Have tried to be accurate to the best of my knowledge. Your feedback/suggestions would be appreciated. All the best
A.** General Tips/Silly mistakes/Common errors**

Although the exam is for 4 hrs spanning 100 questions , time will be a constraint as numerical questions are calculation intensive

Be very familiar with the use of the calculator esp when to comes to calculating e,LN, combination , power , PV etc

Set the decimal to 9

Focus on Products and VaR as they weigh 60%

Skip question immediately if u are stuck [We wouldn’t like our paper to finish at Q no. 84 when there could be possible sitters in the last bunch of 16]

Many questions have multiple lines. Read the last line to directly get to the question and then read the para [understanding would be better]

See the answer options before solving [in many of them if you can guess the direction viz sell/buy – long/shortgain/loss bond price movement –up/down 2 options can be eliminated]

Expect 20% of the questions to be really tough. The key is to identify them and leave them in the first .

Expect that u may not remember all the formulae [everyone goes thru it is natural]

Keep a tab of time . You should have solved around 2530 questions/hr .

Shade the correct option. [sometimes in a stressed situation we subconsciously shade the wrong one]

Inputting of data in the correct form is critical [continuos compounding if the risk free rate is 5% , use .05 not 5 . In duration for 5 basis points use .0005 etc]

Read the question carefully they may have double negative or may ask which of these is FALSE/INCORRECT ?

Pay special attention to calculation of variance/SD/volatility. Often it requires squaring or square rooting.

Do not expect to master all concepts.

Revisit/Reconfirm the conceptual subjective questions. They can be really tricky.

Although people feel that 70% is required for passing , my belief is that 6065% should be good enough [pass rate is 50% and expecting 50% of them to score more than 70% does’nt appear to be probable]
B.** Handy Material**

6 pager schweser’s quick sheet – at the end of practice exam book of schweser

Formulae at the end of Schwser notes

Final Review Guidebook [akin to Secret Sauce of CFA]
C.** High level of testability**
[For the sake of brevity , am mentoning only the formulae/concept name without elaborating and not writing the actual one unless an issue needs highlightSource BT]

VaR – [note that VaR is different if they are talking of confidence level or significance level]

Portfolio volatility [remember to square root]

CAPM the mother of all equations

Mean, Variance (SD)

Sample mean [Std error, critical tvalue]

Distribution [Bernouli, Binomial, Poisson, Normal]

Monte Carlo Simulation

Volatility –EWMA, GAARCH (1,1)

Linear Hedges [almost certain to be tested]

Interest rates

Cost of Carry

Options [Binomial, BSM]

Bond Price –Fwd rates

Expected /Unexpected Loss
______________________________________________________________________________
D.** Key formulae/concepts – High testability**
**i)**Foundations for FRM

VaR

Basis Risk

Expected Return of a portfolio

Variance of a two asset portfolio

Correlation [ve is good fo diversification]

Assumptions of CAPM [total 10]

Multi factor model

Sharpe can be applied to all portfolios/Treynor –when diversified portfolio/Jensenwhen comparing portfolio with same beta/Information Ratio/Sortino –when MAR is not given assume risk free rate as the MAR

ERMwhat it means ?

Debt overhang

Fin Disasters LTCM/Metallgesellchaft

GARP code of conduct [ members cannot outsource or delegate to others
ii) Quantitative Analysis

Expected value

Var(X)= E(Xu) squared

Var (X+Y)= Var(X) + Var(Y) if x, y are independent random variables otherwise add a term ie 2 x Cov(X,Y)

Leptokurtic More PeakedFat Tails –Kurtosis > 3

Z= Observation Pop mean/SD  Very imp formula

Tdistributionwhen constructing confidence interval based on small samples [< 30] from population of unknown variance

Ch—square test For hypothesis tests concerning the variance of a normally distributed population

Std error= SD of the sample avg/sq root of n . n= no of observations

Central Limit Theorm

Confidence Intervaal – Point estimate +, (reliabilityfactor x std error )

Commonly used reliability factors– 90%1.65 , 95% 1.96 , 99% 2.58

Type –Irejecting the null ypothesis when it is truesignificance level alpha =P(Type 1 error) , Type –II error=Power of test = 1 p

Linear RegressionEquation is linear in parameters. May or may not be in linear in variables

R squared/Adjusted R squared

Effects of heteroskedasticity – coefficient estimates are not affected

Assumptions of Multiple Regresion 6 – error term is normally distributed, EV of error terms=0, variance for error terms is constant , error terms uncorrelated with each other

Multicollinearity2 or more of the independent variables are correlated

Ftest= how well the set of independent variables as a group explains the variation in dependent variables = ESS/k/ SSR/nk1

Learn to read the ANOVA table

Binomial EV=np , Variance=npq

Bernouli –EV=p , Variance =pq

Poisson EV= lambda =Variance

Poisson= lambda ^x. e^lambda/factorial of x

MCSGBMequation

EWMA/GAARCH (1,1) Almost certain to be tested [see the gamma and long term variance in GAARCH]
iii) Financial Markets and Products

Initial margin, maintenance margin

Basis risk= spot price of asset being hedged – future priceof contract used in hedge

Min variance hedge ration= SD of spot x correlation/SD of future

No of contract= Beta of portfoilio x Portfolio value/Value of futures contract

Value of future contract = future price x contract multiplier

Change a portfoloio beta= [Target beta – existing beta] x Portfolio Value/Value of underlying

Continuos compounding rate

Theoritical price of bond discount cash flows

R fwd= R2T2 – R1T1/T2T1

FRA remember to discount the net cash flow

Estimated change =  Duration effect + Convexity effect [Note the opposite sign]

Term theories Expectations/Mkt segmentation/Liquidity preference

Fwd price = Spot x e ^rT . In case of dividends replace rT by r – q)T

Interest Rate Parity= F=S x e ^ ( rd rf) T

Backwardation/Contago  diff from normal backwardation/normal contago In the later the comparison is between expected spot and fwd price

Dirty price= Clean price + Accrued Income

CTD Bond= which minimizes Quoted Bond Price  (Settlement Price x Conversion Factor )

Actual fwd rate = Fwd rate implied by futures – 0.5 x T1 x T2 X alpha ^2

Duration based hedge = N=  P x Dp/F x Df

Comparative advantage in interest rate swap

Valuing a currency swap

6 factors impact the value of an option – current stock price , strike price, time to expiration , short term rosk free interest rate , present value of dividend , expected volatility

Effect of each factor on value of call increase/decrease

PUT CALL PARITY c + Xe^ rT =S +p

Covered call – stock + short call income strategy , Protective put – long stock + long put – insurance strategy

Pay of various strategy Bull /Bear/ButterflyCalender/Diagonal/Box

Combination strategies Straddle –bet on volatility/Strangle/StrapBet on volatility but bullish /Strip Bet on volatility but bearish/Collar

Variance of the basis = SD spot^2 + SD future^2  2 x SD spot x SD future x correlation

Hedge effectiveness = 1 – Variance of the basis/SD spot ^2

Lease rate in commodities.

Crack Spread
iv) Valuation and Risk Models

Discount factor

Computing fwd rate

If YTM > Coupon rate – Discount Bond

DV01

Modified duration / Convexity

Duration of portfolio= weighted avg of duration [imp= weight of market value not pa rvalue]

Negative convexity in callable bonds when yields fall

Binomial tree [almost ceratin to appear]

U=size of up move = e^SD X square root of T [note T is square root]

D= 1/U

Probability of up move = e^rtD/U – D

BSM assumptions6 volatility is constant and known , underlying asset has no cash flow, options are European etc

C= S x N(d1)  K x e^ rt x N(d2) [ in dividend paying stock substitute S e^  qt

Continuosly compounded return = LN[Price today/Price last period]

Greeks Delta= change in call option value/change in stock price – highest at the money

Vega ( volatility ), Theta ( time ), Rho Risk free rate , Gamma Rate of change of delta

Stess testing

Rating agency Investment grade S &P BBB Moodys Baa

Expected Loss = Exposure x LGD x PD

Unexpected Loss= AE x [PD x SD of LGD^2 + LGD^2 xSD of PD^2]^0.5

VaR (X%) J days = VAR (X%) 1 day/ J^0.5
E.** One Liners Quickies**

Stock returns are normally distributed, prices are lognormally

A standard normal distribution is defined by 0 parameters

No of iterations required to increase the accuracy by x is x^2

A larges loss is not necessarily a risk mgmt failure

Portfolio Possibility Curve [GMV is not the most efficient portfolio ie one having highest Shape ratio]

Spot rates= zero rates

American options can be exercised early [never optimal to exercise a call in a non dividend paying stock]

Modified duration is less than Macaulay Duration

Significance level= probability of making a Type 1 error

Power of test= probability of making a Type II error

Correlation coefficient = [R^2]^0.5

Alpha + beta = persistence factor in GAARCH (1,1) model

Settlement price= Quoted Futures Price

Calender spread profit if price stays in narrow range

Expected shortfall= conditional VaR

Futures arezero growth instruments

Strenghthening of basis if unexpectedunfavourable for long hedge

Risk Mgnt cannot create value in perfect financial markets

To Hedge take opposite position