FET LOS VS APV/AFE LOS

[beeitt]

Dear All,

I'm sure you all of us are stressed out by the coming exam.

exam is less than a month to go and all the company month end , quarter end and planning reports must also be handed in.

Now, let's get to business.

My exam strategy is to follow LOS rather religiously. and as you all might realize there are a lot of overlapping reading between FET an APV/AFE.

For example, Hull book

APV LOS 1

# Pricing Theory and Practice

Learning Outcomes
The candidate will be able to:

1. Demonstrate mastery of option pricing techniques and theory for equity (including exotic options) and interest rate derivatives.
2. Derive the Black Scholes pricing formula
3. Identify limitations behind various option pricing techniques.
4. Describe how option pricing models can be modified or alternative techniques that can be used to deal with option pricing techniques limitations
5. Explain how numerical methods can be used to effectively model complex assets or liabilities

Now, you can see that when SoA would like you to be able to do Option Pricing, they said so.

Under FET

1. Advanced Derivatives
Learning Outcomes
The candidate will be able to:
a) Define the cash flow characteristics of complex derivatives including exotic options, credit derivatives, interest
rate derivatives, swaps, and other non traditional derivatives
b) Evaluate the risk/return characteristics of complex derivatives
c) Identify embedded options in assets and liabilities
d) Define option adjusted spread analysis and its limitations
e) Evaluate the impact of embedded options on risk/return characteristics of assets and liabilities.

I don't see that the candidate need to be able to price an options or price any derivative for that mater.

according to LOS, for derivatives, we need to know
1) CFs of derivatives
2) Risk/Return characteristic -this is the tricky part? Does anyone have any ideas what this mean??

And just so everyone know, i check this with SoA

and the reply was

"If you are focusing on the Learning Objectives, you are doing the right thing in preparing for this exam. If you don’t see option pricing referenced in any of the LOS on FET, it will not be on the exam."

I won't say who this is.

So, i will say, one less thing to worry or does anybody else have other idea??

I think i would like to start a thread on discussion of LOS

i.e.

LOS 1 a) - What do the SoA examiners want from us?
a) - Which books and articles relate to this LoS?

Good Luck

[TiderInsider]

LOS = Learning Outcomes? I'd prefer you just type that out.

I think the learning outcomes are almost worthless. They are not broad enough to cover all the testable material. Tell me where you see real options in the learning outcomes. If the exam committee, in their RUSH to get the syllabus out, forgot to put a couple of things in the learning outcomes, do you think they won't ask a question about those items? I doubt it.

[waha]

I shared similar view with beeitt, at least at the beginning. Since when I talked to some of the CAS folks at my company, they told me that they treated their learning objectives as bible. However, after I attended Goldfarb's seminar and witnessed him downplaying the learning objectives repeatedly, I decided that it might be too risky just focusing on the learning objectives. Our learning objectives are simply too broad, too abstract and they don't bear the same importance as the CAS's.

Having said the above, I do see some of beeitt's points, one example would be exactly what he just raised. We might be focusing too much on the technical details and have lost sight on the qualitative aspect of the picture.
What are the risk/return characteristics of different derivatives?
I haven't stumbled upon those, at least not until now. Maybe when I have extra time (wishful thinking), I will try to summarize them. Someone care to shed light on this?

[remilard]

Option pricing is referenced in 1 e), the impact of an embedded put on the S&P 500 is that it has a value equal to, get this, a put on the S&P 500. Now quantify that value.

[campbell]

From what I understand from people I've talked to on various exam committees, committee members are given a subset of readings and asked to come up with a few questions on them (as opposed to the learning objectives). If it's in the official course of reading, it's fair game (and, as I found out, sometimes they draw from adjacent sections that aren't on the official course of reading..... okay, the ones I found were a mistake on the part of the committee.) It sounds like the CAS exam committees operate differently.

I would focus more on the readings, and what you think are exam questions that could come up on those readings. I think the learning objectives may help you organize thoughts as to the purpose of certain readings being chosen, but generally the questions relate directly to what you've read.

[campbell]

As for the impact of embedded options, one thing to consider is who "owns" the embedded option.

For example, with a callable bond, the call option is "owned" by the issuer of the bond, not the bond-holder. With mortgages, the prepayment option (similar to a bond call) is owned by the property-owner, not the issuer of the mortgage. With putable bonds, the put option is owned by the bondholder.

So what are the effects of these options on the value of these assets?

For a callable bond, the option is a benefit to the issuer, so this should depress the bond price relative to a noncallable bond, which means the callable's bond yield is higher. With a putable bond, the option is of value to the bondholder, which should increase the price to the bondholder relative to a nonputable bond, thus its yield is lower.

It's not always about getting the numerical result, but also thinking qualitatively as to how these things interact.

[yanz]

When I was studying for AFE, I went through all the readings and tried to tag info that related to the different LO's. It took a long time (partly because there were more readings and they also weren't organized as well as they are for FET), so I'm pretty sure I won't have time to do it for FET, but it did help seeing a learning objective that talked about different risk measures and then seeing my list of CTE, Var, etc next to it. I think that while you can't focus all your energy on the LO's, you should go through them once and make sure you can answer each question.

[PAK]

When I took AFE, I followed the LOS/Learning Outcomes as the guidelines to study. However, in the exam, they were nearly USELESS. It was supposed to have a significant portion of ERM stuff in the exam based on the syllabus but where was it in the exam in reality?? I did not see one in the exam......

so......forget the LOS/Learning Outcomes......

[beeitt]

I see,

Thank you for sharing some light on me.

One reason i want to post this is also so that someone from SoA would see this and at least take note.

To Campbell

If the examination committees are given subset of a reading to come out with a question without LOS, FET exam would be 50% similar to AFE and the other half from APV?
Then, how do SoA give us a rationale for splitting course 8 into 2 exams?
I m not playing devil's advocate here, i think it's something SoA need to answer us.

To TiderInside:

I actually have completed summary note which allocate each reading into different LOS, it doesn't fit perfectly but every reading have some elements of LOS in it.

As for Real Options, the book is allocate for LOS 5 Measurement and Management of Risk.
I put it under LOS 5 i) Apply the elements of risk assessment, reduction, and transfer to new product/project proposals based on a
cost/benefit analysis.

The key word i see it the cost/benefit analysis which i see it as evaluating NPV using various technique.

This is just my idea, everyone else will have different opinion.

I'm not saying that we should skip any reading 'cause i don't and i don't recommend anyone else to do. I'm just saying that, i think we should look at the big picture (like waha said) and trying to understand how these different reading compose into Financial Economics Theory and by using LOS is another way out. And since SoA change split course 8 into 2 exams, maybe they ll be some change , maybe they will stick to LOS? who knows? can any SoA officer confirm this?

cheers!

[beeitt]

p.s.

I did GCE O and A level, those 2 exams are organise by Cambridge uni, and they follows Sllybus religiously. Students will be asking whether certain topic is 'in' the sllybus, if it's not, we will ignore it completely.

I did CFA, and their LOS are very details and Study Note providers could tackle them one by one.

I think it's a good learning process to know everything,

but don't forget that the objective of giving qualification should be giving it to a person who know enough not giving it to someone who know the most

p.s.s

I have nothing against Options pricing though, it's just the first LOS so thus it became my example naturally. If the exam has options pricing question, i think it's an easy mark. apply the formula and that's about it.

[campbell]

It's not 8V split into two exams. APMV had lots of stuff that wasn't on 8V, and FET definitely has a bunch of stuff that wasn't on 8V.

As far as I know, they generally have questions generated on all, or almost all, of the readings, and then cull down from that. Lots of questions aren't used - though I understand they well hold over unused questions sometimes if a reading stays on an exam syllabus.

Yes, some of the study notes probably won't appear at all in this particular sitting - they have only so much time to work with on the exam. Perhaps the group of people who set the final questions look at the overall learning objectives to try to make sure large topics aren't ignored - I've never talked with one of those people (which is a much smaller group than those who come up with questions and who grade the exam.)

I have no clue as to the overall distribution of topics on the exam. I don't know how they weight that when they set it. I just know how the individual questions are generated and graded (though second-hand. I've never been on an exam committee.)

[TiderInsider]

I did CFA, and their LOS are very details and Study Note providers could tackle them one by one.I've heard the same thing about the CFA...I wish our learning objectives were as good...but its easy to see why they are not.

The exam committee for FET consists of 8? volunteers and the exam will be taken by roughly 300-400 people.

The CFA institute has many more paid professionals developing exams that will be taken by thousands of candidates.

[remilard]

It's not always about getting the numerical result, but also thinking qualitatively as to how these things interact.

Thats true but the question is would the SOA ask for a numerical option value at all based on the instructional objectives.

[qqpp]

When I studied for AFE (which I did well), I tried to follow the learning objectives at first, but only to find myself very frustrated. I put them away and never went back to them ever. Fouced on memorizing flashcards, understanding formulas (learning to derive them and really *understand* them, rather than just memorizing). I also found working through old exams very helpful. There were at least 2 questions that almost appeared on every single old exam and ended up showing up on AFE (and I identified them even before the exam). Another question that was on 8E in 2006 which I didn't know how to do and decided to skip also ended up on AFE (thank goodness, doesn't seem like anyone has any idea on this question anyways).

So, I guess I won't concentrate my precious time on LOs for FET either. I will probably look over them once before the exam, but that would be it.