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  • Question 5 defective??

    Does anyone else believe that this problem is defective? Hedge ratio is not mentioned in the syllabus. This topis is discussed in Ch. 10 of Kellison's book, in the chapter that was left out of the syllabus.

  • #2
    Originally posted by sak0h
    Does anyone else believe that this problem is defective? Hedge ratio is not mentioned in the syllabus. This topis is discussed in Ch. 10 of Kellison's book, in the chapter that was left out of the syllabus.

    If that's discussed in chapter 10, i am sure it's otu of the syllabus. It's only up to Chp 9 in Theory of Interest book.. I got that question wrong too..
    Will they know that this question is not in syllabus though?

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    • #3
      I hope Q5 is defective, since i got it wrong also

      Comment


      • #4
        Hedging is covered in sections 8.7 of Kellison.The key phrase that gave me the answer is "risk-free arbitrage." (so the answer couldn't be short sales, which can be quite high risk for an investor since you can make at most a certain amount of profit, but there's no limit to the amount you can lose).

        I also specifically remember reading about it in another FM study manual as well.

        Sorry to dissapoint you...

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        • #5
          Hedge ratio

          Originally posted by sszpakowski
          Hedging is covered in sections 8.7 of Kellison.Sorry to dissapoint you...
          The answer was "hedge ratio", not "hedging". Hedge ratio is not covered anywhere in the syllabus for exam FM, and neither is the Black Scholes formula or Black-Scholes stochastic methodology.

          Questions 1, 5 and 19 were very, very inappropriate, not written in a manner compatible with Course FM readings or syllabus. I am very happy to learn that my students got them right, but this happened only because I advocate overstudying. However, these three questions, in my very firm and opinionated opinion were inappropriate and should all be thrown out.

          I could use stronger words, but this is a public forum. Plus, protests are probably pointless.

          Yours,
          Krzys'
          Last edited by krzysio; November 11 2005, 12:24 AM.
          Want to know how to pass actuarial exams? Go to: smartURL.it/pass

          Comment


          • #6
            Originally posted by krzysio
            The answer was "hedge ratio", not "hedging". Hedge ratio is not covered anywhere in the syllabus for exam FM, and neither is the Black Scholes formula or Black-Scholes stochastic methodology.

            Questions 1, 5 and 19 were very, very inappropriate, not written in a manner compatible with Course FM readings or syllabus. I am very happy to learn that my students got them right, but this happened only because I advocate overstudying. However, these three questions, in my very firm and opinionated opinion were inappropriate and should all be thrown out.

            I could use stronger words, but this is a public forum. Plus, protests are probably pointless.

            Yours,
            Krzys'
            I agree with others (on this board and others), that 5 is a defective question that should (and I think will) be axed. What exactly is your beef with 1 and 19? Are they as defective as 5 or just poor questions?

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            • #7
              I got 1 and 19 wrong. I don't see what the big problem is with #5 though. It says his strategy is to sell a specific number of options for each share of stock owned. This method doesn't involve any value calculations as it is an arbitrage strategy, meaning he buys something on one market and sells it on another market for a higher price. No time value is involved so A is out. B is out because there is no risk involved. C is a term that doesn't apply in any way. D is wrong for 2 reasons, first that short sales are not a arbitrage strategy and secondly because I have never heard option writing referred to as short selling. That leaves only E which makes plenty of sense. He sells with a specific ratio as the questions states and he is hedging against a previous position in the fund. I don't know if the syllabus explicitly covers all of this but if you know the meaning of the word arbitrage I think you should be able to come to this answer. Either way it was a, lets say, not so great question(although I got it correct so I hope it stands for selfish reasons). I was completely confused by the wording of question 1 and lost some valuable time trying to figure it out, which I couldn't. I am not sure what is defective about question 19 either. I assume that I and II are true and III isn't...is that correct? I wasn't sure about III and guessed D.

              Comment


              • #8
                #19 was E.

                I was not true. II and III were true

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                • #9
                  I is not true? Aren't stripped Treasuries a form of what I is talking about. I is the one I was sure was true.

                  Comment


                  • #10
                    Originally posted by dhatlarge
                    I agree with others (on this board and others), that 5 is a defective question that should (and I think will) be axed. What exactly is your beef with 1 and 19? Are they as defective as 5 or just poor questions?
                    Question 1 says that the rate of return is based on accounting entries, but the answer is based on the information on cash flows. Please show me what in this question tells you that the answer is based on cash flows when the first sentence says that it is based on accounting entries?

                    Maybe you can tell me, please, which of the three answers in 19 is incorrect. As we all know, actuarial exams are about guessing the "original intent" of the question writer. So my guess is that you were supposed to say that III is not true. But the interest rates on the risk-free forward yield curve are forward rates. The question did not say which yield curve: bond curve, spot curve or forward curve, it was referring to. There is no way any reasonable person can argue that III is definitely false. So maybe I is false? But this is exactly how original zero-coupon bonds were created. Is it II then? The spot curve is derived typically from on-the-run strip Treasuries, or from stips estimated from on-the-run coupon Treasuries. There is nothing wrong with II.

                    Could you show me how you argue that there was anything right with questions 1, 5, or 19?

                    Yours,
                    Krzys'
                    Want to know how to pass actuarial exams? Go to: smartURL.it/pass

                    Comment


                    • #11
                      I agree with you on 1 and 19 although i still don't even understand the information given in 1. I still feel that understanding the concept of arbitrage allows you to figure out #5.

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                      • #12
                        Krzys....you would know more than I, what is the precendent on eliminating questions after the exams are given? Has it been done? How has it been handled in the past? Thanks.

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                        • #13
                          Question 19

                          Kryz,

                          I answered E because III mentions forward rates. I thought the risk free yield curve had time on the x-axis with spot rates on the y-axis.

                          If that is not correct, I guess I mistakenly got the correct answer. Either way I passed so I am happy!

                          Comment


                          • #14
                            Originally posted by krzysio
                            Could you show me how you argue that there was anything right with questions 1, 5, or 19?
                            Oh don't get me wrong. On my first pass through the test, I skipped over four questions 1, 5, 19, and 21. Something just didn't seem to add up. I got 21 eventually, but had to take educated guesses on the other three. If I remember my answers correctly, the only one I missed was was 19, which I answered D. I was just curious to get a take from someone who knows better than I do.
                            Last edited by dhatlarge; November 11 2005, 05:37 PM.

                            Comment


                            • #15
                              Number 1

                              Originally posted by bv12
                              I agree with you on 1 and 19 although i still don't even understand the information given in 1. I still feel that understanding the concept of arbitrage allows you to figure out #5.
                              I am swamped at work, but hope to get to writing up solutions for this exam very soon. There is no arbitrage in No. 5, the question is about
                              hedging, and picking an appropriate ratio of the hedge to the underlying (you do not need to calculate the hedge ratio, just know that such a hedge ratio is the basis for the strategy).

                              Yours,
                              Krzys'
                              Last edited by krzysio; November 12 2005, 06:04 PM.
                              Want to know how to pass actuarial exams? Go to: smartURL.it/pass

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