An investor holds $1m in face each of two bonds. Bond 1 has a price of 90 and a duration of 5 years. Bond 2 has a price of 110 and a duration of 10 years. What is the combined duration of the portfolio in years?
Which of the following statements are true:
I. Caps allow the buyer of the cap protection against rise in interest expense
II. Floors offer investors protection from downward movement in interest rates
III. Collars can be used as hedges
IV. Both caps and collars can be used to hedge against widening credit spreads
Of the following, which measures can debt holders adopt to protect against a transfer of wealth to their detriment to the shareholders:
I. Restrictive covenants limiting dividends
II. Insisting on professional management separate from owners
III. Higher interest rates
IV. Periodic audits
If interest rates and spot prices stay the same, an increase in the value of a call option will be accompanied by:
The local coefficient of risk aversion for a utility function u(x) where x is wealth is expressed as:
A)
B)
C)
D)
In terms of notional values traded, which of the following represents the largest share of total traded futures and options globally?
When hedging an equity portfolio with index futures that carry no basis risk, the number of futures contracts to hold is determined by:
[According to the PRMIA study guide for Exam 1, Simple Exotics and Convertible Bonds have been excluded from the syllabus. You may choose to ignore this question. It appears here solely because the Handbook continues to have these chapters.]
Which of the following best describes a shout option
A risk manager is deciding between using futures or forward contracts to hedge a forward foreign exchange position. Which of the following statements would be true as he considers his decision:
I. He would need to consider tailing the hedge for the futures contracts while that does not apply to forward contracts
II. He would need to consider tailing the hedge for the forward contract while that does not apply to futures contracts
III. He would need to consider counterparty risk for the futures contracts while that is unlikely to be an issue for the forward contract
IV. He would be likely able to match up maturity dates to his liability when using futures while that may not be so for the forward contracts
An investor in mortgage backed securities can hedge his/her prepayment risk using which of the following?
I. Long swaption
II. Short cap
III. Short callable bonds
IV. Long fixed/floating swap
The price of a bond will approach its par as it approaches maturity. This is called:
What is the notional value of one equity index futures contract where the value of the index is 1500 and the contract multiplier is $50:
If ∆, γ and Θ represent the delta, gamma and theta of any derivative whose value is V; r be the risk free rate; σ be the volatility and S the spot price of the underlying, which of the following equations will hold true? (Note that ∂ is the notation used for partial derivatives)
I. 202.21.q1
II. 202.21.q2
III. 202.21.q3
IV. 202.21.q4
An equity portfolio manager desires to be 'market neutral'. His portfolio is valued at $10m and has a beta of 0.7 to the broad market index. The index is currently at 1000 and an index contract multiplier is specified as 250. What should he do to make the beta of his portfolio zero?
Which of the following statements is not correct with respect to a European call option:
Which of the following statements are true:
I. An interest rate swap is equivalent to the swap counterparties placing deposits with each other, one carrying a fixed rate of interest and the other a floating rate
II. The parties to a currency swap exchange principals
III. The risky leg in an IRS is the floating rate leg
IV. Swaps do not carry counterparty risks
Which of the following statements are true:
I. The convexity of a zero coupon bond maturing in 10 years is more than that of a 4% coupon bond with a modified duration of 10 years
II. The convexity of a bond increases in a linear fashion as its duration is increased
III. Convexity is always positive for long bond positions
IV. The convexity of a zero coupon bond maturing in 10 years is less than that of a 4% coupon bond maturing in 10 years
If the spot price for a commodity is lower than the forward price, the market is said to be in:
Using a single step binomial model, calculate the delta of a call option where future stock prices can take the values $102 and $98, and the call option payoff is $1 if the price goes up, and zero if the price goes down. Ignore interest.
A stock that pays no dividends is trading at $100 spot or $104 as a three month forward. The interest rate you can borrow at is 6% per annum. US treasury yields are 4% per annum. What should you do to profit in the situation?
Repos are used for:
I. Short term borrowings
II. Managing credit risk exposures
III. Money market operations by central banks
IV. Facilitating short positions
Which of the following is one of the basic axioms on which the principle of maximum expected utility is based:
The Federal Reserve tries to limit margin trading using which of the following techniques?
According to the CAPM, the expected return from a risky asset is a function of:
Which of the following expressions represents the Treynor ratio, where μ is the expected return, σ is the standard deviation of returns, rm is the return of the market portfolio and rf is the risk free rate:
A)
B)
C)
D)
A risk analyst working for an asset manager with a large debt portfolio is tasked with determining the suitability of using a traded debt ETF as a hedge against the value of the debt portfolio. He/she calculates the minimum variance hedge ratio to be exactly 1.0.
Given the above facts, which of the following statements are certainly true:
I. The ETF represents a perfect hedge for the portfolio
II. The volatility of the portfolio is the same as that for the ETF
III. The ETF cannot be used as an effective hedge for the debt portfolio
IV. None of the above
What would be the most profitable strategy for an investor who expects interest rates to rise: