Errata for CFA Program Level II Mock Exams**

Updated 22 May 2013 ** We will do our best to answer your inquiry concerning the Mock and/or Sample Exams. Please note that after Friday, 24 May, 2013 due to the closeness of the exam we cannot guarantee that we will get an answer to you before you sit for your exam on 1 June, 2013. ** To be fair to all candidates, CFA Institute does not respond directly to individual candidate inquiries. If you have a question concerning CFA Program content, please contact CFA Institute (info@cfainstitute.org) to have potential errata investigated. Corrections below are in bold and new corrections will be shown in red. AS OF 23 MAY, THE REVISED MOCK EXAM ON THE CFA WEBSITE HAS BEEN UPDATED TO REFLECT THE ERRATA CHANGES BELOW IN RED.

Also, a reminder that some Level II Derivatives pages were tagged optional in error. Please refer to the online Level II Errata http://www.cfainstitute.org/programs/cfaprogram/courseofstudy/Pages/study_sessions.aspx which contains an explanation and corrections for the mis-marked optional segments. In the Level II derivatives readings, the following pages are optional: --Reading 48 (p. 5-17) --Reading 49 (p. 59-80; 93-100) --Reading 50 (p.131-159) --Reading 51 (p. 229-245) --Reading 52 (p.299-322)

All other sections are required.

Morning Session
Question #4: Feedback should read as follows:
Prem also violated Standard V (B) Standard V (B) Communication with Clients and Prospective Clients by citing dated tea production information. and not Prem also violated Standard IV (B) Communication with Clients by citing dated tea production information.

Question #20: Feedback should read as follows: C is correct. Shah is incorrect about average correlation and the number of securities required to achieve a particular level of portfolio risk reduction. As the correlation between securities

increases, the number of securities required to achieve a particular level of portfolio risk decreases. Portfolio risk is:
[ ]

For example, take a situation where the average correlation 0.3. In the this situation the minimum possible portfolio variance, when n is very large, is 0.32, that is 0.3 times the variance of a single stock. In order to achieve a portfolio with only 110% of this minimum possible portfolio variance we would need 25 stocks.
[ ]

If the average correlation is 0.5 it can be shown that only 10 stocks are needed to achieve a portfolio that is 110% of the minimum possible portfolio variance of 0.52 .
[ ]

That is, you need 25 stocks to achieve a risk level of 110% of the minimum possible portfolio risk when the correlation is 0.3. You need 10 stocks to achieve a risk level of 110% of the minimum possible portfolio risk when the correlation is 0.5

Afternoon Session
Vignette for Questions 7 through 12 the Rudi Kesselaaar Case Scenario See the changes below listed in RED. Rudi Kesselaar Case Scenario Rudi Kesselaar, the treasurer for Internationaal Industrie Groep (IIG), a large, Dutch electronics multinational, directs the liquidity and hedging strategies of IIGs global subsidiaries. The treasurers office maintains banking relationships and lines of credit in most countries where IIG has a presence and facilitates currency and interest rate hedges between each subsidiary and its respective local country bank. Kesselaar is meeting with IIGs head trader, Arndt Wolters, to review IIGs economic forecasts and planned hedging strategies for IIGs two largest projects for next year. Kesselaar tells Wolters, Our Polish subsidiary, IIG-Polska (IIG-P), will require financing for 12 months to execute a 50 million Polish zloty (PLN) upgrade of a manufacturing facility near the German border. Earlier this year, we set up a PLN60 million line of credit for them. IIG-P will be able to pay in either EUR or PLN to complete the factory upgrade. What hedging solutions would you recommend?

Wolters replies, Our economists (whose forecast is shown in Exhibit 1) project the PLN/EU R rate to decline to PLN3.75 over the next year. Although eurozone interest rates arent expected to rise, Polish interest rates could start to rise by the fourth quarter of this year. Because the PLN swaps market is large enough to allow us to hedge a floating rate loan and IIG-P can pay in either EUR or PLN, I have developed two alternatives:

Alternative 1Pay in EUR: IIG-P executes a 12-month EUR/PLN fixed-to-fixed currency swap with IIG, swapping PLN50,000,000 for EUR11,904,762. IIG-P pays (semiannually) the EUR rate of 1.50% and receives the PLN rate of 5.75%. Both PLN and EUR yield curves are flat for the next 12 months, and the respective riskfree rates are 5.50% in PLN and 0.40% in EUR. Alternative 2Pay in PLN: IIG-P draws on the PLN line of credit that is charged an interest rate based on the Warsaw Interbank Offered Rate (WIBOR). IIG-P purchases a six-month receiver swaption with an exercise rate of 4.75%. If exercised, IIG-P can enter into an interest rate swap in six months with a fixed rate equal to the exercise rate. Exhibit 1 Currency and Interest Rate Projections 1-Month 1-Month PLN/EUR Date WIBOR Euribor Exchange Rate 1-Apr-13(spot) 4.75% 0.15% 4.2000 1-Jul-13 4.75% 0.20% 4.0000 1-Oct-13 4.85% 0.25% 3.8000 1-Jan-14 5.25% 0.30% 3.7500 1-Apr-14 5.25% 0.35% 3.7500 Kesselaar then informs Wolters, Our second project in Latvia is to finance construction of an oil terminal on the Gulf of Riga for LAT Transport (LAT), a Latvian government-sponsored enterprise. The project has a value of EUR60 million today. LATs stock is a large component of the Riga Equity Index and has an almost perfect correlation with the index. Financing for the project is as follows: The Latvian government issues a four-year bond denominated in Latvian lats (LVL) to finance 50% of the construction costs. IIG provides LAT a EUR30 million loan for two years to finance the remaining 50% of the construction costs. In two years, the Latvian government intends to issue another LVL bond to allow LAT to repay the IIG loan. IIG may pay LAT an additional EUR 2 million now for an option to purchase 50% of the oil terminal for LVL 43.05 million (equivalent of EUR 30 million) at any time over the next two

years. The LVL/EUR exchange rate is pegged at LVL 1.4350 per EUR because the Latvian government engages in market transactions to maintain this rate. Wolters responds to Kesselaar, LATs market capitalization essentially reflects the value of the sum of its oil terminals. I think the price of the purchase option is cheap. I estimated the value of this option assuming the Riga Index can move up 15% or down 20% each year and the LVL annual risk-free rate is 2%. Using the BlackScholesMerton model, I calculate that the normal probabilities for the Riga Index are 59% for a gain each year and 41% for a loss. Kesselaar then tells Wolters, I dont believe your analysis is consistent with the BlackScholes Merton model assumptions. Please keep in mind that Standard & Poors has assigned Latvia a credit rating of BBB, which is only one level above junk status. However, if Latvia still appears economically and politically stable in two years, I think we should definitely exercise our option. Question #10: 10. The price of IIGs option on LAT Transport valued according to a two-period binomial model is closest to: A. EUR 2.0 million B. EUR 3.7 million C. EUR 5.6 million Option Markets and Contracts by Don M. Chance, CFA 2013 Modular Level II, Vol 6, Reading 50, Section 6.2 Study Session 17-50-b Calculate and interpret prices of interest rate options and options on assets using one- and twoperiod binomial models. B is correct. According to the two-period binomial model:

[ ( )

= Max(0,

S (c=?) ( )

(=
[ or

)
= Max (0, - X]

= Max (0,

- X]

where S = value of the underlying equity or EUR 30 million (50% of EUR 60 million), therefore stated in EUR millions:

[ ( S=30 (c=?) ( =24 = 0) [ = 34.50 =5.59) [

= 39.675 = 9.675

(= or

) = 28.75 = 0]

= 19.20 = 0]

The value of a call is: = c= Where = = = = 0.6286

= = 5.96

= 3.67

Solving backwards over two periods, c = EUR 3,670,000. IIG has an option to purchase a EUR 30 million share for the present value of EUR 2 million (32 million future purchase price 30 million repayment of loan). The option is priced cheaper than the EUR 3.67 million fair value indicated in the two-step binomial model.

Questions 19 24 relate to Portfolio Management Jim Huntley Case Scenario Vignette Correction in the Vignette for the paragraph directly after Exhibit 5 (Data for Selected Securities) please change the following: The clients investment policy statement contains the following objective: The portfolios total pre-tax real return should achieve an average in excess of 7% over time in order for the family to have sufficient income to meet both its current and expected future spending needs. Change to read as follows: The clients investment policy statement contains the following objective: The portfolios total after tax real return should achieve an average in excess of 7% over time in order for the family to have sufficient income to meet both its current and expected future spending needs. Question #21: Change the equation in the feedback session to read as follows: A is correct. Strategy 1 provides an arbitrage opportunity; the net return is $31,000 with zero factor sensitivity.

Net Return = $31,000 = ($1,000,000 ((.40 12.0%) + (.60 8.0%))) + (-$1,000,000 ((.30 10.0%) + (.70 5.0%))) Net Factor Sensitivity = 0 = (1 ((.40 1.25) + (.60 .75))) + (-1 ((.30 2.00) + (.70 .50)))

Question #53: Change the correct answer to A; and the justification table should read as follows with the changes shown in RED. 53. The value of FDFs equity as at the end of 2012, according to the approach and estimates by Olsen, is closest to: A. $7,566,000. B. $10,060,800. C. $10,810,800. Answer = A

Market-Based Valuation: Price and Enterprise Multiples, by Jerald Pinto, CFA, Elaine Henry, CFA, Thomas Robinson, CFA, and John Stowe, CFA 2013 Modular Level II, Vol. 4, Reading 35, Section 4 Private Company Valuation, by Raymond D. Rath, ASA, CFA 2013 Modular Level II, Vol. 4, Reading 37, Sections 4.1 and 4.3, Examples 1 and 5 Study Session 1235n; 1237i, k Calculate and interpret EV multiples, and evaluate the use of EV/EBITDA. Determine the value of a private company based on market approach methods, and describe advantages and disadvantages of each method. Explain and evaluate the effects on private company valuations of discounts and premiums based on control and marketability. A is correct. EBITDA EBITDA multiple for FDF MVIC = EBITDA multiple Minus debt Value of equity at the end of 2012 924,000 9.0

924,000 9.0 8,316,000 (750,000) 7,566,000