Errata (eg, FRM Handbook) or Key Exam Issue

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  1. ajsa

    Questions

    Hi asja, Re: Does it mean that the question/answer posted here are copied directly from handbook, therefore may contain error, until you vet them? I guess I will just wait for the pdf then… Yes, exactly correct, they are merely copied until I vet them... Re: If your time is limit, IMHO you may focus more on the Note. (I know this is a sensitive topic. By no means I want to push, I only...
    Hi asja, Re: Does it mean that the question/answer posted here are copied directly from handbook, therefore may contain error, until you vet them? I guess I will just wait for the pdf then… Yes, exactly correct, they are merely copied until I vet them... Re: If your time is limit, IMHO you may focus more on the Note. (I know this is a sensitive topic. By no means I want to push, I only...
    Hi asja, Re: Does it mean that the question/answer posted here are copied directly from handbook, therefore may contain error, until you vet them? I guess I will just wait for the pdf then… Yes, exactly correct, they are merely copied until I vet them... Re: If your time is limit, IMHO...
    Hi asja, Re: Does it mean that the question/answer posted here are copied directly from handbook, therefore may contain error, until you vet them? I guess I will just wait for the pdf then… ...
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  2. lkuo

    Focus Review Exercise 1

    Hi, David, Thank you so much. I got it. I thought I missed some important concept as during the focus review, everyone seems understanding completely.
    Hi, David, Thank you so much. I got it. I thought I missed some important concept as during the focus review, everyone seems understanding completely.
    Hi, David, Thank you so much. I got it. I thought I missed some important concept as during the focus review, everyone seems understanding completely.
    Hi, David, Thank you so much. I got it. I thought I missed some important concept as during the focus review, everyone seems understanding completely.
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  3. David Harper CFA FRM

    Zero Coupon Bond (5th Ed, p11)

    This question, motivated by a forum query, is a variation on an example given in the FRM Handbook (page 11); the spreadsheet contains solutions for both. I thought this would give practice on several bond ideas. Question: Consider a 10-year zero-coupon Treasury bond with face value of $100 trading at a yield of 5%. Questions: a. What is the bond's price under (i) annual, (ii)...
    This question, motivated by a forum query, is a variation on an example given in the FRM Handbook (page 11); the spreadsheet contains solutions for both. I thought this would give practice on several bond ideas. Question: Consider a 10-year zero-coupon Treasury bond with face value of $100 trading at a yield of 5%. Questions: a. What is the bond's price under (i) annual, (ii)...
    This question, motivated by a forum query, is a variation on an example given in the FRM Handbook (page 11); the spreadsheet contains solutions for both. I thought this would give practice on several bond ideas. Question: Consider a 10-year zero-coupon Treasury bond with face value of $100...
    This question, motivated by a forum query, is a variation on an example given in the FRM Handbook (page 11); the spreadsheet contains solutions for both. I thought this would give practice on...
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  4. yjhirad

    Return on Bank Equity pages 682,683

    Hi JY - I am frankly confused by both examples (?!) ... I do agree with you, Jorion's funding of the $100 with $92 or $98 does seem inconsistent with a more typical approach; i.e., to fully fund the asset with deposits, so that there is a clean "spread ... that's how Crouhy does it for RAROC: if $1,000 loan, fund with $1,000 deposits ... the only possibility I can figure is perhaps he has...
    Hi JY - I am frankly confused by both examples (?!) ... I do agree with you, Jorion's funding of the $100 with $92 or $98 does seem inconsistent with a more typical approach; i.e., to fully fund the asset with deposits, so that there is a clean "spread ... that's how Crouhy does it for RAROC: if $1,000 loan, fund with $1,000 deposits ... the only possibility I can figure is perhaps he has...
    Hi JY - I am frankly confused by both examples (?!) ... I do agree with you, Jorion's funding of the $100 with $92 or $98 does seem inconsistent with a more typical approach; i.e., to fully fund the asset with deposits, so that there is a clean "spread ... that's how Crouhy does it for RAROC:...
    Hi JY - I am frankly confused by both examples (?!) ... I do agree with you, Jorion's funding of the $100 with $92 or $98 does seem inconsistent with a more typical approach; i.e., to fully fund...
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  5. ajsa

    relationship between CF and maturity/coupon?

    This looks like a duplicate of this: http://www.bionicturtle.com/forum/viewthread/2387/ David
    This looks like a duplicate of this: http://www.bionicturtle.com/forum/viewthread/2387/ David
    This looks like a duplicate of this: http://www.bionicturtle.com/forum/viewthread/2387/ David
    This looks like a duplicate of this: http://www.bionicturtle.com/forum/viewthread/2387/ David
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  6. Suzanne Evans

    EXAMPLE 4.1: FRM EXAM 2003—QUESTION 40

    Question: In the geometric Brown motion process for a variable S, I. S is normally distributed. II. dln(S) is normally distributed. III. dS/S is normally distributed. IV. S is lognormally distributed. a. I only b. II, III, and IV c. IV only d. III and IV Answer: b. Both dS/S or dln(S) are normally distributed. As a result, S is lognormally distributed. The only incorrect answer...
    Question: In the geometric Brown motion process for a variable S, I. S is normally distributed. II. dln(S) is normally distributed. III. dS/S is normally distributed. IV. S is lognormally distributed. a. I only b. II, III, and IV c. IV only d. III and IV Answer: b. Both dS/S or dln(S) are normally distributed. As a result, S is lognormally distributed. The only incorrect answer...
    Question: In the geometric Brown motion process for a variable S, I. S is normally distributed. II. dln(S) is normally distributed. III. dS/S is normally distributed. IV. S is lognormally distributed. a. I only b. II, III, and IV c. IV only d. III and IV Answer: b. Both dS/S or...
    Question: In the geometric Brown motion process for a variable S, I. S is normally distributed. II. dln(S) is normally distributed. III. dS/S is normally distributed. IV. S is lognormally...
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  7. Suzanne Evans

    EXAMPLE 4.2: FRM EXAM 2002—QUESTION 126

    Question: Consider that a stock price S that follows a geometric Brownian motion dS = aSdt + bSdz, with b strictly positive. Which of the following statements is false? a. If the drift a is positive, the price one year from now will be above today’s price. b. The instantaneous rate of return on the stock follows a normal distribution. c. The stock price S follows a lognormal...
    Question: Consider that a stock price S that follows a geometric Brownian motion dS = aSdt + bSdz, with b strictly positive. Which of the following statements is false? a. If the drift a is positive, the price one year from now will be above today’s price. b. The instantaneous rate of return on the stock follows a normal distribution. c. The stock price S follows a lognormal...
    Question: Consider that a stock price S that follows a geometric Brownian motion dS = aSdt + bSdz, with b strictly positive. Which of the following statements is false? a. If the drift a is positive, the price one year from now will be above today’s price. b. The instantaneous rate of...
    Question: Consider that a stock price S that follows a geometric Brownian motion dS = aSdt + bSdz, with b strictly positive. Which of the following statements is false? a. If the drift a is...
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  8. Suzanne Evans

    EXAMPLE 4.3: FRM EXAM 1999—QUESTION 18

    Question: If S1 follows a geometric Brownian motion and S2 follows a geometric Brownian motion, which of the following is true? a. ln(S1 + S2) is normally distributed. b. S1 × S2 is lognormally distributed. c. S1 × S2 is normally distributed. d. S1 + S2 is normally distributed. Answer: b. Both S1 and S2 are lognormally distributed since dln(S1) and dln(S2) are normally distributed....
    Question: If S1 follows a geometric Brownian motion and S2 follows a geometric Brownian motion, which of the following is true? a. ln(S1 + S2) is normally distributed. b. S1 × S2 is lognormally distributed. c. S1 × S2 is normally distributed. d. S1 + S2 is normally distributed. Answer: b. Both S1 and S2 are lognormally distributed since dln(S1) and dln(S2) are normally distributed....
    Question: If S1 follows a geometric Brownian motion and S2 follows a geometric Brownian motion, which of the following is true? a. ln(S1 + S2) is normally distributed. b. S1 × S2 is lognormally distributed. c. S1 × S2 is normally distributed. d. S1 + S2 is normally distributed. Answer:...
    Question: If S1 follows a geometric Brownian motion and S2 follows a geometric Brownian motion, which of the following is true? a. ln(S1 + S2) is normally distributed. b. S1 × S2 is...
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  9. Suzanne Evans

    EXAMPLE 4.4: FRM EXAM 1999—QUESTION 19

    Question: Considering the one-factor Cox, Ingersoll, and Ross term-structure model and the Vasicek model: I. Drift coefficients are different. II. Both include mean reversion. III. Coefficients of the stochastic term, dz, are different. IV. CIR is a jump-diffusion model. a. All of the above are true. b. I and III are true. c. II, III, and IV are true. d. II and III are true. ...
    Question: Considering the one-factor Cox, Ingersoll, and Ross term-structure model and the Vasicek model: I. Drift coefficients are different. II. Both include mean reversion. III. Coefficients of the stochastic term, dz, are different. IV. CIR is a jump-diffusion model. a. All of the above are true. b. I and III are true. c. II, III, and IV are true. d. II and III are true. ...
    Question: Considering the one-factor Cox, Ingersoll, and Ross term-structure model and the Vasicek model: I. Drift coefficients are different. II. Both include mean reversion. III. Coefficients of the stochastic term, dz, are different. IV. CIR is a jump-diffusion model. a. All of the...
    Question: Considering the one-factor Cox, Ingersoll, and Ross term-structure model and the Vasicek model: I. Drift coefficients are different. II. Both include mean reversion. III....
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  10. Suzanne Evans

    EXAMPLE 4.5: FRM EXAM 1999—QUESTION 25

    Question: The Vasicek model defines a risk-neutral process for r , which is dr = a(b− r )dt + σdz, where a, b, and σ are constant, and r represents the rate of interest. From this equation we can conclude that the model is a a. Monte Carlo-type model b. Single-factor term-structure model c. Two-factor term-structure model d. Decision tree model Answer: b. This model postulates only...
    Question: The Vasicek model defines a risk-neutral process for r , which is dr = a(b− r )dt + σdz, where a, b, and σ are constant, and r represents the rate of interest. From this equation we can conclude that the model is a a. Monte Carlo-type model b. Single-factor term-structure model c. Two-factor term-structure model d. Decision tree model Answer: b. This model postulates only...
    Question: The Vasicek model defines a risk-neutral process for r , which is dr = a(b− r )dt + σdz, where a, b, and σ are constant, and r represents the rate of interest. From this equation we can conclude that the model is a a. Monte Carlo-type model b. Single-factor term-structure model ...
    Question: The Vasicek model defines a risk-neutral process for r , which is dr = a(b− r )dt + σdz, where a, b, and σ are constant, and r represents the rate of interest. From this equation we can...
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  11. Suzanne Evans

    EXAMPLE 4.6: FRM EXAM 1999—QUESTION 26

    Question: The term a(b− r ) in the previous question represents which term? a. Gamma b. Stochastic c. Reversion d. Vega Answer: c. This represents the expected return with mean reversion.
    Question: The term a(b− r ) in the previous question represents which term? a. Gamma b. Stochastic c. Reversion d. Vega Answer: c. This represents the expected return with mean reversion.
    Question: The term a(b− r ) in the previous question represents which term? a. Gamma b. Stochastic c. Reversion d. Vega Answer: c. This represents the expected return with mean reversion.
    Question: The term a(b− r ) in the previous question represents which term? a. Gamma b. Stochastic c. Reversion d. Vega Answer: c. This represents the expected return with mean reversion.
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  12. Suzanne Evans

    EXAMPLE 4.7: FRM EXAM 1998—QUESTION 24

    Question: Which of the following is a shortcoming of modeling a bond option by applying Black-Scholes formula to bond prices? a. It fails to capture convexity in a bond. b. It fails to capture the pull-to-par phenomenon. c. It fails to maintain put-call parity. d. It works for zero-coupon bond options only. Answer: b. The model assumes that prices follow a random walk with a constant...
    Question: Which of the following is a shortcoming of modeling a bond option by applying Black-Scholes formula to bond prices? a. It fails to capture convexity in a bond. b. It fails to capture the pull-to-par phenomenon. c. It fails to maintain put-call parity. d. It works for zero-coupon bond options only. Answer: b. The model assumes that prices follow a random walk with a constant...
    Question: Which of the following is a shortcoming of modeling a bond option by applying Black-Scholes formula to bond prices? a. It fails to capture convexity in a bond. b. It fails to capture the pull-to-par phenomenon. c. It fails to maintain put-call parity. d. It works for zero-coupon...
    Question: Which of the following is a shortcoming of modeling a bond option by applying Black-Scholes formula to bond prices? a. It fails to capture convexity in a bond. b. It fails to...
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  13. Suzanne Evans

    EXAMPLE 4.8: FRM EXAM 2000—QUESTION 118

    Question: Which group of term-structure models do the Ho-Lee, Hull-White and Heath, Jarrow, and Morton models belong to? a. No-arbitrage models b. Two-factor models c. Lognormal models d. Deterministic models Answer: a. These are no-arbitrage models of the term structure, implemented as either one-factor or two-factor models.
    Question: Which group of term-structure models do the Ho-Lee, Hull-White and Heath, Jarrow, and Morton models belong to? a. No-arbitrage models b. Two-factor models c. Lognormal models d. Deterministic models Answer: a. These are no-arbitrage models of the term structure, implemented as either one-factor or two-factor models.
    Question: Which group of term-structure models do the Ho-Lee, Hull-White and Heath, Jarrow, and Morton models belong to? a. No-arbitrage models b. Two-factor models c. Lognormal models d. Deterministic models Answer: a. These are no-arbitrage models of the term structure, implemented...
    Question: Which group of term-structure models do the Ho-Lee, Hull-White and Heath, Jarrow, and Morton models belong to? a. No-arbitrage models b. Two-factor models c. Lognormal models d....
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  14. Suzanne Evans

    EXAMPLE 4.9: FRM EXAM 2000—QUESTION 119

    Question: A plausible stochastic process for the short-term rate is often considered to be one where the rate is pulled back to some long-run average level. Which one of the following term-structure models does not include this characteristic? a. The Vasicek model b. The Ho-Lee model c. The Hull-White model d. The Cox-Ingersoll-Ross model Answer: b. Both the Vasicek and CIR models...
    Question: A plausible stochastic process for the short-term rate is often considered to be one where the rate is pulled back to some long-run average level. Which one of the following term-structure models does not include this characteristic? a. The Vasicek model b. The Ho-Lee model c. The Hull-White model d. The Cox-Ingersoll-Ross model Answer: b. Both the Vasicek and CIR models...
    Question: A plausible stochastic process for the short-term rate is often considered to be one where the rate is pulled back to some long-run average level. Which one of the following term-structure models does not include this characteristic? a. The Vasicek model b. The Ho-Lee model c....
    Question: A plausible stochastic process for the short-term rate is often considered to be one where the rate is pulled back to some long-run average level. Which one of the following...
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  15. Suzanne Evans

    EXAMPLE 4.10: FRM EXAM 2004—QUESTION 28

    Question: Which of the following statements about American stock options is false? a. American options can be exercised at or before maturity. b. American options are always worth at least as much as European options. c. American options can easily be valued with Monte Carlo simulation. d. American options can be easily valued with binomial trees. Answer: c. American options cannot...
    Question: Which of the following statements about American stock options is false? a. American options can be exercised at or before maturity. b. American options are always worth at least as much as European options. c. American options can easily be valued with Monte Carlo simulation. d. American options can be easily valued with binomial trees. Answer: c. American options cannot...
    Question: Which of the following statements about American stock options is false? a. American options can be exercised at or before maturity. b. American options are always worth at least as much as European options. c. American options can easily be valued with Monte Carlo simulation. ...
    Question: Which of the following statements about American stock options is false? a. American options can be exercised at or before maturity. b. American options are always worth at least as...
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  16. Suzanne Evans

    EXAMPLE 4.11: FRM EXAM 1999—QUESTION 8

    Question: Several different estimates of the VAR of an options portfolio were computed using 1,000 independent, log-normally distributed samples of the underlyings. Because each estimate was made using a different set of random numbers, there was some variability in the answers. In fact, the standard deviation of the distribution of answers was about $100,000. It was then decided to rerun...
    Question: Several different estimates of the VAR of an options portfolio were computed using 1,000 independent, log-normally distributed samples of the underlyings. Because each estimate was made using a different set of random numbers, there was some variability in the answers. In fact, the standard deviation of the distribution of answers was about $100,000. It was then decided to rerun...
    Question: Several different estimates of the VAR of an options portfolio were computed using 1,000 independent, log-normally distributed samples of the underlyings. Because each estimate was made using a different set of random numbers, there was some variability in the answers. In fact, the...
    Question: Several different estimates of the VAR of an options portfolio were computed using 1,000 independent, log-normally distributed samples of the underlyings. Because each estimate was...
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  17. Suzanne Evans

    EXAMPLE 4.12: FRM EXAM 1998—QUESTION 34

    Question: You have been asked to find the value of an Asian option on the short rate. The Asian option gives the holder an amount equal to the average value of the short rate over the period to expiration less the strike rate. To value this option with a one-factor binomial model of interest rates, what method would you recommend using? a. The backward induction method, since it is the...
    Question: You have been asked to find the value of an Asian option on the short rate. The Asian option gives the holder an amount equal to the average value of the short rate over the period to expiration less the strike rate. To value this option with a one-factor binomial model of interest rates, what method would you recommend using? a. The backward induction method, since it is the...
    Question: You have been asked to find the value of an Asian option on the short rate. The Asian option gives the holder an amount equal to the average value of the short rate over the period to expiration less the strike rate. To value this option with a one-factor binomial model of interest...
    Question: You have been asked to find the value of an Asian option on the short rate. The Asian option gives the holder an amount equal to the average value of the short rate over the period to...
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  18. Suzanne Evans

    EXAMPLE 4.13: FRM EXAM 1997—QUESTION 17

    Question: The measurement error in VAR, due to sampling variation, should be greater with a. More observations and a high confidence level (e.g., 99%) b. Fewer observations and a high confidence level c. More observations and a low confidence level (e.g., 95%) d. Fewer observations and a low confidence level Answer: b. Sampling variability (or imprecision) increases with (1) fewer...
    Question: The measurement error in VAR, due to sampling variation, should be greater with a. More observations and a high confidence level (e.g., 99%) b. Fewer observations and a high confidence level c. More observations and a low confidence level (e.g., 95%) d. Fewer observations and a low confidence level Answer: b. Sampling variability (or imprecision) increases with (1) fewer...
    Question: The measurement error in VAR, due to sampling variation, should be greater with a. More observations and a high confidence level (e.g., 99%) b. Fewer observations and a high confidence level c. More observations and a low confidence level (e.g., 95%) d. Fewer observations and a...
    Question: The measurement error in VAR, due to sampling variation, should be greater with a. More observations and a high confidence level (e.g., 99%) b. Fewer observations and a high...
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  19. Suzanne Evans

    EXAMPLE 4.14: FRM EXAM 1999—QUESTION 29

    Question: (Data-intensive) Given the covariance matrix, (FORMULA GOES HERE) let = XX, where X is lower triangular, be a Cholesky decomposition. Then the four elements in the upper left-hand corner of X, x11, x12, x21, x22, are, respectively, a. 3.0%, 0.0%, 4.0%, 2.0% b. 3.0%, 4.0%, 0.0%, 2.0% c. 3.0%, 0.0%, 2.0%, 1.0% d. 2.0%, 0.0%, 3.0%, 1.0% Answer: c. This involves a...
    Question: (Data-intensive) Given the covariance matrix, (FORMULA GOES HERE) let = XX, where X is lower triangular, be a Cholesky decomposition. Then the four elements in the upper left-hand corner of X, x11, x12, x21, x22, are, respectively, a. 3.0%, 0.0%, 4.0%, 2.0% b. 3.0%, 4.0%, 0.0%, 2.0% c. 3.0%, 0.0%, 2.0%, 1.0% d. 2.0%, 0.0%, 3.0%, 1.0% Answer: c. This involves a...
    Question: (Data-intensive) Given the covariance matrix, (FORMULA GOES HERE) let = XX, where X is lower triangular, be a Cholesky decomposition. Then the four elements in the upper left-hand corner of X, x11, x12, x21, x22, are, respectively, a. 3.0%, 0.0%, 4.0%, 2.0% b. 3.0%,...
    Question: (Data-intensive) Given the covariance matrix, (FORMULA GOES HERE) let = XX, where X is lower triangular, be a Cholesky decomposition. Then the four elements in the upper...
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  20. Suzanne Evans

    EXAMPLE 5.1: FRM EXAM 2002—QUESTION 56

    Question: Consider a forward contract on a stock market index. Identify the false statement. Everything else being constant, a. The forward price depends directly on the level of the stock market index. b. The forward price will fall if underlying stocks increase the level of dividend payments over the life of the contract. c. The forward price will rise if time to maturity is...
    Question: Consider a forward contract on a stock market index. Identify the false statement. Everything else being constant, a. The forward price depends directly on the level of the stock market index. b. The forward price will fall if underlying stocks increase the level of dividend payments over the life of the contract. c. The forward price will rise if time to maturity is...
    Question: Consider a forward contract on a stock market index. Identify the false statement. Everything else being constant, a. The forward price depends directly on the level of the stock market index. b. The forward price will fall if underlying stocks increase the level of dividend...
    Question: Consider a forward contract on a stock market index. Identify the false statement. Everything else being constant, a. The forward price depends directly on the level of the stock...
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  21. Suzanne Evans

    EXAMPLE 5.2: FRM EXAM 1999—QUESTION 31

    Question: Consider an eight-month forward contract on a stock with a price of $98/share. The delivery date is eight months hence. The firm is expected to pay a $1.80 per share dividend in four months. Riskless zero-coupon interest rates (continuously compounded) are 4% for six months, and 4.5% for eight months. The theoretical forward price (to the nearest cent) is a. 99.15 b. 99.18 c....
    Question: Consider an eight-month forward contract on a stock with a price of $98/share. The delivery date is eight months hence. The firm is expected to pay a $1.80 per share dividend in four months. Riskless zero-coupon interest rates (continuously compounded) are 4% for six months, and 4.5% for eight months. The theoretical forward price (to the nearest cent) is a. 99.15 b. 99.18 c....
    Question: Consider an eight-month forward contract on a stock with a price of $98/share. The delivery date is eight months hence. The firm is expected to pay a $1.80 per share dividend in four months. Riskless zero-coupon interest rates (continuously compounded) are 4% for six months, and 4.5%...
    Question: Consider an eight-month forward contract on a stock with a price of $98/share. The delivery date is eight months hence. The firm is expected to pay a $1.80 per share dividend in four...
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  22. Suzanne Evans

    EXAMPLE 5.3: FRM EXAM 2001—QUESTION 93

    Question: Calculate the price of a 1-year forward contract on gold. Assume the storage cost for gold is $5.00 per ounce, with payment made at the end of the year. Spot gold is $290 per ounce and the risk-free rate is 5%. a. $304.86 b. $309.87 c. $310.12 d. $313.17 Answer: b. Assuming continuous compounding, the present value factor is PV = exp(−0.05) = 0.951. Here, the storage cost...
    Question: Calculate the price of a 1-year forward contract on gold. Assume the storage cost for gold is $5.00 per ounce, with payment made at the end of the year. Spot gold is $290 per ounce and the risk-free rate is 5%. a. $304.86 b. $309.87 c. $310.12 d. $313.17 Answer: b. Assuming continuous compounding, the present value factor is PV = exp(−0.05) = 0.951. Here, the storage cost...
    Question: Calculate the price of a 1-year forward contract on gold. Assume the storage cost for gold is $5.00 per ounce, with payment made at the end of the year. Spot gold is $290 per ounce and the risk-free rate is 5%. a. $304.86 b. $309.87 c. $310.12 d. $313.17 Answer: b. Assuming...
    Question: Calculate the price of a 1-year forward contract on gold. Assume the storage cost for gold is $5.00 per ounce, with payment made at the end of the year. Spot gold is $290 per ounce and...
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  23. Suzanne Evans

    EXAMPLE 5.4: FRM EXAM 2004—QUESTION 10

    Question: Use the following information to answer the next two questions. The two-year risk-free rate in the United Kingdom and France is 8% and 5% per annum, continuously compounded, respectively. The current French franc (FF) to the GBP currency exchange rate is that one unit of GBP currency costs 0.75 units of French franc. What is the two-year forward price of one unit of the GBP in...
    Question: Use the following information to answer the next two questions. The two-year risk-free rate in the United Kingdom and France is 8% and 5% per annum, continuously compounded, respectively. The current French franc (FF) to the GBP currency exchange rate is that one unit of GBP currency costs 0.75 units of French franc. What is the two-year forward price of one unit of the GBP in...
    Question: Use the following information to answer the next two questions. The two-year risk-free rate in the United Kingdom and France is 8% and 5% per annum, continuously compounded, respectively. The current French franc (FF) to the GBP currency exchange rate is that one unit of GBP currency...
    Question: Use the following information to answer the next two questions. The two-year risk-free rate in the United Kingdom and France is 8% and 5% per annum, continuously compounded,...
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  24. Suzanne Evans

    EXAMPLE 5.5: FRM EXAM 2004—QUESTION 11

    Question: If the observed two-year forward price of one unit of the GBP is 0.850 units of the French franc, what is your strategy to make an arbitrage profit? a. Borrow GBP, buy FF and enter a short forward contract on French francs. b. Borrow GBP, buy FF, and enter a short forward contract on GBP. c. Borrow FF, buy GBP, and enter a short forward contract on French francs. d. Borrow FF,...
    Question: If the observed two-year forward price of one unit of the GBP is 0.850 units of the French franc, what is your strategy to make an arbitrage profit? a. Borrow GBP, buy FF and enter a short forward contract on French francs. b. Borrow GBP, buy FF, and enter a short forward contract on GBP. c. Borrow FF, buy GBP, and enter a short forward contract on French francs. d. Borrow FF,...
    Question: If the observed two-year forward price of one unit of the GBP is 0.850 units of the French franc, what is your strategy to make an arbitrage profit? a. Borrow GBP, buy FF and enter a short forward contract on French francs. b. Borrow GBP, buy FF, and enter a short forward contract...
    Question: If the observed two-year forward price of one unit of the GBP is 0.850 units of the French franc, what is your strategy to make an arbitrage profit? a. Borrow GBP, buy FF and enter a...
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  25. Suzanne Evans

    EXAMPLE 5.6: FRM EXAM 2004—QUESTION 38

    Question: An investor enters into a short position in a gold futures contract at USD 294.20. Each futures contract controls 100 troy ounces. The initial margin is USD 3,200, and the maintenance margin is USD 2,900. At the end of the first day, the futures price drops to USD 286.6. Which of the following is the amount of the variation margin at the end of the first day? a. 0 b. USD 34 c....
    Question: An investor enters into a short position in a gold futures contract at USD 294.20. Each futures contract controls 100 troy ounces. The initial margin is USD 3,200, and the maintenance margin is USD 2,900. At the end of the first day, the futures price drops to USD 286.6. Which of the following is the amount of the variation margin at the end of the first day? a. 0 b. USD 34 c....
    Question: An investor enters into a short position in a gold futures contract at USD 294.20. Each futures contract controls 100 troy ounces. The initial margin is USD 3,200, and the maintenance margin is USD 2,900. At the end of the first day, the futures price drops to USD 286.6. Which of the...
    Question: An investor enters into a short position in a gold futures contract at USD 294.20. Each futures contract controls 100 troy ounces. The initial margin is USD 3,200, and the maintenance...
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    0
    Views:
    2
  26. Suzanne Evans

    EXAMPLE 5.7: FRM EXAM 2004—QUESTION 66

    Question: Which one of the following statements is incorrect regarding the margining of exchange-traded futures contracts? a. Day trades and spread transactions require lower margin levels. b. If an investor fails to deposit variation margin in a timely manner, the positions may be liquidated by the carrying broker. c. Initial margin is the amount of money that must be deposited when a...
    Question: Which one of the following statements is incorrect regarding the margining of exchange-traded futures contracts? a. Day trades and spread transactions require lower margin levels. b. If an investor fails to deposit variation margin in a timely manner, the positions may be liquidated by the carrying broker. c. Initial margin is the amount of money that must be deposited when a...
    Question: Which one of the following statements is incorrect regarding the margining of exchange-traded futures contracts? a. Day trades and spread transactions require lower margin levels. b. If an investor fails to deposit variation margin in a timely manner, the positions may be...
    Question: Which one of the following statements is incorrect regarding the margining of exchange-traded futures contracts? a. Day trades and spread transactions require lower margin levels. ...
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    1
  27. Suzanne Evans

    EXAMPLE 5.8: FRM EXAM 2000—QUESTION 7

    Question: For assets that are strongly positively correlated with interest rates, which one of the following is true? a. Long-dated forward contracts will have higher prices than long-dated futures contracts. b. Long-dated futures contracts will have higher prices than long-dated forward contracts. c. Long-dated forward and long-dated futures prices are always the same. d. The...
    Question: For assets that are strongly positively correlated with interest rates, which one of the following is true? a. Long-dated forward contracts will have higher prices than long-dated futures contracts. b. Long-dated futures contracts will have higher prices than long-dated forward contracts. c. Long-dated forward and long-dated futures prices are always the same. d. The...
    Question: For assets that are strongly positively correlated with interest rates, which one of the following is true? a. Long-dated forward contracts will have higher prices than long-dated futures contracts. b. Long-dated futures contracts will have higher prices than long-dated forward...
    Question: For assets that are strongly positively correlated with interest rates, which one of the following is true? a. Long-dated forward contracts will have higher prices than long-dated...
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    Views:
    1
  28. Suzanne Evans

    EXAMPLE 6.1: FRM EXAM 1999—QUESTION 35

    Question: According to put-call parity, writing a put is like a. Buying a call, buying stock, and lending b. Writing a call, buying stock, and borrowing c. Writing a call, buying stock, and lending d. Writing a call, selling stock, and borrowing Answer: b. A short put position is equivalent to a long asset position plus shorting a call. To fund the purchase of the asset, we need to...
    Question: According to put-call parity, writing a put is like a. Buying a call, buying stock, and lending b. Writing a call, buying stock, and borrowing c. Writing a call, buying stock, and lending d. Writing a call, selling stock, and borrowing Answer: b. A short put position is equivalent to a long asset position plus shorting a call. To fund the purchase of the asset, we need to...
    Question: According to put-call parity, writing a put is like a. Buying a call, buying stock, and lending b. Writing a call, buying stock, and borrowing c. Writing a call, buying stock, and lending d. Writing a call, selling stock, and borrowing Answer: b. A short put position is...
    Question: According to put-call parity, writing a put is like a. Buying a call, buying stock, and lending b. Writing a call, buying stock, and borrowing c. Writing a call, buying stock, and...
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    Views:
    1
  29. Suzanne Evans

    EXAMPLE 6.2: FRM EXAM 2002—QUESTION 47

    Question: A two-year European call option has a market price of $50 with a strike price of $140. The underlying stock price is $100 with a two-year annualized interest rate of 5% and a dividend yield of 2% (annualized). What is the number closest to the market price of a two-year European put struck at $140? a. $77 b. $10 c. $90 d. $81 Answer: d. Because this is a European call, we...
    Question: A two-year European call option has a market price of $50 with a strike price of $140. The underlying stock price is $100 with a two-year annualized interest rate of 5% and a dividend yield of 2% (annualized). What is the number closest to the market price of a two-year European put struck at $140? a. $77 b. $10 c. $90 d. $81 Answer: d. Because this is a European call, we...
    Question: A two-year European call option has a market price of $50 with a strike price of $140. The underlying stock price is $100 with a two-year annualized interest rate of 5% and a dividend yield of 2% (annualized). What is the number closest to the market price of a two-year European put...
    Question: A two-year European call option has a market price of $50 with a strike price of $140. The underlying stock price is $100 with a two-year annualized interest rate of 5% and a dividend...
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    0
    Views:
    1
  30. Suzanne Evans

    EXAMPLE 6.3: FRM EXAM 2002—QUESTION 25

    Question: The price of a non-dividend paying stock is $20. A six-month European call option with a strike price of $18 sells for $4. A European put option on the same stock, with the same strike price and maturity, sells for $1.47. The continuously compounded risk-free interest rate is 6% per annum. Are these three securities (the stock and the two options) consistently priced? a. No,...
    Question: The price of a non-dividend paying stock is $20. A six-month European call option with a strike price of $18 sells for $4. A European put option on the same stock, with the same strike price and maturity, sells for $1.47. The continuously compounded risk-free interest rate is 6% per annum. Are these three securities (the stock and the two options) consistently priced? a. No,...
    Question: The price of a non-dividend paying stock is $20. A six-month European call option with a strike price of $18 sells for $4. A European put option on the same stock, with the same strike price and maturity, sells for $1.47. The continuously compounded risk-free interest rate is 6% per...
    Question: The price of a non-dividend paying stock is $20. A six-month European call option with a strike price of $18 sells for $4. A European put option on the same stock, with the same strike...
    Replies:
    0
    Views:
    1

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