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1.
A multifactor Arbitrage Pricing model is known to have two independent economic factors, F1 and F2. The risk-free
rate of return is 7.5%. Two well-diversified portfolios have the following information available:
Portfolio
A
B
on F1
1.5
2.0
on F2
2.5
4.0
Expected Return
25%
35%
Assuming no arbitrage opportunities exist, the risk premium on the factor portfolios should be:
A. F1 = 1.25% , F2 = 7.25%
B. F1 = 1.25% , F2 = 6.25%
C. F1 = 6.25% , F2 = 7.25%
D. F1 = 6.25% , F2 = 1.25%
2.
Suppose that the Treasury bond futures price is 105-14. Which of the following four bonds is cheapest to deliver?
A. Price = 141-18, Conversion Factor = 1.3148
B. Price = 126-28, Conversion Factor = 1.1734
C. Price = 119-07, Conversion Factor = 1.1153
D. Price = 135-11, Conversion Factor = 1.2642
3.
Ross is an investment banker at SeaShore Inc. His portfolio consists of various calls and puts option contracts. At the
moment, he is worried about the increase in the interest rate recently announced by the Federal Bank. Which of the
following is likely to increase the most with the change in interest rate?
A. In the money put option
B. Out of the money put option
C. In the money call option
D. Out of the money call option
4.
A simple regression model was determined to have the following equation: Y = a + bX + e. The correlation between X
and Y is known to be 0.75. The value of a is 3, b is 2, Std (X) = 2.5. The value of Std(e) is
A. 4.01
B. 4.41
C. 5.15
D. 4.75
5.
In a Treasury bond futures contract, it is known that the cheapest-to-deliver bond will be a 10% coupon bond with a
conversion factor of 1.2458. Also that it is known that delivery will take place in 270 days. Coupons are payable semiannually on the bond. The last coupon date was 50 days ago, the next coupon date is in 132 days, and the coupon date
thereafter is in 315 days. The term structure is flat and the rate of interest (with continuous compounding) is 8% per
annum. Assume that the current quoted bond price is $135. Then what would be the quoted futures bond price?
A. $108.97
B. $113.35
C. $122.74
D. $117.18
6.
A stock price is currently $35. It is known that at the end of two months it will be either $33 or $39. The risk-free interest
rate is 10% per annum with continuous compounding. Suppose ST is the stock price at the end of two months and X is
the strike price which is $36. What is the value of a derivative that pays off ST2 - X at this time?
A. $1284.4
B. $1269.4
C. $1204.8
D. $1248.4
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7.
8.
A trader hedges the price risk of his commodity with a grain futures contract. The standard deviation of the commodity
futures price is 2.28% while the standard deviation of the spot price on the same commodity is 2.93%. The standard
deviation of the difference the spot price and futures price is 1.52%. The hedge effectiveness measure from using this
commodity futures contract is closest to:
A. 0.73
B. 0.87
C. 0.83
D. 0.78
9.
A non dividend paying stock with volatility of 20% per annum is currently trading at $50. A European call option on the
stock with a strike price of $49 has a time to maturity of 5 months. The risk free rate is 6%. Given that N(0.42) = 0.6627,
N(0.41) = 0.6590, N(0.28) = .6102, N(0.29) = .6140, N(0.62) = .7323 and N(0.63) = 0.7356, the price of the option is
A. $3.78
B. $4.28
C. $3.44
D. $3.14
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12. In the 1995, Mexican government developed different type of bonds in which the amount received by the holder at
maturity varies with a foreign exchange rate. There was a trade with the Long Term Credit Bank of Australia. The bond
specified that if the aus-US dollar exchange rate, X, is greater than 78 aus per dollar at maturity (in 2010), the holder of
the bond receives $500. If it is less than 78 aus per dollar, the amount received by the holder of the bond is 500 max[0,
500(78/X 1)]. When the exchange rate is below 35.4, nothing is received by the holder at maturity. Then the bond is
combination of
A. Regular bond and one option
B. Regular bond and two options
C. Regular bond and one future
D. Regular bond and two futures
13. The transition matrix of a PiSquare Ratings Agency is given below. What is the probability that a C rated firm today will
default only in the 3rd year from now.
Rating From
A
B
C
A.
B.
C.
D.
A
90
5
0
B
5
80
7
Rating To
C
5
7
80
Default
0%
8
13
9.27%
8.35%
8.97%
9.62%
14. Ed has recently carried out a survey of consumer habits in Singapore and Malaysia. He wants to check whether the
variances of the survey results in a particular country are significantly different or not. To check this, he plans to uses Fstatistic which is the ratio of the variances of the collected sample. Which of the following is/are correct:
I. F- distribution is left skewed
II. Null hypothesis is that the variance of the two countrys results is different
III. F(, s12, s22)=1/F(1 - , s22,s12)
A. I only
B. I, II and III
C. II and III
D. III only
15. Suppose that the standard deviation of quarterly changes in the prices of a commodity is $0.80, the standard deviation of
quarterly changes in a futures price on the commodity is $0.95, and the co-efficient of correlation between the two
changes is 0.75. What is the optimal hedge ratio for a 3-month contract?
A. 0.853
B. 0.632
C. 0.358
D. 0.562
16. Two countries A and B have recently announced suspensions on their outstanding loans. Country A has suspended only
interest payments while Country B has suspended both interest as well as principal payments. A Country Risk Analysis
(CRA) model uses current data and the results from electoral polls, and is constantly updated. Which of the following
problem is it most likely to suffer from?
A. Timing or forecasting problems
B. Stability
C. Population grouping
D. Political risks
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17. An Investor has obtained the following information on his portfolio which is well-diversified.
Beta: 1.12
Standard deviation of Market: 10.2%
Treynor Ratio = 1.5
Calculate the Sharpe Ratio for the given Portfolio?
A. 0.542
B. 0.147
C. 1.345
D. 1.192
18. The following table gives the data on monthly changes in the spot price and the future price for a certain commodity. Use
the data to calculate a minimum variance hedge ratio. Correlation of the spot price change and future price change is
0.94.
Spot Price Change
Future Price Change
A.
B.
C.
D.
0.45
0.35
-0.32
-0.04
-0.64
-0.23
0.37
0.12
0.52
0.21
3.18
1.46
2.22
0.654
19. Suppose the rate on 1-year zero-coupon corporate bonds is 16.3% and the implied probability of default is 5.87%.
Assume Loss Given default is 100%. Then, 1-year T-bill rate is closest to:
A. 8.63%
B. 9.47%
C. 10.17%
D. 7.51%
20. Which of the following statements regarding hypothesis testing is/are true?
I. If the significance level is more than the p-value, the null hypothesis is rejected
II. A decrease in the level of type I error causes a decrease in Type II error as well
III. Type I error is the error when a false null hypothesis is not rejected
IV. Systematic error is caused by non-random variations due to unknown sources
A. I only
B. I and IV
C. I and III
D. I, II and IV
21. The firm with risk management is appropriate in the following case EXCEPT
A. Present value of bankruptcy cost is less than Present value of the incremental cash flow through risk
management program
B. Present value of the reduction in the cost of the financial distress is greater than Present value of the risk
management program
C. Present value of the incremental tax-shield from debt through the risk management program is less than cost of
the financial distress
D. None of the above
22. A company has a $11 million portfolio with a beta of 1.5. It would like to use futures contracts on the NASDAQ to
hedge its risk. The index futures price is currently standing at 1100, and each contract is for delivery of $500 times the
index. What should company do if it wants to increase the beta of the portfolio to 2.0?
A. A short position in 10 contracts
B. A long position in 10 contracts
C. A short position in 20 contracts
D. A long position in 20 contracts
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23. Consider the following portfolio of the bonds. Then, what is the value of the portfolios DVBP (Dollar Value per Basis
Point)?
Bond
Price
Par Amount
Modified Duration
X
114.24
$5000
4.27
Y
89.71
$6000
5.39
Z
127.37
$9000
8.54
A. 15.13
B. 13.75
C. 17.32
D. None of the above
24. A box contains four types of marbles with different colours. There are 5 Red, 7 Yellow, 12 Blue and 8 Green marbles.
Person P picks one marble at a time and places it outside. What is the minimum number of attempts required to get at
least 1 red marble and 1 green marble definitely out of the box?
A. 21
B. 28
C. 27
D. 24
25. Kumar holds an American call contract on a stock Y, which is a dividend paying stock. The option has an expiry time
period of 6 months. Today, 5th March, the stock is trading at $105 and the strike price is $100. A dividend of $2.5 is
expected 3 months later with the ex-dividend date being 5th June. Assume that the risk free rate of return compounded
continuously is 5% per annum. Kumar can
A. Exercise the option on 4th June
B. Exercise the option at expiry date
C. Exercise the option today
D. Exercise the option on 5th June
26. Suppose ABC bank finalised the loan with the following characteristics: Total commitments of $4,000,000, of which
$2,300,000 is currently out standings. The bank has assessed an internal credit rating equivalent to a 1.5% default
probability over the next year. Draw down upon default is assumed to be 68%. The bank has additionally estimated a
30% loss given default. Then what will be the expected loss?
A. $14538
B. $15552
C. $17346
D. None of the above
27. The correlations of returns among the various indices for last 5 yrs were presented in table below. Use the table to select
the correct statement(s)
Nifty
Hang-seng (HS)
Straits Times (ST)
Nikkei 225
Shanghai Comp. (SC)
A.
B.
C.
D.
Nifty
1.00
0.22
0.03
0.04
0.02
Hang-seng
Straits Times
Nikkei 225
Shanghai Comp.
1.00
0.25
0.13
0.02
1.00
0.26
-0.01
1.00
0.12
1.00
28. Harold is an avid investor and regularly invests in options and futures. He is planning to create a Calendar spread using
index options on Nifty. However, he can only trade in the following 5 options:
925, Corporate Avenue, Sonawala Road
Goregaon (E), Mumbai 63, Ph. +91 +91 80800 05533 info@edupristine.com
www.edupristine.com
Pristine
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32. Brown, an avid investor has created a peculiar spread as shown below using call options. Assume that the horizontal
lines have a slope of 0 and the slanted lines have a slope of +1 or -1. The call prices are as given below:
Strike Price
$50
$60
$65
$70
$75
$80
$85
$90
$95
Call Price
$10
$9
$8
$7.5
$7.26
$7
$6
$5.5
$5
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36. Suppose a bank finalised the loan with the following characteristics: Total commitments of $6,600,000, of which
$3,900,000 is currently out standings. The bank has assessed an internal credit rating equivalent to a 1.4% default
probability over the next year. Draw down upon default is assumed to be 74%. The bank has additionally estimated a
32% loss given default. The standard deviation of EDF and LGD is 6% and 22%, respectively. Then what will be the
unexpected loss to the bank?
A. $190,774
B. $235,563
C. $273,462
D. $285,926
37. Long-Term Capital Management (LTCM), incorporated in early 1994, grew enormously in the first few years of its
existence. Which of the following is true about LTCM?
I. LTCMs possibility of insolvency before convergence of credit spread was similar to the funding liquidity
risk in the Metallgesellschaft case
II. Revaluation of its currency by Brazil led to even more losses in LTCMs equity volatility strategies
III. Russias unexpected debt default triggered investor concern about ailing economies in the Pacific rim
IV. LTCMs diversification strategy protected them from the market risk to a great extent.
A. I only
B. II and IV
C. III and IV
D. I and III
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