Common reason for the failure of Bargin, Mettal., Irish bank, maybe also Kider Peabody.
The exam was rock hard you had to use concepts across different topics to help solve some of the questions and time was required figuring this out, which is something you did not have nor a clock in the Room (London) (I made a complaint about this). The questions were tricky or worded in a such a way you had to think. Here are some of the questions I remember:
1: LTCM and metallegeschaf what is common
2: A list of estimated vol and return prices calculate the smoothing factor used.
3: calculate the highest long run variance given w, alpha and beta in a table.
4: bank issues 100 million BLR bond, and has 100 million BLR bond and 25 mill BLR cash assets what is the net exposure in dollars
5: Forward of 90 million jpy in 3 months what is the payoff
6: What is the price of an American put given the binomial tree already where the strike is 50 and the stock price is 40 and percentage of up jump is 58% (this was a trick question)
7: The difference between the upper and lower bound of the american put and call where strike is 35 and stock is 40. Again have to read the question carefully to understand it.
8: Bank has a lawsuit against it what is the best operation risk measure to calculate the LF/HS impact of this.
9: Given the volatility of two funds equally weighted and scatter graph of the two returns what is the volatility of the portfolio. (tricky)
10: Calculate the market return given the table of results you need to calculate beta on this. Risk free rate was 0.02.
11: Calculate jensen alpha question.
12: Hedge a bond given two DV01 in a table (near the end)
13: given the prices of three zero coupon bonds with mature in 1,2,3 years, select which of the forward rates is inconsistent.
14: the gamma of a position is 6000 and you have two options 1) 0.25 delta and 1.5 gamma 2) 0.25 delta 3 gamma what combination will give a delta/gamma neutral hedge.
15: Margin question with 100 ouces and contract price is 1,500 and margin is at 7,200.
16: BSM cannot be used for which of the following : Forward, option, etc.
17: 25 weekly volatility what is the one week volatility return (square root rule)
18: VaR is 8 million for 1 day 95 % what is the Var for 10 day 99%.
19: SuperBull and Hedge50 with 15 million and 7.5 million given volatility for both what is the volatility of the portfolio.
20: Expected loss question with credit of 200 million of which 100 million has been used and the UGD is 0.7
21: What is the EDF given the expected loss and adjusted exposure.
22: What is the adjusted exposure given the EDF and the recovery rate.
23: long 10 puts and long 10 calls what position do you have to take to make a profit given the table (one entry was 10*S-400)
24: One fund manager is worried that the price will not move causing loss what can he do: 1) calend spread, long straddle, Butterfly
25:what is the levered beta.
26: hybrid approach includes simulation and ?
27: July a farmer hedges his soyabean with a call option on a futures to mature in August and he has to pay in September the call option gives him the right to buy at 380, the futures price is at 390 the current soyabean price is at 400 what is his loss/gain(can't remember this one properly sorry)
28ifference between a callable bond, and putable bond.
29: Sinking funds what is the risk (credit, credit duration, reinvestment risk, ?)
30: A loss is made in a futures contract what conditions have to be for this to happen, (backwardation, contango, etc)
31: What is exchange for physicals
32: Key rates questions
33: swap question: given table which floating rate would be most profitable (comparative advantage)
34: Which one of the ratings is considered contraversial. (unsolicited, issuer pay, etc.)
35: What is the convenience yield given the futures price, risk free rate, and storage costs.
36: minimum variance ratio given correlation, volatility of spot and futures, worded to confuse you.
37: Given bond price and conversion factor is a table and the QFP which bond will be cheapest to deliver or something like that.
2Pr(X-10<-10)<0.25 due to symmetrical , so Pr(X-10>10)=Pr(X-10<-10)
i'm not sure but I don't think that you can apply chebyshev inequality in this case. I used the Transformation rule (x-u)/Sigma and looked it up in the provided z-table. This was the only question, where the z-table could have been used and I don't think that they would provide an extra page with negative (!) z-values, if it would be not necessary for a question
I got a 17500 answer too. but for question 41 I think the answer should be long struddle because the question talk about high change in volatility@Uchica_Itachi: Thank you for that summary. First of all, it seems that we had slightly different exams, because some questions you are referring to, were not present in the exam which I did. (I am quite sure, because there are several questions which sound new to me)
Maybe you could argue on the following Points:
Question 4: my result was 17500 and I would wonder if I made a mistake in this straight forward calculation...
Question 30: I think the correct answer would have been the one with the subadditivity because the formula stated VAR(PF) <= VAR (A) + VAR (B). I would assume, that this also holds even if VaR is not aubbadditive because it does not say < but <=, which should also hold for Portfolios which are not subadditive.
Question 41: I think your choice (short calendar spread) is not the correct answer because a calendar spread has a payoff similar to a butterfly spread. Hence, a short calendar spread is a bet on high vola. The correct answer should have been Long butterfly spread, which bets on decreasing vola.
Question 49: What are your arguments for American call? I would argue that an American call can be approximated by the Price of an European call (they have the same bounds). This is not true for an American put, which has other bounds than a European put.
In the interests of cobbling together everything that has come before this post, I've compiled a list of the questions I remember along with the other bits n bobs others have remembered. So here goes:
1) 2 Step-American Put question (strike 40 I think). What is the price after 6 months if price goes down? Answer: 10 .The instrinsic value of 10 is higher than the discounted price of 8.something at that node.
2) Linear regression question which asked about intercept. Answer: Something to do with the independent variable being zero.
3) Regression graph for two assets (both asset vols were supplied) and the question was about the st dev of portfolio I think. Answer: Cant remember exact answer but its one where the the correlation is a negative values close to -1 (this is inferred from the graph of the assets).
4) Futures margin question about purchasing 100 tons with initial margin at 7500 and variation margin at 6200 (not exactly sure of margin nums). Answer: 18800 Reason; Margin account had just been topped up to initial margin the day before and the price increase left 18800 in account.
5) Gain/loss on buying Sept soyabean futures/forward in August. Cant remember all the details but i remember there were some distractor numbers and I had to re-read the question carefully before answering. Answer: Loss of $5/ton
6) Question of changing portfolio beta. Answer: Easy calc J
7) Question about being long 10 option at 60, short 10 puts at 20, what option to buy to create payoff profile given in table. Answer: Short 10 puts at 40.
8) Similarities between LTCM, Metallselegaschaft n other. Answer: Something about liquidity.
9) Similarity between traders for All First, Barings, and drysdale. Answer: High leverage.
10) A trader is worried about impact of unemployment rate announcement on his shares. He decides to sell if rate is higher than expected. Which of the following should he use. Answer: Stop Loss.
11) Hedge ration question: Answer: Easy calc.
12) Question about bonds with income reinvested but they have different payment frequency. Answer: Easy calc (convert all to annual and pick highest).
13) If trader is going to price European share using Libor, what does he need to know? Answer: Libor is not European risk free so it needs to be converted to European equivalent (The question about some other traders not viewing Libor is less relevant, in my opinion, because of the way the question is framed.).
14) Comparative advantage question on converting fixed liabiloity to floating one and which counterparty to use. Answer: A (this company had the lowest borrowing cost for both fixed and floating markets.
15) Lower n upper bound of the difference between American call and put for stock with price of 40, strike of 35. Answer: B. (5 and 5.13).
16) Commodity fiture price given risk free, convenience yield and storage cost: Answer: Easy calc.
17) Cheapest to Deliver Bond. Answer: Easy Calc.
18) Net forex exposure for company with Brazilian Real liabilities and assets. Answer: Easy Calc. Calculate difference between assets and liabilities and divide by exchange rate.
19) Purchasing power parity question: Answer: inflation.
20) Which bond will have their price affected most by change in rate, Investment grade or high yield. Answer: Investment grade has higher duration as it has lower yield so its price is affected more.
21) Additional risk of sinking fund bond: Answer: Reinvestment risk.
22) What is investment gradefor S&P and Moodies. They gave description of repayment characteristics (this is what gave it away). Answer: BBB/Baa.
23) Question about policy on only investing in investment grade bonds. What is the probability this rule will be violated. Answer: Added up BBB transition probabilities to non-investment grade but I think the solution is to add up probabilities for all investment grade rating, i.e. AAA-BBB. Oh well.
24) Issue with rating process. Answer: Issuer-pay model.
25) Chi squared stat calculation. Answer: Easy calc.
26) Key rate hedge. Answer: Easy calc.
27) Gamma hedge. Answer: A. Easy calc.
28) DV01 hedge. Answer: Easy calc.
29) Which option has the highest vega. Answer: At-the-money 1 year.
30) Which of the following questions are ALWAYS correct. Answer: D. None of the above. VaR violates subadditivity so none of them are always true.
31) Which method for stressing ignores correlations: Answer: A. Factor push method ignores correlations.
32) R2 calculation given ESS and RSS. Answer: Easy calc (ESS/(ESS+RSS)).
33) Determine share price after single step of monte carlo. Answer: Easy calc.
34) Determine rate after single step of monte carlo. Answer: Easy calc.
35) The hybrid method is a combination of historical simulation and? Answer: D. GARCH.
36) Analyst built European crediyt model management asked him to build India n other country model in a month. Did he violate conduct? Answer. No. He told them about his lack of knowledge and didn’t commit to completing within a specific time-period.
37) Analyst does research on a company and is 50% ceratin about “something” (I forgot what this something is). The inclusion of what constitutes a violation of conduct in his report? Answer: That “something” will certainly happen. If he does this he is misrepresenting the facts.
38) What is a risk universe? Answer: C. Full list of risks that both positively n negatively affect company.
39) What option prices will replicate chooser option. Answer: Long put and call with strike of 800.
40) Var calc for converting 1 day 95% to 10 day 99%. Answer: Easy calc.
41) A trader believes that there will be little volatility in the coming months. He needs to hedge a position (I think). What option strategy will he use?? Answer: short calendar spread. Long straddle is wrong because thats is essentially long vol and trader wants to be short vol because he thinks there wont be much of it.
42) Calc jensen’s alpha given 5 years of risk free, share returns n market returns. Answer: Easy calc but I couldn’t get it. I was getting 2.6% so i put 2.06% as answer.
43) List of estimated vol and return prices. Calc lambda for EWMA model. Answer: Easy calc (0.92 0r 0.94). Cant remember.
44) Question about structure of estimated vol given GARCH parameters. Answer: Not sure. I put decreasing.
45) Given vol skew, if at the money vol for strike 30 is used to price options, which option will be underpriced. Answer: In-the-money put ( most relevant for the put!)
46) Bank has lawsuit against it. What is the best operational risk measure. Answer: Dont remember question well enough.
47) Calculate market return given table of results. Risk free was 2%. Answer: Easy calc.
48) Given the price of 3 ZCBs which forward rates are inconsistent? Answer: Not sure. Didnt have time to calculate.
49) BSM cannot be used for which of the following? Answer: American call.
50) 25 weekly return, what is the one week volatility? Answer: Easy calc.
51) SuperBull and Hedge50 with 15 million and 7.5 million given volatility for both what is the volatility of the portfolio. Answer: Easy calc.
52) Expected loss question with credit of 200 million of which 100 million has been used and the UGD is 0.7. Answer: Easy calc.
53) What is the EDF given the expected loss and adjusted exposure. Answer: Easy calc.
54) What is the adjusted exposure given the EDF and the recovery rate. Answer: Easy calc.
55) Leveraged beta calc. Answer: Not so easy calc.
56) Difference between a callable bond and a puttable bond? Answer: Don’t remember options.
57) A loss is made in a futures contract what conditions have to be for this to happen, (backwardation, contango, etc). Answer: I put backwardation because future prices were lower than spot.
58) What is exchange for physicals. Answer: Don’t remember.
59) Question about data and business process view. Answer: I put the one about rogue trader.
60) Mean of 10, std dev of 5. What is probability of negative return: Answer: 25% I think.
61) Probability of A or B not defaulting. Answer: 0.94.
62) In which case will a comp missing a payment indicate default? Answer: Floating rate note. Others were assets were payments were not a guarantee.
63) You collected monthly rets over a 3 year period. You are given std dev. What is the annual std dev? Answer: Given std dev multiplied by sqrt(12) because data was monthly.
64) Same expected return for two stock. Indexed to the same benchmark. Which is true?Answer: Lower beta implies higher Treynor.
65) Option has positive convexity. which one is true? Answer: Don’t quite remember.
66) T-stat confidence interval question. Answer: Easy calc.
67) Efficient frontier question for 3 portfolios. Answer: B. Adding in the additional asset will improve the tri-asset sharpe ratio so frontier will push out to the left a tad bit.