TIA’s Exam 2/FM Blog

A student asked the following:

I am reviewing No-Arbitrage Bounds with Transaction Costs. Could you please explain how the F- formula is derived?

Here is my response: Derivation of F-

Student Questions

The file was too large to attach.  You can download it here.  I’ve also uploaded a Breakdown of Old Exams.  Please note that the old exams didn’t cover the DM material, so the breakdown only counts for 75-80% of the current exam, since 20-25% of your exam will be DM questions.

Updates

You have exactly one more month to study.  Hopefully you have gone through all the material at least once.  Now is the time to focus on working problems.  I recommend working all the recently published exams  first.  I’ve attached edited versions of those exams with the problems no longer on the syllabus stripped out.  If you have trouble working any of these problems, then please let me know.

After you finish those problems, then start working (or reworking) all the section problems again.  Work 10 from section A.1, then 10 from A.2, and so on.  After you have worked 10 from each section, then start over and work 10 more.  This will help you stay fresh on all the material.  You will basically be reviewing the entire course on a continuous basis.  Every couple of days read over the Summary sheets (these is one for each section).  Most of the stuff on the sheets should be understood, therefore there is no need to memorize.

Exam Tips

I’ve posted video solutions to the 9 sample problems released by the SOA.  Two of these problems were pretty hard IMO (#1 and #9).  The rest of the problems are more on par with what I expected the difficulty of the DM problems to be.  I think you will find a lot of value in watching the solutions to these problems, even if you got them correct.

You can view the solutions on tiavideos1.com or tiavideos2.com.  See “Joint Exam 2/FM Solutions” section D.

Updates

I failed to mention a couple of key concepts in the lesson A.3.5 Amortization Method. I’ve created a new lesson – A.3.5.2 Amortization Method Part 2. Please watch this video when you get a chance.

Updates

There are still many spots left for the live seminar if you are interested.  More information about the live seminar can be found here.  The live seminar is a great way to get away from study distractions and really focus on the exam.  I always found my study time after a seminar to be more productive then before the seminar.

Uncategorized

The book primarily uses “Purchased and Written”, but the test writers for some reason decided to use “Long and Short”.  Just remember if you are “long” in a option, that is the same as a “purchased” option.  If you are “short” in a option, that is the same as a “written” option.

Exam Tips

I got this great question from a student:

I believe there is an error on problem 18 of Section B chapter 2.
The third choice in the true/false statements says:

A short put’s maximum loss is:
Strike price – FV (put premium)

The solution for this questions says that the above statement is true.

However, based on the notes from the 4th video of this chapter and the text book page 43, if the statement is going to be true it should be:

A long put’s maximum gain is:
Strike price – FV (put premium)

or

A short put’s maximum loss is:
FV (put premium) – Strike price

Please let me know if I am missing something.

Here was my response:

This is really just a difference in how you say you lost $X. Do you say I lost $X or I lost -$X. Hopefully the exam wouldn’t contain something like this.

If you short a put what is the worst case scenario? Well a put option has value when the stock price goes down, so the worst case scenario for a short put is a spot price at expiration of 0. You have to buy the stock at the strike price and you’ve accumulated the FV(premium). So FV(premium) – Strike price will be a negative number. Let’s say the FV(Premium) is $5 and the strike price is $100. Then according to the book you have a loss of $5 – $100 = -$95. To me it doesn’t make sense to say I lost -$95 (losing -$95 means winning $95 IMO). I would say I lost $95 = $100 – $5 = Strike Price – FV(premium).

Student Questions

You can download them here:

http://www.soa.org/files/pdf/edu-fm-09-07.pdf

Uncategorized

I’ve posted the first 3 calculator lessons. I plan to add a handful of these every week. Most of the stuff covered in these lessons are covered throughout the main lessons, but this will serve as a quick place to refresh if you forget how to do something.

Updates