Real PRIMA PRM Designation Exam 8006 Dumps Questions

1. Calculate the number of S&P futures contracts to sell to hedge the market exposure of an equity portfolio value at $1m and with a of 1.5. The S&P is currently at 1000 and the contract multiplier is 250.

2. Calculate the fair no-arbitrage spot price of oil if the price of a one year forward is $75, the discrete one year interest rates are 6%, and annual storage costs are $4 per barrel paid at the end of the year.

3. Euro-dollar deposits refer to

4. If the 3 month interest rate is 5%, and the 6 month interest rate is 6%, what would be the contract rate applicable to a 3 x 6 FRA?

5. Which of the following statements is INCORRECT according to CAPM:

6. A bank advertises its certificates of deposits as yielding a 5.2% annual effective rate.

What is the equivalent continuously compounded rate of return?

7. [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.]

What is the current conversion premium for a convertible bond where $100 in market value of the bond is convertible into two shares and the current share price is $50?

8. [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 describes a 'quanto' instrument:

9. A bullet bond refers to a bond:

10. The securities market line (SML) based upon the CAPM expresses the relationship between

11. Using covered interest parity, calculate the 3 month CAD/USD forward rate if the spot CAD/USD rate is 1.1239 and the three month interest rates on CAD and USD are 0.75% and 0.4% annually respectively.

12. A receiver option on a swap is a swaption that gives the buyer the right to:

13. [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.]

A company that uses physical commodities as an input into its manufacturing process wishes to use options to hedge against a rise in its raw material costs.

Which of the following options would be the most cost effective to use?

14. A company has a long term loan from a bank at a fixed rate of interest. It expects interest rates to go down.

Which of the following instruments can the company use to convert its fixed rate liability to a floating rate liability?

15. A trader comes in to work and finds the following prices in relation to a stock: $100 spot, $10 for a call expiring in one year with a strike price of $100, and $10 for a put with the same expiry and strike. Interest rates are at 5% per year, and the stock does not pay any dividends.

What should the trader do?

16. Which of the following does not explain the shape of an yield curve?

17. If the quoted discount rate of a 3 month treasury bill futures contract is 10%, what is the price of a 3-month treasury bill with a principal at maturity of $100?

18. [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 statements relating to convertible debt are true:

I. A hard call protection means the bond cannot be called by the issuer till the share price reaches a threshold

II. It is advantageous for the issuer to call its convertible securities when the share price exceeds the conversion price

III. When the issuer's share prices is very high, the convertible bond trades at a discount to the value of the shares it is convertible into

IV. Convertible bonds generally have to carry a higher coupon than on equivalent non-convertible securities to make them attractive to investors

19. For a stock that does not pay dividends, which of the following represents the delta of a futures contract?

20. What is the fair price for a bond paying annual coupons at 5% and maturing in 5 years.

Assume par value of $100 and the yield curve is flat at 6%.

21. The yield-to-maturity on a 10 year coupon bearing bond

22. A stock sells for $100, and a call on the same stock for one year hence at a strike price of $100 goes for $35.

What is the price of the put on the stock with the same exercise and strike as the call? Assume the stock pays dividends at 1% per year at the end of the year and interest rates are 5% annually.

23. [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 is not an approach to attempt to value to a convertible security:

24. The two components of risk in a commodities futures portfolio are:

25. Which of the following statements are true:

I. Protective puts are a form of insurance against a fall in prices

II. The maximum loss for an investor holding a protective put is equal to the decline in the value of the underlying

III. The premium paid on the put options held as a protective put is a loss if the value of the underlying goes up

IV. Protective puts can be a useful strategy for an investor holding a long position but with a negative short term view of the markets

26. Which of the following is not a money market security

27. In terms of notional values traded, which of the following represents the largest share of total traded futures and options globally?

28. Which of the following statements is not correct with respect to a European call option:

29. Which of the following expressions represents the Treynor ratio, where is the expected return, 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)

30. Which of the following best describes the efficient frontier?

31. Profits and losses on futures contracts are:

32. Determine the enterprise value of a firm whose expected operating free cash flows are $100 each year and are growing with GDP at 2.5%. Assume its weighted average cost of capital is 7.5% annually.

33. 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

34. A bank sells an interest rate swap to its client, with the client agreeing to pay the bank a fixed 4% and receive 3 month LIBOR + 100 basis points, payments due every quarter. After quarter 1, the 3 month LIBOR is 2% pa.

Which of the following payments will happen in respect of this swap, assuming the contract notional is $100m, and the rate convention is 30/360?

35. Which of the following statements are true:

I. All investors regardless of their expectations face the same efficient frontier which is always the market portfolio

II. Investors will have different efficient frontiers based upon their views of expected risks, returns and correlations

III. Investors risk appetite will determine their choice of the combination of risk-free and risky assets to hold

IV. If all investors have identical views on expected returns, standard deviation and correlations, they will hold risky assets in identical proportions

36. Which of the following statements is true in relation to an American style option:

I. Put-call parity applies to American options

II. An American put will never be cheaper than a European put

III. An American put option should never be exercised early for a non-dividend paying stock

IV. An American put option is always at least as valuable as its intrinsic value

37. The theta of a delta neutral options position is large and positive.

What can we say about the gamma of the position?

38. Which of the following statements is false:

39. The value of which of the following options cannot be less than its intrinsic value

40. What is the yield to maturity for a 5% annual coupon bond trading at par? The bond matures in 10 years.

41. The LIBOR square swap offers the square of the interest rate change between contract inception and settlement date. If LIBOR at inception is y, and upon settlement is x, the contract pays (x - y)2 for x > y; and -(x - y)2 for x < y.

What of the following cannot be a value of the gamma of this contract?

42. 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?

43. [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 statements is true?

I. Knock-out options start lifeless and convert to a plain vanilla option when the barrier is hit

II. Barrier options are cheaper than equivalent vanilla options

III. Average price options are more expensive than equivalent vanilla options

IV. Digital options have a high gamma close to the strike price

44. What is the running yield on a 6% coupon bond selling at a clean price of $96?

45. An investor holds $1m in a 10 year bond that has a basis point value (or PV01) of 5 cents. She seeks to hedge it using a 30 year bond that has a BPV of 8 cents.

How much of the 30 year bond should she buy or sell to hedge against parallel shifts in the yield curve?

46. If the continuously compounded risk free rate is 4% per year, and the continuous rate of dividend on a broad market index is 1% annually, what is the no-arbitrage 6-month futures price of the index if its spot value is $1000?

47. Backwardation can be explained by:

48. The yield to maturity for a zero coupon bond is equivalent to:

49. If zero rates with continuous compounding for 4 and 5 years are 4% and 5% respectively, what is the forward rate for year 5?

50. According to the CAPM, the expected return from a risky asset is a function of:

51. A trader finds that a stock index is trading at 1000, and a six month futures contract on the same index is available at 1020. The risk free rate is 2% per annum, and the dividend rate is 1% per annum.

What should the trader do?

52. A portfolio comprising a long call and a short put option has the same payoff as:

53. A utility function expresses:

54. What is the standard deviation (in dollars) of a portfolio worth $10,000, of which $4,000 is invested in Stock A, with an expected return of 10% and standard deviation of 20%; and the rest in Stock B, with an expected return of 12% and a standard deviation of 25%. The correlation between the two stocks is 0.6.

55. An investor has a bullish outlook on the market.

Which of the following option strategies would suit him?

I. Risk reversal

II. Collar

III. Bull spread

IV. Butterfly spread

56. Suppose the S&P is trading at a level of 1000. Using continuously compounded rates, calculate the futures price for a contract expiring in three months, assuming expected dividends to be 2% and the interest rate for futures funding to be 5% (both rates expressed as continuously compounded rates)

57. How are foreign exchange futures quoted against the US dollar?

58. What is the duration of a 10 year zero coupon bond. Assume the bond is callable (ie, the issuer can buy it back) at face value at any time during its existence.

59. The forward price of a physical asset is affected by:

60. If the implied volatility for a call option is 30%, the implied volatility for the corresponding put option is:

61. Which of the following statements are true:

I. A deep in-the-money call option has a value very close to that of a forward contract with a forward price equal to the exercise price

II. If the volatility of a stock goes down to zero, the value of a call option on the stock will tend to be close to that of a forward contract so long as the option is in the money.

III. All other things remaining the same, the issue of stock warrants exercisable at a future date will cause a decline in the current stock price

IV. Implied volatilities are calculated from market prices of options and are forward looking

62. Which of the following statements are true:

63. Futures initial margin requirements are

64. The relationship between covariance and correlation for two assets x and y is expressed by which of the following equations (where covarx,y is the covariance between x and y , x and y are the respective standard deviations and x,y is the correlation between x and y ):

A)

B)

C)

D)

None of the above

65. Which of the following are valid credit enhancements used for credit derivatives:

I. Overcollateralization

II. Excess spread

III. Cash reserves

IV. Margin requirements

66. The gamma of a call option is 0.08.

What is the gamma of the corresponding put option?

67. For an investor short a bond, which of the following is true:

I. Higher convexity is preferable to lower convexity

II. An increase in yields is preferable to a decrease in yield

III. Negative convexity is preferable to positive convexity

68. Which of the following markets are characterized by the presence of a market maker always making two-way prices?

69. A borrower pays a floating rate on a loan and wishes to convert it to a position where a fixed rate is paid.

Which of the following can be used to accomplish this objective?

I. A short position in a fixed rate bond and a long position in an FRN

II. An long position in an interest rate collar and long an FRN

III. A short position in a fixed rate bond and a short position in an FRN

IV. An interest rate swap where the investor pays the fixed rate

70. Which of the following best describes a 'when-issued' market?

71. Which of the following statements is a correct description of the phrase present value of a basis point?

72. According to the dividend discount model, if d be the dividend per share in perpetuity of a company and g its expected growth rate, what would the share price of the company be. 'r' is the discount rate.

73. Which of the following statements are true?

I. The square-root-of-time rule for scaling volatility over time assumes returns on different

days are independent

II. If daily returns are positively correlated, realized volatility will be less than that calculated using the square-root-of time rule

III. If daily returns are negatively correlated, realized volatility will be less than that calculated using the square-root-of-time rule

IV. If stock prices are said to follow a random walk, it means daily returns are independent of each other and have an expected value of zero

74. An investor enters into a 4 year interest rate swap with a bank, agreeing to pay a fixed rate of 4% on a notional of $100m in return for receiving LIBOR.

What is the value of the swap to the investor two years hence, immediately after the net interest payments are exchanged? Assume the current zero coupon bond yields for 1, 2 and 3 years are 5%, 6% and 7% respectively. Also assume that the yield curve stays the same after two years (ie, at the end of year two, the rates for the following three years are 5%, 6%, and 7%

respectively).

75. The price of an interest rate cap is determined by:

I. The period to which the cap relates

II. Volatility of the underlying interest rate

III. The exercise or the strike rate

IV. The risk free rate

76. Which of the following correctly describes a "reverse repo"?

77. A bond with a 5% coupon trades at 95. An increase in interest rates by 10 bps causes its price to decline to $94.50. A decrease in interest rates by 10 bps causes its price to increase to $95.60. Estimate the modified duration of the bond.

78. What can the buyer of a 6 x 12 FRA expect to receive (or pay) if the contracted rate is 10% and the settlement rate is 12%? Assume contract notional is $100m.

79. [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?

80. Which of the following statements is false:

81. What kind of a risk attitude does a utility function with downward sloping curvature indicate?

82. A normal yield curve is generally:

83. The quote for which of the following methods of physical delivery of a futures contract would be the cheapest?

84. The greatest risk in energy derivatives trading comes from:

85. Which of the following statements is true:

I. The maximum value of the delta of a call option can be infinity

II. The value of theta for a deep out of the money call approaches zero

III. The vega for a put option is negative

IV. For a at the money cash-or-nothing digital option, gamma approaches zero

86. A bank holding a basket of credit sensitive securities transfers these to a special purpose vehicle (SPV), which sells notes based on these securities to third party investors.

Which of the following terms best describes this arrangement?

87. An investor expects stock prices to move either sharply up or down.

His preferred strategy should be to:

88. For a forward contract on a commodity, an increase in carrying costs (all other factors remaining constant) has the effect of:

89. What would be the expected return on a stock with a beta of 1.2, when the risk free rate is 3% and the broad market index is expected to earn 8%?

90. Which of the following statements are true:

I. A credit default swap provides exposure to credit risk alone and none to credit spreads

II. A CDS contract provides exposure to default risk and credit spreads

III. A TRS can be used as a funding source by the party paying LIBOR or other floating rate

IV. A CLN is an unfunded security for getting exposure to credit risk

91. An investor enters into a 4 year interest rate swap with a bank, agreeing to pay a fixed rate of 4% on a notional of $100m in return for receiving LIBOR.

What is the value of the swap to the investor two years hence, immediately after the net interest payments are exchanged? Assume the 2 year swap rate is 5%, and the yield curve is also flat at 5%

92. Which of the following expressions represents Jensen's alpha, where is the expected return, is the standard deviation of returns, rm is the return of the market portfolio and rf is the risk free rate:

93. When graphing the efficient frontier, the two axes are:

94. Backwardation can happen in markets where

95. If the spot price for a commodity is lower than the forward price, the market is said to be in:

96. The cheapest to deliver bond for a treasury bond futures contract is the one with the :