Exam Feedback May 2018 Part 2 Exam Feedback

Nicole Seaman

Director of CFA & FRM Operations
Staff member
Subscriber
I was under the same impression and this was what happened in London but then how is it possible for other countries to have had a wall clock in the actual exam room?? I think this is not fair game so was wondering if anyone could advise on any formal policy that GARP might have released regarding this. Maybe @David Harper CFA FRM or @Nicole Seaman would be the best persons to assist.
Hello @Stella G

It is my understanding that wall clocks are not to be present in the exam room, and that the proctor of the exam announces the time remaining at specific times. The best place to find an accurate answer as to whether any exam sites did, in fact, have a wall clock would be through GARP member services. They can also explain their exact policies regarding this. You can contact them via email at [email protected] or telephone +1 201-719-7210.

Thank you,

Nicole
 

Kullado

New Member
You are right i believe. What was the exact question....i dont remember exactly which option i choose among funding liquidity.
I got confused with the hedging question I chose the one that had basis risk and market risk. The person was cross-hedging so I thought there must be basis risk present and there was only one choice that included basis risk which was (basis risk and market risk)
 

antogiar

Active Member
I got confused with the hedging question I chose the one that had basis risk and market risk. The person was cross-hedging so I thought there must be basis risk present and there was only one choice that included basis risk which was (basis risk and market risk)
Same here
 

David Harper CFA FRM

David Harper CFA FRM
Subscriber
If I remember correctly, the question was about a merging of a company taking place in a few days. The price of the stock was expected to either increase by X% or decrease by Y%.
Thanks it's interesting how recollections vary, assuming everyone is referring to the same question (and not two different questions). In this case, I agree with @Navneet02: the correct answer is (almost certainly) a frown, not a smile. I still completely empathize with anybody who selected smile, however, due to the fact that "jump risk" is more realistic and implies heavy-tail. But this Q&A situation of a stock "jumping" to either +X% or -Y% is a one-step binomial and (consistent with Hull 20.8) the (returns-based) kurtosis is less than 3.0 for any reasonable p; specifically if p*(1-p) > 1/6 then excess kurtosis < 0, then kurtosis is less than 3 (see https://en.wikipedia.org/wiki/Bernoulli_distribution and solve for excess kurtosis = o). In short, most binomials are light-tailed, but "jump risk" is a much broader, realistic and versatile dynamic than a one-step binomial.

@Nirushan1990 Re: "Since the volatility smile curve is different for currency and equity options ..." You make a good point. One of the most useful mental models, at least for me, in finance is "normative versus empirical." Or, put a different way: fundamental vs technical.
  • Normative/fundamental refers to how we learn and, often but not always, many exam-type questions. The cost of carry model (eg) returns for us a theoretical futures price; the Black-Scholes returns for us a "theoretical" option price; discounting bond cash flows returns for as an expected discounted value. The answer can only be a function of the model's inputs and factors. Exam-type questions are "safer" when they are normative/fundamental because ....
  • Empirical/technical refers to observed reality (by definition, including factors beyond our model and possibly any model). Arbitrage-free term structure models (eg) incorporate market prices and are therefore "realistic." The important thing about implied option volatility is that the traded market price is an input: it is thusly and utterly empirical in nature. Trades prices are, by definition, empirical; we do not expect them to match our model price. Why does this matter? Because there is no universally "correct" equity smile or currency smile, there is only the "empirical tendency for the equity smile to look like the following ..." But if traders go risk-on/risk-off or change their crashophobia, supply/demand alters and the smile changes. So, exam questions need to be very careful about querying empirical phenomenon "as if" they are normative truths. The question above, framed as a one-step binomial, is better when it ignores the empirical tendencies of asset classes. This is also why some of the FRM readings are too stale, feedback I have given to GARP; e.g., Stulz T6 mixes some normative Merton (accurate of course!) with obsolete empirical observations about rates/debts, but without making extremely clear the distinction ("model" versus "empirical") to the perennial confusion of candidates.
My summary point as it relates to the question, which i have not seen of course :rolleyes: , is that it probably is safely normative: what is the implication on the (generic) implied volatility smile if the (generic) asset price is modeled by the (unrealistic) single-step binomial. We don't need to reference the empirical tendencies of different asset classes, which are anyhow time-varying. I hope that's interesting!
 
Last edited:

oldfed

Member
Thanks it's interesting how recollections vary, assuming everyone is referring to the same question (and not two different questions). In this case, I agree with @Navneet02: the correct answer is (almost certainly) a frown, not a smile. I still completely empathize with anybody who selected smile, however, due to the fact that "jump risk" is more realistic and implies heavy-tail. But this Q&A situation of a stock "jumping" to either +X% or -Y% is a one-step binomial and (consistent with Hull 20.8) the (returns-based) kurtosis is less than 3.0 for any reasonable p; specifically if p*(1-p) > 1/6 then excess kurtosis < 0, then kurtosis is less than 3 (see https://en.wikipedia.org/wiki/Bernoulli_distribution and solve for excess kurtosis = o). In short, most binomials are light-tailed, but "jump risk" is a much broader, realistic and versatile dynamic than a one-step binomial.

Hello professor and candidates.
Should another way to go for the frown rather than the smile be to consider "only" that the jumps (+ or -) are "event-driven"? The market participants are not pricing their "fear of more probable extreme outcomes" on the OTM options (creating high implied volatility on low and high strikes) on a standard way because they actually expect jumps to happen, putting more relative pressure on ATM price (and its implied volatility) and then creating the frown?

And sorry for my poor english ;-)
 

David Harper CFA FRM

David Harper CFA FRM
Subscriber
Hi @oldfed Excellent point! Please see my prior post, while you were posting I amended with a comment about normative versus empirical. First, "fear of more probable extreme outcomes" would imply a smile, not a frown. Right? This is crashophobia, at least on the left side: fear of a crash drives up the price of catastrophe insurance (i.e. out of the money puts --> low strike price --> left side of the distribution). Fear of extreme movements (up or down) should drive up the price of options with low/high strike prices and therefore create a smile; imagine you are the option writer, the greater your fear of exercise, the more you will charge (the higher your offer or "ask"). But this is supply (and demand) and relates to .... Second, it's a narrative such that you might be able to find a viable narrative to support a frown. Maybe I should call it "empirical/technical/narrative." ... the special challenge with vol smiles is that they are inherently empirical, they accept empirical prices as inputs. So, historically we do tend to observe equity skews (i.e., higher implied volatility at lower strikes; on the left side). Having observed this empirically, then some endeavor to find models that "fit" what is observed: e.g., the "Merton jump" option pricing model is used to explain the observed volatility skew. Implied volatility is counterintuive because it's the reverse of what we usually do in finance (ie., price something): An empirical price pattern is observed, then a (normative) model is designed to fit what is observed. Thanks,
 
Last edited:

Syd_Prasai

New Member
What is GARPs rules on talking about the exam? We had to sign something about not talking about receiving information about the exam before starting - and now I just realized I never signed! My proctors were very specific about what to do and they never said to sign the front of our exam. I specifically remember this because the guy beside me signed his right away and the proctor yelled at him.

I remember in part 1 we finished, sealed our exam and then signed it but this did not happen in Toronto [edit: for part II]
Something similar happened here in Delhi, India. The proctor instructed us to seal the questionnaire, while keeping the ORS sheet (answer key) out and handing over separately. I wonder if this is the way it was supposed to be done. I even asked the proctor, specifically, if the answer sheet was supposed to be left outside, unsealed, to which he insisted on his previous instruction. Can anyone please help me understand?
 

Syd_Prasai

New Member
Hello @Stella G

It is my understanding that wall clocks are not to be present in the exam room, and that the proctor of the exam announces the time remaining at specific times. The best place to find an accurate answer as to whether any exam sites did, in fact, have a wall clock would be through GARP member services. They can also explain their exact policies regarding this. You can contact them via email at [email protected] or telephone +1 201-719-7210.

Thank you,

Nicole

Well, I can confirm that there was a wall clock at my centre in Delhi, India, on both, part 1 (Nov 2017) and part 2 (May 2018) exams. Can't comment on the actual policy though.
 

Stella G

New Member
Hello @Stella G

It is my understanding that wall clocks are not to be present in the exam room, and that the proctor of the exam announces the time remaining at specific times. The best place to find an accurate answer as to whether any exam sites did, in fact, have a wall clock would be through GARP member services. They can also explain their exact policies regarding this. You can contact them via email at [email protected] or telephone +1 201-719-7210.

Thank you,

Nicole


Thanks for sharing your opinion @Nicole Seaman, much appreciated. I will definitely follow your advice.
 

IB_frm

New Member
Something similar happened here in Delhi, India. The proctor instructed us to seal the questionnaire, while keeping the ORS sheet (answer key) out and handing over separately. I wonder if this is the way it was supposed to be done. I even asked the proctor, specifically, if the answer sheet was supposed to be left outside, unsealed, to which he insisted on his previous instruction. Can anyone please help me understand?

Same in Germany - question booklet sealed with answer sheet outside. No idea for the reason - but guess it's normal
 

SODJAN

New Member
Thanks for the feedback @sharg and @arnasp Can I ask you: what were the Current Issues (Topic 9) questions like? (the practice exams contained no CI questions so we don't know what to expect). Also, I'd be interested to know anything specifically about the Basel questions ... thanks again
There were 2 questions on cecl and ifrs 9, one regarding the difference in the standard and the other on using past performance,current and future factors to model lifetime loss, one on Random forest , one on clustering in relation to fraud, one on institutional culture regarding AIG,LTC etc, one on artificial intelligence, that's all I can remember regarding current issues,
 

oldfed

Member
Hello. Good week-end to everybody.
Can anyone can inform me on a GARP policy?

If one has to re-take (hope it will not happen) the exam in november, do the the GARP material (including current issues) stay the same during the calendar year or are the modifications in chapters semi-annual?
 

Karim_B

Active Member
Subscriber
Hello. Good week-end to everybody.
Can anyone can inform me on a GARP policy?

If one has to re-take (hope it will not happen) the exam in november, do the the GARP material (including current issues) stay the same during the calendar year or are the modifications in chapters semi-annual?
Hi @oldfed
The syllabus changes just once each calendar year.

So May and November exams within the same year will cover the same material.

Hopefully we pass :)

Best
Karim
 
Top