R19.P1.T3.HULL_CH7_TOPICS: SWAP_VALUATION

[gargi.adhikari]

In reference to R19.P1.T3.HULL_CH7_TOPICS: SWAP_VALUATION :-
@David Harper CFA FRM Hi- In the 2016 videos, Hull-Ch7, it's mentioned that Highly Testable Topic is
"IRA SWAPS"-" BOND-METHOD " Valuation. In the 2017 Hull Ch7 Video however, did not see a mention on the High/Low Testability Topics for Hull Ch 7... Does the statement from 2016 still hold good ..?

 

[Nicole Seaman]

In reference to R19.P1.T3.HULL_CH7_TOPICS: SWAP_VALUATION :-
@David Harper CFA FRM Hi- In the 2016 videos, Hull-Ch7, it's mentioned that Highly Testable Topic is
"IRA SWAPS"-" BOND-METHOD " Valuation. In the 2017 Hull Ch7 Video however, did not see a mention on the High/Low Testability Topics for Hull Ch 7... Does the statement from 2016 still hold good ..?

Hello @gargi.adhikari

David may have a better explanation, but I would say that if he noted in his previous video that it was a highly testable topic, then (in this case) it is most likely still highly testable. This Hull reading has been carried over year after year in the FRM curriculum, and the learning objectives have not really changed much. These concepts have continued to be an important part of the curriculum since we updated these videos last. I hope this is helpful!

Nicole

 

[David Harper CFA FRM]

Thank you @Nicole Seaman I agree with that. In this specific instance, swap valuation remains "highly testable;" further, as you suggest, given that Hull P1.T3 had not really changed fundamentally over several years (and in fact, several editions even of the text), the "highly testable" Hull domain is approximately unchanged.

In the updates, I have stopped introducing the videos with formal high/low testability guidance framework, to your point @gargi.adhikari . The primary reason is that, you might notice, I tend to embed strongly felt opinions (in that respect) in the commentary; but, importantly, I don't always have such opinions. For some of the syllabus, the only honest answer is, we can't be confident that such and such will not, or will be tested. That caveat aside, GARP has improved some of these LO (in part as a response to feedback from us and others I presume), so I would like to think that the LOs continue to evolve in such a way that they can give the guidance (where my own focus has been to request that quantitative verbs--e.g, "calculate" and "compute"--are designed with intention simply because they impose a higher burden on the candidate). The secondary reason is that's it's a bit of a mug's game when ... there are a few areas where I can be confident, there are many areas where I cannot and, to be perfectly candid, there are areas where I know GARP's own "testable frame" hasn't caught up (areas where I apply current feedback. Sometimes it takes a long time for them to incorporate a particular concept). In my ideal world, GARP's LOs would be crafted with such care that the Study Guide/LO itself gives plenty of its own self-contained guidance. It isn't there yet, I will continue to do my part by sending them feedback.

For example, in regard to swaps that we are talking about, in Hull's 10th edition, for vanilla interest rate swaps, Hull has dropped the "valuation as two bonds" as part of his consistent replacement of LIBOR with OIS as the risk-free discount rate (i.e., if the floating rate coupon pays at a different rate than it discounts, then it no longer prices exactly to par at the exchange dates). Valuation "as if two bonds" can still be done, but it has less advantage over "as FRAs" so Hull now only shows "as FRAs" for vanilla IRS. My point is, when will GARP adjust to Hull's wholesale pivot, and its implications, on the riskfree rate? I don't really know ..... Thanks!

 

[gargi.adhikari]

Thanks @Nicole Seaman and @David Harper CFA FRM - Yes I completely agree and understand ....it's indeed hard to identify as GARP can swap in Low- Testability Topics or re-orient to pivot to Hull's latest...it is truly hard to predict...

Having said that though, I am trying to narrow my focus with my very limited Brain's Retention Capacities ..lol ..and so trying to make sure am reading the above right...
@David Harper CFA FRM - you mention above Valuation "as if two bonds" can still be done, but it has less advantage over "as FRAs
In the 2016, videos, you mention Valuation as 2 Bonds = HIGHly-TESTABLE and Valuation as FRAs= LOW-TESTABILITY....so then , this has reversed as per Hull's latest..?

 

[David Harper CFA FRM]

@gargi.adhikari No, that previous guidance would still apply: Hull's 10th edition (which universally swaps LIBOR with OIS, pun intended! ) is not current assigned (here in 2017!). The LOs include:

• Calculate the value of a plain vanilla interest rate swap based on two simultaneous bond positions.
• Calculate the value of a plain vanilla interest rate swap from a sequence of forward rate agreements (FRAs)

But, honestly and candidly, it shows why I think our updated videos should discontinue this practice: at a minimum it renders the videos less durable over time. Or, confirms why we shouldn't do this, i mean. I think my guidance was well-intentioned: if you need to save time, just learn the 2 bonds approach (way my intention). On the other hand, I regret that it would cause somebody to skip the "as FRAs" approach. (my preference because it is the approach that is trying to model cash flows as they are expected to actually occur; i.e., "as FRA" is the truer DCF). We do the best we can, the last honest thing i will say about this is that it starts with GARP's responsibility to craft careful LOs. The more careful are the LOs, the less the EPPs have to play the guessing game for candidates, which I repeat, is definitely a mugs game. Thanks!

 

[gargi.adhikari]

@David Harper CFA FRM thanks so much for your invaluable insights and guidance...yes...was asking to save time ...but i had worked through in detail the FRA methodology as well...both for IRS and also for CURRENCY SWAPS for knowledge's sake...( hope that makes u feel a little better...? ... ....lol...)but for the sake of the exam am trying to narrow down my focus ...as i know that there is an ocean out there that i need to practice and master....

 

[David Harper CFA FRM]

@gargi.adhikari totally understood. And ... you had me at the third emoji my working life is so much improved when I have a day with emojis!