I’ve posted an updated version of sample exam 1 on the website. This update has two main purposes. First, the exam has been expanded from 25 questions to 30, which is now the length of the actual MFE exam. Second, I’ve changed the answer choices, which formerly were calculated using the old standard normal tables, to reflect the more accurate answers produced using the standard normal calculator rounded to five decimal places, which is what you will use on the CBT version of the exam.
For those of you who’ve already taken sample exam 1, the five new questions are question numbers 26-30, so can easily find and attempt them on the updated exam.
Updated solutions that also reflect the changes mentioned above and an updated CBT version of sample exam 1 should be available on the site in the next 24 hours.
I have not yet had the chance to update sample exam 2, so please continue to round d1 and d2 to two decimal places and the resulting N(d1) and N(d2) to four decimals to match the multiple choice answers and provided solutions for that exam.
michael Updates
I received the following question from a student regarding the first sample question in lesson D.1.1. This is a frequently asked question, so I wanted to post the question and my response, in the hopes that it might resolve any confusion.
“I have a question on Lesson D.1.1- In the sample question 1, I am a little confused with the signs (+/-) of the securities we’re buying and selling. We were told that we sold 1000 units of a call, and noted that as -1000. If we sold the call, shouldn’t that be +, because there was a positive cash flow at that time? Similarly, we solved for the numbers of shares to buy is 872.65. If we are buying, shouldn’t it be negative?”
The reason for the different signs here is that we aren’t dealing with cashflows; we’re dealing with properties of the portfolio going forward.
When I am working a problem dealing with current prices and trading at time 0 (e.g., the no-arbitrage conditions underlying put-call parity), I think of the cashflows involved with a purchase or sale. Thus, I associate positives with short positions and negatives with long positions, since it requires a cash outflow to purchase an asset. I prefer to think of things in terms of cashflows because it allows us to use the “move everything to the ‘greater than’ side” trick to quickly find the proper steps to exploit an arbitrage based on current prices.
When I am working a problem that involves an ongoing position in a portfolio, such as how my portfolio value might change in response to a change in the underlying stock (as in a delta-hedging problem), I associate long positions with positives and short positions with negatives. The reason is that the negative cashflow today associated with a long position corresponds to a positive cashflow in the future. For example, if I buy a call, then in the future, if the stock price goes up by one dollar, the value of my portfolio has gone up by Delta dollars. Thus, a long call has a positive delta.
michael Uncategorized
I’ve uploaded a new version of E.2.P. The new file replaces solutions which were previously calculated using the normal tables with more accurate ones consistent with using the prometric normal calculator. The solutions also have been reformatted and expanded to include the inputs used for all Black-Scholes calculations.
The order of the first 7 questions in the problem set has also been changed. Please make note of this fact when emailing questions about these problems.
michael Updates
I’ve uploaded a new version of E.1.P. The new file replaces solutions which were previously calculated using the normal tables with more accurate ones consistent with using the prometric normal calculator. The solutions also have been expanded to include the inputs used for all Black-Scholes calculations.
michael Updates
There was a typo in the formulation of the prepaid forward price in question 16. The actual price and the final answer are not affected by this update.
michael Updates
I’ve uploaded a new version of D.1.P. The new file replaces solutions which were previously calculated using the normal tables with more accurate ones calculated using the prometric normal calculator. The solutions also have been expanded to include the inputs used for all Black-Scholes calculations.
michael Updates
I’ve uploaded a new version of C.2.P. The new file replaces solutions which were previously calculated using the normal tables with more accurate ones calculated using the prometric normal calculator. The problem set also includes a change to questions 10 and 16, as well as more detailed solutions to almost all of the problems.
michael Updates
I’ve uploaded a new version of C.1.P. The new file contains a new problem, as well as substantial revisions to a few of the questions and almost all of the solutions.
michael Updates
In the past few days, I have received several emails regarding optimal guessing strategies. Since this seems to be on many students’ minds, I decided to post my thoughts here.
Let me begin by saying that I would always prefer that you make an educated guess based on the information in the problem and the solutions given. If you are able to deem even one or two answers as less likely, then educated guessing will almost certainly dominate even the best pure guessing strategy. With that caveat in mind, here are my thoughts in the event that you have no other option than to pick a choice at random.
First, I’ve heard many students propose a strategy whereby at the end of the exam, you count up the number of each answer choice that you’ve selected, and then you guess the letter that has been chosen the least. For instance, if after 29 questions you’ve selected 5 A’s, 7 B’s, 9 C’s, 3 D’s and 5 E’s, then you would guess D on the remaining question. If exam questions were written by a single author, this approach might have merit–as a professor, I know that on some level I try to evenly distribute the letters of the correct choices on a multiple choice exam. However, on a computer-based exam where questions are quasi-randomly selected, I don’t think this particular method for guessing is fruitful. In fact, since it requires some small amount of time to tabulate all of your answer choices in order to apply this method, I would recommend against its use.
While I can’t recommend one specific letter choice, I do suggest that if you must blindly guess, choose one of the “interior” choices (B, C or D). The SOA consistently provides answer choices reflecting the most likely mistakes students could make. Since these choices often represent mistakes such as forgetting a “1/2″ or adding or subtracting an incorrect term, there will often be at least one “dummy” answer choice that is either below or above the true answer choice. Since numerical answer choices on this exam are listed in ascending order, this makes choices A and E less likely to be the correct answers, ceteris paribus.
michael Uncategorized
There was a typo in the second formula on page 33 of the newest formula sheet. The “dt” should simply be “t”.
michael Updates