Testability in Financial Markets & Products

[Flashback]

Some of questions within this part are easy going almost as a poetry and some like exotic options are very rigorous? Are all of those highly testable?

 

[David Harper CFA FRM]

@Flashback No, they are not all highly testable. In a carefully written memo I recently sent to GARP's leadership (Board/FRM Committee/Executives), among several issues, I referred to Potential Over-assignments (my vocabulary) which makes reference to some of the more extreme examples, at least to illustrate how some LOs have a low testability, or may even never be tested. See below, one of my examples is Hull's tedious theoretical T-bond futures contract ... similarly, to your point, some of the exotic option LOs clearly have lower "testability" than other T3 topics.

From my memo:

Potential Over-assignments refer to subtopics (or patches of learning outcomes) that seem unlikely to appear on the exam yet can be heavy time-traps for especially diligent candidates. This is a minor pattern among the post-exam feedback items: highly prepared candidates are prone to voicing frustration that they spent many hours studying for a section that was completely untested. Possible examples may include (this is a very partial list from my perspective):

• Calculus in Miller
• John Hull’s Interest Rate Futures chapter; e.g., many candidates spend many hours understanding the details of this chapter, including “Explain and calculate a US Treasury bond futures contract conversion factor.” (I would be surprised if any reader of this memo recalls how to calculate a T-bond conversion factor), and “Calculate the theoretical futures price for a Treasury bond futures contract”
• Tuckman
  • Risk-neutral derivation
  • Certain details of term structure models
• Jon Gregory: GARP has densely assigned learning objectives (LOs) to several chapters. But the practice exam questions are limited to a few, easier learning objectives (LOs). We have no evidence to suggest the harder LOs will be tested. Related, the current Practice Exam refers throughout to the text’s prior edition (Counterparty Credit Risk and CVA, 2nd Edition). But the syllabus assigns the recent edition (The xVA Challenge, 3rd Edition). I have no idea if GARP is aware of Gregory’s nuanced changes between editions; e.g., we are forced to support the related confusions.
• Basel: I could write an entire memo on Basel alone. In fairness, the Basel regulations are inherently detailed and dynamic. Still, if GARP’s motivations do include “we care about candidates’ time,” there is room to provide better prospective clarity to candidates. Just one small example: this week a candidate posted "Looking at question 10 for the 2018 sample paper it looks like we are expected to memorize the BI buckets!!! Unbelievable!"[1] (Legitimate inference. The associated LO is: Calculate the operational risk capital requirement for a bank using the SMA)

 

[Flashback]

Great! After I'm finally getting started to feel that I already have a big picture, some of those completely knock me down.