Exam Feedback May 2018 Part 1 Exam Feedback

[Nicole Seaman]

We hope that everyone did well on the FRM Part 1 exam on Saturday! Now that everyone has taken the exam, we would love to hear any feedback that you have about the exam. How did it go? Did you encounter unexpected questions? Thank you in advance for any feedback you can provide!

 

[Albertikos]

Hi,

I just remember one question which is to compute a sharpe ratio of a portfolio. Covariance was the same between the Assets, and expected return, risk free and Std was given. I didn´t know how to calculate it.

For pension funds, there was one asking what happened if interest rates rise in a defined benefit plan and how affects it to bondholders and equityholders.

Financial dissasters... metal (funding problem) and Barings (one lesson is to segregate trading area and BO area)

One asking which greek decreases the value of a call/put all being equal. I marked theta.

Loss Frequency and loss severity (poisson and lognormal).

Mimimun bound for european call.

Binomian tree (one step)

Convexity, effective duration and DV01

Barbell portfolio construct

Hedge with a new beta target

Hedge a portfolio

call/put parity

Select a portfolio with the highest information ratio and with at least 0,3 i think of sharpe

 

[bollinez123]

In my opinion the exam was pretty tough , especially in terms of time. I had the feeling the questions itself had lots of text, which I first skipped as planned. But when finishing my 15 or 20 easy ones, I tried the long ones again and had the feeling the questions that required calculations included lots of information which was actually not needed. In practice exams, both BT and GARP, there were usually only 2 or 3 with unnecessary infos (for calculation questions!) , but here I had several ones.

Also, there were quite some FX related questions. I find those ok, but FX related questions took me always a bit more time than similar ones with one currency only. This again gave me the feeling there is not enough time. In the end I guessed 12 ones randomly due to time constraints; with 30 I am very sure, 20 probably correct, rest so so. I really practiced a lot, started beginning of December, practiced around 15-20 hours per week and work in exactly that area; so I probably would score 85 if there had been 45 minutes more time, but guess time kicked me into November 18 repetition. However, will not be too disappointed if I did not pass, because this forces me to strengthen my knowledge for the Part II exam I intended to do in May 2018.

 

[tusharkango]

I agree...There were a lot of questions with unnecessary info. Also, and maybe it was my personal experience but i found the first 50 questions to be really time consuming. I remember i was at 10:30 mark when i started off with the second half of my exam. The barbell question was exactly similar to the one on the sample exam, except the numbers. Also, don't know if it was just me but the question where we needed to select the highest Sharpe Ratio, i feel the one satisfying that condition had the lowest Information Ratio. I think there were maybe different sets of questions in the two different booklets as i dont remember any question on Barings...Metallgesellschaft was there though.

 

[Albertikos]

For the one of the information ... the manager says to select the one with the highest information ratio but at least 0,30 sharpe.

I remember another one which was literally one sheet of the exam of a multi factor question.

 

[tusharkango]

Yeap..the one with atleast 0.3 Sharpe but highest IR. That was the one with lowest IR..i think it was option D. Otherwise i think B had the highest IR.

 

[Albertikos]

Yeap..the one with atleast 0.3 Sharpe but highest IR. That was the one with lowest IR..i think it was option D. Otherwise i think B had the highest IR.

I think that the highest information ratio is the good one... I remember that only two portfolios were at leat 0,30 sharpe. Think that B was that

 

[tusharkango]

Oh well, guess i got that one wrong!!!

 

[Dotun]

Finally Tuesday.... Let me download my memory

1. 1 Year ratings probability matrix required to work out the 2 Year Probability of B rated bond default.
2. Binomial question relating to Var . I think one more on biomial also with 3 bonds to calculate at least 2 defaults.
3. Difference between mutual and Hedge fund -
4. Futures price involving Cost of carry relating to storage cost per month paid in advance.
5. Put Call parity off course.
6. Some positions by various Counterparties to work out which one has the greatest exposure.
7. Barings failure - Separation of back and front office
8. Optimisation of Shareholders wealth.
9. UL question
10. EL calculation.
11. How banks plan for EL in their products.
12. Possion question 2 per month and to work out 9 months
13. 10Day VAR 99% confidence to calculate 5Day VAR 95% or so.
14. Lots of Stress test questions. One difference between Stress vs EC/Var
15. Expected shortfall calculations for a set of losses.
16. Covariance estimate for the next day with the n-1 inputs and volatilities + return.
17. EWMA question that involve calculation Return as Ln(sn/Sn-1)
18. Set of values to calculate volatility with GARCH
19. Spot rates to calculate Forward rate with annual compounding. Almost same as practice question.
20. GARP code of conduct question on use of previous employers data for current employer due to time.
21. FX forward calculation from spot using interest rate parity. straight application.
22. Neutralise gamma of a set of positions.
23. Covariance stationary property.
24. Which model out of s2, Aic or SIC has the best Consistency.
25. Calculate the outstanding mortgage for a particular year remaining from a set of given values e.g mortgage value rate etc
26. SMM or CPR calculation with initial value at begining of month and what value was paid off.
27. Barbel portfolio calculation
28. Think a question around Risk Management failure by not using correct distribution.
29. ERM question was very tricky. I think it asked about Line Management/ Risk Transfer role on the Stack or responsibilities.
30. Country risk estimate by Risk Officer on sourcing data from sovering gov agency or ..
31. Using Duration and convexity to calculation the change in price of a FI asset.
32. Sharpe ratio and IR combined.
33. MG case which relate why it failed
34. MA or ARMA inversion question.

Can't remember seeing anyone on Key rate shift. Time wasnt enough as usual coupled with the delayed start at Ibis London.

 

[nikic]

I think that the highest information ratio is the good one... I remember that only two portfolios were at leat 0,30 sharpe. Think that B was that

I also got two answers with sharpe ratio above 0.3. But it was the ones with 2nd and 4th highest IRs.

But there were two sets of questions. Maybe one had different numbers.

 

[nikic]

There was a question on hedge and mutual funds. Anyone remember the exact question and the answers?

Also one question on futures contracts. What was it again?

What about the one for covariance and std dev. Was it using population or sample? Was the divisor 2 or 3?

What about the hedge amount of the bond given the two DV01 values. Was it half the amount or twice? Was the answer 24mil or 96mil if the protfolio value was 48mil?

 

[Dotun]

There was a question on hedge and mutual funds. Anyone remember the exact question and the answers?

Also one question on futures contracts. What was it again?

What about the one for covariance and std dev. Was it using population or sample? Was the divisor 2 or 3?

Hedge Fund vs Mutual funds asked about the difference and the correct answer was HF can leverage and use derivatives unlike MF.

 

[nikic]

Hedge Fund vs Mutual funds asked about the difference and the correct answer was HF can leverage and use derivatives unlike MF.

Absolutely certain? I put the same but the first option seemed correct as well when I check back on the notes.

 

[hana1563]

Hedge Fund vs Mutual funds asked about the difference and the correct answer was HF can leverage and use derivatives unlike MF.

I remember the answer i chose was something like ' MFs have to disclose their strategy but HFs dont'. I believe both HF and MF can use derivatives and leverage.

 

[nikic]

Some more I remember:

Question on operational risk. My answer was B, the one talking about basic indicator approach. Was that correct?

Question on margin. My answer was 54000 variation margin. I know for a fact the aaccount goes to -22000 at the end of day one. Am I correct?

Question on erm. Was the answer the one containing line management?

Can't recall question, but answer was about a bond portfolio being able to outperform treasuries. Was this the correct answer?

For the question of netting, answer is the one with the highest negative exposure, correct?

Implied volatility is found using the basic up move formula?

Put delta is simple as nd1 minus one?

For prepayment, simple case of amount paid minus off monthly repayment amount?

I'll remember more when I get home. Managed to write down almost 50

 

[nikic]

I remember the answer i chose was something like ' MFs have to disclose their strategy but HFs dont'. I believe both HF and MF can use derivatives and leverage.

Yeah so can we please come to awork conclusion, which was ccorrect? This is sure tricky given I work in a mf!

 

[David Harper CFA FRM]

The HF versus MF is a classic question and historically the correct answer (going back to Jaeger) was that HFs are liberated in three ways, HF can: short-sell, leverage up, and use derivatives. This is consistent with one of Mirabile's seven differences (but Mirabile is a P2.T8 assignment):

"There are seven major differences between a private hedge fund and a traditional stock or bond mutual fund that are worth noting:
...
6. Leverage, short selling, and derivatives
Most mutual funds are restricted by regulation from the use of leverage, short selling, or derivatives. When permitted to do so, they can do so only in varying degrees and within strict limits. Even those that can use leverage, short selling, and derivatives often do not, as the firm may lack the expertise and training to do so effectively. Almost every hedge fund can use some combination of leverage, short selling, or derivatives to modify returns and lower volatility."

However, Hull is assigned in Part 1 and here is his answer (emphasis mine):

"4.5 Hedge Funds: Hedge funds are different from mutual funds in that they are subject to very little regulation. This is because they accept funds only from financially sophisticated individuals and organizations. Examples of the regulations that affect mutual funds are the requirements that:

• Shares be redeemable at any time
• NAV be calculated daily
• Investment policies be disclosed
• The use of leverage be limited

Hedge funds are largely free from these regulations. This gives them a great deal of freedom to develop sophisticated, unconventional, and proprietary investment strategies .."

And I notice this is one of Hull's EOC questions:

Question 4.9:
Give three examples of the rules that apply to mutual funds, but not to hedge funds.

Answer:
Mutual funds must disclose their investment policies; their use of leverage is limited; they must calculate NAV daily; their shares must be redeemable at any time.

 

[hana1563]

The HF versus MF is a classic question and historically the correct answer (going back to Jaeger) was that HFs are liberated in three ways, HF can: short-sell, leverage up, and use derivatives. This is consistent with one of Mirabile's seven differences (but Mirabile is a P2.T8 assignment):


However, Hull is assigned in Part 1 and here is his answer (emphasis mine):


And I notice this is one of Hull's EOC questions:

so i guess the correct answer is the answer regarding disclosure, according to the example in the book..

 

[pranay1986]

Some questions i remember about information criterion with best consistency answer was SIC

expection of jump on both sides for a security which is the best spread to apply to capture volatility using puts
I marked long butterfly answer is i think is short butterfly

One question on difference between future and OTC contract

Operationl risk allocation

One on korean bank recieving AUD dollars best hedge to prevent some risk but also gain if its in favour i marked long put

 

[pranay1986]

Also one more on firm having GBP equivalent asset of 200 mil USD what is the gain when spot rates change i was getting gain around 31.4 mil not sure whether its right

One on option contract for Copper price. Now of 3.17 strike of 2.25 price after months of 2.95 what is the profit on option i marked 0. Not sure whether i remember correct qns