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# FRM MAY PART 1 2013 Feedback

#### Spronkworks

##### New Member
Re the barings aib and drysdale. Theres no explicit mention in the core reading on the leverage made by leeson and rusnak, but you could read fictitious and fraudulent accounting and reporting in all three.

While I agree with you on AIB and Barings, Drysdale was a result of a flaw in the market practice for calculating the collateral value of US Treasuries. There was no fictitious or fraudulent accounting in the Drysdale event... they simply borrowed much more money than their capital would have permitted without the flaw. The money was used to make highly leveraged bets in the market, and losses became so large they eventually could not borrow enough to hide them anymore. For their part, both Leeson and Rusnak were supposed to be running small, non-directional arb books, while the readings explicitly state they were running large outright positions and hiding them from management. Thus the common element was size of bet relative to capital, i.e. leverage. That being said, I made the choice reluctantly, by process of elimination...

#### kalyan786

##### New Member
This n
Company pays dividend to its common stockholders. But he expects revenue to go down . company could go bankrupt if he doesn't pay to the holders of ?
Floating rate note
Participating bond
Income bond
Common stockholders
The Answer to this one was clear cut Floating Rate bond.....

#### noalv4

##### Member
There were three questions regarding binomial trees:
1. American put with strke 50.
2. Europian call with p=0.58. I calculatad the call to be $0.68. 3. What is the probability of going down of an american put with one step, two years horison, given r and volatility. My answer was 53%, because of the two years horison, so EXP of r is less than 1. #### kalyan786 ##### New Member 14. I don't remember Expected Shortfall question. I also read option strategies a lot but there was only one and even I don't know whether I wrote it right. Investor expects volatility could decrease. which strategy to choose ? Straddle, Short butterly, Short calendar, short bull or bear . Question was worded that manager's fund would experience large losses from drop in market volatility. So, I choose Butterfly (I think it was stated as long the wings, short the middle) which is a bet on lower volatility. Is it long a butterfly? I Remember it was said he was worried if the volatility decreased. I too chose long butterfly......because we would be in the money in case the stock price doesnt move much. #### kalyan786 ##### New Member Did anyone solve futures daily settlements? So= 1500, 5 days. Answers contained 17500, 18000 . Initial margin 1700. The answer to this if I remember correctly....the margin account balance at the end of day was 18800 #### Backwardation ##### Member As I remember, the Initial margin was 7200, not 1700 ? #### Uchica__Itachi ##### New Member While I agree with you on AIB and Barings, Drysdale was a result of a flaw in the market practice for calculating the collateral value of US Treasuries. There was no fictitious or fraudulent accounting in the Drysdale event... they simply borrowed much more money than their capital would have permitted without the flaw. The money was used to make highly leveraged bets in the market, and losses became so large they eventually could not borrow enough to hide them anymore. For their part, both Leeson and Rusnak were supposed to be running small, non-directional arb books, while the readings explicitly state they were running large outright positions and hiding them from management. Thus the common element was size of bet relative to capital, i.e. leverage. That being said, I made the choice reluctantly, by process of elimination... LOL. My choice was less reluctant but it does say in the notes that Drysdale clearly used false reporting to gain access to the funds - thats why I guess false reporting could be an option as well for D-dale. For the binomial dwn prob question I thought the options were 42%,48%, 40-somthing%, and 58%. I dont remember a 53%? #### kalyan786 ##### New Member Hi All 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.
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.
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.
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.
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.
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.

Question no. 20 in your list : In my opinion a bond with higher yield will be more affected by a change in interest rates than a bond with investment grade.
Question 23 in your list : We must add up the prob of all non investment grade ratings.
Question 35 in your list : Are you sure that Hybrid approach combines with GARCH?

I agree with most of the other answer....though I am not sure whether I marked them in the exam......

#### Spronkworks

##### New Member
Re the barings aib and drysdale. Theres no explicit mention in the core reading on the leverage made by leeson and rusnak, but you could read fictitious and fraudulent accounting and reporting in all three.

I took a look online, and while there's no explicit mention of accounting irregularities anywhere in the assigned reading for Drysdale, it turns out that Arthur Anderson had to pay a \$45 million settlement to Chase for accounting "misrepresentation"... go figures GARP would give 2 choices that don't fit precisely from the readings.

#### Spronkworks

##### New Member
LOL. My choice was less reluctant but it does say in the notes that Drysdale clearly used false reporting to gain access to the funds - thats why I guess false reporting could be an option as well for D-dale.

For the binomial dwn prob question I thought the options were 42%,48%, 40-somthing%, and 58%. I dont remember a 53%?

Which notes? I just re-read the assigned reading from Allen and accounting isn't mentioned at all, not even once. That being said, I've subsequently learned from another source that financial statements submitted to Chase were fraudulent...

#### noalv4

##### Member
LOL. My choice was less reluctant but it does say in the notes that Drysdale clearly used false reporting to gain access to the funds - thats why I guess false reporting could be an option as well for D-dale.

For the binomial dwn prob question I thought the options were 42%,48%, 40-somthing%, and 58%. I dont remember a 53%?

If you refer to the question of what is the 1-p... there was option of 53%, which I choose. Now I'm not that sure that it is correct. At first I calculatad 47% and chose the 48% option. Then because of the 1 steo two years horison, I calculated agein and received 53%.
What do you think the answer should be?

I also put several posts with new questions that I remembered. Did you see them? Would appriciate your answers...

Thank.

#### Backwardation

##### Member
I also think the binomial question was something like 48%. The probability of a down move asked, so you should not forget to take 1 minus the result of the q-measure

#### noalv4

##### Member
I also think the binomial question was something like 48%. The probability of a down move asked, so you should not forget to take 1 minus the result of the q-measure

Didn't understand you quite well...
You think that the correct answer is 48%?

#### Clarence SB Swamptown

##### New Member
Did anyone else find their test facility lacking? We were in a US high school, and sat at student's desks. I am 6 feet 3 and 220 pounds. The desk was far too small, and keeping my exam booklet, answer sheet, pencils, ID, and calculator on the 12inch by 12inch surface provided was an annoyance I was not prepared for. I might have studied in a broom closet wearing a very tight jacket if I had known. On Garp's page, they show pictures of candidates taking the exam on broad tables. This was not what we encountered in Chicago.

#### Uchica__Itachi

##### New Member
The thing that irritated me most about the London exams is the fact that the exam was not in the most central place which meant waking up extra early for most candidates to trek to the venue. Only to be greeted by a late start. That might not seem like much of an issue but those extra 30 mins of sitting down and just waiting didnt do anyone any good. It certainly didnt help with the fatigue. The knock on effect to some of us who wrote Part 2 was even more soul destroying !!

#### HawkFRM

##### New Member
Did anyone else find their test facility lacking? We were in a US high school, and sat at student's desks. I am 6 feet 3 and 220 pounds. The desk was far too small, and keeping my exam booklet, answer sheet, pencils, ID, and calculator on the 12inch by 12inch surface provided was an annoyance I was not prepared for. I might have studied in a broom closet wearing a very tight jacket if I had known. On Garp's page, they show pictures of candidates taking the exam on broad tables. This was not what we encountered in Chicago.

I took the test in Chicago as well. The 1980's desks were not optimal. The worst part was that the room I was in had a broken clock.

#### Milan K

##### New Member
Guys on the GARP COC question the analyst did say he had little knowledge of the markets he was requested to build the model for as well as saying he couldnt promise when he could complete the model. Looks like he did his part and didnt violate COC to me.

Regression graph had a clear pattern which was closish to y=-x pattern so the correlation was close to -1 (not quite -1).

For the VaR question, VaR is not always subadditive which implies that VaR of portfolio could be higher than sum of componet VaRs as Spronkworks pointed out.

Hey,

Since sigmaP <= sigmaA + sigmaB, I think even VaR is <= weighted avg of component VaRs.....

#### Milan K

##### New Member
another question:
american call expire in two months, dividend is paid in one month and the option of early exercise.

When D > K * (1 - r ^ (T-t)), which essentially means, dividends are greater than the interest you would earn on the money if you save it till the end.

#### MJ2013

##### Member
The thing that irritated me most about the London exams is the fact that the exam was not in the most central place which meant waking up extra early for most candidates to trek to the venue. Only to be greeted by a late start. That might not seem like much of an issue but those extra 30 mins of sitting down and just waiting didnt do anyone any good. It certainly didnt help with the fatigue. The knock on effect to some of us who wrote Part 2 was even more soul destroying !!

Even in Mumbai...it was not a central location...but a very distant suburb in Mumbai...i have provided a feedback last year as well regarding the location but GARP did not change the location.....i think everybody should right to GARP about the location issues

#### nabil1234

##### Member
the question that include long straddle and butterfly.....was it about high volatility or low volatility?

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