Exam Feedback May 2018 Part 1 Exam Feedback

[nikic]

Was it possible to solve this question without looking at the SMM and CPR formula? Cause I know there was a question relating to prepayment, and I got a matching answer using the NPV inputs on the calculator.

Or were there two calculation questions relating to prepayment?

 

[Stuart D Moncrieff]

Was it possible to solve this question without looking at the SMM and CPR formula? Cause I know there was a question relating to prepayment, and I got a matching answer using the NPV inputs on the calculator.

Or were there two calculation questions relating to prepayment?

I think this might have been another question which mentioned prepayment. The one you were talking about what to do with a customer with a mortgage right? If they paid x amount then how much prepayment have they made -something like that?

 

[nikic]

I think this might have been another question which mentioned prepayment. The one you were talking about what to do with a customer with a mortgage right? If they paid x amount then how much prepayment have they made -something like that?

Yes, so you confirm there were two prepayment related calculation questions, correct? Cause I thought my mind was playing tricks on me.

For the SMM CPR type question I use a shortcut with the NPV formula. Not exact answer but very close and this worked with the past year questions.

 

[Albertikos]

What was the other one related to prepayment?

 

[Learner frm]

I calculated pmt of mortgage payment and deducted from the value given. It matches one of the answers, answer c I think.

I didn't choose recovery rates have log normal distribution because I think they have beta distribution. The question had many choices but I don't seem to remember those options. Can anyone please remind mem

 

[nikic]

I calculated pmt of mortgage payment and deducted from the value given. It matches one of the answers, answer c I think.

Yes I did the same but there seems to be a confusion whether was this the same question with the SMM CPR type question.

Someone else please weigh in

 

[nikic]

Hey everyone, want to clarify two things here:

1) Were there one or two prepayment-related calculation questions in the FRM Part 1 2018 paper?

2) For the prepayment question that was relating to CPR & SMM, was the question similar to the one I have posted below? How similar was it? Exactly the same pretty much (except differing numbers)? Or how? The one below is taken from the 2017 sample paper, the 2018 sample paper has a similar question as well.

Thanks!

 

[Albertikos]

Hey everyone, want to clarify two things here:

1) Were there one or two prepayment-related calculation questions in the FRM Part 1 2018 paper?

2) For the prepayment question that was relating to CPR & SMM, was the question similar to the one I have posted below? How similar was it? Exactly the same pretty much (except differing numbers)? Or how? The one below is taken from the 2017 sample paper, the 2018 sample paper has a similar question as well.

Thanks!
View attachment 1658

That´s it!

 

[Learner frm]

There was a 2 tail t test. I selected, reject null hyphothesis as calculated value was lower than tvalue. Is that what anyone else selected

 

[BoobyMiles]

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?

The question on hedge vs. mutual funds was "what is one difference between the two?" (or something along those lines). The answer was that Hedge Funds are not required to disclose their Investment Policy.

 

[BoobyMiles]

Do you remember the questioned for the futures and operational risk allocation? What were the answers? I'm hazy.

For the put options, I need the exact question again to worksend out my answer.

For the futures vs. OTC question, I'm pretty sure the answer to "what is the defining feature of OTC's relative to futures": D) settled through bilateral agreements and central counterpartys.

 

[BoobyMiles]

which is this one "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."

 

[BoobyMiles]

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.

for the long question on Margin. it says he enters the position that day. Is it possible the first marked-to-market for a futures position is at the end of the first full day you've held the position? I was taken aback by the question as well because none of my calculations worked out. any insights are very appreicated!!

 

[BoobyMiles]

I thought it was a bit harder than the practice exams but not crazily so. As some of the other posters have said, a fair amount of cross-LO questions, lots of misleading/extra info provide and some very wordy questions. The one regarding the treasurer/CFO should have included an answer of "go back and ask him are those really his requirements?"

Performance not helped overall by the 05.30 startup of the monster aircon unit - if you stay overnight at Ibis before the exam and are a light sleeper, I recommend you ask about this when choosing a room. It was on about the 8th floor at the front of the hotel.

Looking at that long list from earlier on:
3. Difference between mutual and Hedge fund. Disclosure.
6. Some positions by various Counterparties to work out which one has the greatest exposure. Exposure was expressed as a P&L I think. + ve P&L means counterparty owes you money, so I think the correct answer must be the largest positive P&L number (which I recall had a smaller absolute value than the largest negative number). I work in credit risk - don't tell the boss if I get this one wrong...
7. Barings failure - Separation of back and front office. Yep, agree.
9. UL question. Some tings is squared and some ain't! Was surprised to get this wrong after trying pretty much every combination but well done to those who did.
15. Expected shortfall calculations for a set of losses. Average of worst 5 days out of 100 (I think..)
20. GARP code of conduct question on use of previous employers data for current employer due to time. Agree - can't use previous employers' confidential data.
21. FX forward calculation from spot using interest rate parity. straight application. Agree.
22. Neutralise gamma of a set of positions. There was a qualitative question where the answer was it requires option and stock
23. Covariance stationary property. Mean and covariance must both be stable over time - I recall selecting the answer that two things must be stable but cannot remember what those things were..
24. Which model out of s2, Aic or SIC has the best Consistency. It's SIC -AIC is the most asymptotically something or other.
29. ERM question was very tricky. I think it asked about Line Management/ Risk Transfer role on the Stack or responsibilities. I think the answer here was about integrating risk management into operations or some other aspect which fell within line management responsibility.
30. Country risk estimate by Risk Officer on sourcing data from sovering gov agency or .. Yes - getting data from Sov Agency.
33. MG case which relate why it failed. Something about being unable to maintain liquidity while hedges moved against it?

Anyone remember the LTCM question?
I also could not get the Callable Bond Convexity to agree with either answer. Duration was OK, convexity not. Anyone manage this?

Thanks

Hmm, for 22, I'm pretty sure it explicitly states in the material that stock transactions do not impact gamma. only buying/selling stocks will impact gamma. At least that's what i saw in several practice materials. is this wrong?

Also, for 20, i completely agree. Though you shouldn't use external sources or something to that effect, it's also explicitly mentioned that employer's (and former employer's) property qualifies under confidential info. so that one was for sure violated, just not sure which one was the more clear violation

 

[nikic]

For the futures vs. OTC question, I'm pretty sure the answer to "what is the defining feature of OTC's relative to futures": D) settled through bilateral agreements and central counterpartys.

Yes that's it then. Relatively straightforward answer. Futures are traded on exchanges.

 

[nikic]

which is this one "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."

I got this wrong. Answer should be rising interest rates makes it easier to meet the commitment and also increases the shareholders fund. I put it as decreases shareholders fund.

 

[nikic]

for the long question on Margin. it says he enters the position that day. Is it possible the first marked-to-market for a futures position is at the end of the first full day you've held the position? I was taken aback by the question as well because none of my calculations worked out. any insights are very appreicated!!

I'm not sure if people realize or not, but the question says there were FOUR contracts purchased. It wasn't really obvious in the question this bit of info. So the initial margin of 8000 multiplied by 4 is 32000.

 

[Shailesh]

There was a theory question on how Sovereign ratings are provided by rating agencies. Does anyone know the answer?

 

[BoobyMiles]

I got this wrong. Answer should be rising interest rates makes it easier to meet the commitment and also increases the shareholders fund. I put it as decreases shareholders fund.

i believe the question asked about the funded status, no? so up-rates = up discount rate for PBO = down PV of obligations = up funded status. along the same lines, down liabilities = (to satisfy Assets = liabilities + shareholder equity)... up equity.

am i right on this?

 

[BoobyMiles]

There was a theory question on how Sovereign ratings are provided by rating agencies. Does anyone know the answer?

i'm pretty sure it asked, which is incorrect about ratings agencies, or all of the following are correct EXCEPT... and the answer if i recall correctly was A) "rating agencies seldom rely on government information/use a the govt as a primary source of info"... that's incorrect, as they do often use govts as their primary source, and i believe that was cited in the material as one of the reasons rating agencies may have an upward bias (given govt's may not provide complete information regarding their financial standing etc. )