Exam Feedback November 2017 Part 1 Exam Feedback

[schumi_frm]

I remember it being written different . That ES (p1 + p2) <= p1 + p2. Probably read it wrong though. Although I don’t think var(p1 + p2) >= p1 + p2 makes sense. Take two continuous distributions and add the variance with negative correlation and your inequality fails.

It could be that you are right, not sure that I remember correctly. I found the questions quite clearly written (and not trying to confuse), but with the time pressure and the nerves it is always possible to read wrong....

@oldfed, I do indeed remember the combined question that Ankitrautela mentioned.

 

[lesliex]

The exam was challenging for me. A lot of questions are not straightforward, I worked out step 1 but couldn't continue step 2.. I thought there would be at least one or two BSM questions, but there was none, which was disappointing.

 

[oldfed]

It could be that you are right, not sure that I remember correctly. I found the questions quite clearly written (and not trying to confuse), but with the time pressure and the nerves it is always possible to read wrong....

@oldfed, I do indeed remember the combined question that Ankitrautela mentioned.

Ok. Thanks Shumi. So I get that one wrong at 100%. I only made the 95=>99 conversion. Read the question too fast/badly. And, apparently, there was a great wrong customized answer dedicated to that omission.

 

[stina0105]

To be honest I expected the exam to be a lot more difficult. Most of the questions were not considerably longer than the BT questions or even GARP mock. A lot of easy points with Sharpe, Information Ratio etc. Most of the calculation questions did not require multiple steps (easy hedges, CAPM, FX parity, upper put bound, 1-step binomial tree, warrant calculation). The most time consuming one was the EWMA correlation calculation but this was number 95 or something so I would assume not a lot of people had time to do it. I found with most of the qualitative questions that it was very easy to eliminate at least 1 or 2 answers leaving you with a 50-50 chance. So again, not too bad.

Can someone from BT please explain the UL question? It seems to be coming up in every single exam if you are looking at previous threads and the obvious answer is 137 which is not any of the possibilities given. What’s the trick here? Also the convenience yield question. What’s the trick here? If you apply the simple Cost of Carry formula it gives you 0. But there must be a different formula they referring to. Generally I found there were a lot of interest rate conversion questions. Sometimes as part of a question and sometimes as a full question. I was confused by the monthly compounding into annual as GARP did not specify if they wanted annual continuous or annual discrete compounding? Answer 1 [8%] would have been continuous and answer 2 [8.33%] the discrete compounding.

There were no BSM questions. One Greek ( I chose theta as this would cause both call and put values to decline). Only one question on option strategies (I also chose Strangle or Straddle whatever it was). Only one question on financial disasters. And I thought quite a few qualitative questions on MBS, bond pricing.

 

[flawless21]

I think the reason it was slightly less difficult was because of how impossible the May 2017 exam (see passing rate, lowest in ~10 years). How many do you think we can get wrong in order to pass? David said ~30% at least I think.

 

[kawal_frm]

To be honest I expected the exam to be a lot more difficult. Most of the questions were not considerably longer than the BT questions or even GARP mock. A lot of easy points with Sharpe, Information Ratio etc. Most of the calculation questions did not require multiple steps (easy hedges, CAPM, FX parity, upper put bound, 1-step binomial tree, warrant calculation). The most time consuming one was the EWMA correlation calculation but this was number 95 or something so I would assume not a lot of people had time to do it. I found with most of the qualitative questions that it was very easy to eliminate at least 1 or 2 answers leaving you with a 50-50 chance. So again, not too bad.

Can someone from BT please explain the UL question? It seems to be coming up in every single exam if you are looking at previous threads and the obvious answer is 137 which is not any of the possibilities given. What’s the trick here? Also the convenience yield question. What’s the trick here? If you apply the simple Cost of Carry formula it gives you 0. But there must be a different formula they referring to. Generally I found there were a lot of interest rate conversion questions. Sometimes as part of a question and sometimes as a full question. I was confused by the monthly compounding into annual as GARP did not specify if they wanted annual continuous or annual discrete compounding? Answer 1 [8%] would have been continuous and answer 2 [8.33%] the discrete compounding.

There were no BSM questions. One Greek ( I chose theta as this would cause both call and put values to decline). Only one question on option strategies (I also chose Strangle or Straddle whatever it was). Only one question on financial disasters. And I thought quite a few qualitative questions on MBS, bond pricing.

Even I was getting 0 for convenience yield question. For annual 8.33% answer ,question was asking for effective annual yield so 8% continuous become 8.33EAY

 

[schumi_frm]

Can someone from BT please explain the UL question? It seems to be coming up in every single exam if you are looking at previous threads and the obvious answer is 137 which is not any of the possibilities given. What’s the trick here? Also the convenience yield question. What’s the trick here? If you apply the simple Cost of Carry formula it gives you 0. But there must be a different formula they referring to. Generally I found there were a lot of interest rate conversion questions. Sometimes as part of a question and sometimes as a full question. I was confused by the monthly compounding into annual as GARP did not specify if they wanted annual continuous or annual discrete compounding? Answer 1 [8%] would have been continuous and answer 2 [8.33%] the discrete compounding.

I also would like to know about the UL question.

Regarding the cost of carry, If I remember correctly there was a question where the forward and the spot price were given, together with the risk-free rate, the dividend and the storage cost. I applied the formula forward = spot * exp(r + u - q -y ) and isolated y. I got then something different than 0 and I think matched one of the answers.

 

[oldfed]

Even I was getting 0 for convenience yield question. For annual 8.33% answer ,question was asking for effective annual yield so 8% continuous become 8.33EAY

@kawal stina shumi: If we are referring to the same "cost of carry for commodity" question. If I remember, the question was giving a lease rate as one of our inputs and storage costs. So, they required, in my opinion, that we assumed lease rate (a global benefit of carry) = convenience yield - storage costs. With risk free rate, forward and spot prices, we could then compute the convenience, which was not zero for me and matched an answer, as Shumi (With no certainty of course). Oldfed.

 

[oldfed]

Even I was getting 0 for convenience yield question. For annual 8.33% answer ,question was asking for effective annual yield so 8% continuous become 8.33EAY

@kawal stina shumi: If we are referring to the same "cost of carry for commodity" question. If I remember, the question was giving a lease rate as one of our inputs and storage costs. So, they required, in my opinion, that we assumed lease rate (a global benefit of carry) = convenience yield - storage costs. With risk free rate, forward and spot prices, we could then compute the convenience, which was not zero for me and matched an answer, as Shumi (With no certainty of course). Oldfed.

 

[oldfed]

First, sorry for the double identical answer (do not know why ;-))

And errata => with continously compounding storage costs and lease rates given, I did not use r, S and F. I just used the fact that convenience yield is equal to storage costs + lease rate.

 

[rsparks]

I thought it was very challenging, but easier than the May 2017 exam. I skipped 10-12 in the first 50 questions because they involved more work/thought, however, by the time I was done with the exam, I was unable to spend enough time on those remaining questions so I had to guess

I also picked strangle for Q14. I think that's right. I don't think its butterfly because the position was only two legs, a call and a put. Isn't a butterfly 4 legs?

There was a question on mortality, should've studied that part, but I glossed over it quickly. The one step European put binomial tree was pretty easy (thanks David!)

I got a 3232 in May, and since i heard that is barely failing, I hope to do better this time around!

Did anyone get Q4???? It was the easiest question on the exam but I couldnt' get it for the life of me. It was when you had to figure out how any bushel contracts you had to hedge with. We had the portfolio value which was 4M, then you had the contract size and multiplier, so that was in the denominator. Then you were given the standard dev of the spot and future and correlation.. but i multipled the first part with (stand dev spot/stand dev future)*Correlation.. but could not get the answer!

Can I just add that when taking an exam, people need to be more responsible when checking in. The proctor's said multiple times to shut your phone off, but people kept leaving the sound on.. delaying the exam start date by 30 minutes. Same thing happened in May. Unfortunately, I saw some people dismissed as they didn't enter the room by 7:45AM.

Also, i was surprised by how many country risk questions that were asked! 2 or 3? Do you think the curve is more lenient for November exams?

Q4 if i remember was you need to calculate the Hedge Ratio as P x (SD spot/SD future) then Hedge Ratio (portfolio value/future x multiplier). I got an answer but dont remember what it was.

It was def Strangle. The mortality one I studied but couldn't get the answer in the end.

 

[[email protected]]

1. Diff b/w r2 and adj r2 - i chose it merges when n increases

2. Question on VAR of call option - 75.. was the answer but it was not matching exactly for me

3. Two factor model beta to neutralize pos of portfolio A with B and C? Marked B - 500000 short B and 250000 short

3. Question of eg of basis risk - I maked A as answer

4. Question on Basel standpoint on data - options were manual data not allowed, data verification..., i marked data verification

 

[prsdmoh]

I guess volume doesn't get affected. Only the open interest.

@oldfed there were 2 questions on VaR.. 1.6 Mn 95% 1d VaR given.. find 99% 10d VaR.. another question was 99% 120 days..find number of exceptions or sth like that.

Anyone remember the insurance premium prob? Was it 957 ??

GARCH .. given long range variance of 0.00004 a=0.13 b=0.82 cont.return -1.6% daily vol of 2%.

Hedging given b=1.35 target b=1.8 p=48 Mn.. contract size was not mentioned explicitly but as 10 times the value of FTSE 100..was the answer 16000 sth??

Rating transition matrix questions..? And 12.. or ??

Basis risk question

Network risk

Adjusted R2 - adding a independent variable will improve R2??

Deposit insurance - Moral hazard - depositors not analysing risk of banks

DBP vs. DCP pension

Inc in time till expiration will increase both call and put

Accrued int question

CCP and margining

Kindly confirm if upper bound was asked for European call or put.. my mind assumed as put

 

[wujiangzuida]

Really thanks to BT and the GARP association is very professional during the test. I think the test is not as hard as I had imagined before I took the test.

Firstly, the test is still focused on calculation but not so much on the so-called calculator skills. I finished the test in 3 hours but still it was not easy.

The most common test problems are about the forward,future hedge or valuation problems. Others are:
1 . currency problems with hedging,payoffs calculation
2. regression parts questions: beta calculation and a F-test question about the parameters significance.
3. a few YTM problems , and one-step binominal question--which is more kind compared to 2-steps.
4. lots of stress tests ,CRO , audit ,operational risk,ERM, failure of risk management, risk management benefits , what is good risk management, country rating problems, financial disasters history.
5. There are some insurance plan problems that I am not sure, and the insurance break-even premiums calculation about the life insurance. Also there are something about the bank risk problems.
6 The easiest questions are among 88-100, so we can see GARP always use hard question at the beginning to take away your time.
7. The most tricky parts are the problems want you to analyze the interest rate impact on bonds,options ,even futures. (nothing about backwardation,contango, but zero coupon bond pump out lots of times,and you should be really know about the basic logic under all kinds of derivatives)

I am so sorry that I can not remember all of these test problems, but I compare with the practical exam problems and I find out that there are almost 60% test points covered in practical exam. We can see maybe GARP think the May test is too hard for students based on the May results.

ALL in ALL , Thanks to BT community and I hope everyone can get good news about the test. I really admire David and Nicole and I wish I could work with them in FRM community in the future. Anybody deserves better test path!

 

[huzi]

@wuijangzuida, for 5. insurance breakeven premium, the RHS (total expexcted claim amt was given in the question) we had to formulate and sum up the premium paid twice (once at the beginning of 1st year sp take it as 'x' and the 2nd premium paid at start of 2nd year, so it will b discounted by 1 year multiplied by x. Add both and u get ur LHS. This way u get x, which shud be the answer. (dont remember the answer though).

 

[huzi]

I guess volume doesn't get affected. Only the open interest.

@oldfed there were 2 questions on VaR.. 1.6 Mn 95% 1d VaR given.. find 99% 10d VaR.. another question was 99% 120 days..find number of exceptions or sth like that.

Anyone remember the insurance premium prob? Was it 957 ??

GARCH .. given long range variance of 0.00004 a=0.13 b=0.82 cont.return -1.6% daily vol of 2%.

Hedging given b=1.35 target b=1.8 p=48 Mn.. contract size was not mentioned explicitly but as 10 times the value of FTSE 100..was the answer 16000 sth??

Rating transition matrix questions..? And 12.. or ??

Basis risk question

Network risk

Adjusted R2 - adding a independent variable will improve R2??

Deposit insurance - Moral hazard - depositors not analysing risk of banks

DBP vs. DCP pension

Inc in time till expiration will increase both call and put

Accrued int question

CCP and margining

Kindly confirm if upper bound was asked for European call or put.. my mind assumed as put

i guess the upper bound was for Eur PUT

 

[Leo3007]

Thanks to BT team for the FRM materials. I found the exam of easy to medium difficulty level and while doing it felt like am doing BT question bank everything was already covered somewhere or the other in BT materials.

Time constraint was there, some questions needed long calculations and some were just sitters. Overall I felt it was a balanced paper and I think I did well. Now fingers crossed for the result

 

[Leo3007]

I guess volume doesn't get affected. Only the open interest.

@oldfed there were 2 questions on VaR.. 1.6 Mn 95% 1d VaR given.. find 99% 10d VaR.. another question was 99% 120 days..find number of exceptions or sth like that.

Anyone remember the insurance premium prob? Was it 957 ??

GARCH .. given long range variance of 0.00004 a=0.13 b=0.82 cont.return -1.6% daily vol of 2%.

Hedging given b=1.35 target b=1.8 p=48 Mn.. contract size was not mentioned explicitly but as 10 times the value of FTSE 100..was the answer 16000 sth??

Rating transition matrix questions..? And 12.. or ??

Basis risk question

Network risk

Adjusted R2 - adding a independent variable will improve R2??

Deposit insurance - Moral hazard - depositors not analysing risk of banks

DBP vs. DCP pension

Inc in time till expiration will increase both call and put

Accrued int question

CCP and margining

Kindly confirm if upper bound was asked for European call or put.. my mind assumed as put

On volume / open interest question-
Traded contracts ( buyer- seller found) get added to the volume and yet to be traded, only quoted remains in open interest.As farvI remember, 400 was original volume and 300 original open interest. 100 new contracts were added of which 40 were used to trade original open interest. So these 40 should be added to the original volume and remaining 60 which are yet to be traded should be added to the open interest. So updated volume should be 440 and updated open interest should be 360.

 

[prsdmoh]

On volume / open interest question-
Traded contracts ( buyer- seller found) get added to the volume and yet to be traded, only quoted remains in open interest.As farvI remember, 400 was original volume and 300 original open interest. 100 new contracts were added of which 40 were used to trade original open interest. So these 40 should be added to the original volume and remaining 60 which are yet to be traded should be added to the open interest. So updated volume should be 440 and updated open interest should be 360.

Every futures or option trade has a buyer and a seller. The buyer can hold the contract till expiry or sell it to another buyer or liquidate it before expiry. Each action changes open interest differently. For example, if trader A buys 10 futures contracts from trader B, then open interest is 10. If another trader X buys 20 futures from trader Y, then the open interest accordingly adds to 30.


But, if A unwinds his position of 10 futures, then open interest will decrease by 10, because these contracts cease to exist. Instead, if A sells these to another trader C, then the open interest remains unchanged since it is C who holds the contracts now.

In the above example, while open interest increased or decreased depending on the type of trade, trading volume only increased.

When A bought 10 futures, trading volume was 10 and when X bought 20 contracts, volume rose to 30. But, when A unwound his position, open interest declined by 10 but trading volume increased to 40.

 

[prsdmoh]

Every futures or option trade has a buyer and a seller. The buyer can hold the contract till expiry or sell it to another buyer or liquidate it before expiry. Each action changes open interest differently. For example, if trader A buys 10 futures contracts from trader B, then open interest is 10. If another trader X buys 20 futures from trader Y, then the open interest accordingly adds to 30.

But, if A unwinds his position of 10 futures, then open interest will decrease by 10, because these contracts cease to exist. Instead, if A sells these to another trader C, then the open interest remains unchanged since it is C who holds the contracts now.

In the above example, while open interest increased or decreased depending on the type of trade, trading volume only increased.

When A bought 10 futures, trading volume was 10 and when X bought 20 contracts, volume rose to 30. But, when A unwound his position, open interest declined by 10 but trading volume increased to 40.

Shouldn't 100 new contracts increase the volume?