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

CFA Level III
#21

Go see Marc :slight_smile:

#22

Ah great question. Its new material thus likely to show up. I’d definitely make sure you understand Bluebox 4 and why a 2 yr Greek and a ten yr Greek bond has its trade offs and then why you enter a euro swap to reduce the duration once you bought the 10 yr Greek. All of that carry (pun intended) intBluebox 5. Now in the BB5 the most important thing is (1) be able to calculate the return on that 5 yr US Treasury. It has three elements…pull to par + couponrolldown/aging and change in price based on a constant maturity change in rates. That is part A of BB5. Be able to do part B. Now beyond that I’d stretch and say being able to identify the best pairwise trade would be a really good skill set and be able to justify based on the IPS constraints such as no short selling, dollar neutral trade.

#23

Hi Marc, I was in the San Fran bootcamp. Thanks for all your wisdom. Do we have to know the Effective annual yield calculation in the fixed income section? Thanks

#24

Hi Marc,

In regard to blue box 5, I remember you saying in the video that the local return for US 6 month local return was calculable. However, I’m not too sure how the other percentages were calculated the 0.28 percent, -0.05 percent and - 1.37 percent.

Other than the 0.52 percent I don’t know how they got the bond price numbers.

I have a feeling it won’t get tested but it’s just been bugging me since you said you could calculated it out similar to the 5 year US local 6 month return.

Thanks.

#25

Yeah…first believe in yourself. You have done the work for three years, that has a whole lot of value and sometimes it takes a few trys to get this right. They didn’t send a man to the moon on the first attempt and that was easier than the CFA Level III exam. There are small points to pick up along the way (1) answer the question being asked. Don’t answer how you think it should be answered but answer the question they ask. In otherwords apply the solution you provide to the case, client or portfolio attribute as well. Many times candidates miss that subtle element of answering the essay questions. The justification is the application of the concept being tested. Label your solutions if they ask for a label. Details matter in the afternoon item sets. Don’t forget detailed last steps in finishing your solutions. Remember if you forget a step that wrong answer will be there. Study how the old essay CFA exams provide the solutions and learn to mirror that approach with less words but same completeness. You will do great. The 4th time is the charm.

#26

I will agree it is tricky and when I asked the Institute about it they agreed it was not presented well. First step is the pull to par is the price of the bond going from a premium (1.90% yield vs 2% coupon bond) to par. The second step is related to riding the yield curve, in this case the bond “ages” from 5 years to 4.5 years and as yields fall the price rises and lastly the CM yield change basically says that the new yield is 1.75& and yields rise to 2.0% and the price moves from premium back to par. All three summed is the 0.52%. hey don’t provide those detauls for any other bond.

#27

The effective annual yield in the fixed income section…help me a bit further. I am drawing a blank. Can you point me to the reading or example? If it is in the CFA curriculum yes you would need to know it.

#28

Choosing between ABO then PBO then finding the effective duration --> then finding how many number of future contracts, forward contracts or doing a reciver swaption…I think that’s what he was talking about…I hope it doesn’t get tested…but man with how much detail they went into it with calling the guy a DB hero…you’d think it’s bound to show up…

#29

Absolutely…happy to help everyone pass…!

Can I ask for a little more clarification on your first question?

Yes on the CFA institute web site under candidate resources exam details is a list of key words used and what they mean.

#30

Hey Marc

When using swap duration e.g. -2 to reduce the duration on a portfolio of corporate bonds e.g. 5 with a target of 3, can you simply add them? 5-2 = 3 so target duration met?

Ive worked a question in the TT where they select the cheapest of the 3 swap duration options given to reduce the bond portfolio duration and not the swap that gives you the target duration. Would we always default to selecting the cheaper option?

#31

Well the focus in the curriculum is the PBO and since we don’t know the timing and amount of final benefit payments the effective duration should be used since pension payments are type IV liabilities. Knowing how to use derivative overlays to bridge the duration gap is key for reading 23 whether the liability is a pension (section 5) or a corporate debt liability (section 4). The use of futures, adding a positive duration swap or hedging IR with a swaption would be something I’d spend some time on. See Reading 23 pages 81-84 and example 7.

#32

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.

#33

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

#34

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.

#35

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.

#36

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

The LADG

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

#37

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.

#38

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.

#39

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

Thanks.

#40

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?