# 6/4 Ask Me Anything with Marc LeFebvre of LevelUp Bootcamps

Marc in regards to exhibit 28 and 29 in the alternative investment readings.  (Reading 30)

What are the important take away from that.  When I looked through it I don’t think they would have us calculate everything.  Maybe what will be tested I think

Is the rolling return

Sharpe

Sortino

Gain to loss ratio.

In regards to that chapter the most testable material to me seems like the HF benchmark problems, Sharpe ratio gaming, PE vs BO, HF performance calc, REIT vs Direct RE, J Factor and with commodities being a good unexpected inflation hedge before the 2008 crisis.  Am I missing any other important points?

Also, what’s the best way to tackle ethics at this point?

Thanks.

I'll get knocked down but I'll come right back up.

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The problem is there is a few details in the curriculum candidates miss.  (1) first identify the swap that brings the current duration to the target (2) find a swap whos maturity is long enough to hedge the risk for the period the manager wants the protection.  Don’t select a 3 year swap that bridges the duration gap but expires before the duration of the hedge is met by the manager and lastly (3) find the swap with the biggest duration because when that is put into the denominator of the notional amount, the larger the swap duration the smaller the NP and the more likely you’ll find a counter party to take the swap.  It is an optimization problem.

Reading 34 Section 2.2 page 364 right below the three bullet points

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I’d be able to calculate the negative st dev that is used in the Sortino ratio.  The exhibit 27 and 28 show this calculation and they ask again in the practice problems.  Once oyu can calculate the downside deviation learn how they annualize the risk.  The formula is page 80 in reading 30 and the application is exhibit 27, please catch the footnote below exhibit 27 so you identify the hurdle rate of 5% annually or 0.4167% per month.

You are correct on the other Alt Inv topics.

Ethics, read a standard a day and be sure to work all the probelms in the back of volume 1 where the ethics question are found, nearly 285 of them and hope for the best.

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Like the whole reading.  Know how to hedge using currency puts and the cheapest options to use, how to use currency forwards.  Know the trade offs of each approach.  Know the four reasons to trade currencies.  Know the strategies they out line in the examples.  If you can work the blueboxes correctly in that reading you have it mastered.

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Marc-

For institutional.  If they do test PC insurance and Banks.  What do you think most likely will be tested?

My thoughts are.

PC Insurance.

Liquidity needs and short duration.

Banks

For LADG the concept felt similar to that of a DB plan where you want a negative gap (shorter duration like in DB plans) with rising i rates and a positive GAP with falling i rates (longer duration for a DB plan)

Is that correct?

Thanks

I'll get knocked down but I'll come right back up.

I suspect the institutional reading will get updated soon.  Not sure but likely.  Nevertheless, they have rarely but they have tested P&C companies before. The last time was in 2006 I believe.  They have never tested banks and YES I believe this is the year. So understanding how a bank manages the interest rate risk of the B/S is important. The LADG material on page 521 in reading 15 is testable.  The bank wants longer duration loans and shorter duration deposits when rates are falling and shorter duration loans and longer duration deposits when rates are falling.The bank manages this through the k variable or the amount of liabilities (L) it has vs the assets (A) it has in the equation.  Spend twenty minutes on that section 5.1 pages 519-523 and you’ll be thankful you did.

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Hey Marc,

Thanks for this Q&A session. So regarding Fixed Income, is there a possibility of a liability defeasance question on the AM session ? What I’m referring to is the Bluebox question where we’ve been asked to calculate the Par Values of the bond.

In Behavioral Finance, if asked to identify the bias and provide an example to support selection, are we required to first define the bias and then give the example or can we just skip the definition and move on to the example ? Also, if asked how a rational human would behave, is that the same as asking how to mitigate the bias ?

In general, if asked advantage & disadvantage, must we explain in thoroughly or can we just list them down ? Eg - Pros & Cons of VWAP & IS. Will we need to explain how gaming would be done by traders ?

Thanks.

I suspect the institutional reading will get updated soon.  Not sure but likely.  Nevertheless, they have rarely but they have tested P&C companies before. The last time was in 2006 I believe.  They have never tested banks and YES I believe this is the year. So understanding how a bank manages the interest rate risk of the B/S is important. The LADG material on page 521 in reading 15 is testable.  The bank wants longer duration loans and shorter duration deposits when rates are falling and shorter duration loans and longer duration deposits when rates are falling.The bank manages this through the k variable or the amount of liabilities (L) it has vs the assets (A) it has in the equation.  Spend twenty minutes on that section 5.1 pages 519-523 and you’ll be thankful you did.

Marc did you mean when i rates are rising you want longer duration deposits and shorter duration loans right?

Thanks.

I'll get knocked down but I'll come right back up.

Sure happy to help.

Anything in the curriculum can be tested, that is per the CFA Institute.  Know that.

Liability defeasance is a highly testable topic.  Best place to practice this is Bluebox 4 in reading 23 Liability Driven Strategies.  In order to truly remove the corporate debt you have to use a risk free asset to hedge and the method in the readings is Section 4.1 cash flow matching.  Be sure you can work at least the first two years of the details in BBox 3…totally testable.  Early BBoxes are always tested with new readings.

When you study the past exam solutions they provide two aspects to every BF solution…the definition and the application. Give the grader both.  If they don’t want it you only wasted a minute of time, if they do want it and you didn’t give it then it could cost you 400 hours ofd study time next year.  I like my risk-reward trade off better.

Funny thing is if you study more recent exams they don’t really test adv and disadv anymore.  Those really come up in the justification part of the question.  Always give them the justification but you MUST apply it to the portfolio, client or circumstance mentioned in the question.  If you don’t do that you’ll leave 50% of the points on the flor and not earn those points.  You must provide the application.  A disadvantage of VWAP is that is gamed by traders.  The trader can recongize the weakness of the measurement tool and take advantage.  The trader pulled the remaining unfilled portion of the trade late one day and completed the trade the next day beating the subsequent day’s VWAP.  Had the trader completed the trade on the first day his execution average price would exceed the VWAP and not look good.  See how you apply the adv and disadv?

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Yes silly me.  You have it correct. Too much coffee today.

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Hey Marc-

Is there a good way to try to memorize/get down the currency swap.

Sometimes hard to see for me if it is asking for measuring the credit risk, (SFFD) or if it’s asking on the different payments when you’re concerting a loan in one currency to another.  (Walmart to GEB)

Thanks

I'll get knocked down but I'll come right back up.

Simple question Marc, is it necessary to write down all the inputs in a TVM calculation or any calculation than is done thru the calculator? Thanks in advance

Hey back,

Never memorize, not a good idea for Level III.  There are many aspects of the currency swap so the dynamics can change based on the question the exam asks.  Is the bond better issued as in the Royal Tech section 3.1 in the swap reading 3.1.  It can also be converting foreign cash receipts and payments into the domestic currency in section 3.2 with Colorama Software.  You can even manage the risk of a duel currency bonds as they did in section 3.3.  There is only three circumstances they ask about currency swaps in the swap reading.

The “credit risk” of a forward contract is easy when you use SFFD . Try the technique with  Bluebox 8 in Reading 31, page 177 and 178.

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If the question states “Show your calculations,” then ABSOLUTELY yes.  If you simply provide your 4.5% solution for a 5 point problem the grader doesn’t know how you arrived at your solution, either by the four other inputs or by a look at your neighbor’s paper.  Give them your inputs.  If you make an error then you lose only one point as well and not the input plus the solution  there is no double jeopardy. If you only provide the 4.5% for a five point question you will loose the other 4 because they asked to show your calculations.  Answer the question they ask ;-)

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Overall MPS prediction? We were looking at the percentile ranks for the 2018 exam and it looks like ~68% for the AM and well above 70% - maybe closer to 80% for the PM. What would you consider a “safe” score?

Voyager3 wrote:

Overall MPS prediction? We were looking at the 90th percentile ranks for the 2018 exam and it looks like ~68% for the AM and well above 70% - maybe closer to 80% for the PM. What would you consider a “safe” score?

I’m not sure how you derive that information.  It rolls like this…after the exam is graded (not before) the senior grader is asked what is a MPS on each specific question they were responsible for in the grading process.  Once they determine each questions MPS, they then aggregate the scores across all questions on the exam.  Thusly a 10 point question MPS can be 4 points if it was a very hard question.

The CFA Institute has said any candidate scoring above 70% has passed the exam.  That is printed and verified.

Let’s make it “One & Done in 2019”

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Hey Marc,

I’ve managed to go over the Focus Book, Core Curriculum Book, Old Exam Binder, and IPS workbook 2x each since attending your bootcamp a month ago!

I’m not sure if I’ll have enough time in the next 1.5 weeks to do another round of everything… But would you recommend I just go through the Core Curriculum book (and its relevant Blue Boxes) for the next week? or should I spend some time to redo the online Practice Questions (i’ve only done them once so far…)?

Also, regardless if I pass or not this year. Just wanted to thank you for your help! I’ve been taking another prep course for L3 prior to attending your bootcamp, and had the original intention of attending your bootcamp *only* for the IPS/Exam Strategy workshop. Well, you’ve completely changed the way of how I should approach this exam post-bootcamp, and the notes of my other prep provider had been collecting dust since then!

That looks more like 90th percentile than MPS

Yup great job with the material Marc.  This year so much more confident.  All the mistakes at least this year. I know where exactly to find the answers from the curriculum/slidebook so there are no more hidden surprises.

For the intensive boot camp before the exam what will you have your candidates doing that week?  Just mainly questions from the old exam binder?

Thanks

I'll get knocked down but I'll come right back up.

When we show calculations, do we have to label what we are doing, or can we assume the grader can follow along?

Example: portfolio is \$1 M, and the person needs to spend \$500k in a few days, and you want to calculate the portfolio value next year as an input to calculate next year’s return. They need \$100k for next year.

1,000,000 - 500,000 = 500,000

100,000/500,000 = 20%

OR

Portfolio value next year: 1,000,000 - 500,000 = 500,000

Needs next year: 100,000

next year’s return requirement: 100,000/500,000 = 20%

Great work, that is solid.  You will have no surprises on exam day.  Speed is always an issue.  Focus on your rough spots and make those your crushing topics.  Keep reviewing the slide book and whichever questions you struggled with.

I’m glad you saw there is much more to how I cna help vs just the IPS return calc ;-))  Send me your positive outcome results!

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I want to work old exam problems and demonstrate how to answer the questions base don the points awarded and how to do so with less words/verbiage. Once we have done a topic of exams switch to Blueboxes.  I am also going to have the candidate verbally explain how they answered the questions and have them simplify the approach they used to solve the problems. They are also presenting at random times a ethics substandard they have been assigned (along with the associated questions at the back of Volume 1).  After the Blueboxes we will hit the white text.  IPS twice.  Over the course of the 8 days I want to hit Individual, Institutional and BF twice hard before the exam

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Just label your solution, especially if they ask for it in a particular form such as basis points.  Intermediate labeling isn’t necessary it only burns up time and won’t earn points.

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cfalevel3taker19 wrote:

That looks more like 90th percentile than MPS

Yes, I meant to say that was the 90th percentile. Not the MPS. Didn’t mean to freak people out :)

lol too late hahaha

I'll get knocked down but I'll come right back up.

Hi Marc,

thumbs up for the Boston Bootcamp. Certainly recommend it.

I have a hard time understanding the following EOC q: (on one hand the text states trades should be assessed on hedged returns but then the answer states it doesnt matter if hedged or not to evaluate attractiveness)

Regarding inter-market trades in general her notes indicate:

Inter-market trades should be assessed based on currency-hedged returns.

Anticipated changes in yield spreads are the primary driver of inter-market trades.

Whether a bond offers a relatively attractive return depends on both the portfolio’s base currency and the currency in which the bond is denominated.

Statement IV

Statement V

Statement VI

C is correct. Winslow’s Statement VI is incorrect. Due to covered interest arbitrage, the relative attractiveness of bonds does not depend on the currency into which they are hedged for comparison. Hence, the ranking of bonds does not depend on the base currency of the portfolio.

The context matters from which the question is posed.  There is uncovered IRP and covered IRP.  Uncovered means the currency exposure is unhedged, once hedged it becomes covered IRP once the forward currency contract is introduced.

The primary driver of intermarket trades is a view on narrowing or widening of yield spreads (Reading 24, section 5, third paragraph).

Bluebox 4 reflects this approach.

Intermarket positioning in BBox 5 has a unique proposition.  That is that the manager has an existing portfolio of bonds from UK, Germany and the US.  The manager is constrained by no short selling, buying and selling bonds with a limit of 1.0mm and duration neutral.  In this context they said the trades had to be evaluated after the return is converted back to the local currency.

Maybe this was confusing with your interpretation of the EOC.  I hope this helped.

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Thanks everyone, this was fun.  I though it would be harder;-))

As in any worthwhile journey in life, it is the work that you put into the process that makes the result so valuable. I know you are all ready to rock the exam and I hope everyone of you passes.  No one should have to take the Level III exam more than once, thus I pray you make it “One & Done”.

One bit of advice…don’t get medical advice from any one other than a licensed medical doctor.  Don’t get legal advice from anyone but a licensed attorney and don’t climb Mount Everest without the best Sherpa you can hire  Lastly, on your last leg of the CFA journey find the best instructor you can to help you make it One & Done and that they have the CFA designation.

Best of luck to you all!

Let’s make it “One & Done in 2019”

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