Nov 2013 FRM Level 1 feedback

[monsieuruzairo3]

@babyik
PFA my comments on your answers to the questions I dare to disagree with
Q2: Graph of Variance Vs correl: Var= 2(1- correl). Option should be A (Straight line) with Max. of 4 and min of 0
Q24: Definitely Sharpe ratio. I have put my comments prior giving the explanation
Q35: Not sure which one you marked, but I marked the one that was convex
Q46: I chose Higher beta, higher return. Though not sure whether they meant expected return or actual return. I may be wrong
Q49: LTCM: Failure to include scenario of competitors holding similar position. This increased the liquidity issue(Schweser notes)
Q66: It can be either Stop-Loss or Stop limit. I don't understand what you mean by Stop-loss limit. I chose Stop-Limit
Q75: it should be "Who to deliver" since the exchange will determine who will get the order since the other party can close its position before delivery it is impossible to state beforehand who to deliver on the contract.Where to deliver is specified in the contract
Q88: BSM cannot value American put since early exercise in optimal and basic condition of BSM to hold is that there should be no early exercise.American calls are usually exercised at maturity and the same with Forwards. American puts can be exercised anytime

All the best!

KR
Uzi

 

[krenate]

@babyik
PFA my comments on your answers to the questions I dare to disagree with
Q2: Graph of Variance Vs correl: Var= 2(1- correl). Option should be A (Straight line) with Max. of 4 and min of 0
Q24: Definitely Sharpe ratio. I have put my comments prior giving the explanation
Q35: Not sure which one you marked, but I marked the one that was convex
Q46: I chose Higher beta, higher return. Though not sure whether they meant expected return or actual return. I may be wrong
Q49: LTCM: Failure to include scenario of competitors holding similar position. This increased the liquidity issue(Schweser notes)
Q66: It can be either Stop-Loss or Stop limit. I don't understand what you mean by Stop-loss limit. I chose Stop-Limit
Q75: it should be "Who to deliver" since the exchange will determine who will get the order since the other party can close its position before delivery it is impossible to state beforehand who to deliver on the contract.Where to deliver is specified in the contract
Q88: BSM cannot value American put since early exercise in optimal and basic condition of BSM to hold is that there should be no early exercise.American calls are usually exercised at maturity and the same with Forwards. American puts can be exercised anytime

All the best!

KR
Uzi

Q 88 is incorrect... BSM values only European options, American call can also be exercised at prior date if dividends are high enough... I have also marked frw...since Americans options value the best Blacks

 

[a.lesnar]

@babyik
PFA my comments on your answers to the questions I dare to disagree with
Q2: Graph of Variance Vs correl: Var= 2(1- correl). Option should be A (Straight line) with Max. of 4 and min of 0
Q24: Definitely Sharpe ratio. I have put my comments prior giving the explanation
Q35: Not sure which one you marked, but I marked the one that was convex
Q46: I chose Higher beta, higher return. Though not sure whether they meant expected return or actual return. I may be wrong
Q49: LTCM: Failure to include scenario of competitors holding similar position. This increased the liquidity issue(Schweser notes)
Q66: It can be either Stop-Loss or Stop limit. I don't understand what you mean by Stop-loss limit. I chose Stop-Limit
Q75: it should be "Who to deliver" since the exchange will determine who will get the order since the other party can close its position before delivery it is impossible to state beforehand who to deliver on the contract.Where to deliver is specified in the contract
Q88: BSM cannot value American put since early exercise in optimal and basic condition of BSM to hold is that there should be no early exercise.American calls are usually exercised at maturity and the same with Forwards. American puts can be exercised anytime

All the best!

KR
Uzi

hi
congratulations for being able to recall the numbers of questions!
actually I have a couple of doubts:
Q88: Firstly, both american calls and puts can be exercised before maturity: for exclusion I selected forwards but I am not sure about it
Q75 I did not find explicitly in the preparation material so I googled it and I found out that it is likely that the clearinghouse communicates where to deliver the assets: I am not completely sure because there is really no reference in my preparation material but I am convinced that it is likely that the clearinghouse communicates the place where to deliver the items
Q35 can you recall what is that convex graph about? what was kindly the question?
Q66 I am convinced that if you want to exit the market you enter either a stop loss or a market sell order, although I believe the market sell order should be more coherent: the question contained the adjective "QUICKLY" and I believe the quickest order is the market order
Let me kindly know
Best regards

 

[krenate]

hi
congratulations for being able to recall the numbers of questions!
actually I have a couple of doubts:
Q88: Firstly, both american calls and puts can be exercised before maturity: for exclusion I selected forwards but I am not sure about it
Q75 I did not find explicitly in the preparation material so I googled it and I found out that it is likely that the clearinghouse communicates where to deliver the assets: I am not completely sure because there is really no reference in my preparation material but I am convinced that it is likely that the clearinghouse communicates the place where to deliver the items
Q35 can you recall what is that convex graph about? what was kindly the question?
Q66 I am convinced that if you want to exit the market you enter either a stop loss or a market sell order, although I believe the market sell order should be more coherent: the question contained the adjective "QUICKLY" and I believe the quickest order is the market order
Let me kindly know
Best regards

Q75 I have read somewhere in Schweser notes..that the short has an advantage while selecting the place where to deliver...but I am not sure...
and actually a lot of questions were completely misleading because they have asked for some small details, which were not provided in many sources...

 

[a.lesnar]

Q75 I have read somewhere in Schweser notes..that the short has an advantage while selecting the place where to deliver...but I am not sure...
and actually a lot of questions were completely misleading because they have asked for some small details, which were not provided in many sources...

hi
wel i cnnot remember the question exactly, but did it ask what the clearinghouse communicated to the buyer? so that choices such as the quality of the assets can be certainly excluded

 

[krenate]

hello, unfortunately, I cannot recall the question, however as I remember it, the question was related to the options from the seller side..not from clearinghouse itself....In reality I am tired... and I really think that at the moment we won't find out anything...the solutions are already under investigation and in 5 weeks we will know more...
good luck to everybody!

 

[babyik]

Hi MayaH, Pl refer to q.54 of the excel sheet i have uploaded in my earlier post. The gist of the question was. "The market is expected to be flat".
What should be the strategy? Ans- Short a straddle. [ Straddle bets son volaitility and if the price is expected to remain at the same level the purchaser of the straddle would not exercise his call option. Hence the seller would gain by the amt of option premium received. Hence short a straddle.

 

[babyik]

@babyik
PFA my comments on your answers to the questions I dare to disagree with
Q2: Graph of Variance Vs correl: Var= 2(1- correl). Option should be A (Straight line) with Max. of 4 and min of 0
Q24: Definitely Sharpe ratio. I have put my comments prior giving the explanation
Q35: Not sure which one you marked, but I marked the one that was convex
Q46: I chose Higher beta, higher return. Though not sure whether they meant expected return or actual return. I may be wrong
Q49: LTCM: Failure to include scenario of competitors holding similar position. This increased the liquidity issue(Schweser notes)
Q66: It can be either Stop-Loss or Stop limit. I don't understand what you mean by Stop-loss limit. I chose Stop-Limit
Q75: it should be "Who to deliver" since the exchange will determine who will get the order since the other party can close its position before delivery it is impossible to state beforehand who to deliver on the contract.Where to deliver is specified in the contract
Q88: BSM cannot value American put since early exercise in optimal and basic condition of BSM to hold is that there should be no early exercise.American calls are usually exercised at maturity and the same with Forwards. American puts can be exercised anytime

All the best!

KR
Uzi

Hi Uzi..thks for ur inputs.

Q2 - agree
Q 24- could be
Q.35 -ur convex ans if for q 36. i too marked the convex one which is the mirror image of effcient frontier
q.46-pl reread the question. the question asks for the effect of increasing risk free rate when beta is more
than 1 say 1.2 . try for beta= 1.2 expected market = 10 and find the CAPM return asuming risk free rate of 5 , 6 and 7.
u wud see that increasing the risk free rate reduces the return due to beta [ exp. market retrun - risk free rate]
q.49- could be , if they asked for which is the correct reason
q.66- it could be market limit which is to execute the order immediately at the best available price . this would prevent further loss
q-75- i agree. had marked the same. inadveretently written where
q.88- i agree, if american put was one of the option

all the best..tc

 

[Maiyaa]

Q 66 is "Market order" as Lesnar pointed said "QUICKLY" thats the key. Hall mark of the exam was for the non numerical questions you could eliminate 2 options quickly other two option required some bit of deep thinking and was often tricky. Imp it did test key ideas.

Q 75 agree with @babyik , short will deliver as late as possible in case of falling prices. Clearing house will determine WHO to deliver.

 

[babyik]

q.88- me too

q-75 - agree actually who and where are being understood interchangeably. clear house wud probably direct " Deliver to Mr. X at that place"

In case of confusion all the specifications can be decided well in advance like specifications/contract size/grade/delivery month/place except

for who to deliver in advance. Hence logically should be who to deliver?

q-35- as mentioned in my reply to uzi pl read q.36. q.35 was a diff question where 2 columns of return/SD were given and we were to

find the inefficient portfolio[ explained in excel]. the convex one were 4 graphs of portfolio possibility curves

. the mirror image of the efficient fromtier should be the answer. [ the one at the bottom]

q.66- agree with market order

hi
congratulations for being able to recall the numbers of questions!
actually I have a couple of doubts:
Q88: Firstly, both american calls and puts can be exercised before maturity: for exclusion I selected forwards but I am not sure about it
Q75 I did not find explicitly in the preparation material so I googled it and I found out that it is likely that the clearinghouse communicates where to deliver the assets: I am not completely sure because there is really no reference in my preparation material but I am convinced that it is likely that the clearinghouse communicates the place where to deliver the items
Q35 can you recall what is that convex graph about? what was kindly the question?
Q66 I am convinced that if you want to exit the market you enter either a stop loss or a market sell order, although I believe the market sell order should be more coherent: the question contained the adjective "QUICKLY" and I believe the quickest order is the market order
Let me kindly know
Best regards

 

[Maiyaa]

Also there was one question to find updated correlation coefficient You have to find updated covariance, use the 2 std dev to find updated correlation. does anyone recollect such a question?

 

[a.lesnar]

Also there was one question to find updated correlation coefficient You have to find updated covariance, use the 2 std dev to find updated correlation. does anyone recollect such a question?

I do not remember exactly but there was a question that asked to calculate covariance first and then find correlation value given two standard deviations if I remember correctly.
I however would ask anyone if someone can recall one question that asked to identify a graph of Var(%) I think: I indicated the one that increases exponentially, similarly to the left tail of a normal distribution but I am not sure about it

 

[krenate]

I do not remember exactly but there was a question that asked to calculate covariance first and then find correlation value given two standard deviations if I remember correctly.
I however would ask anyone if someone can recall one question that asked to identify a graph of Var(%) I think: I indicated the one that increases exponentially, similarly to the left tail of a normal distribution but I am not sure about it

yes, it was one question, I have applied the EWMA model, however the data was given for the day t-1 and we needed to find it out for the day t... I was also frustrated regarding this question...
Re graph with VaR , I have market the straight growing line..but probably I am not right...and the question was the delta neutral VaR for a normal distribution...

 

[Sabit Rahimov]

What i got was,
variance ( basis ) = var (spot) + var( futur) - 2 p sigma(spot) * sigma (future)
= 1 + 1 - 2p * 1* 1
var ( basis) = 2 - 2p

The question was asking plot between var(basis) and correlation ( p )

this gives us a straight line was negative slope and intercept of +2.

I thiink Option C was the correct answer !

Hi,

is there was only one straight line in the graphs?

 

[rua]

I see there are many members in this thread facing some problem with FRM P1 Nov, I guess a cut off range about 55-60, hope

 

[babyik]

I see there are many members in this thread facing some problem with FRM P1 Nov, I guess a cut off range about 55-60, hope

endorse ur view rua..cant be more than 60..logically

 

[babyik]

Hi,

is there was only one straight line in the graphs?

there were two..we had to see the slope and intercept to eliminate

 

[babyik]

yes, it was one question, I have applied the EWMA model, however the data was given for the day t-1 and we needed to find it out for the day t... I was also frustrated regarding this question...
Re graph with VaR , I have market the straight growing line..but probably I am not right...and the question was the delta neutral VaR for a normal distribution...

@krenate- yeah the EWMA model for t-1 required some calculation..so me too found the t day and it was one of the options, eliminated that
and guessed the other one close to it.

regarding the graph ( 3 VaR and one by analyst) i chose the topmost one [ above the straight line there were 2 ]
Logc- Var is not subadditive but am not sure abt the ans

 

[krenate]

do not know, what is cut off, but probably I failed...

 

[Sabit Rahimov]

there were two..we had to see the slope and intercept to eliminate

I just looked to the straight lines and logically marked the answers. As known, Var(basis) is inversely related with correlation. As correlation increases , variance of basis of hedged asset price and futures price decreases. In short, variance of basis become close to zero, when spot price of asset perfectly correlated with futures price.