FRM Practice exam 2

frm practice exam helps you prepare better for exam 1) The Long-Term Capital Management (LTCM) fiasco was an example of: a.Extreme derivatives mispricing b.Lack of VaR process at LTCM c.Extreme leverage by LTCM d.All of the above Answer : C 2) Loans are securitized to: a.Reduce regulatory capital b.Reduce credit concentrations c.Provide access to loan products for investors d.All of the above Answer : d 3) How would you describe the typical price behavior of a low premium mortgage pass-through security? a.It is similar to a U.S. Treasury bond. b.It is similar to a plain vanilla corporate bond. c.When interest rates fall, its price increase would exceed that of a comparable duration U.S. Treasury. d.When interest rates fall, its price increase would lag behind that of U.S. Treasury with a comparable duration. Answer : d 4) On Friday, October 4, the spot price of gold was $378.85 per troy ounce. The price of an April gold futures contract was $387.20 per troy ounce. (Note: Each gold futures contract is for 100 troy ounces.) Assume that a Treasury bill maturing in April with an "ask yield" of 5.28% provides the relevant financing (borrowing or lending rate). Use 180 days as the term to maturity. Also assume that warehousing and delivery costs are negligible and ignore convenience yields. What is the theoretically correct price for the April futures contract and what is the potential arbitrage profit per contract? a.$379.85 and $156.59 b.$318.05 and $615.00 c.$387.84 and $163.25 d.$388.84 and $164.00 Answer : d 5)Consider a bullish spread option strategy of buying one call option with a $30 exercise price at a premium of $3 and writing a call option with a $40 exercise price at a premium of $1.50. If the price of the stock increases to $42 at expiration and the option is exercised on the expiration date, the net profit per share at expiration (ignoring transaction costs) will be: a.8.5 b.9 c.9.5 d.12.5 Answer :a 6)A 90-day Eurodollar futures contract has a constant Price Value of a Basis Point (PVBP) of $25.00 per million. The 90-day bank bill futures contract on the Sydney Futures Exchange trades on a discount basis and the PVBP is different for each yield level. Assuming nonnegative yields, the PVBP for the bank bill contract will be: a.Always less than the Eurodollar contract b.Always greater than the Eurodollar contract c.Dependent on the market yield d.$27.00 per million Answer : a 6) What is a bond? Bond is a kind of financial instrument. Bond is an obligation to pay the debt of a company or an government entity. It is a security.