David Harper CFA FRM
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!
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 ?
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)?
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.
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.
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.