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# Exam FeedbackMay 2018 Part 1 Exam Feedback

#### PaulTomlin

Subscriber
I've been thinking about the margin question again. I recall the question asked what was the account balance on Day 2. The only possible answer could have been $32,000. For it to have a balance of$0...it won't make sense. Yes, there was $0 movement on Day 2, but the question wasn't asking about that, was it? It had to have a balance of the initial margin of$32,000, given the Day 1 position was at -$22,000. To the best of my knowledge, there was no answer for$32,000, but an answer that specifically spoke about a variation margin of $54,000, hence me choosing that. Does anyone remember anything from this question that could help us reach a decision as to what the answer was? I couldn't see any meaningful VM numbers except 54, 000 either but every answer did seem wrong! #### Albertikos ##### Member 4) How did you answer this question? Is it as simple as S*(e^rt) + Cost + Cost*(e^-rt/12)? I believe the storage cost was$6. My answer was 1242 or something. Basically around $12 above the vanilla futures price. The answers were spaced$2 apart.
==> Yes, I didn't get the exact answer and had to choose the nearest guess.

6) Would this be simply finding the counterparty with the highest negative exposure?

8) I don't recall this question. Can someone jog my memory?
==> Question related to Role of Board in adding value to company. Apologies, I cant remember as this was one of the many qualitative questions

11) I can't recall the answers. What's the correct answer for this?
==> Yes, It was around expected loss and unexpected loss mixed together.

19) I don't recall such a question at all. I do recall a given rate for semi-annual compounding and you were asked to calculate the corresponding rate for monthly compounding. Is this what you're referring to? There was another question with 1.5 year discount rate given and you were asked to calculate the corresponding spot rate.
==> This was a different question, it was presented in a table format.

20) Is the answer something along the lines of "execute all services with diligence and perform all work in a manner that is independent from interested parties"? The others sounded wrong.
==> Yes.

25) Sadly don't recall this question!
==> Yes, its a B.Tuckman mortgage like questions but not direct.

26) Is this the one on prepayment? Find the monthly repayment, and minus that from the amount that was paid for the particular month to find the pre-payment amount?
==> Yes

28) Not able to recall this either!

29) Is this the one where the answer contained the words "line management" as well?
==> Yes. You are correct.
For 19, someone remember the answer?

#### nikic

##### Active Member
For 19, someone remember the answer?
How was the question? Was it with three question marks in a table format?

#### Albertikos

##### Member
How was the question? Was it with three question marks in a table format?
I think that you have to mark a spot rate.

#### nikic

##### Active Member
I think that you have to mark a spot rate.
Was it as follows?

t Discount Spot
0.5 0.99xxxx 1.xxx
1.0 0.94xxxx 1.xxx
1.5 0.88xxxx ?????

Is that the one? If yes, I just took it as such:

1/0.88xxxxx = (1 + x/2)^3

Solve for x as the spot rate

PS: Numbers are just an illustration

#### Albertikos

##### Member
Was it as follows?

t Discount Spot
0.5 0.99xxxx 1.xxx
1.0 0.94xxxx 1.xxx
1.5 0.88xxxx ?????

Is that the one? If yes, I just took it as such:

1/0.88xxxxx = (1 + x/2)^3

Solve for x as the spot rate

PS: Numbers are just an illustration
that´s it but i didn´t remember the answer do you?

#### PaulTomlin

##### New Member
Subscriber
I thought it was a bit harder than the practice exams but not crazily so. As some of the other posters have said, a fair amount of cross-LO questions, lots of misleading/extra info provide and some very wordy questions. The one regarding the treasurer/CFO should have included an answer of "go back and ask him are those really his requirements?"

Performance not helped overall by the 05.30 startup of the monster aircon unit - if you stay overnight at Ibis before the exam and are a light sleeper, I recommend you ask about this when choosing a room. It was on about the 8th floor at the front of the hotel.

Looking at that long list from earlier on:
3. Difference between mutual and Hedge fund. Disclosure.
6. Some positions by various Counterparties to work out which one has the greatest exposure. Exposure was expressed as a P&L I think. + ve P&L means counterparty owes you money, so I think the correct answer must be the largest positive P&L number (which I recall had a smaller absolute value than the largest negative number). I work in credit risk - don't tell the boss if I get this one wrong...
7. Barings failure - Separation of back and front office. Yep, agree.
9. UL question. Some tings is squared and some ain't! Was surprised to get this wrong after trying pretty much every combination but well done to those who did.
15. Expected shortfall calculations for a set of losses. Average of worst 5 days out of 100 (I think..)
20. GARP code of conduct question on use of previous employers data for current employer due to time. Agree - can't use previous employers' confidential data.
21. FX forward calculation from spot using interest rate parity. straight application. Agree.
22. Neutralise gamma of a set of positions. There was a qualitative question where the answer was it requires option and stock
23. Covariance stationary property. Mean and covariance must both be stable over time - I recall selecting the answer that two things must be stable but cannot remember what those things were..
24. Which model out of s2, Aic or SIC has the best Consistency. It's SIC -AIC is the most asymptotically something or other.
29. ERM question was very tricky. I think it asked about Line Management/ Risk Transfer role on the Stack or responsibilities. I think the answer here was about integrating risk management into operations or some other aspect which fell within line management responsibility.
30. Country risk estimate by Risk Officer on sourcing data from sovering gov agency or .. Yes - getting data from Sov Agency.
33. MG case which relate why it failed. Something about being unable to maintain liquidity while hedges moved against it?

Anyone remember the LTCM question?
I also could not get the Callable Bond Convexity to agree with either answer. Duration was OK, convexity not. Anyone manage this?

Thanks

#### nikic

##### Active Member
6. Some positions by various Counterparties to work out which one has the greatest exposure. Exposure was expressed as a P&L I think. + ve P&L means counterparty owes you money, so I think the correct answer must be the largest positive P&L number (which I recall had a smaller absolute value than the largest negative number). I work in credit risk - don't tell the boss if I get this one wrong...

20. GARP code of conduct question on use of previous employers data for current employer due to time. Agree - can't use previous employers' confidential data.

29. ERM question was very tricky. I think it asked about Line Management/ Risk Transfer role on the Stack or responsibilities. I think the answer here was about integrating risk management into operations or some other aspect which fell within line management responsibility.

30. Country risk estimate by Risk Officer on sourcing data from sovering gov agency or .. Yes - getting data from Sov Agency.

Anyone remember the LTCM question?
I also could not get the Callable Bond Convexity to agree with either answer. Duration was OK, convexity not. Anyone manage this?

Thanks
6. Yes the largest -ve value had a higher absolute value than the largest +ve value. Are you absolutely certain it's the highest positive that's the answer, and not the largest negative value? Wasn't the question asking about the risk to the CCP? Meaning, if it is a net negative exposure, that's when the CCP bears risk?

20. Was the answer you got "execute all services with diligence and perform all work in a manner that is independent from interested parties"?

29. Yeah I got the line management one as my answer as well. I considered this a 50/50 so if that's correct, it's great!

30. I recall a question on country risk but not what it was specifically. Also can't recall the answer. But I thought I had this locked down. Would appreciate if you could jog my memory here with the question and some answers.

There was a question on LTCM!?!?

And where's this callable bond convexity coming from? Was it a question only on convexity? Or is this the portfolio duration/convexity question? Don't recall it.

#### Learner frm

##### New Member
Vaguely remember two questions.

1. What about whether callable option is expensive/cheaper for issuer/investor? I chosen callable option is costly for investor compared to bond w/o option?

2.2For operational risk qs, is it true that the operation risk allocation decreases for departments that perform well?

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#### Learner frm

##### New Member
3. Also one question was about MGRM failure, was it 'customers started to close their contracts' as the reason for its failure?

#### jbejarjimenez

##### New Member
30. Country risk estimate by Risk Officer on sourcing data from sovering gov agency or .. Yes - getting data from Sov Agency.

I think the question was regarding the use of ratings or default spread, is that right? Thanks in advance

#### Learner frm

##### New Member
Also does any one remember question about recovery rate? Something about recovery rate having log normal distribution?

#### nikic

##### Active Member
Vaguely remember two questions.

1. What about whether callable option is expensive/cheaper for issuer/investor? I chosen callable option is costly for investor compared to bond w/o option?

2.2For operational risk qs, is it true that the operation risk allocation decreases for departments that perform well?
1. I know the answer was in a 2x2 table form. On the left side I chose investor. Can’t remember what was on the right. Was it cheaper/expensive? If so I’d have put cheaper.

2. I don’t think I chose that as the answer for this question.

#### nikic

##### Active Member
Was there a question on stack and roll? Does anyone remember the exact nature of it?

Also, for the portfolio duration and complexity calculation, anyone remember the answer for convexity? Was it 14 point something or 16 point something?

#### flex

##### Member
Was there a question on stack and roll? Does anyone remember the exact nature of it?

Also, for the portfolio duration and complexity calculation, anyone remember the answer for convexity? Was it 14 point something or 16 point something?
there's 14.5 & 16.5 answers, last should be true

#### pint0

##### New Member
i had it difficult with the CPR / SMM Question. ,
In the GARP Books it is missing how it is actually calc. on a example like it appeared in the exam, except the standard formula to measure SMM, CPR and including PSA.
It was like 450K is initial, 8.5k is prepaid by customer and end of month was 411k balance. What was the .. SMM?? Cant recall so exactly anymore.

On that note, there was a question to calculate portfolio duration and convexity. I got the duration easily...but the convexity alluded me. What did I miss out on? I believe there were two answers - 14.3 and 16.4. At least one was 14.x and another 16.x. I took a gamble on 16.x. No idea!!!
Yes i had difficulties with that question too:
Please correct me if I am wrong, because I missed that question out in order to solve at in the end and there was not enough time, so I guessed at in the end:

it was given the price of two zero-bonds, with Duration and no assumption of delta% the yield would change. Convexity was not given.
It was for me not clear how to calc. the convexity on a approximation approach, as I know I have do approx. it with the %change in yield with (again, I couldnt find in the question) , eg.:
(B(-0.25%)+(B+0.25%)-2*B) / (B*0,25%²),
This was a tricky one, for me at least.

#### Albertikos

##### Member
i had it difficult with the CPR / SMM Question. ,
In the GARP Books it is missing how it is actually calc. on a example like it appeared in the exam, except the standard formula to measure SMM, CPR and including PSA.
It was like 450K is initial, 8.5k is prepaid by customer and end of month was 411k balance. What was the .. SMM?? Cant recall so exactly anymore.

Yes i had difficulties with that question too:
Please correct me if I am wrong, because I missed that question out in order to solve at in the end and there was not enough time, so I guessed at in the end:

it was given the price of two zero-bonds, with Duration and no assumption of delta% the yield would change. Convexity was not given.
It was for me not clear how to calc. the convexity on a approximation approach, as I know I have do approx. it with the %change in yield with (again, I couldnt find in the question) , eg.:
(B(-0.25%)+(B+0.25%)-2*B) / (B*0,25%²),
This was a tricky one, for me at least.
For CPR and SMM think that the formula is (1-(1-cpr)^(1/12))*Outstanding balance amount

#### pint0

##### New Member
For CPR and SMM think that the formula is (1-(1-cpr)^(1/12))*Outstanding balance amount
But i think CPR% was not given, or was it?
I made it little bit complicated, like 450k - 8k - 411k = prepayment -> prepayment / (450k - 8k) is the CPR% and the transform it into SMM -> SMM * Outstanding? But thanks for your input, maybe it was so easy and i missed the infos

#### Albertikos

##### Member
But i think CPR% was not given, or was it?
I made it little bit complicated, like 450k - 8k - 411k = prepayment -> prepayment / (450k - 8k) is the CPR% and the transform it into SMM -> SMM * Outstanding? But thanks for your input, maybe it was so easy and i missed the infos
CPR was given as a 9%....

#### hana1563

##### New Member
6. Yes the largest -ve value had a higher absolute value than the largest +ve value. Are you absolutely certain it's the highest positive that's the answer, and not the largest negative value? Wasn't the question asking about the risk to the CCP? Meaning, if it is a net negative exposure, that's when the CCP bears risk?

20. Was the answer you got "execute all services with diligence and perform all work in a manner that is independent from interested parties"?

29. Yeah I got the line management one as my answer as well. I considered this a 50/50 so if that's correct, it's great!

30. I recall a question on country risk but not what it was specifically. Also can't recall the answer. But I thought I had this locked down. Would appreciate if you could jog my memory here with the question and some answers.

There was a question on LTCM!?!?

And where's this callable bond convexity coming from? Was it a question only on convexity? Or is this the portfolio duration/convexity question? Don't recall it.

i m pretty sure it should be the highest positive exposure for ccp. its part2 material. i know cuz i took both p1 and p2.