FIMS common mistakes
FIMS · Understand the traps and how to avoid them.
Applying a nominal interest rate to discount real cash flows (or vice versa) when computing present values, so the answer is off by roughly the inflation differential.
Candidates learn the Fisher relationship and NPV mechanics separately, then under time pressure grab whichever rate appears first in the question without checking whether the cash flows are stated in nominal or real terms.
What to do instead
Before any discounting question, write one line: 'cash flows are [nominal/real], rate is [nominal/real]'. Convert with (1+nominal) = (1+real)(1+inflation) or use the approximation real ≈ nominal − inflation only when inflation is small. Practise five mixed nominal/real NPV items until the check becomes automatic.
Treating a central bank policy rate cut as automatically bullish for the currency, or confusing the direction of the interest-rate/currency link in an exam scenario.
Candidates memorise 'higher rates attract capital' but then misapply it under carry-trade and forward-premium framing, where a rate cut may already be priced and the forward discount widens.
What to do instead
For every FX question, write the two rates side by side and ask which currency offers the higher risk-free return; the higher-rate currency trades at a forward discount under covered interest parity. Distinguish spot expectations from forward pricing explicitly before answering.
Classifying a hybrid or convertible instrument as pure debt or pure equity instead of splitting it into its liability and equity components.
Candidates default to the instrument's legal label ('bond') and skip the substance-over-form analysis that the exam rewards, especially where conversion features or mandatory redemption terms change classification.
What to do instead
For each instrument, list the three classification tests in order: contractual obligation to deliver cash, ability to avoid settlement in own shares, and fixed-for-fixed versus variable share settlement. Only after all three are answered decide debt, equity, or compound. Use a two-column table in scratch notes.
Computing diluted EPS by adding back the full after-tax interest on convertible debt without checking whether the conversion is actually dilutive.
The mechanical formula is easy to memorise, so candidates apply it to every convertible and every option tranche, including those that are anti-dilutive, producing an answer lower than basic EPS.
What to do instead
Always compute basic EPS first, then test each potential ordinary share individually: only include it if it reduces EPS. State the dilutive/anti-dilutive conclusion in one sentence before finalising the number. Work three examples with out-of-the-money options and loss-making issuers.
Using the risk-free rate as the discount rate for a project or valuation when the cash flows are risky, or using WACC for a project with materially different business risk.
Candidates conflate 'the rate given in the question' with 'the correct rate', and forget that WACC reflects the firm's existing asset mix, not a new division's risk profile.
What to do instead
Match the discount rate to the cash flow: risk-free cash flows get the risk-free rate, project cash flows get a rate reflecting that project's beta. When a question gives a comparable firm's beta, unlever and relever it. Build a one-page decision tree and use it on every valuation item.
Quoting a bond's yield change in basis points without converting correctly between modified duration, Macaulay duration, and the price change, especially for large yield moves.
Duration is taught as a single number, so candidates apply the linear approximation to a 200bp move where convexity matters, or use Macaulay duration where modified duration is required.
What to do instead
Memorise the chain: modified duration = Macaulay / (1 + y/m); percentage price change ≈ −MD × Δy + ½ × convexity × Δy². For moves above about 50bp, always include the convexity term and state the direction of the approximation error.
Netting derivative positions across different counterparties or ignoring collateral when computing counterparty credit exposure.
Candidates see offsetting payables and receivables on the same underlying and net them, missing that enforceable netting sets are legally defined per counterparty and per master agreement.
What to do instead
For every exposure question, draw the counterparty boundary first and only net within a single enforceable netting set. Then add current exposure plus potential future exposure and subtract posted collateral. Practise with a two-counterparty, three-trade example.
Selecting a portfolio on the efficient frontier by highest Sharpe ratio when the client's constraints (liability timing, liquidity, drawdown tolerance) should determine the allocation.
Candidates reduce asset allocation to an optimisation output and skip the IPS step, so they ignore return requirement, risk tolerance, time horizon, and liquidity needs stated in the scenario.
What to do instead
Read the client facts first and write the return objective, risk objective, and constraints before touching any portfolio statistics. Eliminate infeasible portfolios, then optimise within the feasible set. If two portfolios have similar Sharpe ratios, the constraint set breaks the tie.
Treating a client's stated risk tolerance as the governing constraint without reconciling it against their ability to bear risk, or ignoring behavioural biases in the recommendation.
Question stems often describe an aggressive-sounding client with a short horizon and a large near-term cash need; candidates answer the stated preference instead of the economically feasible one.
What to do instead
For each advisory item, write 'willingness' and 'ability' in separate columns, then take the lower of the two as the binding constraint. Name the specific bias (loss aversion, recency, overconfidence) and the mitigation (education, framing, automatic rebalancing) in the answer.
Answering an ethics question from personal or commercial intuition rather than applying the Code and Standards in their stated order of priority.
Candidates know the standards by name but not the decision framework, so they choose the option that protects the client's immediate interest even when it conflicts with market integrity, employer policy, or local law versus the Code.
What to do instead
Use a fixed sequence: identify the conduct, identify the affected parties, apply the Code and Standards (which prevail over local law when stricter), then check employer policy and disclosure. Practise by writing the governing standard number and the decisive fact for each ethics vignette before reading the options.