Nov 2013 FRM Level 1 feedback

[Sabit Rahimov]

@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,
in regard to Q75 I'm definitely agree with you. I marked "to whom to deliver the commodity". Delivery location options even for each commodity is defined by the Exchange beforehand and includes provisions on this issue. Short position chooses where to deliver and depending on the locations, price is adjusted Good luck!

 

[Sabit Rahimov]

@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

I'm not really remember this question. could you please tell me what was the issue in this questions and which options were in respect of answers.
Many thanks!

 

[babyik]

@krenate- everybody is just guestimating. the cutoff can be as low as 50. so lets wait till 2 jan

 

[babyik]

I'm not really remember this question. could you please tell me what was the issue in this questions and which options were in respect of answers.
Many thanks!

@Sabit- data was given for return/volatility of t day and t-1 day. we had to find the volatility of day t. we had to use EWMA model. catch was we had to calculate the SD (volatility) using the formula for correlation/covariance.

regarding the question on graph there were 4 graphs on X-Y axis of VAR - 3 carried out by VaR and one by an analyst . we were asked to find out which of the 4 is the one drawn by analyst. 3 of them were curvy. one was a straight line.

hope u remember the questions now.but i think we shud rest the discussion..lets enjoy dec...and wait for another 37 days

 

[Sabit Rahimov]

Hi all, PFA an excel sheet with 88 questions of the FRM Part-1 on 16 Nov 2013 based on memory. [ In CFA we cant discuss actual exam questions but it seeems GARP is silent about it ] . Encouraged by the discussions am sharing my questions. What could be the expected score to pass ? My guess is 60 %. I dont agree with 70% + as the pass rate is 50% and given the nature of the exam & time constraint, expecting 50% of the test takers to score more than 70% does not appear to be probable. What are ur views?

Hi,

In most part, I agree with you. But with answers to the questions below, I disagree:

Q24 - It is definitely - Sharpe Ratio
Q75 - Clearing House define to whom to deliver. Where to deliver is prescribed for each futures contract (there might be a number of delivery location options) and the party in the short position chooses where to deliver and finally price is adjusted accordingly.
Q84 - employee strikes is an operational risk incident. As per Basel papers, it includes in the risk category of "Employment practices, relations and workplace safety"

Good luck!

 

[Sabit Rahimov]

There was also a question regarding the operational risk, specifically asking in which way it is possible to increase the volume of data on operational risk. I have marked the final answers which states "by acquiring data from data vendors and then by making the scale adjusting" I don't really remember the other options, but I considered this option is much reasonable. In reality, the Banks uses external data in case of lack of specific data on op risk event.

However, someone who has idea about this questions, please comment on it.

 

[Sabit Rahimov]

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

Hi

Q75 - link to http://www.cmegroup.com/rulebook/CBOT/I/7/7.pdf (provision 713).

 

[Sabit Rahimov]

q.66- agree with market order[/quote]

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

Q 75 - Chapter 2 (J.Hull)

 

[a.lesnar]

q.66- agree with market order

Q 75 - Chapter 2 (J.Hull)[/quote]

thank you! you finally solved my doubt, actually not as I would have liked because I selected the place to deliver, but at least now I know which was the right answer
I also remember that one question was about an analyst or someone that had a very small amount of data at disposal for a statistic: we were asked to identify which choice would have helped him to solve this problem
I believed that the choice to run Montecarlo and add those generated data back to the existing sample could have been a proper solution
I do not remember the question exactly, so my apologies in advance for not being able to provide additional information on that question
As I see you are very articulated I hope you remember it as well
Let me know kindly
Thank you in advance

 

[Adelaide]

wrt to the question with the market, limit, sopt-loss and stop-limit....the key word here was "immediately"...so I guess the right answer was "market order"

 

[Sabit Rahimov]

Q 75 - Chapter 2 (J.Hull)

thank you! you finally solved my doubt, actually not as I would have liked because I selected the place to deliver, but at least now I know which was the right answer
I also remember that one question was about an analyst or someone that had a very small amount of data at disposal for a statistic: we were asked to identify which choice would have helped him to solve this problem
I believed that the choice to run Montecarlo and add those generated data back to the existing sample could have been a proper solution
I do not remember the question exactly, so my apologies in advance for not being able to provide additional information on that question
As I see you are very articulated I hope you remember it as well
Let me know kindly
Thank you in advance[/quote]

18 Chapter: Operational risk (J.Hull)
Aim statement:Describe the common data issues that can introduce inaccuracies and
biases in the estimation of loss frequency and severity distributions.

 

[Sabit Rahimov]

"The key data issue is the fact that relatively little data exist that is highly relevant. According to Hull, the loss frequency distribution should be estimated from the bank’s own data as far as possible. In regard to the loss severity data, regulators encourage banks to use their own data in conjunction with external data. There are two sources of external data: data obtained through sharing arrangements between banks; and publicly available data
collected by third-party vendors. Both internal and external historical data must be adjusted for inflation."

 

[Sabit Rahimov]

"The key data issue is the fact that relatively little data exist that is highly relevant. According to Hull, the loss frequency distribution should be estimated from the bank’s own data as far as possible. In regard to the loss severity data, regulators encourage banks to use their own data in conjunction with external data. There are two sources of external data: data obtained through sharing arrangements between banks; and publicly available data
collected by third-party vendors. Both internal and external historical data must be adjusted for inflation."

 

[a.lesnar]

"The key data issue is the fact that relatively little data exist that is highly relevant. According to Hull, the loss frequency distribution should be estimated from the bank’s own data as far as possible. In regard to the loss severity data, regulators encourage banks to use their own data in conjunction with external data. There are two sources of external data: data obtained through sharing arrangements between banks; and publicly available data
collected by third-party vendors. Both internal and external historical data must be adjusted for inflation."

hi
can you kindly recall the wording of the question? because I am not completely sure it was related with loss severity
The only association I got at that time was related to the bootstrapping method, that is actually exploited in cases of scarcity of data
In that case if I remember correctly, the manager had a little data sample at disposal, and I believed that to apply Montecarlo could also be coherent with the bootstrapping assumptions, according to which bootstrapping is effective in cases of data scarcity
Let me know
Thank you for your contribution

 

[Sabit Rahimov]

hi
can you kindly recall the wording of the question? because I am not completely sure it was related with loss severity
The only association I got at that time was related to the bootstrapping method, that is actually exploited in cases of scarcity of data
In that case if I remember correctly, the manager had a little data sample at disposal, and I believed that to apply Montecarlo could also be coherent with the bootstrapping assumptions, according to which bootstrapping is effective in cases of data scarcity
Let me know
Thank you for your contribution

This question is purely operational risk question. Therefore, the issue highlited in the question can be solved by looking to the topics frm program covers. Personally, I think right topic is john hulls chapter. In fact, i didnt find any reference to the answer that you have argued. However, take have a look to the topic, might be im wrong.

Rgds
Sabit

 

[Sabit Rahimov]

hi
can you kindly recall the wording of the question? because I am not completely sure it was related with loss severity
The only association I got at that time was related to the bootstrapping method, that is actually exploited in cases of scarcity of data
In that case if I remember correctly, the manager had a little data sample at disposal, and I believed that to apply Montecarlo could also be coherent with the bootstrapping assumptions, according to which bootstrapping is effective in cases of data scarcity
Let me know
Thank you for your contribution[/quo

Additionally, alternative topic might be Monte Carlo methods by P. Jorion. But, As far as i know, there is nothing about this matter that we are trying to find to be correct.

 

[a.lesnar]

yes actually the topic you found was:
Describe the common data issues that can introduce inaccuracies and
biases in the estimation of loss frequency and severity distributions.
I am really sorry I should not have mentioned a question without knowing its wording very precisely
I am convinced however that the subject matter was on the limited data availability rather than on operational risk: an analyst had some observation on a stock or an index (I don't remember exactly), so that we were asked to find a solution to this limited data availability problem
I was convinced that it would not have been illogical to consider to apply Montecarlo to generate additional data and add them back to the existing sample when it is too small so I selected that option
Thank you again

 

[babyik]

There was also a question regarding the operational risk, specifically asking in which way it is possible to increase the volume of data on operational risk. I have marked the final answers which states "by acquiring data from data vendors and then by making the scale adjusting" I don't really remember the other options, but I considered this option is much reasonable. In reality, the Banks uses external data in case of lack of specific data on op risk event.

However, someone who has idea about this questions, please comment on it.

i too had ticked that one ..appears to be logical..if a bank has limited data it makes sense to borrow the quantitative data
from similar industries from outside and then scale them accordingly..am not sure whether there was any better option

 

[Sabit Rahimov]

i too had ticked that one ..appears to be logical..if a bank has limited data it makes sense to borrow the quantitative data
from similar industries from outside and then scale them accordingly..am not sure whether there was any better option

Hi,

do you remember the question in regard to beta of stock index futures. Currently, beta is 1.2 and investor reduces it from 1.2 to 0.9. It is required to calculate number of contracts on stock index futures. I don't fully understand the final wording of the question, whether they asked how many contract investor must hold in order to achieve target beta (0.9) or how many contract in the long position required to have beta from 1.2 to 0.9????

the following logical answers were there: A) 36 long B) 108 long C) 108 short

Please comment on this question.

Thanks!

 

[Sabit Rahimov]

Guys,

do you remember the question in regard to beta of stock index futures. Currently, beta is 1.2 and investor reduces it from 1.2 to 0.9. It is required to calculate number of contracts on stock index futures. I don't fully understand the final wording of the question, whether they asked how many contract investor must hold in order to achieve target beta (0.9) or how many contract in the long position required to have beta from 1.2 to 0.9????

the following logical answers were there: A) 36 long B) 108 long C) 108 short

Please comment on this question.