Exam Feedback May 2018 Part 1 Exam Feedback

[nikic]

Some more questions I've not seen discussed here:

1) Delta of a put option N(d1) and N(d2) were given in the question alongside some other data. For this, is it simply N(d1) - 1? There were no similar answers for the put delta so the second part didn't need to be computed (as for the number of shares to be hedged).

2) Asking to calculate implied volatility. I used the UP movement formula from BSM. Is this correct?

3) One question about bonds with an embedded call option. I can't even recall the answers. Someone expand on this if possible. I felt like I had the correct answer though.

4) One question where the answer I selected was the subadditive quality of Expected Shortfall

5) Question about cross hedging jet fuel with crude oil. I got the computation correct, but it should have been a long position rather than a short position.

6) Computation of Expected Shortfall. Got this wrong as well. Correct answer is average of the five lowest values.

7) Question on warrants. Straightforward if you know it otherwise could seem difficult.

 

[Albertikos]

There was a table with return 90 to 100 to calculate VAR... Is the one that you have to choose the return 95?....

 

[Albertikos]

Some more questions I've not seen discussed here:

1) Delta of a put option N(d1) and N(d2) were given in the question alongside some other data. For this, is it simply N(d1) - 1? There were no similar answers for the put delta so the second part didn't need to be computed (as for the number of shares to be hedged).

2) Asking to calculate implied volatility. I used the UP movement formula from BSM. Is this correct?

3) One question about bonds with an embedded call option. I can't even recall the answers. Someone expand on this if possible. I felt like I had the correct answer though.

4) One question where the answer I selected was the subadditive quality of Expected Shortfall

5) Question about cross hedging jet fuel with crude oil. I got the computation correct, but it should have been a long position rather than a short position.

6) Computation of Expected Shortfall. Got this wrong as well. Correct answer is average of the five lowest values.

7) Question on warrants. Straightforward if you know it otherwise could seem difficult.

4) I think the same.
5) I have the correct number but don´t know if you have to be long or short...
7) n/n+m no?

 

[nikic]

There was a table with return 90 to 100 to calculate VAR... Is the one that you have to choose the return 95?....

That was on expected shortfall, no? You have to take the average of the 96th to 100th values. I incorrectly took the 100th value only.

 

[nikic]

4) I think the same.
5) I have the correct number but don´t know if you have to be long or short...
7) n/n+m no?

5) The question said hedge against a rise in jet fuel prices using crude oil, correct? If so, it had to be long. I know I answered short, so I'm wrong in this instance.

7) Yes!

 

[jbejarjimenez]

That was on expected shortfall, no? You have to take the average of the 96th to 100th values. I incorrectly took the 100th value only.

I think that question asked for the VAR and u had to choose the 95th value

 

[Albertikos]

I think that question asked for the VAR and u had to choose the 95th value

Agree with you.... i choose the 95 value... was a directly match on the return with the answer...

 

[nikic]

I think that question asked for the VAR and u had to choose the 95th value

I would disagree. In any case, a 95% VAR looks for the 96th value, not 95th, and there was no such answer.

 

[nikic]

Final few questions I can recall that have not yet been discussed:

1) Impact of Beta (or was it std dev?) on Jensen/Sharpe/Sortino/Treynor ratios.

2) One question about CAPM theory

3) One question to find volatility of the fund with more volatile returns. To find volatility i.e. std dev, use formula Var (X) = E(X)^2 - [E(X)]^2

4) One question regarding the impact of a narrower confidence interval band on the sample size required.

5) One question on forward rate agreement

6) One question on the CSI Index hedge

7) One question about spot/fwd curve (theory). I believe the answer is that as the fwd curve rises the spot curve rises, or something to that effect.

8) Forward/futures price given continuous storage costs and convenience yields

9) Question about which is operational risk. The answer I got was something along the lines of rogue trading.

PS: Hopefully for those joining us newly, can go through the past few pages and give input/answers to any questions for the benefit of us all.

 

[[email protected]]

There was one question on operational risk UL calculation EA was 80 mil recovery rate was 67% and probability of Default was 12%. i think none of the option was correct, did anyone else faced same issue ??

Yes me too think so

 

[Dotun]

Hey Dotun, my queries on the questions highlighted by your good self as follows:

4) How did you answer this question? Is it as simple as S*(e^rt) + Cost + Cost*(e^-rt/12)? I believe the storage cost was $6. My answer was 1242 or something. Basically around $12 above the vanilla futures price. The answers were spaced $2 apart.

6) Would this be simply finding the counterparty with the highest negative exposure?

8) I don't recall this question. Can someone jog my memory?

11) I can't recall the answers. What's the correct answer for this?

19) I don't recall such a question at all. I do recall a given rate for semi-annual compounding and you were asked to calculate the corresponding rate for monthly compounding. Is this what you're referring to? There was another question with 1.5 year discount rate given and you were asked to calculate the corresponding spot rate.

20) Is the answer something along the lines of "execute all services with diligence and perform all work in a manner that is independent from interested parties"? The others sounded wrong.

25) Sadly don't recall this question!

26) Is this the one on prepayment? Find the monthly repayment, and minus that from the amount that was paid for the particular month to find the pre-payment amount?

28) Not able to recall this either!

29) Is this the one where the answer contained the words "line management" as well?

Thanks!

4) How did you answer this question? Is it as simple as S*(e^rt) + Cost + Cost*(e^-rt/12)? I believe the storage cost was $6. My answer was 1242 or something. Basically around $12 above the vanilla futures price. The answers were spaced $2 apart.
==> Yes, I didn't get the exact answer and had to choose the nearest guess.


6) Would this be simply finding the counterparty with the highest negative exposure?
==> Yes. Not sure about this answer.

8) I don't recall this question. Can someone jog my memory?
==> Question related to Role of Board in adding value to company. Apologies, I cant remember as this was one of the many qualitative questions

11) I can't recall the answers. What's the correct answer for this?
==> Yes, It was around expected loss and unexpected loss mixed together.

19) I don't recall such a question at all. I do recall a given rate for semi-annual compounding and you were asked to calculate the corresponding rate for monthly compounding. Is this what you're referring to? There was another question with 1.5 year discount rate given and you were asked to calculate the corresponding spot rate.
==> This was a different question, it was presented in a table format.

20) Is the answer something along the lines of "execute all services with diligence and perform all work in a manner that is independent from interested parties"? The others sounded wrong.
==> Yes.

25) Sadly don't recall this question!
==> Yes, its a B.Tuckman mortgage like questions but not direct.

26) Is this the one on prepayment? Find the monthly repayment, and minus that from the amount that was paid for the particular month to find the pre-payment amount?
==> Yes

28) Not able to recall this either!

29) Is this the one where the answer contained the words "line management" as well?
==> Yes. You are correct.

 

[nikic]

29) Is this the one where the answer contained the words "line management" as well?
==> Yes. You are correct.

Was the "line management" thing the actual answer though?

 

[Albertikos]

Was the "line management" thing the actual answer though?

For 26... i put something like 3.200 usd or rounded...

 

[Albertikos]

Was the "line management" thing the actual answer though?

for me yes too

 

[Stuart D Moncrieff]

Yes me too think so

I think I got the answer in the exam. To use your numbers as an example PD = 0.12; LR = 1 - RR = 0.33; variance_pd = 0.12 * 0.88; variance_lgd = 0.4 [it was something like that right?]

UL = sqrt(PD * variance_lgd + variance_pd*LR^2)

 

[Albertikos]

I match one of UL which was 11M€...

 

[David Harper CFA FRM]

This is correct. Convexity is always positive due to the square, duration has the opposite effect.

On that note, there was a question to calculate portfolio duration and convexity. I got the duration easily...but the convexity alluded me. What did I miss out on? I believe there were two answers - 14.3 and 16.4. At least one was 14.x and another 16.x. I took a gamble on 16.x. No idea!!!

Agreed. Privately a member asked me to report this question as problematic, but it sounds like the question was good (and it's a classic). The wording is important but if you think about the fundamental ΔP/P = -D*Δy + 0.5*C*Δy^2, an increase in the yield is associated with a price decrease due to duration, per -D*Δy, but a mitigating increase due to convexity, per 0.5*C*Δy^2. This can be visualized too.

 

[jbejarjimenez]

Hon

I think I got the answer in the exam. To use your numbers as an example PD = 0.12; LR = 1 - RR = 0.33; variance_pd = 0.12 * 0.88; variance_lgd = 0.4 [it was something like that right?]

UL = sqrt(PD * variance_lgd + variance_pd*LR^2)

Honestly I did exactly that and I didn’t get the answer right, I almost got crazy during the exam

 

[nikic]

I thought that since the price remained unchanged on the second day the variation margin should have been 0 since the margin should be updated daily. I wasn't certain though.

For the probability question I remember I constructed a table like David used most in his examples - method was similar to you but I think I might have applied the odds of it being an AA, BB or C bond on top of the probability of defaults. Can't quite remember the wording of the question but I remember constructing the table.

I've been thinking about the margin question again. I recall the question asked what was the account balance on Day 2. The only possible answer could have been $32,000. For it to have a balance of $0...it won't make sense. Yes, there was $0 movement on Day 2, but the question wasn't asking about that, was it? It had to have a balance of the initial margin of $32,000, given the Day 1 position was at -$22,000. To the best of my knowledge, there was no answer for $32,000, but an answer that specifically spoke about a variation margin of $54,000, hence me choosing that.

Does anyone remember anything from this question that could help us reach a decision as to what the answer was?

 

[nikic]

Hon

Honestly I did exactly that and I didn’t get the answer right, I almost got crazy during the exam

Pretty sure that the std dev of LGD was given, not the variance. Also you need to multiply the whole thing with the EA.