When graphing the efficient frontier, the two axes are:

A normal yield curve is generally:

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?

[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

A US treasury bill with 90 days to maturity and a face value of $100 is priced at $98. What is the annual bond-equivalent yield on this treasury bill?

Which of the following statements is false:

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

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?

Futures initial margin requirements are

The rule that optimal portfolios will maximize the Sharpe ratio only applies when which of the following conditions is satisfied:

I. It is possible to borrow or lend any amounts at the risk free rate

II. Investors' risk preferences are fully described by expected returns and standard deviation

III. Investors are risk neutral

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

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

Which of the following statements is true:

I. The standard deviation of a short position is the same as the standard deviation of a long position

II. The expected return of a short position is the same as that a long position in the same asset

III. If two assets are perfectly positively correlated, then a short position in one and a long position in the other are negatively correlated

IV. If we increase the weight of an asset in a portfolio, its correlation with other assets in the portfolio scales up proportionately

Caps, floors and collars are instruments designed to:

A bond has a Macaulay duration of 6 years. The yield to maturity for this bond is currently 5%. If interest rates rise across the curve by 10 basis points, what is the impact on the price of the bond?

Security A and B both have expected returns of 10%, but the standard deviation of Security A is 10% while that of security B is 20%. Borrowings are not permitted. A portfolio manager who wishes to maximize his probability of earning a 25% return during the year should invest in:

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:

Arrange the following rates in descending order, assuming an upward sloping yield curve:

1. The 10 year zero rate

2. The forward rate from year 9 to 10

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

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 convexity of the bond.

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

Which of the following statements are true:

I. The swap rate, also called the swap spread, is initially calculated so that the value of the swap at inception is zero.

II. The value of a swap at initiation is different from zero and is equal to the difference between the NPV of the cash flows of the two legs of the swap

III. OTC swaps are standardized and limited to a defined set of standard contracts

IV. Interest rate and commodity swaps are the types of swaps that are most traded

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

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%?

What is the coupon on a treasury bill?

Buying an option on a futures contract requires:

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

The effectiveness of a hedge is determined by:

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

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

An asset has a volatility of 10% per year. An investment manager chooses to hedge it with another asset that has a volatility of 9% per year and a correlation of 0.9. Calculate the hedge ratio.

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?

Which of the following are true:

I. A interest rate cap is effectively a call option on an underlying interest rate

II. The premium on a cap is determined by the volatility of the underlying rate

III. A collar is more expensive than a cap or a floor

IV. A floor is effectively a put option on an underlying interest rate

[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 holder extendible option:

An investor holds a portfolio of mortage backed securities valued at $100m. Using a Monte Carlo based pricing model, he determines that the value of the portfolio would rise to $102m if interest rates were to fall by 45 basis points, and fall to $97m if interest rates were to rise by 45 basis points. What is the estimated modified duration of the investor's portfolio?

Which of the following statements are true:

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 corn farmer has committed to sell 20,000 bushels of corn in November. The spot price has a standard deviation of 20 cents per bushel, and its correlation with the December futures prices is 0.9. The futures contract is for 5000 bushels and has a standard deviation of 24 cents per bushel. What should the corn producer do if he/she wishes to hedge the risk of price movements between now and November?

A 'consol' is a perpetual bond issued by the UK government. Its running yield is 5%. What is its duration?

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

When comparing compound interest rates to equivalent continuously compounded rates of return, the latter will always be:

A futures contract is quoted at 105. Which is the cheapest-to-deliver bond for this contract if there are three available bonds, quoted at 97, 101 and 106 with conversion factors respectively of 0.9, 1 and 1.1 respectively?

The 'transformation line' expresses the relationship between