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# Exam FeedbackFRM Part 1 (May 2014) Exam Feedback

#### Roshan Ramdas

##### Active Member
Right at the beginning before the question starts. Like in the GARP practice exam.
Overlooked it completely

##### Member
wrt to Duration - I thing you need to calculate the Macalay duration first, use it in the modified and the calculate the Dollar duration as given in the exam.

##### Member
btw - does someone remember the market order question: it was something like price decline, 5 USD or above as a target and then decide which order. Which one did you pick???

#### Roshan Ramdas

##### Active Member
I chose the limit order option.
The reason was more to do with the wording - \$5 USD or "better",.....which seems to be in sync with the meaning of a limit order - "the order can be executed only at this price or at one more favourable to the investor"
I vaguely remember 2 other options,...discretionary & market-not-held which didn't seem to be relevant to the question and which both have the same meaning. Do not recall the 4th option.

#### secondtimearound

##### New Member
@Roshan Ramdas I hadnt read the note that you did, so I didnt think that question was confusing (!) and selected the second last day which is when the margin fell below the maintenance margin. Perhaps @David Harper can comment on this one?

#### Naseer

##### New Member
These 2 questions I was not able to get with even second attempt.. can someone throw some light

1. given a table with expected returns and Market portfolio returns and Beta of 3 assets A,B,C estimate Jenson's alpha using linear regression

2. Historical simulation VAR calculation problem given past returns and no of days old for each return
finding updated VAR estimate something like that..

and one other question on finding value a random variable 2 standard deviations away.. i get caught in wording of this question
Sorry dont remember exactly questions now...

#### EO

##### New Member
They also gave
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.
- just mentioning what i have said already: Bionic Turtle is the way to go. In case you ever consider Schweser (like i did until the last week), they don't even mention the formula on F-statistic applied for t-tests and corr... BT had it all, with examples...

#### secondtimearound

##### New Member
@Naseer For #2, the question asked to calculate a 100 day historical 95% Var and then provided additional losses for 4 days..when you plugged those in the order (descending order of loss), in the latest 100 day loss, the (previous) 95th day observation (of 25% of so) got kicked out. so the updated 5th observation was 4.xx% or so.

Is that how others did it?

#### amresh

##### Member
Subscriber
These 2 questions I was not able to get with even second attempt.. can someone throw some light

1. given a table with expected returns and Market portfolio returns and Beta of 3 assets A,B,C estimate Jenson's alpha using linear regression

2. Historical simulation VAR calculation problem given past returns and no of days old for each return
finding updated VAR estimate something like that..

and one other question on finding value a random variable 2 standard deviations away.. i get caught in wording of this question
Sorry dont remember exactly questions now...
1. Got -1.. Just you had to calculate average of all the numbers in table and subtract.
2. Create new rank list.. Take 5th last.

2 standard deviation was tricky too. I think none of the options were correct. As average of none of the options were coming out to be the mean. So it was possible to answer Without solving for portfolio standard deviation.

#### amresh

##### Member
Subscriber
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 ?
I dint go by that .. I chose tht it needs to be paid on 12th...
In arbitrage pricing .. You have to balance the pay offs and solve ... But I usually go by options e.g. Rs. X difference in price for RS, y difference in offered price. And assume linear.. If options are not close this works .. I marked 101.3 I guess
Box spread was easy .. You got it right.

##### Member
There was a question regarding futures and spot differences, physical settlement,
VaR assumptions made by the manager - options were jointly distributed variables, not correlated, i.i.d...dont remember the last options

#### Roshan Ramdas

##### Active Member
@Roshan Ramdas I hadnt read the note that you did, so I didnt think that question was confusing (!) and selected the second last day which is when the margin fell below the maintenance margin. Perhaps @David Harper can comment on this one?

Here is the note.....have a really strange feeling that I may have misunderstood the highlighted portion and could thereby be wrong......don't think that GARP will test candidates on technical details pertaining to the collection of margin.

Each day all clearinghouse member firms either must pay to or receive from the clearinghouse the difference between the current settlement price and the trade price or, for an existing position, the previous day's settlement price. This difference is known as the variation margin. Variation margin is collected separately for customer positions and the clearing member's own positions and is paid to or from the clearinghouse before the opening of trading on the following business day. Payment is made by automatic debit or credit to the clearing member's customer or house (proprietary) margin account. In some cases, payment is made by certified check. In some markets, variation margin also is collected intraday based on the previous day's open positions, and clearinghouse members are required to deposit funds within one hour of the intraday margin call.

#### Roshan Ramdas

##### Active Member
@Naseer For #2, the question asked to calculate a 100 day historical 95% Var and then provided additional losses for 4 days..when you plugged those in the order (descending order of loss), in the latest 100 day loss, the (previous) 95th day observation (of 25% of so) got kicked out. so the updated 5th observation was 4.xx% or so.

Is that how others did it?
That is correct,....vaguely remember the answer being 4.xx %

##### Member
oh, and two more....200 scenarions and 2 confidence intervals, how many scenarios?
2. standard deviations and scenarios were given, what is the most efficient estimator?

#### amresh

##### Member
Subscriber
There was a question regarding futures and spot differences, physical settlement,
VaR assumptions made by the manager - options were jointly distributed variables, not correlated, i.i.d...dont remember the last options

Carry market .. Var is not sub-additive.

#### amresh

##### Member
Subscriber
oh, and two more....200 scenarions and 2 confidence intervals, how many scenarios?
2. standard deviations and scenarios were given, what is the most efficient estimator?
800.
That's tough one as time has to be minimum and takes minimum number of scenarios.. I too I was confused.

#### amresh

##### Member
Subscriber
Here is the note.....have a really strange feeling that I may have misunderstood the highlighted portion and could thereby be wrong......don't think that GARP will test candidates on technical details pertaining to the collection of margin.

Each day all clearinghouse member firms either must pay to or receive from the clearinghouse the difference between the current settlement price and the trade price or, for an existing position, the previous day's settlement price. This difference is known as the variation margin. Variation margin is collected separately for customer positions and the clearing member's own positions and is paid to or from the clearinghouse before the opening of trading on the following business day. Payment is made by automatic debit or credit to the clearing member's customer or house (proprietary) margin account. In some cases, payment is made by certified check. In some markets, variation margin also is collected intraday based on the previous day's open positions, and clearinghouse members are required to deposit funds within one hour of the intraday margin call.

It says before the opening of the trading next day. Means today. Right?

#### Roshan Ramdas

##### Active Member
It says before the opening of the trading next day. Means today. Right?
May be,....didn't read it that way though.....if it were today, then the text should have simply read by the end of the day.

##### Member
Carry market .. Var is not sub-additive.

and futures & spot - answers included number of shares, price movements....dont remember exacty, but struggled with this one

##### Member
800.
That's tough one as time has to be minimum and takes minimum number of scenarios.. I too I was confused.
I also took 800, but now think that 1600 was the right answer...
for the 2nd one - narrowed to 2, 0.25% with 1200 scenarios and 0.30% with 700 scenaros, dont know which one I picked in the end...

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