them seemed spot on...

I think the choices were, leverage, rogue traders, fictitious acctg, liquidity (this last one im not sure, i may be picking up from another question). I think the closest would be fictitious acctg.

 

[Juan B.]

On this one re GARP code, I thought that the fact the analyst was a senior, and successfull as far as I remember as per the question, was relevant. The analyst clearly stated the timeframe disclaimer which should give her/him enought time to do a proper research...i went for not violation as I thought otherwise who is going to do researhing & modelling otherwise

 

[noalv4]

i think that the correcclt answer is that the traders become less risk adverse... in order to cover their losses thay took higher positions so the became less risk adverse....

 

[Spronkworks]

I choose 94% as well, but just because that looked the most reasonable. Any math to back up your answers?

If I recall, it was prob of 5% for each, and 4% for both together... maybe too straight forward, but 4% together leaves 1% each alone... 4% + 1% + 1% gives 6% chance of at least one default.

 

[Uchica__Itachi]

The AIB, Drysdale and Barings question was, in my mind, clearly High leverage.
The Drysdale guys had £20mil capital and invested £300m (borrowed from Chase). Nick Leeson and John Rusnak also had extremely high leverage positions which led to losses.

The COC question did give some context saying he knew very little about the market. The analysts response to his seniors was (paraphrased of course): "I have little knowledge of these markets so cannot complete model in a month. I will build the new model but cannot promise when I will complete it.".
The COC doesnt say you shouldnt do work if you have little knowledge of it. I think this question was aimed at the COC relating to giving clarity on your abilities and lack thereof hence he shouldnt have violated anything.

I have a question, for the risk neutral probability I remember calcing an Up probability of 0.58 n hence a down probability of 0.42 but my gut feel was that I made an error. Does anyone remember the numbers for that question? I think risk free was 4% and vol was 14% but with those numbers the 58% up probability doesnt make sense.

 

[pambansang]

On this one re GARP code, I thought that the fact the analyst was a senior, and successfull as far as I remember as per the question, was relevant. The analyst clearly stated the timeframe disclaimer which should give her/him enought time to do a proper research...i went for not violation as I thought otherwise who is going to do researhing & modelling otherwise

Yeah i see your point. I just assume that hes not the only analyst around. Disclaimer/disclosure is good but if you made those already then theres no point in performing the analysis and modelling. The one month reqt is explicit and i assume absolute since this is based on client's need, then why bother at all if the analyst know nothing of the subject at hand. Just my analysis of the situation.

 

[Spronkworks]

The AIB, Drysdale and Barings question was, in my mind, clearly High leverage.
The Drysdale guys had £20mil capital and invested £300m (borrowed from Chase). Nick Leeson and John Rusnak also had extremely high leverage positions which led to losses.

The COC question did give some context saying he knew very little about the market. The analysts response to his seniors was (paraphrased of course): "I have little knowledge of these markets so cannot complete model in a month. I will build the new model but cannot promise when I will complete it.".
The COC doesnt say you shouldnt do work if you have little knowledge of it. I think this question was aimed at the COC relating to giving clarity on your abilities and lack thereof hence he shouldnt have violated anything.

I have a question, for the risk neutral probability I remember calcing an Up probability of 0.58 n hence a down probability of 0.42 but my gut feel was that I made an error. Does anyone remember the numbers for that question? I think risk free was 4% and vol was 14% but with those numbers the 58% up probability doesnt make sense.

I agree on the high leverage answer (and hope GARP does as well!). As to the CoC question, though I could of course be wrong, I remember re-re-reading the RM's response specifically looking for disclosure of level of knowledge, and I recall the RM only asking for a month without explanation. Don't remember the risk-neutral question details.

 

[Spronkworks]

Yeah i see your point. I just assume that hes not the only analyst around. Disclaimer/disclosure is good but if you made those already then theres no point in performing the analysis and modelling. The one month reqt is explicit and i assume absolute since this is based on client's need, then why bother at all if the analyst know nothing of the subject at hand. Just my analysis of the situation.

Could be the need for a model is immediate, so asking for a month to "learn" is not sufficient. What if losses occurred during the month that might have been preventable if the RM had acknowledged the model could be built faster by someone who was already up to speed?

 

[Spronkworks]

for the question on the GARP Code re the indian market, i think he violated the code since he has totally no previous background on the indian market yet he plans on keeping the clients hanging until he could finish the model. Doesnt 4.3 of the coc apply to this also.

Yes, 4.3 applies. Para 4.5 is even more specific to the point... the RM must disclose lack of knowledge. What if the model is time critical and the firm/client doesn't have a month to wait if it could be done faster by someone with specific knowledge?

 

[pambansang]

The AIB, Drysdale and Barings question was, in my mind, clearly High leverage.
The Drysdale guys had £20mil capital and invested £300m (borrowed from Chase). Nick Leeson and John Rusnak also had extremely high leverage positions which led to losses.

The COC question did give some context saying he knew very little about the market. The analysts response to his seniors was (paraphrased of course): "I have little knowledge of these markets so cannot complete model in a month. I will build the new model but cannot promise when I will complete it.".
The COC doesnt say you shouldnt do work if you have little knowledge of it. I think this question was aimed at the COC relating to giving clarity on your abilities and lack thereof hence he shouldnt have violated anything.

I have a question, for the risk neutral probability I remember calcing an Up probability of 0.58 n hence a down probability of 0.42 but my gut feel was that I made an error. Does anyone remember the numbers for that question? I think risk free was 4% and vol was 14% but with those numbers the 58% up probability doesnt make sense.

Re the barings aib and drysdale. Theres no explicit mention in the core reading on the leverage made by leeson and rusnak, but you could read fictitious and fraudulent accounting and reporting in all three.

 

[pambansang]

And yeah i think i got 58 percent and 42 percent on one binomial tree.

 

[Uchica__Itachi]

Re the barings aib and drysdale. Theres no explicit mention in the core reading on the leverage made by leeson and rusnak, but you could read fictitious and fraudulent accounting and reporting in all three.

I agree that you could read into fictitous and fraudulent accnting n reporting into all 3 but you could just as much read leverage into all 3. The word leverage is not specifically used but for AIB it is stated that Rusnak's positions were not small positions as expected but LARGE ones. For Baring it is clearly stated that Leeson's actions exposed the firm to large market and event risk. In the Drysdale case they mention that the amount that was invested was disproportionately larger than their capital (300m vs 20m). Given a bigger of two evils scenario I thought leverage was "it". I guess its also the fact that for cases like Drysdale and AIB the false reporting/accounting is not as close to the forefront as other factors as well (bullying back office staff and poor mngment oversight was big for AIB and the flaw in collateral calc was also a big issue for DsDale).

At the end of the day you may be correct though. I guess this is what GARP wants sometimes, a situation where 1 answer is 55% correct and another 45% correct.

 

[noalv4]

One more question was what is the 1-p of an option with 1 step with two years horison...

this was tricky because of the two years horison.
i beleive that the correct answer was 53%.

what do you think?

 

[noalv4]

another question:
american call expire in two months, dividend is paid in one month and the option of early exercise.

what is the correct answer?