Certification Training for 8006 Exam Dumps Test Engine [2021]

Sep 02, 2021 Step by Step Guide to Prepare for 8006 Exam

NEW QUESTION 160
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.

• A. 1.1249
• B. 1.1229
• C. 1.1200
• D. 1.1278

Answer: A

Explanation:
Explanation
Forward rates can be calculated from spot rates and interest rates using the formula Spot x (1+domestic interest rate)/(1+foreign interest rate), where the 'Spot' is expressed as a direct rate (ie as the number of domestic currency units one unit of the foreign currency can buy). In this case the forward rate will be 1.1239
* (1 + 0.75%*90/360) / (1 + 0.4%*90/360) = 1.1249.
It can be confusing to determine which interest rate should be considered 'domestic', and which 'foreign' for this formula. For that, look at the spot rate. Think of the spot rate as being x units of one currency equal to 1 unit of the other currency. In this case, think of the spot rate 1.1239 as "CAD 1.1239 = USD 1". The currency that has the "1" in it is the 'foreign' and the other one is 'domestic'.
It is also important to remember how exchange rates are generally quoted. Most exchange rates are quoted in terms of how many foreign currencies does USD 1 buy. Therefore, a rate of 99 for the JPY means that USD 1 is equal to JPY 99. These are called 'direct rates'. However, there are four major world currencies where the rate quote convention is the other way round - these are EUR, GBP, AUD and NZD. For these currencies, the FX quote implies how many US dollars can one unit of these currencies buy. So a quote of "1.1023" for the Euro means EUR 1 is equal to USD 1.1023 and not the other way round.

 

NEW QUESTION 161
It is January and an Australian importer needs to pay USD 1,120,000 at the end of August to a US creditor. If a AUD/USD futures contract is trading on the exchange at a futures price of 0.6750 (ie, 1 AUD = 0.6750 USD), and the contract size is USD 100,000, what would represent an appropriate hedge?

• A. Buy 11 contracts to the September expiry date and receive delivery of USDs in September
• B. Buy 11 contracts to the September expiry date which are closed out in August at the end of August.
• C. Buy 17 contracts to the September expiry date which are closed out in August at the end of August.
• D. Sell 11 contracts to the September expiry date and make delivery of USDs in September

Answer: B

Explanation:
Explanation
This question touches upon a couple of issues that relate to hedging foreign exchange exposures using futures contracts. Firstly, many futures contracts on exchanges are available only at specific maturity dates, for example, the IMM dates. They may or may not coincide with actual liabilities for a running business. Also, futures contracts are standardized, ie their notional amounts are fixed rounded sums, and they can only be traded in whole numbers. This often means business using futures for hedging end up having a close enough, but not perfect hedge.
For our importer in the question, clearly he has to buy USDs so he can make his payment. Since each contract gives him USD 100k, he should buy 11 contracts that will get him very close to the amount he finally needs.
Also, the contract expires a month later than his liability is due. This means he should offset the contract by closing it out in August soon as he has made his payment. This will allow him to stay hedged till August. If he does not sell out of the contracts, he will become exposed to a long position for one month till the contract settles, a risk which is unnecessary for him.
Therefore Choice 'b' is the best answer.

 

NEW QUESTION 162
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?

• A. A collateralized debt obligation issuance
• B. A credit default swap purchase
• C. n-th to default swap
• D. A synthetic CDO creation

Answer: A

Explanation:
Explanation
A traditional collateralized debt obligation (CDO) involves the complete transfer of securities to an SPV, which then issues notes or securities to investors. Therefore Choice 'd' is the correct answer.
A synthetic CDO achieves the same result as a traditional CDO, but uses credit derivatives to synthetically create the same economic effect as a traditional CDO.
A credit default swap is a derivative instrument that pays in the event of the occurrence of agreed credit events. The arrangement described in the question is not a credit default swap purchase. n-th to default swap arrangements are similar to CDSs, but on a portfolio with the first 'n' losses being covered by the swap.

 

NEW QUESTION 163
A fund manager buys a gold futures contract at $1000 per troy ounce, each contract being worth 100 ounces of gold. Initial margin is $5,000 per contract, and the exchange requires a maintenance margin to be maintained at $4,000 per contract. Prices fall the next day to $980. What is the margin call the fund manager faces in respect of daily variation margin ?

• A. $2000
• B. $7000
• C. $0
• D. $1000

Answer: A

Explanation:
Explanation
The loss to the fund manager is $20*100 = $2,000. The initial margin placed was $5,000. After the loss is charged to his account, the margin balance is only $3,000 ($5,000 - $2,000). The margin to be maintained is
$5,000. Therefore the margin call is $2,000.
Note that there would have been no margin call till the balance in the margin account had reduced to the
'maintenance' level of $4,000. So if the price had fallen by $5, and the loss had been $500, there would have been no margin call. But when the margin call would be made, it would require the balance to be brought up to the initial margin of $5,000 (and not the maintenance margin of $4,000).

 

NEW QUESTION 164
Theta for a call option:

• A. approaches 1 as the expiration date draws closer
• B. approaches 0 as the expiration date draws closer
• C. approaches -1 as the expiration date draws closer
• D. approaches as the expiration date draws closer

Answer: B

Explanation:
Explanation
Theta measures time decay, ie the change in value of the option with the passage of time. When the option is close to expiry, theta is very low as the value of the option is driven by intrinsic value rather than the time value. Therefore theta approaches zero as the option comes closer to expiry.

 

NEW QUESTION 165
What kind of a risk attitude does a utility function with downward sloping curvature indicate?

• A. risk averse
• B. risk neutral
• C. risk seeking
• D. risk mitigation

Answer: A

Explanation:
Explanation
A utility function is graphed with utility on the y-axis and the variable driving utility (generally wealth) along the x-axis.
A concave utility function, ie a function with a downward sloping curve, indicates risk aversion. A convex utility function indicates a risk seeking attitude and a straight line (ie no curvature) indicates a risk neutral attitude.

 

NEW QUESTION 166
The effectiveness of a hedge is determined by which of the following expressions, where x,y is the correlation between the asset being hedged and the hedge position:
A)

B)

C)

D)

• A. Option D
• B. Option C
• C. Option A
• D. Option B

Answer: B

Explanation:
Explanation
The effectiveness of the hedge is solely determined by the correlation between the position being hedged, and the position being used as the hedge. A hedge can be perfect when correlation is 1, and will be less than perfect when it is anything other than 1.The effectiveness of the optimal hedge is given by the formula (1-2), where is the correlation between the two. Therefore Choice 'c' is the correct answer. Standard deviations affect the hedge ratio, not the effectiveness of the hedge.

 

NEW QUESTION 167
The annual borrowing rate for investors is 10% per annum. What is the par no-arbitrage futures price for delivery one year hence for a stock currently selling in the spot market at $100 ? Assume the stock pays no dividends.

• A. $90
• B. $105
• C. $110
• D. $100

Answer: C

Explanation:
Explanation
The no-arbitrage futures price for the stock is the current spot price plus the carrying cost for one year, which in this case is $100 * 10% =$10. Therefore the no-arbitrage futures price for the stock is $110.
($100*(1+10%), or $100 + $10.)

 

NEW QUESTION 168
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%?

• A. 7%
• B. 9.6%
• C. 9%
• D. 7.4%

Answer: C

Explanation:
Explanation
The stock has a beta of 1.2, therefore intuitively it can be expected to earn more than the broad market index.
It will earn the risk free rate, ie 3%, and 1.2 times the equity risk premium of 5% (8% - 3%). The expected returns from the stock therefore are 3% + (8% - 3%)*1.2 = 9%

 

NEW QUESTION 169
[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 writer extendible option

• A. an option whose expiry is automatically extended if it finishes out of the money.
• B. an option in which the buyer of the option has the option to extend the expiry of the option upon the payment of an extra premium
• C. an option in which the holder of the option has the right to reset the strike price to be at-the-money once during the life of the option
• D. an option which kicks in as a plain vanilla option if the underlying hits an agreed threshold

Answer: A

Explanation:
Explanation
Choice 'a' correctly describes a 'holder extendible option'. Choice 'b' describes a 'writer extendible option'.
Choice 'c' describes a 'shout option'. Choice 'd' describes a 'knock in' option.

 

NEW QUESTION 170
Which of the following statements is false:

• A. Forward and futures prices differ due to differences in the timing of cash flows
• B. Forward contracts are settled at the end of the contract while futures gains and losses are settled daily
• C. Forward contracts, unless collateralized, carry credit risks while the exchange practically eliminates the credit risk on a futures contract.
• D. Futures are OTC instruments with transparent pricing while forward contracts are not

Answer: D

Explanation:
Explanation
This question addresses the key differences between futures and forward contracts. Forward contracts are over the counter (OTC) instruments, while futures are exchange traded. Therefore Choice 'b' is not a true statement.
Futures contracts require an initial margin to be paid to the exchange, and gains and losses to be settled daily, while forward contracts generally settle only at the maturity of the contract. Therefore Choice 'a' is a true statement.
The exchange is the counterparty in a futures contract, and through its system of initial and variation margins guarantees the performance of the contract. Futures therefore have very little credit risk when compared to forwards. Therefore Choice 'c' is a true statement.
Because futures gains and losses give rise to daily cash flows, while the P&L on forward contracts is settled only at the end of the contract, the timing differences create small pricing differences between the two.
Therefore Choice 'd' is a true statement.

 

NEW QUESTION 171
Which of the following statements is true in relation to the capital markets line (CML):
I. The CML is a transformation line that is tangential to the efficient frontier II. The CML allows an investor to obtain the highest return for a given level of risk chosen according to the investor's risk attitude III. The CML is the line passing through the point on the efficient frontier with the highest Sharpe ratio, and a y-intercept equal to the risk free rate IV. The Sharpe ratio for the points on the CML increase in a linear fashion

• A. I, II and III
• B. I and III
• C. I and II
• D. II, III and IV

Answer: A

Explanation:
Explanation
The highest possible transformation line, ie the transformation line with the maximum slope, is the transformation line joining the risk free rate on the y-axis and the portfolio with the maximum Sharpe ratio on the efficient frontier. This line is called the 'capital markets line'. Investors can pick any point on this line according to their risk appetite, and doing so would maximize the return they can obtain for their desired level of risk. The capital markets line is tangential to the efficient frontier. The Sharpe ratio stays constant throughout the CML. Therefore statement IV is not true, while the rest are.

 

NEW QUESTION 172
By market convention, which of the following currencies are not quoted in terms of 'direct quotes' versus the USD?

• A. CAD
• B. EUR
• C. KWD
• D. INR

Answer: B

Explanation:
Remember how exchange rates are generally quoted. Most exchange rates are quoted in terms of how many foreign currencies does USD 1 buy. Therefore, a rate of 99 for the JPY means that USD 1 is equal to JPY 99.
These are called 'direct rates'. However, there are four major world currencies where the rate quote convention is the other way round - these are EUR, GBP, AUD and NZD. For these currencies, the FX quote implies how many US dollars can one unit of these currencies buy. So a quote of "1.1023" for the Euro means EUR 1 is equal to USD 1.1023 and not the other way round.

 

NEW QUESTION 173
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?

• A. Buy the index spot and sell the futures contract
• B. Buy the index spot and buy the futures contract
• C. Buy the futures contract and sell the index spot
• D. Sell the futures contract

Answer: A

Explanation:
Explanation
The fair price for the futures contract should be [1000 x ( 1 + (2%-1%)/2)] = 1005. This means the futures contract is 'rich' at 1020. The trader should therefore short the futures contract, and buy the index spot. To buy the spot index, he will incur a borrowing cost of 2%, which will be partly offset by the dividend yield of 1%, and at the end of six months he will owe a net amount of 1005 and hold the index. At the same time the futures contract would expire too, and he would be able to sell at the agreed price of 1020, making a risk free profit of
15.

 

NEW QUESTION 174
Which of the following is an example of a multifactor model explaining expected asset returns:
I. Arbitrage pricing theory
II. Single index model
III. Capital asset pricing model

• A. III
• B. II and III
• C. II
• D. I

Answer: D

Explanation:
Explanation
The arbitrage pricing theory is a multifactor model for explaining asset returns as it can be used to incorporate multiple factors, for example inflation, GDP growth rate, employment, interest rates etc to explain asset returns. Choice 'a' is the correct answer.
The single index model, as the name implies, uses only a single factor, and so does the CAPM which uses excess returns to explain an individual security's returns. Neither of these are multi-factor models.

 

NEW QUESTION 175
A hedge fund offers a fund with an expected volatility of 12% and expected returns of 12%. The risk free rate is 4%. An institutional investor wants the hedge fund manager to invest 60% of their total allocation to the fund, and the rest in the risk free asset. What expected return and volatility can the institutional investor expect?

• A. 8.8% expected return and 7.2% volatility
• B. 12% expected return and 12% volatility
• C. 12% expected return and 7.2% volatility
• D. Cannot be determined in the absence of correlation data between the two

Answer: A

Explanation:
Explanation
This is a straightforward case of basic portfolio math - the only thing being that we are not explicitly given the correlation between the two assets, nor are we given the volatility of the risk free asset. But since the other asset in the portfolio is the risk free asset, it has no risk, ie its volatility is zero, and its correlation with the fund run by the hedge fund manager is also zero. Portfolio returns will be the average returns of the two assets, and portfolio variance will be given by the formula portfolio_vol. Its square root will provide the portfolio volatility.
Therefore the expected returns are = 60%*12% + 40%*4% = 8.8%
The combined volatility of this portfolio will be given by (in Excel formula format) as =SQRT((60%*12%)^2
+ (40%*0%)^2 + 2*0*60%*40%*12%*0%) = 7.2%

 

NEW QUESTION 176
Which of the following is not a money market security

• A. Treasury bills
• B. Commercial paper
• C. Bankers' acceptances
• D. Treasury notes

Answer: D

Explanation:
Explanation
A money market security is one that is initially issued with a maturity of less than one year. Treasury bills are short-term government securities with maturities ranging from a few days to 52 weeks. Bills are sold at a discount from their face value, and do not carry a coupon. Treasury notes and treasury bonds are not money market instruments as they are issued for a maturity greater than a year. Treasury notes are issued with maturities of 2, 3, 5, 7, and 10 years and pay interest every six months. Treasury bonds pay interest every six months and mature in 30 years.
Commercial paper is issued by corporations to meet their short term funding needs and is a money market instrument. Bankers' acceptances are short term loans to corporations that are guaranteed by a bank.
Of the given list, since treasury notes are the only instrument that are not money market securities, Choice 'a' is the correct answer.

 

NEW QUESTION 177
What is the running yield on a 6% coupon bond selling at a clean price of $96?

• A. 6.00%
• B. 6.30%
• C. 6.25%
• D. 5.70%

Answer: C

Explanation:
Explanation
The 'running yield' refers to the coupon rate divided by the current price. In this case, it is 6/96 = 6.25%.
Remember that the running yield is also called the current yield.

 

NEW QUESTION 178
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