M
mtm
Member
I failed ST6 in September and have subsequently rewritten the exam as extra practice. I still found the exam tricky and noticed some problems in the institutes exam solutions which I thought Id share with all the disgruntled (to put it mildly) ST6 students out there. I have also added some complaints of my own in some of the questions. I have not yet received my ASET so some of the following may be mentioned there already.
First of all what does the U in the recommended reading found above each model solution mean? Does it mean Unit or Part of the acted course? That would make sense, except for question 8, say, which recommends unit 7 for reading. Pity there is only 6 parts or units in total. Also, for example, Solution 2 recommends reading of U6 which in the Acted notes covers risk management and the term structure of interest rates although the question itself covers a bull spread.
Anyway on to the questions
Q1:
(i)
I havent quite seen this convenience yield definition before but I suppose the institute accepted other answers as well. Cost of carry is defined as r+u-q, and ignoring q, i.e. if non-dividend paying or consumption commodity, itll be r+u. That is; financing cost plus storage cost. The solution given is the difference between the storage and financing costs. Why difference? That doesnt make sense. Thereafter the solution reads For bonds, which typically have higher yields than commodities, the cost of carry can be negative. What is the examiner trying to say here? A bond is a commodity, and what yield is being referred to?
(ii)
This derivation of the forward price is plain nasty and I still dont understand what the examiner is saying. Why not: Hold the following two portfolios at time 0: portfolio A consists of long forward position plus Ke^(-rT) cash and porfolio B consisting of e^(uT) units of share of value S0. At time T the porfolio values are the same and hence A=B at time 0. Then say something about the equality not completely holding and then bring in your convenience yield.
(iii)
The solution immediately starts talking about the forward price although the question specifically asks about future prices. I suppose this is not a big issue?
Q2:
The reading specified is Hull Chapter 14. I have the 6th edition of Hull; there are no graphs in chapter 14. Chapter 15 in Hull covers the greek letters. I suppose the examiner is referring to a previous edition of Hull.
(ii)
The graph given is a Payoff diagram not a P&L diagram (as in the heading of the diagram) as the options premiums have not been taken into account. The sketch is for a P&L 1 year even though the question asked for a 6 month one.
(iii)
I didnt know my graphs out of the back of my head in September and I sure didnt know how to draw these graphs. It takes quite a while to think of how to draw this. The St6 notes do not cover graphs much at all. The ones covered are for one option alone and not for a portfolio of options.
Q3:
This question was raised by exam student on this forum and Mike Lewry answered him/her.
(ii)
The solution derives delta and gamma for a long position not a short position. Mike said this was probably just a typo I disagree and youll see why in part (iii) below.
(iii)
Look at the examiners solution. The entire question is answered as if in a long put position. If in a long put position and index falls the delta becomes more negative. The solution does not end off by then arguing that therefore if in a short position delta would then become more positive; which it would have done if a typo had been made in (ii). No, it ends off by saying: This applies to all the put options in the portfolio, hence it applies to the portfolio Delta in aggregate. No, it does not apply to the portfolio Delta because you have a short put position and hence the opposite effect actually occurs on the portfolio delta.
Thus the examiner was consistent in his/her answers to (ii) and (iii), consistently wrong that is. If students had answered this correctly (i.e. overall portfolio delta becomes more positive) would they have been given the appropriate marks?
Q4:
Hard question which you only would have been able to do to its conclusion if you had answered the question the way the examiner did.
Q5:
The section in the Acted notes on American Options is purely theoretical no maths involved. If you hadnt studied this in Hull (question is mostly directly from Hull) you would have struggled here.
Q6:
Chapter 13 covers Risk Management in the notes. I find this chapter really badly explained so that this question was a losing battle. I hope Hull explains this material better
Q7:
Nice question, although if you had studied this in Hull the night before (directly from Hull) it would have been even nicer. Im sure the word numeraire would have thrown some students off as the word numeraire is mentioned only once in the notes, in chapter three.
Q8:
OK question although after struggling through all of the previous questions you would have been really flustered by now.
In closing I see that the institute has recommended students to read Hull and Rennie. This recommendation came out in December so for student writing in April they have little over 3 months (after reading this in the education noticeboard) to study 13 chapters of Acted material and two text books. On top of this students probably have a full day work as well. Good luck to those Actuarial Students! Acted has pointed out that students should at least read about 200 pages out of Hull. You cannot read this it is a matter of actively studying these pages, especially since Hull contains a lot more extra information than the notes. This takes a lot more time than reading!
First of all what does the U in the recommended reading found above each model solution mean? Does it mean Unit or Part of the acted course? That would make sense, except for question 8, say, which recommends unit 7 for reading. Pity there is only 6 parts or units in total. Also, for example, Solution 2 recommends reading of U6 which in the Acted notes covers risk management and the term structure of interest rates although the question itself covers a bull spread.
Anyway on to the questions
Q1:
(i)
I havent quite seen this convenience yield definition before but I suppose the institute accepted other answers as well. Cost of carry is defined as r+u-q, and ignoring q, i.e. if non-dividend paying or consumption commodity, itll be r+u. That is; financing cost plus storage cost. The solution given is the difference between the storage and financing costs. Why difference? That doesnt make sense. Thereafter the solution reads For bonds, which typically have higher yields than commodities, the cost of carry can be negative. What is the examiner trying to say here? A bond is a commodity, and what yield is being referred to?
(ii)
This derivation of the forward price is plain nasty and I still dont understand what the examiner is saying. Why not: Hold the following two portfolios at time 0: portfolio A consists of long forward position plus Ke^(-rT) cash and porfolio B consisting of e^(uT) units of share of value S0. At time T the porfolio values are the same and hence A=B at time 0. Then say something about the equality not completely holding and then bring in your convenience yield.
(iii)
The solution immediately starts talking about the forward price although the question specifically asks about future prices. I suppose this is not a big issue?
Q2:
The reading specified is Hull Chapter 14. I have the 6th edition of Hull; there are no graphs in chapter 14. Chapter 15 in Hull covers the greek letters. I suppose the examiner is referring to a previous edition of Hull.
(ii)
The graph given is a Payoff diagram not a P&L diagram (as in the heading of the diagram) as the options premiums have not been taken into account. The sketch is for a P&L 1 year even though the question asked for a 6 month one.
(iii)
I didnt know my graphs out of the back of my head in September and I sure didnt know how to draw these graphs. It takes quite a while to think of how to draw this. The St6 notes do not cover graphs much at all. The ones covered are for one option alone and not for a portfolio of options.
Q3:
This question was raised by exam student on this forum and Mike Lewry answered him/her.
(ii)
The solution derives delta and gamma for a long position not a short position. Mike said this was probably just a typo I disagree and youll see why in part (iii) below.
(iii)
Look at the examiners solution. The entire question is answered as if in a long put position. If in a long put position and index falls the delta becomes more negative. The solution does not end off by then arguing that therefore if in a short position delta would then become more positive; which it would have done if a typo had been made in (ii). No, it ends off by saying: This applies to all the put options in the portfolio, hence it applies to the portfolio Delta in aggregate. No, it does not apply to the portfolio Delta because you have a short put position and hence the opposite effect actually occurs on the portfolio delta.
Thus the examiner was consistent in his/her answers to (ii) and (iii), consistently wrong that is. If students had answered this correctly (i.e. overall portfolio delta becomes more positive) would they have been given the appropriate marks?
Q4:
Hard question which you only would have been able to do to its conclusion if you had answered the question the way the examiner did.
Q5:
The section in the Acted notes on American Options is purely theoretical no maths involved. If you hadnt studied this in Hull (question is mostly directly from Hull) you would have struggled here.
Q6:
Chapter 13 covers Risk Management in the notes. I find this chapter really badly explained so that this question was a losing battle. I hope Hull explains this material better
Q7:
Nice question, although if you had studied this in Hull the night before (directly from Hull) it would have been even nicer. Im sure the word numeraire would have thrown some students off as the word numeraire is mentioned only once in the notes, in chapter three.
Q8:
OK question although after struggling through all of the previous questions you would have been really flustered by now.
In closing I see that the institute has recommended students to read Hull and Rennie. This recommendation came out in December so for student writing in April they have little over 3 months (after reading this in the education noticeboard) to study 13 chapters of Acted material and two text books. On top of this students probably have a full day work as well. Good luck to those Actuarial Students! Acted has pointed out that students should at least read about 200 pages out of Hull. You cannot read this it is a matter of actively studying these pages, especially since Hull contains a lot more extra information than the notes. This takes a lot more time than reading!
