8006 by PRMIA Actual Free Exam Questions And Answers

Question 1

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?

A. Buy the call, buy the put and sell the stock

B. Do nothing

C. Buy the put, sell the call and buy the stock

D. Buy the call, sell the put and sell the stock

Discussion 0

Correct Answer: D Vote an answer

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Question 2

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

A. foreign exchange futures and options

B. equity futures and options

C. interest rate products

D. commodities

Discussion 0

Correct Answer: B Vote an answer

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Question 3

Which of the following reflects the pricing convention for currency forwards, where one of the currencies is USD?

A. It can be quoted either way, based on whether the contract is for a short maturity or long

B. It depends upon the currency - futures forex prices follow the same convention as for spot prices

C. Forward forex prices are always quoted as the number of units of the foreign currency that one US dollar can buy

D. Forward forex prices are always quoted as the number of US dollars one unit of the foreign currency can buy

Discussion 0

Correct Answer: B Vote an answer

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Question 4

[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:

A. options on options

B. any two asset hybrid instrument

C. any two asset instrument in which one asset is a foreign currency

D. correlation products

Discussion 0

Correct Answer: C Vote an answer

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Question 5

Where futures are being used to hedge a commodities position, which of the following formulae should be used to determine the number of futures contracts to buy (or sell)?

A. Minimum Variance Hedge Ratio x Dollar Value of Position / Dollar Value of Single Futures Contract

B. Minimum Variance Hedge Ratio

C. Minimum Variance Hedge Ratio x Dollar Value of Position / Units in a Single Futures Contract

D. Minimum Variance Hedge Ratio x Units in Position Held / Units in Single Futures Contract

Discussion 0

Correct Answer: A Vote an answer

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Question 6

Credit risk in the case of a CDO (Collateralized Debt Obligation) is borne by:

A. The reference entity

B. Investors

C. The sponsoring institution

D. The Special Purpose Vehicle (SPV)

Discussion 0

Correct Answer: B Vote an answer

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Question 7

If interest rates and spot prices stay the same, an increase in the value of a call option will be accompanied by:

A. no impact in the value of the corresponding put option

B. an increase in the value of the corresponding put option

C. a decrease in the value of the corresponding put option

D. an indeterminate change in the value of the corresponding put option

Discussion 0

Correct Answer: B Vote an answer

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Question 8

Which of the following is true about the early exercise of an American call option:

A. An early exercise of an American call option is advisable whenever the option is deep in the money and delta approaches 1

B. An early exercise of an American call option is never a good idea as an option is always worth more alive than when it is dead

C. An early exercise of an American call option may be justified if an extraordinarily large dividend payment is imminent

D. An early exercise of an American option, if ever to be done, should be done immediately after an ex-dividend date

Discussion 0

Correct Answer: C Vote an answer

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Question 9

Which of the following are valid credit enhancements used for credit derivatives:
I. Overcollateralization
II. Excess spread
III. Cash reserves
IV. Margin requirements

A. I, II and IV

B. I, II and III

C. II, III and IV

D. I, II, III and IV

Discussion 0

Correct Answer: B Vote an answer

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Question 10

Credit derivatives can be used for:
I. Reducing credit exposures
II. Reducing interest rate risks
III. Earn credit risk premiums
IV. Get market exposure without taking cash market positions

A. I and IV

B. I, III and IV

C. I, II and III

D. II, III and IV

Discussion 0

Correct Answer: B Vote an answer

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Question 11

Which of the following cause convexity to increase:
I. Increase in yields
II. Increase in maturity
III. Increase in coupon rate
IV. Increase in duration

A. I and IV

B. I and III

C. II, III and IV

D. II and IV

Discussion 0

Correct Answer: D Vote an answer

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Question 12

An investor expects stock prices to move either sharply up or down. His preferred strategy should be to:

A. buy a collar

B. buy a straddle

C. buy a condor

D. buy a butterfly spread

Discussion 0

Correct Answer: B Vote an answer

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Question 13

Consider a portfolio with a large number of uncorrelated assets, each carrying an equal weight in the portfolio.
Which of the following statements accurately describes the volatility of the portfolio?

A. The volatility of the portfolio will be equal to the weighted average of the volatility of the assets in the portfolio

B. The volatility of the portfolio will be equal to the square root of the sum of the variances of the assets in the portfolio weighted by the square of their weights

C. The volatility of the portfolio will be close to zero

D. The volatility of the portfolio is the same as that of the market

Discussion 0

Correct Answer: B Vote an answer

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Question 14

Assuming all other factors remain the same, an increase in the volatility of the returns on the assets of a firm causes which of the following outcomes?

A. An increase in the value of the equity of the firm

B. A decrease in the value of the implicit put in in the debt of the firm

C. An increase in the value of the callable debt of the firm

D. A decrease in the value of the non-callable debt issued by the firm

Discussion 0

Correct Answer: D Vote an answer

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Question 15

Basis risk between spot and futures prices for stock indices is caused by changes in:
I. The risk free rate, or the funding cost for the futures
II. Expected dividend yield
III. Volatility of the underlying stock index

A. I, II and III

B. I and III

C. I and II

D. II and III

Discussion 0

Correct Answer: C Vote an answer

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PRMIA Exam I: Finance Theory Financial Instruments Financial Markets - 2015 Edition - 8006 Exam Practice Test

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