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# Exam FeedbackFRM Part 1 (May 2014) Exam Feedback

#### David Harper CFA FRM

##### David Harper CFA FRM
Staff member
Subscriber
Hi valued members, we'd love to hear any feedback from today's FRM exam. How did it go? Did you encounter unexpected questions? Thank you in advance for any feedback!

#### hoang.vu90

##### New Member
There is one question when they gave the computed B1 and B2 t-stats value (1.64 and 2.33) and asks to compute F stats and determine if it is significant at 95% (reject and accept the Null Hypothesis that B1=0 and B2=0)..I dont know how to compute F stats from B1 and B2 so I make a guess that if B1 and B2 are both significant at 95% then F stats is also significant at 95%...Is that correct ?

#### mep

##### New Member
I don't think that's necessarily true because testing multiple t-stats individually overstates the joint probability, but the correlation given was 0.3 so I'm hoping it's statistically significant (I had to guess on that one too).

#### secondtimearound

##### New Member
David ..first of all thank you for your comprehensive material. It made my testing experience so much better (than my first time)! Here are a couple of questions that I thought were new.
1. In the EWMA model, we were asked to calculate the weight of a return for 5 days, given lamda^T=1/2 where T denotes that half life where half life = 23 days. I remembered the formula for calculating the weight of the return, however how does one calculate lamda given the above? Is it Ln(1/2)?
2. When calculating the forward exchange rate, the formula used is So*e^(Rusd-Rnonusd). However there were 2 questions where the Rnonusd was greater than the Rusd. On plugging the values into the above formula, the resulting answer was not among the choices. Instead the reverse choice was there i.e. the forward price using Rnonusd-Rusd. Is that correct? The second question also included inflation rate in both currencies. How does that plug into the calculation of the forward exchange rate with the risk free rates?

#### Jo_

##### Member
Subscriber
Had to skip 7/8 questions while doing the exam because i had no idea how to begin with them. Got 40 minutes left in the end of the exam to have a second look, so time mangement wise, i'm happy i could finish the entire exam without having to skip questions. Wonder how other candidates did time-wise? I felt most people in my testing site were able to complete the exam, contrary to expectation.

Content-wise, i guess many of the questions were to be expected. Maybe somewhat more qualitative questions then expected (there were 2 on the new country risk chapter, btw). For future candidates, i do think it's important to stress the GARP practice exams. There were at least 3 questions which were literally copy/paste. I do think that's a nice gesture of GARP, to "reward" candidates with thorough prepration.

There is one question when they gave the computed B1 and B2 t-stats value (1.64 and 2.33) and asks to compute F stats and determine if it is significant at 95% (reject and accept the Null Hypothesis that B1=0 and B2=0)..I dont know how to compute F stats from B1 and B2 so I make a guess that if B1 and B2 are both significant at 95% then F stats is also significant at 95%...Is that correct ?

There is a formula to calculate F-stat from the individual t-stats and correlation. I knew it exists but I personally skipped it when i was studying because i thought it was an overexagerated formula to expect candidates to know. If GARP truely wants to be "practice-oriented", i really think these kind of questions are ridiculous. In practice, you'll get the p-value. In that sense, i liked the more qualitative questions from QA more (like the interpretation of the scatterplot and R² implications). Anyway, applying the formula on 1.64, 2.33 and 0.3 correlation gives an F-stat of 7-something, so the answer should be significant if i'm correct.

1. In the EWMA model, we were asked to calculate the weight of a return for 5 days, given lamda^T=1/2 where T denotes that half life where half life = 23 days. I remembered the formula for calculating the weight of the return, however how does one calculate lamda given the above? Is it Ln(1/2)?

I found that a bit strange too indeed. I did: lamda^23 = 1/2 --> lamda = 0.97.. Then 0.03 times 0.97^4 was one of the given answers.

On the forward rates: i believe the currency was quoted in reverse (in David's exercises the EUR/USD was always given as e.g. 1.2. Garp now gave it as 1/1.2. That's probably why the order of the rates was inverse too. I converted the rate to the "norrmal" notation, did the "normal" calculation and then converted back. Maybe a bit of a detour, but i felt most safe like that and the answer was in the list.

#### ask06

##### New Member
Where can we expect the cut offs to be given the level was above expectations of candidates (Mostly i guess)...??

#### plulutes

##### New Member
My thoughts may best be explained through a brief analogy. I've spent the past 5 months taking batting practice from Dave. I've been thrown some major league curve balls, 98 mph fastballs, some knucklers and some splitters, and all the rest. Dave has a major league arm and even gets to use vaseline on his pitches to make them spin all the more. And after extensive practice, I've gotten pretty good a hitting the best he had to throw at me. So, now it's off to the game. GARP says to me, as I open my exam booklet, "I hear you're a pretty good batter but here's the rub. We are going to pitch to you fastballs, curves, forkballs, etc..., all the pitches you've learned to hit pretty well, and you'll get to bat from the right side of the plate for 1/3 of the time. However, you'll be asked to hit these pitches from the left side of the batters box another 1/3 of the time. For the remaining 1/3, you'll be suspended and upside down from all around the batters box. We think you'll really enjoy the new perspective we have for you towards batting. Oh, and you'll need a .600 slugging percentage to pass."

With that said, they did throw enough balls to walk me a bit too. This is no complaint from me. I actually enjoy the intellectual challenges that GARP infuses in some of the questions, albeit at the possible expense of categorizing some questions as more appropriate for philosophical debate (i.e. are we to assume inflation rate as a proxy for a risk free rate? Absolutely not, but do we excuse this and proceed as though it's not relevant?). It would be much easier if this exam were simply a function of the application of time of study and understanding of principles, equations, and markets with respect to topics that are expected to be learned and not so open to objective interpretation. I felt as if there were plenty of these types of questions that may have been better presented for discussion in a study group vs. an assessment of understanding and knowledge. Yet, I appreciate the complexities that GARP sets before us, too. Having the FRM will certainly say that you've overcome a lot, and that makes my pursuit of these studies valuable to me, and future employers and their clients.

Jo_ , I finished on time as well with about 8 minutes (LOL, ya I was really watching to clock!) to go back over about 8 questions I had passed on. I wished I had more time to review them in greater detail because a couple that I had to blindly guess at were doable, I think. Again, it was sometimes a matter of not understanding the questions vs. not knowing how to answer.

Question for Dave, or others that may know, is, does GARP ever show to B.T. the questions they really ask us? If not, then the challenge I see is, how do we as exam takers let our preparers know how to prepare us? I can't imagine being more prepared for this exam than I was. I could study for an entire year and still need to guess at roughly 25% of those questions today. I felt that I solidly answered 50%, reasonably guessed at 25%, and flat out guessed at 25% (approx).

All in all, I am very happy with the prep Dave and B.T. provided and generally feel pretty ok, kinda, sometimes, here and there, that I did well. But who knows. I'm not very good at batting left-handed while upside down.

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#### plulutes

##### New Member
Jo_ ,

I also did the EUR/USD exactly the way you did. I needed to set the currency in the way I'm used to seeing it.

#### hoang.vu90

##### New Member
Yes there are also a few questions giving you both Inflation rate and Real rate so I guess they expect you to use Nominal Rate = (1+Inflation)(1+Real) for the calculation.

Some IRS questions are tricky. One quesiton where The fixed payment is annually but the float payment is semi-annually and they ask for cashflow AT month 12. I remember the fixed payment is 3% and float is Libor+yy bps. They gave spot 6 month rate (2.xx%) and 6 month forward rate in 6 months (3.xx%). So the Expected cashflow at month 12 if the forward rate is realised will be ((3%-(3.xx% + yy bps) /2))*notional ? I used this formula but dont see the answer in the given multiple choices It is confusing where they only ask for cashflow without specifying the condition (realised forward rate, unchanged term structure, etc..)

There is one question where they gave all the required input to compute the current bond price. And ask for dollar duration where they say Dollar duration is defined as Current Price x Modified Duration. I cant remember the analytical formula for Modified Duration and computing it using average weighted maturity would take too much time so I just shock the yield by 0.1% using the calculator and formula deltaP/deltaY to compute the Dollar duration. I think the answer was 173.

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#### Adelaide

##### Member
A lot of questions from the new chapters....

#### amresh

##### Member
Subscriber
Well.. Similar observations .. Qualitative questions were so confusing that I went back to instruction booklet to check if multiple answers are correct.
Overall .. I think I could not have prepared better .. Still I guess , I didn't do well and don't expect to clear it. Committed several mistakes no normal/inverted curve, bayes theorem.. And the worst was swaps. Where I was not confident about even one of the three questions which were asked.
Barbell curve.. Convexity problemAnswers were not matching for me. Was not sure of highest interest ; whether in ATM or itm or otm. Not sure of rebalancing hedge . Deliberately left 2-step binomial(it was pre-decided)... Questions where you need to calculate standard deviation of 2 asset portfolio.. I was making calculation mistakes.. For a change one question was on 90%var.

#### Roshan Ramdas

##### Active Member
Yes there are also a few questions giving you both Inflation rate and Real rate so I guess they expect you to use Nominal Rate = (1+Inflation)(1+Real) for the calculation.

Some IRS questions are tricky. One quesiton where The fixed payment is annually but the float payment is semi-annually and they ask for cashflow AT month 12. I remember the fixed payment is 3% and float is Libor+yy bps. They gave spot 6 month rate (2.xx%) and 6 month forward rate in 6 months (3.xx%). So the Expected cashflow at month 12 if the forward rate is realised will be ((3%-(3.xx% + yy bps) /2))*notional ? I used this formula but dont see the answer in the given multiple choices It is confusing where they only ask for cashflow without specifying the condition (realised forward rate, unchanged term structure, etc..)

There is one question where they gave all the required input to compute the current bond price. And ask for dollar duration where they say Dollar duration is defined as Current Price x Modified Duration. I cant remember the analytical formula for Modified Duration and computing it using average weighted maturity would take too much time so I just shock the yield by 0.1% using the calculator and formula deltaP/deltaY to compute the Dollar duration. I think the answer was 173.

Hello,

The way I approached the nominal rate question was as below -
a) Individually calculate the nominal rate of interest in both the currencies using -> Real rate of interest + Inflation Rate
b) Assuming that X is the quoted currency and Y is the base currency -
Apply the formula -> Forward Rate (X|Y) = Spot Rate(X|Y) *[ (1+Nominal Rate Currency Y)/ (1+Nominal Rate Currency X)]^T

The 12 month IRS was a really tricky one as well & I believe that I managed to work it out the second time -
I see one small issue with your formula,....the fixed rate of 3% was being paid semiannually and thereby needs to be divided by 2 as well. The floating rate + bps logic that you've used looks perfect to me.

The dollar duration question was difficult again,....I do not remember getting the exact answer for this one and landed up picking the nearest possible option. I first applied a shock of 10 bps using the calculator & then reduced the yield shock to 5 bps,....the answer barely changed.
Formula used - (V_-V+)/2*v0*Delta Y

Thank you,
Roshan

#### Roshan Ramdas

##### Active Member
Well.. Similar observations .. Qualitative questions were so confusing that I went back to instruction booklet to check if multiple answers are correct.
Overall .. I think I could not have prepared better .. Still I guess , I didn't do well and don't expect to clear it. Committed several mistakes no normal/inverted curve, bayes theorem.. And the worst was swaps. Where I was not confident about even one of the three questions which were asked.
Barbell curve.. Convexity problemAnswers were not matching for me. Was not sure of highest interest ; whether in ATM or itm or otm. Not sure of rebalancing hedge . Deliberately left 2-step binomial(it was pre-decided)... Questions where you need to calculate standard deviation of 2 asset portfolio.. I was making calculation mistakes.. For a change one question was on 90%var.

The interest cost is highest for the ITM options which come with the highest deltas.
The 90% VAR question caught me off guard - I did not even know what the 1 sided deviate was for 90% confidence,......I thereby landed up performing the calculation using a deviate value of 1.645 (2 sided confidence) and chose the next lowest answer,.....as the z value that I was using was on the higher side.
Believe that I selected the second last option.

Thank you,
Roshan

#### secondtimearound

##### New Member
@Jo_ @Roshan Ramdas Thank you for the feedback. Looks like i definitely missed a couple of observations there!

#### CoinDrop

##### New Member
Many of the questions were familiar, but thought a lot of them were much tougher than anticipated. Wasted time doing and sometimes re-doing calcs because my answer was not among the choices or questions were not specific enough with regards to what kind of compounding should be applied, and ended up not finishing the last 7 questions. Hats off to those who finished with time to review.

#### hoang.vu90

##### New Member
The interest cost is highest for the ITM options which come with the highest deltas.
The 90% VAR question caught me off guard - I did not even know what the 1 sided deviate was for 90% confidence,......I thereby landed up performing the calculation using a deviate value of 1.645 (2 sided confidence) and chose the next lowest answer,.....as the z value that I was using was on the higher side.
Believe that I selected the second last option.

Thank you,
Roshan

Also can use the Z table that is given no ? Critical Z I found is around 1.28-1.29.

#### Roshan Ramdas

##### Active Member
Had to skip 7/8 questions while doing the exam because i had no idea how to begin with them. Got 40 minutes left in the end of the exam to have a second look, so time mangement wise, i'm happy i could finish the entire exam without having to skip questions. Wonder how other candidates did time-wise? I felt most people in my testing site were able to complete the exam, contrary to expectation.

Content-wise, i guess many of the questions were to be expected. Maybe somewhat more qualitative questions then expected (there were 2 on the new country risk chapter, btw). For future candidates, i do think it's important to stress the GARP practice exams. There were at least 3 questions which were literally copy/paste. I do think that's a nice gesture of GARP, to "reward" candidates with thorough prepration.

There is a formula to calculate F-stat from the individual t-stats and correlation. I knew it exists but I personally skipped it when i was studying because i thought it was an overexagerated formula to expect candidates to know. If GARP truely wants to be "practice-oriented", i really think these kind of questions are ridiculous. In practice, you'll get the p-value. In that sense, i liked the more qualitative questions from QA more (like the interpretation of the scatterplot and R² implications). Anyway, applying the formula on 1.64, 2.33 and 0.3 correlation gives an F-stat of 7-something, so the answer should be significant if i'm correct.

I found that a bit strange too indeed. I did: lamda^23 = 1/2 --> lamda = 0.97.. Then 0.03 times 0.97^4 was one of the given answers.

On the forward rates: i believe the currency was quoted in reverse (in David's exercises the EUR/USD was always given as e.g. 1.2. Garp now gave it as 1/1.2. That's probably why the order of the rates was inverse too. I converted the rate to the "norrmal" notation, did the "normal" calculation and then converted back. Maybe a bit of a detour, but i felt most safe like that and the answer was in the list.

I landed up skipping the F Stat,....the qualitative questions seemed easy.

The lambda question was worked out in exactly the same way that you have mentioned. Didn't find any issue with the forward rate question actually -

Formula that was used -> Fo = S0*EXP(Rate USD - Rate EUR) Time.

Thank you,
Roshan

#### Roshan Ramdas

##### Active Member
Also can use the Z table that is given no ? Critical Z I found is around 1.28-1.29.
Gosh,....didn't see any z table  ,....where was the z table located in the question paper ?

#### hoang.vu90

##### New Member
Gosh,....didn't see any z table  ,....where was the z table located in the question paper ?
Right at the beginning before the question starts. Like in the GARP practice exam.

#### Roshan Ramdas

##### Active Member
Guys,.....how about the variation margin question. I found this to be a slightly tricky one.

The calculations seemed pretty straight forward,....as per my workings, margin balance as of the second last day went below the maintenance margin level.

The way the question was worded though was slightly different,.....it went like -> on which day is the margin collected from the client ?

There is a note in one of the IFM chapters that state that variation margin is collected on the following business day,......I thereby landed up selecting the option which highlighted margin as being collected on the last day and not on the second last day. Not sure if this was the right decision ?
-------------------------------------------------
Also,....there was a question that spoke about identifying an arbitrage scenario given a set of options with different strikes & premiums,....any idea how this needs to be worked out.

None of the combinations in the answers had the design of a box spread,....which I believe should provide a constant payoff,.....and I landed up choosing a combination which looked like a butterfly spread,...buy call @ lower strike & higher strike and short call 2 options at an intermediary strike,.....have no clue if this is the answer or if there is a different way in which the problem needs to be approached ?

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