Nov 2013 FRM Level 1 feedback

[Sabit Rahimov]

In terms of profit made:

1. for volitile market
long straddle (significant profit) > long butterfly (small loss)
long straddle (significant profit) > short butterfly (modest profit)
in the short butterfly, modest profit is due to limiting its up and down profit potential by strike price K1 and K3

2. for non volitile market

short straddle (significant profit) > short butterfly (small loss)
short straddle (significant profit)> long butterfly (modest profit)

But for the long straddle in case of non volitile market and the short straddle in case of volitile market significant loss is inevitable.

Butterfly spread in either cases generate modest profit and small loss respectively. By straddle, investor can experience either significant profit or significant loss depending on the market conditions and positions accordingly.

Thanks!

 

[monsieuruzairo3]

Re-posting this as I see a lot of discussion going on and wouldn't do harm to add to it
I would like to chip in my 2 cents concerning my observations of the FRM exam. In General, I found exam to be competitive with proportionate focus provided across all relevant topics, GARP surely means business when they supply such a massive number of reading.They touched almost every topic and if you hadn't given attention on some topics out of disinterest, perceived unimportance or sheer laziness then this paper could prove tricky

Purely Quantitative questions (In my opinion Schweser Practice questions and ACE3 questions were of prime importance)
I have an engineering background and am good in Mathematics, although with no prior experience in Finance industry. Good math skills definitely and I felt that a good proportion of the numericals were not very calculation centric and tested on your familiarity with the concept. Based on my small research over the internet, I conclude that candidates did not feel overwhelmed at the quality of the numericals but had time-crunch issues. I also hypothesize that these time-crunch issues actually stem from the confusion between two options in theoretical questions. Also in my set of questions, the simplest of numericals were found towards the end of the paper ~80-100 question. In my opinion candidates perceived the "PURELY QUANTITATIVE PART" of the paper to be the most scoring with a success rate ~60-70%

I have tried to replicate ~45% of the paper and you are free to agree/disagree with my answers, opinions. I am aware that some questions are open for interpretation and as I might pray and hope that my answers are correct, I cannot vouch for the same.

Some of the questions( on the top of my mind)
1. Binomial tree valuation of Euro call with X=105 S=100 Sup = 110, Sdown=95. I took U=1.1, D=0.95 and calculated the value
2. Binomial value of American put. I got value of 5 (Eearly exerice better than PV of future payoff)
3. Range of values of the dependent variable with 95% confidence interval. I think [1.1, 1.89]
4. VaR of FI: This was a repeat from the practice paper 46,445 or something is the answer, I believe
5. Value of put (with dividends). I used the equation: S+P=C+PV(Dividends)+Xexp(-Rf*T)
6. Dollar Duration: Calculated the modified/macaulay duration from the formula and multiplied with the PV of bond(I got an answer that mathced with the options)
7. Hedge ratio of copper futures (15million tonnes copper, 25000 ton per contract)- Calculated the HR and multiplied it with (15mn/25000). I think the answer I got was 350
8.NPV: Just input CF0= 0.00 and calculate the value. The Risk-adjusted rate comes through R = Rf +Beta(Country risk premium+ Market risk premium)
9. Risk neutral probability of down movement: I got Pup ~ 0.71 so therefore P down~0.298(29.8%)
10. Conditional probability(Matrix) of operational losses and no. of trainings missed. I calculated it to be (5/25)*100 = 20%
11. Bank wants to consider only those companies that have 95% probability of B+or above. I think only A+, A- were eligible and since the question wanted the least rated one I chose A-
12. Standard error of Monte carlo was 0.4 with 1000 iterations. Recalculate for 3000 iterations. I calculated it to be 0.23(0.4/sqrt(3))
13. Poisson question: Lambda was 4*2=8, N=5. I calculated answer to be 9%
14. Binomial distribution: Probability question was direct(don't remember although got an answer) and second question wanted to calculate mean and variance( N*P, N*P*Q). Very straightforward
15. T-test : df=10-1. I think I rejected the null hypothesis as my calculated t-stat was 2 pint something and at 5% level of significance the value for df=9 was 1.8 (The table was a one one-sided test table and therefore I took alpha=5% and not 2.5%. If I took alpha=2.5% I will not be able to reject)
16. Variation Vs Correlation graph question: Relation was Var =2(1-correl). Therefore answer A
17. Bond replication question: I couldn't get it, to bonds are given and you need to calculate the middle one(5%) coupon bond value. I had no time so I just avergaed the prices out.
18.Highest Bond price/yield : Different frequency coupons were given and coupon rates were given. I think the 9% annual coupon had the highest yield.Don't remember exactly
19. CTD bond: Two bonds given, settlement price, QBP, CF given and I think the 125$ bond was the cheapest to deliver
20. Forward rates: Straightforward except for the fact that compounding was semi-annual and not continuous.
21. Payoff of FRA: I think we had to discount back also
22. Bond price: Coupons are given and you need to calculate the PV using relevant discount factors
23. Bond price change: Simple question given duration, convexity and 150bps increase in yield
24. Calculate Correlation given R^2=0.75. I input -0.86 as the relationship in the question was negative y=b0-b1x
25. Calculating Beta given Covariance and standard deviation (KOSPI)
26. Expected loss: UGD was 100%
27: Adjusted exposure: very straightforward given OS, COM, UGD
28. Bond question. We had to calculate the original discount. I randomly put the value 300 something

Purely Qualitative questions(30-35%)
I think the person who has nailed this part is most likely to succeed as very fine points were tested and options were indeed confusing. This I believe is going to differentiate not only in the Q1 scores but also in the cut-offs. In my personal opinion, I believe that mostly candidates would have performed on this with lesser accuracy as compared to the numerical part of the paper. I found conflicting answers in my own group once we gave the exam. Some of the questions from this section
1. Code of conduct: The guy uses the old Risk framework. I believe he has violated the code WITHOUT ANY IFS AND BUTS that were mentioned in the answer. This was somewhat similar to Junaid Manzoor KLM finance past FRM Sample paper.
2.Graph of Variance of error Vs independent variable : I think Heteroskedasticity as the variance was conditionally dependent on the independent variable values
3. For which option should there be another session on VAR for the members. I input the option "When the trainees say that VAR is the Maximum possible loss given an event has happened". VaR is the lowest possible loss at a certain significance level
4.Crack spread: I input short on heating oil although I am not 100% sure
5. LTCM: I wrote failure to input other hedge funds doing the same which was not inputted in the stress tests. It's written in Schweser notes
6. Question on CAPM: Which of the statements are true if everything is held constant. I chose Higher beta is higher return. The first option stated that for Beta>1 if Rf increases, Return decrease which I don't think is right R=Rm(Beta) +Rf(1-Beta) does not necessarily decrease as beta increases
7. Barings Bank: Don't remember the question, although I think it was one of the easier ones.
8. Efficient portfolios graph: I chose the one which was convex as the graph should be concave
9. Delta normal VaR graph with increase in confidence level: I chose the linear one as delta normal implies Linearity
10. BLUE for OLS estimator: Not sure what I filled but I think the answer is B0 & B1 should be independent and identically distributed
11. Analyst thinks these is not much volatility: I chose short straddle
12. Which has a delta of zero, gamma positive: I chose long ATM put(Deltacall-1) + long ATM call(Delta) as overall delta= 2*Deltacall-1 = 2*0.5-1= 0
13.Operational risk: I chose employee turnover
14. Sovereign risk: One option related to transfer risk. Not sure on this
15. One question related to Corporate bonds: Random guess.Skipped this section altogether
16. Bootstrapping method does notwork if: Don't remember the answer. I am not sure on this anyway

Overall feedback: Based on the discussions on the internet, I can only gauge that candidates found the paper medium difficult with a lot of confusing theoretical questions and even more confusing answers. Time management was also the issue. My strategy was to pick on the low-hanging fruits first and complete the first the first review of the 100 questions. The paper had challenging question interspersed in the paper and therefore I believe the momentum carried by quickly doing the correct questions got slowed by hurdles of the difficult ones.

Uzi

 

[a.lesnar]

in the short butterfly, modest profit is due to limiting its up and down profit potential by strike price K1 and K3

2. for non volitile market

short straddle (significant profit) > short butterfly (small loss)
short straddle (significant profit)> long butterfly (modest profit)

But for the long straddle in case of non volitile market and the short straddle in case of volitile market significant loss occurs.

Butterfly spread in either cases generate modest profit and small loss. By straddle, investor can experience either significant profit or significant loss depending on the market conditions and positions accordingly.

Thanks![/quote]

can I ask you kindly which was your choice for that question?

 

[a.lesnar]

In terms of profit made:

1. for volitile market
long straddle (significant profit) > long butterfly (small loss)
long straddle (significant profit) > short butterfly (modest profit)
in the short butterfly, modest profit is due to limiting its up and down profit potential by strike price K1 and K3

2. for non volitile market

short straddle (significant profit) > short butterfly (small loss)
short straddle (significant profit)> long butterfly (modest profit)

But for the long straddle in case of non volitile market and the short straddle in case of volitile market significant loss occurs.

Butterfly spread in either cases generate modest profit and small loss. By straddle, investor can experience either significant profit or significant loss depending on the market conditions and positions accordingly.

Thanks!

Can I ask you kindly which was your choice for this question?
I remember that the question was about an analyst that did not expect significant changes within the future price of the asset and I am sure that the question did not say anything about volatility as hypothesis. It simply said that the analyst made this assumption, which is in my view still arbitrary
I was very confused on that question since also calendar spread generates a small payoff when the market remains stable
I personally remember that however the option D on butterfly spread was not as a conventional butterfly, since it stated that two options were exploited (instead of three positions as within a classical butterfly, from the theory) so I was really uncertain on that question

 

[Sabit Rahimov]

in the short butterfly, modest profit is due to limiting its up and down profit potential by strike price K1 and K3

2. for non volitile market

short straddle (significant profit) > short butterfly (small loss)
short straddle (significant profit)> long butterfly (modest profit)

But for the long straddle in case of non volitile market and the short straddle in case of volitile market significant loss occurs.

Butterfly spread in either cases generate modest profit and small loss. By straddle, investor can experience either significant profit or significant loss depending on the market conditions and positions accordingly.

Thanks!

can I ask you kindly which was your choice for that question?[/quote]

short straddle

 

[babyik]

the butterfly spread was def an option. According to schweser :
"A short straddle bets on the same thing as the butterfly spread or the calendar spread, expect the losses are not limited."
But I don't remember the question....

Butterfly and straddle are both volatility strategies. However there is a slight differrence. In butterfly the bet is on the
prices moving on both side . hence a range of volatillity is defined. [ Strike prices are diff ] In straddle strike price
is same . the question was market remains flat. conservatively , short straddle is a better option even if the butterfly
option was given.

 

[Sabit Rahimov]

One more question who remember it??
1. question about what is the drawback of the stress testing.
I marked: Stress testing is highly subjective (but im not 100% sure, but considered this choice much more reasonable within the set of answers)
2. Question about the delta normal Var deficiencies??
If Im not wrong final answers stated that delta normal cannot approximate well the securities with extreme non linearities (e.g fixed income with embedded options). I think that was the correct answers.
3. Question about Barings case?? Fully can not express the question, but something asked what was the reason of huge loss that Nick Leeson had faced.
for my opinion there were 2 reasonable choices. choices b and c . the choices were similar to each other except for positions Nick Leeson and Nikkei exchange were different. (e.g choice B) Nick long and Nikkei short . C) Nick short and Nikkei long so on.

My answer: Nick long position and Nikkei short position

Hope someone remember above stated questions??? Please comment on the answers given.

 

[babyik]

Re-posting this as I see a lot of discussion going on and wouldn't do harm to add to it
I would like to chip in my 2 cents concerning my observations of the FRM exam. In General, I found exam to be competitive with proportionate focus provided across all relevant topics, GARP surely means business when they supply such a massive number of reading.They touched almost every topic and if you hadn't given attention on some topics out of disinterest, perceived unimportance or sheer laziness then this paper could prove tricky

Purely Quantitative questions (In my opinion Schweser Practice questions and ACE3 questions were of prime importance)
I have an engineering background and am good in Mathematics, although with no prior experience in Finance industry. Good math skills definitely and I felt that a good proportion of the numericals were not very calculation centric and tested on your familiarity with the concept. Based on my small research over the internet, I conclude that candidates did not feel overwhelmed at the quality of the numericals but had time-crunch issues. I also hypothesize that these time-crunch issues actually stem from the confusion between two options in theoretical questions. Also in my set of questions, the simplest of numericals were found towards the end of the paper ~80-100 question. In my opinion candidates perceived the "PURELY QUANTITATIVE PART" of the paper to be the most scoring with a success rate ~60-70%

I have tried to replicate ~45% of the paper and you are free to agree/disagree with my answers, opinions. I am aware that some questions are open for interpretation and as I might pray and hope that my answers are correct, I cannot vouch for the same.

Some of the questions( on the top of my mind)
1. Binomial tree valuation of Euro call with X=105 S=100 Sup = 110, Sdown=95. I took U=1.1, D=0.95 and calculated the value
2. Binomial value of American put. I got value of 5 (Eearly exerice better than PV of future payoff)
3. Range of values of the dependent variable with 95% confidence interval. I think [1.1, 1.89]
4. VaR of FI: This was a repeat from the practice paper 46,445 or something is the answer, I believe
5. Value of put (with dividends). I used the equation: S+P=C+PV(Dividends)+Xexp(-Rf*T)
6. Dollar Duration: Calculated the modified/macaulay duration from the formula and multiplied with the PV of bond(I got an answer that mathced with the options)
7. Hedge ratio of copper futures (15million tonnes copper, 25000 ton per contract)- Calculated the HR and multiplied it with (15mn/25000). I think the answer I got was 350
8.NPV: Just input CF0= 0.00 and calculate the value. The Risk-adjusted rate comes through R = Rf +Beta(Country risk premium+ Market risk premium)
9. Risk neutral probability of down movement: I got Pup ~ 0.71 so therefore P down~0.298(29.8%)
10. Conditional probability(Matrix) of operational losses and no. of trainings missed. I calculated it to be (5/25)*100 = 20%
11. Bank wants to consider only those companies that have 95% probability of B+or above. I think only A+, A- were eligible and since the question wanted the least rated one I chose A-
12. Standard error of Monte carlo was 0.4 with 1000 iterations. Recalculate for 3000 iterations. I calculated it to be 0.23(0.4/sqrt(3))
13. Poisson question: Lambda was 4*2=8, N=5. I calculated answer to be 9%
14. Binomial distribution: Probability question was direct(don't remember although got an answer) and second question wanted to calculate mean and variance( N*P, N*P*Q). Very straightforward
15. T-test : df=10-1. I think I rejected the null hypothesis as my calculated t-stat was 2 pint something and at 5% level of significance the value for df=9 was 1.8 (The table was a one one-sided test table and therefore I took alpha=5% and not 2.5%. If I took alpha=2.5% I will not be able to reject)
16. Variation Vs Correlation graph question: Relation was Var =2(1-correl). Therefore answer A
17. Bond replication question: I couldn't get it, to bonds are given and you need to calculate the middle one(5%) coupon bond value. I had no time so I just avergaed the prices out.
18.Highest Bond price/yield : Different frequency coupons were given and coupon rates were given. I think the 9% annual coupon had the highest yield.Don't remember exactly
19. CTD bond: Two bonds given, settlement price, QBP, CF given and I think the 125$ bond was the cheapest to deliver
20. Forward rates: Straightforward except for the fact that compounding was semi-annual and not continuous.
21. Payoff of FRA: I think we had to discount back also
22. Bond price: Coupons are given and you need to calculate the PV using relevant discount factors
23. Bond price change: Simple question given duration, convexity and 150bps increase in yield
24. Calculate Correlation given R^2=0.75. I input -0.86 as the relationship in the question was negative y=b0-b1x
25. Calculating Beta given Covariance and standard deviation (KOSPI)
26. Expected loss: UGD was 100%
27: Adjusted exposure: very straightforward given OS, COM, UGD
28. Bond question. We had to calculate the original discount. I randomly put the value 300 something

Purely Qualitative questions(30-35%)
I think the person who has nailed this part is most likely to succeed as very fine points were tested and options were indeed confusing. This I believe is going to differentiate not only in the Q1 scores but also in the cut-offs. In my personal opinion, I believe that mostly candidates would have performed on this with lesser accuracy as compared to the numerical part of the paper. I found conflicting answers in my own group once we gave the exam. Some of the questions from this section
1. Code of conduct: The guy uses the old Risk framework. I believe he has violated the code WITHOUT ANY IFS AND BUTS that were mentioned in the answer. This was somewhat similar to Junaid Manzoor KLM finance past FRM Sample paper.
2.Graph of Variance of error Vs independent variable : I think Heteroskedasticity as the variance was conditionally dependent on the independent variable values
3. For which option should there be another session on VAR for the members. I input the option "When the trainees say that VAR is the Maximum possible loss given an event has happened". VaR is the lowest possible loss at a certain significance level
4.Crack spread: I input short on heating oil although I am not 100% sure
5. LTCM: I wrote failure to input other hedge funds doing the same which was not inputted in the stress tests. It's written in Schweser notes
6. Question on CAPM: Which of the statements are true if everything is held constant. I chose Higher beta is higher return. The first option stated that for Beta>1 if Rf increases, Return decrease which I don't think is right R=Rm(Beta) +Rf(1-Beta) does not necessarily decrease as beta increases
7. Barings Bank: Don't remember the question, although I think it was one of the easier ones.
8. Efficient portfolios graph: I chose the one which was convex as the graph should be concave
9. Delta normal VaR graph with increase in confidence level: I chose the linear one as delta normal implies Linearity
10. BLUE for OLS estimator: Not sure what I filled but I think the answer is B0 & B1 should be independent and identically distributed
11. Analyst thinks these is not much volatility: I chose short straddle
12. Which has a delta of zero, gamma positive: I chose long ATM put(Deltacall-1) + long ATM call(Delta) as overall delta= 2*Deltacall-1 = 2*0.5-1= 0
13.Operational risk: I chose employee turnover
14. Sovereign risk: One option related to transfer risk. Not sure on this
15. One question related to Corporate bonds: Random guess.Skipped this section altogether
16. Bootstrapping method does notwork if: Don't remember the answer. I am not sure on this anyway

Overall feedback: Based on the discussions on the internet, I can only gauge that candidates found the paper medium difficult with a lot of confusing theoretical questions and even more confusing answers. Time management was also the issue. My strategy was to pick on the low-hanging fruits first and complete the first the first review of the 100 questions. The paper had challenging question interspersed in the paper and therefore I believe the momentum carried by quickly doing the correct questions got slowed by hurdles of the difficult ones.

Uzi

Thanks Uzi for sharing ur thoughts. With respect to Quantitative part- Q 17- Bond replication-(PL see my comments in the excel sheet attached
earlier at Q. 3] With respect tour Q 19-CTD -pl see Q no 58 of excel sheet . Q- 28- Discount-Pl see Q.68 of excel sheet. Qualitative- Q 4-Crack spread-
Pl see Q.78 of of excel sheet. Uzi i dont think that 50-55% would be a good passing score. all the best.

 

[babyik]

One more question who remember it??
1. question about what is the drawback of the stress testing.
I marked: Stress testing is highly subjective (but im not 100% sure, but considered this choice much more reasonable within the set of answers)
2. Question about the delta normal Var deficiencies??
If Im not wrong final answers stated that delta normal cannot approximate well the securities with extreme non linearities (e.g fixed income with embedded options). I think that was the correct answers.
3. Question about Barings case?? Fully can not express the question, but something asked what was the reason of huge loss that Nick Leeson had faced.

Stress testing- I wrote correlations are not parametrised [ not sure right or wrong ]
Delta nomal-marked the same as yours
Barings- marked the option where Nick was long on NIkkei.


for my opinion there were 2 reasonable choices. choices b and c . the choices were similar to each other except for positions Nick Leeson and Nikkei exchange were different. (e.g choice B) Nick long and Nikkei short . C) Nick short and Nikkei long so on.

My answer: Nick long position and Nikkei short position

Hope someone remember above stated questions??? Please comment on the answers given.

 

[Sabit Rahimov]

Re-posting this as I see a lot of discussion going on and wouldn't do harm to add to it
I would like to chip in my 2 cents concerning my observations of the FRM exam. In General, I found exam to be competitive with proportionate focus provided across all relevant topics, GARP surely means business when they supply such a massive number of reading.They touched almost every topic and if you hadn't given attention on some topics out of disinterest, perceived unimportance or sheer laziness then this paper could prove tricky

Purely Quantitative questions (In my opinion Schweser Practice questions and ACE3 questions were of prime importance)
I have an engineering background and am good in Mathematics, although with no prior experience in Finance industry. Good math skills definitely and I felt that a good proportion of the numericals were not very calculation centric and tested on your familiarity with the concept. Based on my small research over the internet, I conclude that candidates did not feel overwhelmed at the quality of the numericals but had time-crunch issues. I also hypothesize that these time-crunch issues actually stem from the confusion between two options in theoretical questions. Also in my set of questions, the simplest of numericals were found towards the end of the paper ~80-100 question. In my opinion candidates perceived the "PURELY QUANTITATIVE PART" of the paper to be the most scoring with a success rate ~60-70%

I have tried to replicate ~45% of the paper and you are free to agree/disagree with my answers, opinions. I am aware that some questions are open for interpretation and as I might pray and hope that my answers are correct, I cannot vouch for the same.

Some of the questions( on the top of my mind)
1. Binomial tree valuation of Euro call with X=105 S=100 Sup = 110, Sdown=95. I took U=1.1, D=0.95 and calculated the value
2. Binomial value of American put. I got value of 5 (Eearly exerice better than PV of future payoff)
3. Range of values of the dependent variable with 95% confidence interval. I think [1.1, 1.89]
4. VaR of FI: This was a repeat from the practice paper 46,445 or something is the answer, I believe
5. Value of put (with dividends). I used the equation: S+P=C+PV(Dividends)+Xexp(-Rf*T)
6. Dollar Duration: Calculated the modified/macaulay duration from the formula and multiplied with the PV of bond(I got an answer that mathced with the options)
7. Hedge ratio of copper futures (15million tonnes copper, 25000 ton per contract)- Calculated the HR and multiplied it with (15mn/25000). I think the answer I got was 350
8.NPV: Just input CF0= 0.00 and calculate the value. The Risk-adjusted rate comes through R = Rf +Beta(Country risk premium+ Market risk premium)
9. Risk neutral probability of down movement: I got Pup ~ 0.71 so therefore P down~0.298(29.8%)
10. Conditional probability(Matrix) of operational losses and no. of trainings missed. I calculated it to be (5/25)*100 = 20%
11. Bank wants to consider only those companies that have 95% probability of B+or above. I think only A+, A- were eligible and since the question wanted the least rated one I chose A-
12. Standard error of Monte carlo was 0.4 with 1000 iterations. Recalculate for 3000 iterations. I calculated it to be 0.23(0.4/sqrt(3))
13. Poisson question: Lambda was 4*2=8, N=5. I calculated answer to be 9%
14. Binomial distribution: Probability question was direct(don't remember although got an answer) and second question wanted to calculate mean and variance( N*P, N*P*Q). Very straightforward
15. T-test : df=10-1. I think I rejected the null hypothesis as my calculated t-stat was 2 pint something and at 5% level of significance the value for df=9 was 1.8 (The table was a one one-sided test table and therefore I took alpha=5% and not 2.5%. If I took alpha=2.5% I will not be able to reject)
16. Variation Vs Correlation graph question: Relation was Var =2(1-correl). Therefore answer A
17. Bond replication question: I couldn't get it, to bonds are given and you need to calculate the middle one(5%) coupon bond value. I had no time so I just avergaed the prices out.
18.Highest Bond price/yield : Different frequency coupons were given and coupon rates were given. I think the 9% annual coupon had the highest yield.Don't remember exactly
19. CTD bond: Two bonds given, settlement price, QBP, CF given and I think the 125$ bond was the cheapest to deliver
20. Forward rates: Straightforward except for the fact that compounding was semi-annual and not continuous.
21. Payoff of FRA: I think we had to discount back also
22. Bond price: Coupons are given and you need to calculate the PV using relevant discount factors
23. Bond price change: Simple question given duration, convexity and 150bps increase in yield
24. Calculate Correlation given R^2=0.75. I input -0.86 as the relationship in the question was negative y=b0-b1x
25. Calculating Beta given Covariance and standard deviation (KOSPI)
26. Expected loss: UGD was 100%
27: Adjusted exposure: very straightforward given OS, COM, UGD
28. Bond question. We had to calculate the original discount. I randomly put the value 300 something

Purely Qualitative questions(30-35%)
I think the person who has nailed this part is most likely to succeed as very fine points were tested and options were indeed confusing. This I believe is going to differentiate not only in the Q1 scores but also in the cut-offs. In my personal opinion, I believe that mostly candidates would have performed on this with lesser accuracy as compared to the numerical part of the paper. I found conflicting answers in my own group once we gave the exam. Some of the questions from this section
1. Code of conduct: The guy uses the old Risk framework. I believe he has violated the code WITHOUT ANY IFS AND BUTS that were mentioned in the answer. This was somewhat similar to Junaid Manzoor KLM finance past FRM Sample paper.
2.Graph of Variance of error Vs independent variable : I think Heteroskedasticity as the variance was conditionally dependent on the independent variable values
3. For which option should there be another session on VAR for the members. I input the option "When the trainees say that VAR is the Maximum possible loss given an event has happened". VaR is the lowest possible loss at a certain significance level
4.Crack spread: I input short on heating oil although I am not 100% sure
5. LTCM: I wrote failure to input other hedge funds doing the same which was not inputted in the stress tests. It's written in Schweser notes
6. Question on CAPM: Which of the statements are true if everything is held constant. I chose Higher beta is higher return. The first option stated that for Beta>1 if Rf increases, Return decrease which I don't think is right R=Rm(Beta) +Rf(1-Beta) does not necessarily decrease as beta increases
7. Barings Bank: Don't remember the question, although I think it was one of the easier ones.
8. Efficient portfolios graph: I chose the one which was convex as the graph should be concave
9. Delta normal VaR graph with increase in confidence level: I chose the linear one as delta normal implies Linearity
10. BLUE for OLS estimator: Not sure what I filled but I think the answer is B0 & B1 should be independent and identically distributed
11. Analyst thinks these is not much volatility: I chose short straddle
12. Which has a delta of zero, gamma positive: I chose long ATM put(Deltacall-1) + long ATM call(Delta) as overall delta= 2*Deltacall-1 = 2*0.5-1= 0
13.Operational risk: I chose employee turnover
14. Sovereign risk: One option related to transfer risk. Not sure on this
15. One question related to Corporate bonds: Random guess.Skipped this section altogether
16. Bootstrapping method does notwork if: Don't remember the answer. I am not sure on this anyway

Overall feedback: Based on the discussions on the internet, I can only gauge that candidates found the paper medium difficult with a lot of confusing theoretical questions and even more confusing answers. Time management was also the issue. My strategy was to pick on the low-hanging fruits first and complete the first the first review of the 100 questions. The paper had challenging question interspersed in the paper and therefore I believe the momentum carried by quickly doing the correct questions got slowed by hurdles of the difficult ones.

Uzi

Hi,
Thank you for your contribution and thoughts!

Regarding the numerical question 15, as far as i know there were 2 tail test and in case of 2 tail test t stat was less than critical value and therefore fail to reject the hypothesis. more likely, it was final option! I did in that manner.

 

[monsieuruzairo3]

@Sabit Rahimov
True the question was a two-tailed test but the twist was that the table given was for a one-tailed test and therefore alpha should be 5% and not 2.5%(as you would take in a two-tailed test)
ATB
Uzi

 

[monsieuruzairo3]

Thanks Uzi for sharing ur thoughts. With respect to Quantitative part- Q 17- Bond replication-(PL see my comments in the excel sheet attached
earlier at Q. 3] With respect tour Q 19-CTD -pl see Q no 58 of excel sheet . Q- 28- Discount-Pl see Q.68 of excel sheet. Qualitative- Q 4-Crack spread-
Pl see Q.78 of of excel sheet. Uzi i dont think that 50-55% would be a good passing score. all the best.

Hi @babyik
So what's your take on the cut-off if not 50-55%. My guess is 55-65% (big range) since the numerical part was relatively average but qualitative questions accuracy is definitely not going to be high on an average. The confusion among options is visible in the 131 comments above

KR
Uzi

 

[Sabit Rahimov]

@Sabit Rahimov
True the question was a two-tailed test but the twist was that the table given was for a one-tailed test and therefore alpha should be 5% and not 2.5%(as you would take in a two-tailed test)
ATB
Uzi

Table was given below answers. t stat with 95% confidence level, 0.05 and 0.025 significance level and their respective critical values has been provided! Only thing is to define whether alternative hypothesis is one tailed or two-tailed. As per terms of the question, null hypothesis argued that coefficient equal to zero and alternative hypothesis stated different from zero. SO two tailed test with 95 % CL!

 

[Sabit Rahimov]

Table was given below answers. t stat with 95% confidence level, 0.05 and 0.025 significance level and their respective critical values has been provided! Only thing is to define whether alternative hypothesis is one tailed or two-tailed. As per terms of the question, null hypothesis argued that coefficient equal to zero and alternative hypothesis stated different from zero. SO two tailed test with 95 % CL!

at first attempt, I puzzled and calculated it based on one tailed. But then I figure out that the terms require us to conduct two tailed test and finally had a look below given table. and then the option appropriate for the result has been chosen. However, analysis is my personal view.

 

[Sabit Rahimov]

@Sabit Rahimov
True the question was a two-tailed test but the twist was that the table given was for a one-tailed test and therefore alpha should be 5% and not 2.5%(as you would take in a two-tailed test)
ATB
Uzi

Additionally, it seems illogical on one hand terms require to conduct two tailed test and on the other hand, it provides only 0.05 significance level.

 

[monsieuruzairo3]

@Sabit Rahimov
I think the confusion stems from the fact that you probably didn't notice that the header on the table was One tailed-T statistic values. So accordingly you had to take alpha=5% and not alpha =2.5%. The question was two-tailed test but to arrive at the critical t-stat value you would require the value at alpha=0.05. if two tailed t-stat table was given you would have taken alpha=2.5%. Just compare the critical t-stat values taking alpha =0.05 from the 1 tailed t stat table and alpha =0.025 from the 2 tailed t stat table. Both will match! That should be enough explanation for you

 

[Sabit Rahimov]

I remain on my point based on the fact that with 95 % confidence level, alternative hypothesis require two tailed test regardless of the table given or not.

95% CL, two tailed test requires to use upward and downward limits as Alfa/2
That is 0.025 (5%/2). you must find critical values from the tables based 0.025 for each. As known, t distribution is symmetric and it is enough to look at one tail.

Furthermore garp provided you with all needed statistic tables ! that is all. I stop my comment on this question.

Thank you!

 

[monsieuruzairo3]

Sure man let's leave our destinies to GARP

 

[a.lesnar]

One more question who remember it??
1. question about what is the drawback of the stress testing.
I marked: Stress testing is highly subjective (but im not 100% sure, but considered this choice much more reasonable within the set of answers)
2. Question about the delta normal Var deficiencies??
If Im not wrong final answers stated that delta normal cannot approximate well the securities with extreme non linearities (e.g fixed income with embedded options). I think that was the correct answers.
3. Question about Barings case?? Fully can not express the question, but something asked what was the reason of huge loss that Nick Leeson had faced.
for my opinion there were 2 reasonable choices. choices b and c . the choices were similar to each other except for positions Nick Leeson and Nikkei exchange were different. (e.g choice B) Nick long and Nikkei short . C) Nick short and Nikkei long so on.

My answer: Nick long position and Nikkei short position

Hope someone remember above stated questions??? Please comment on the answers given.

hi
on the subjectivity of stress testing yes I remember I also indicated that possible solution, which is in my view coherent with the theory.
For barings case, I do not remember all four possible answers but yes nick lesson was long on the Japanese index while the index was loosing ground due to a major earthquake at that time: that solution is precise in my opinion
I also praise your detailed overview of each question you remember: your contributions are very helpful and i appreciate them

 

[a.lesnar]

hi everyone
I also have one last question: there was a question on the exam on a FRA agreement where we were asked to compute either the cash flow to the floating payer or the payoff: I really cannot remember the exact wording of the question, and as I did not memorize the exact words, I feel the doubt that the question intended the payment only, as cash flow (and therefore not discounted) and not the payoff (which is discounted)
Thank you in advance