FRM I 2016 - VaR Quiz 2 - New

5/28/2016 FRM I 2016: VaR Quiz 2 New
Hi Bharath Kumar (LOGOUT) support@edupristine.com
EduPristine ► FRM I 2016 ► Quizzes ► VaR Quiz 2 New ► Review of attempt 1
My Schedule
VaR Quiz 2 New
Review of attempt 1
Finish review
Started on Saturday, 28 May 2016, 11:28 AM
Completed on Saturday, 28 May 2016, 11:28 AM
Time taken 10 secs
Raw score 0/24 (0%)
Grade 0 out of a maximum of 10
1
Marks: 1 You are risk manager in a trading company. There is a nondividend paying stock which current price is $85 per
share. You have just sold a sixmonth European call option contract on 500 shares of this stock at a strike price of
$88 per share. You are asked by your boss to implement a dynamic delta hedging scheme to hedge the risk of
having sold the option. The option has a delta of 0.60. It is expected that delta would fall to 0.40 if the stock
price falls to $83.5 per share. What would you do NOW to implement the delta neutral position and what would
you do LATER if the price falls to $83.5 per share to rebalance the delta hedged position?
Choose one a. NOW: buy 300 shares of stock, LATER: buy 100 shares of stock
answer.
b. NOW: buy 300 shares of stock, LATER: sell 100 shares of stock
c. NOW: sell 300 shares of stock, LATER: buy 100 shares of stock
d. NOW: buy 250 shares of stock, LATER: sell 50 shares of stock
The correct answer is B
NOW: You have sold a call option contract on 500 shares with 0.6 delta, that means you are short delta of 0.60 x
500, which is delta = 300. Therefore, to be delta neutral, you must long (i.e. buy) 300 shares of stock.
LATER: As price falls to $83.5, the delta moves to 40 = 0.40 x 500. Therefore, to be delta neutral, your
portfolio needs to have 200 shares of stock. You purchased 300 shares at time 0. To rebalance, you must sell 100
shares.
Incorrect
Marks for this submission: 0/1.
2
Marks: 1 Vega measures the sensitivity of an option's price with respect to changes in the volatility of the underlying asset.
Consider a stock option whose vega is 8. What will be the change in the price of the call and put options if the
volatility of the underlying asset increases by 1%?
Choose one a. Call: Increase by .08 Put: Decrease by .08
answer.
b. Call: Increase by .02 Put: Increase by .02
c. Call: Increase by .08 Put: Increase by .08
d. Call: Decrease by .02 Put: Increase by .02
The correct answer is C
Vega measures the sensitivity of the option price to the underlying asset’s volatility. A vega 0f 8 indicates that for
a 1% increase in volatility of the underlying asset the option’s price increase by 1% x 8 = .08 The vega of a call
and put options are equal given for the same maturity and exercise price. Therefore, the correct answer is ‘C’.
Incorrect
3
Marks: 1 There are two equity option traders in XYZ Ltd. The first equity option trader Bell has shorted a call option of ABC
Ltd. with strike at $54 and the maturity of the option is within 1 hour and the current price is $75. The second
equity option trader Richards has to examine the gamma of the option of Google Inc. when the current price of
Google Inc. is $92. Which of the Greeks poses the highest risk in the Bell’s position and which of the options
http://www.edupristine.com/infrastructure/mod/quiz/review.php?attempt=127292 1/9
5/28/2016 FRM I 2016: VaR Quiz 2 New
poses the highest gamma in Richards’ portfolio of Google?
Choose one a. Bell: Delta / Richards: Call option expiring in 10 days with strike $70
answer.
b. Bell: Gamma / Richards: Call option expiring in 100 days with strike $90
c. Bell: Delta / Richards: Put option expiring in 2 days with strike $90
d. Bell: Gamma / Richards: Put option expiring in 100 days with strike $110
Delta is the rate of change of the option price with respect to the price of the underlying. Delta is greatest for in
the money options. Given Bell was short the option, the delta poses the highest risk to his position.
Gamma is the rate of change of the option’s delta with respect to the price of the underlying security. Gamma is
highest for at the money options nearing expiration. The atthemoney options of Google are those with a strike
price of $90. The shortest dated option is the 2 day option.
Thus, ‘C’ is correct.
Incorrect
4
Marks: 1 Raman is a portfolio manager in ABCD Ltd. He is considering a portfolio of stock XYZ and options on the same
stock XYZ which is currently delta neutral, but has a positive gamma. Which of the following actions will make the
portfolio both delta and gamma neutral?
Choose one a. Buy call options on stock XYZ and sell stock XYZ
answer.
b. Sell call options on stock XYZ and sell stock XYZ
c. Buy put options on stock XYZ and buy stock XYZ
d. Sell put options on stock XYZ and sell stock XYZ
The correct answer is D
Sell put options on stock XYZ and sell stock XYZ. To reduce positive gamma, one needs to sell options. When call
options are sold, the delta becomes negative and one needs to buy stock to keep delta neutrality. When put
options are sold, the delta becomes positive, and one needs to sell stock to keep delta neutrality.
Incorrect
5
Marks: 1 Which of the following statements is/are NOT true regarding options’ Greeks?
Theta tends to be large and positive for atthemoney options.
Gamma is greatest for inthemoney options with long times remaining to expiration.
Vega is greatest for atthemoney options with long times remaining to expiration.
Delta of deep inthemoney put options tends towards +1
Choose one a. I, II
answer.
b. III, IV
c. I, II, IV
d. All the above
Vega is the rate of change in the price of an option with respect to changes in the volatility of the underlying
asset. Vega is greatest for atthemoney options with long times remaining to expiration. Only statement III is
True and rest all are False.
Incorrect
6
Marks: 1 Robin a portfolio manager at PQR Ltd is looking to purchase a Call Option. He has the following information about
the call option:
Time to maturity = 3 years
Continuous riskfree rate = 6%
Continuous dividend yield = 2.5%
N(d1) = 0.54
Calculate the delta of this option.
Choose one a. 0.54
answer.
b. 0.50
5/28/2016 FRM I 2016: VaR Quiz 2 New
c. 0.50
d. 0.54
The delta of a call option with a continuous dividend yield is given by the following formula: Delta = N(d1) x e
qxT, where q is the continuous dividend yield, and T is the time to maturity. Hence, Delta = 0.54 x e0.025 x 3 =
0.50
Incorrect
7
Marks: 1 Suppose there is an existing short option position with deltaneutral, but has a gamma of negative 1000. Also
assume that there exists a traded option with a delta of 0.50 and a gamma of 2.50. In order to maintain the
position gammaneutral and deltaneutral, which of the following is the appropriate strategy?
Choose one a. Buy 400 options and sell 200 shares of the underlying asset.
answer.
b. Buy 200 options and sell 400 shares of the underlying asset.
c. Sell 400 options and buy 200 shares of the underlying asset.
d. Sell 200 options and buy 400 shares of the underlying asset.
The correct answer is A
To gammahedge the position, one should buy 400 options (1000/2.50). The additional options will alter delta
hedge, and to maintain deltahedge position again, one should sell 200 shares (400 x 0.50) of the underlying
position.
Incorrect
8
Marks: 1 You are a portfolio manager and want to implement a portfolio insurance strategy using index futures designed to
protect the value of a portfolio of non dividend paying stocks. Assume the value of your stock portfolio decreases,
which strategy would you implement to protect your portfolio?
Choose one a. Buy an amount of index futures equivalent to the change in the call delta x original
answer. portfolio value.
b. Sell an amount of index futures equivalent to the change in the call delta x original
portfolio value.
c. Buy an amount of index futures equivalent to the change in the put delta x original
portfolio value.
d. Sell an amount of index futures equivalent to the change in the put delta x original
portfolio value.
Portfolio insurance strategy is accomplished by selling index futures contracts in an amount equivalent to the
proportion of the portfolio dictated by the delta of the required put option. When a decrease in the value of the
underlying portfolio occurs, the amount of additional index futures sold corresponds to the change in the put
delta x original portfolio value.
Incorrect
9
Marks: 1 Which of the following statements is/are true?
Europeanstyled call and put options are most affected by changes in vega when they are at themoney.
The delta of a Europeanstyled put option on an underlying stock would move towards zero as the price of the
underlying stock rises.
The gamma of an atthemoney Europeanstyled option tends to increase as the remaining maturity of the option
decreases.
Choose one a. I only
answer.
b. II only
c. None of the above
d. All the above
All the statements are True.
5/28/2016 FRM I 2016: VaR Quiz 2 New
Incorrect
10
Marks: 1 Mark FRM is a market risk manager at Netlong Securities. He is analyzing the risk of the S&P500 Index options
position. His risk report shows the position is exposed to long gamma and short vega risks. Which of the following
positions of options show exposures consistent with his report?
Choose one a. The positions are long expiry long Call and short expiry short Put.
answer.
b. The positions are long expiry long Put and long expiry short Call.
c. The positions are long expiry long Call and short expiry short Call.
d. The positions are short expiry long Call and long expiry short Call.
Gamma risk = short expiry position, Vega risk = long expiry position
Long call/put = long gamma/vega, Short call/put = short gamma/vega
Hence, long gamma & short vega = Short expiry with long Call & Long expiry with short Call
Incorrect
11
Marks: 1 There is a call option on Microsoft Inc. with 120 days to maturity trades at USD 1.90. The option has a delta of
0.6339. A dealer sells 200 call option contracts and to delta hedge the position, the dealer purchases 12,678
shares of the stock at the current market price of USD 45 per share. The multiplier is 100. The following week,
the prices of both the stock and the call option increase and consequently delta increases to 0.7260. To maintain
the delta hedge, the dealer should:
Choose one a. Purchase 1842 shares.
answer.
b. Sell 1842 shares.
c. Purchase 1493 shares.
d. Sell 1493 shares.
Number of calls = 200 contracts x 100 = 20,000 calls.
Number of shares = (Number of calls) x (New delta – Old delta)
= 20,000 x (0.7260 – 0.6339) = +1842 shares
Positive sign indicates that the manager should purchase new shares.
Incorrect
12
Marks: 1 You are an option trader in Acme Securities. Considering the options only generally your supervisor asks you to
examine the following statements about vega.
An option holder can never be vega negative.
A deep in the money up and out call option has a negative vega.
A deep out of money up and out call option has a negative vega.
A deep out of money digital option has a negative vega.
You need to determine which of the above statement/s is/are correct?
Choose one a. I, III
answer.
b. II only
c. II, IV
d. None
Deep in the money Up and Out call option because an increase in the volatility of such options leads to the
increasing chances of option either being knocked out (if the price increases beyond the barrier) or loosing its
moneyness (if the prices falls) and hence the increasing volatility tends to have negative impact on the price of
the option.
Incorrect
5/28/2016 FRM I 2016: VaR Quiz 2 New
13
Marks: 1 Mr. Hudson has written a put option on the S&P 500 index. The option has an exercise price and a maturity that
is not available for options traded on exchanges. He wants to hedge his position dynamically. Which of the
following statements about the risk of his position are correct?
He can make his portfolio delta neutral by shorting index futures contracts.
A short position in an S&P 500 futures contract that will make his portfolio insensitive to both small and large
moves in the S&P 500.
A long position in a traded option on the S&P 500 will help hedge the volatility risk of the option he has written.
To make his hedged portfolio gamma neutral, he needs to take positions in options as well as futures.
Choose one a. I, II & III
answer.
b. I & III
c. II only
d. I, III & IV
Statement II is NOT correct because the short index futures make the portfolio delta neutral. It does not help
with large moves, though. All other statements correct.
Incorrect
14
Marks: 1 You are asked to find the price of the US Treasury note. The following table gives the prices of two out of three US
Treasury notes for settlement on August 30, 2012. All three notes will mature exactly one year later on August
30, 2013. Assume annual coupon payments and that all three bonds have the same coupon payment date.
Approximately what would be the price of the 4 1/2 US Treasury note?
Choose one a. 99.64
answer.
b. 98.20
c. 98.64
d. 100.20
Explanation: 5% x X + 8% x (1 – X) = 7%, Therefore X = 80%.
Incorrect
15
Marks: 1 Matt is asked to check for arbitrage opportunity in the Treasury bond market by comparing the cash flows of
selected bonds with the cash flows of combinations of other bonds. If a 1 year zero coupon bond is priced at USD
97.42 and a 1 year 12% bond paying coupons semiannually is priced at 104.18. What should be the price of 1
year Treasury bond which pays 8% semiannually?
Choose one a. 102.40
answer.
b. 101.93
c. 99.58
d. 101.42
The solution is to replicate the 1 year 8% bond using the other two treasury bonds. The cash flow from the
portfolio of two Treasury bond should be equal to cash flow of 8% bond. Weight of each bond needs to be
determined in the portfolio.
Replicating the cash flow at the end of 1 year 1st equation
(100 x B1) + (106 x B2) =104
Replicating the cash flow at the end of 6 months 2nd equation
6 x B2 = 4
After solving both the equations, B1 = 33.33% & B2 = 66.67%
Therefore the price of the 8% bond = 0.3333 x 97.42 + 0.6667 x 104.18 = 101.93
Incorrect
5/28/2016 FRM I 2016: VaR Quiz 2 New
16
Marks: 1 Use the following information for answering Question 16 & 17.
Suppose that you are a fixed income portfolio manager in XYZ ltd. Your supervisor asked you to compute the
clean and dirty price of a Bond from your portfolio. The information is as follows:
Day count convention is 30/360
7% Bond pays semiannual coupons
Bond start date January 1 2005
Bond maturity date July 1 2015
Required Annual Yield is 9%
Today date is May 1 2013
Question
Your supervisor asks you to find the accrued interest on the Bond as on date?
Choose one a. 35
answer.
b. 25.5
c. 23.33
d. 11.67
Accrued Interest = Coupon payment x (# of days from last coupon date to date/# of days in coupon period) = 35
x (120/180) = 23.33
Incorrect
17
Marks: 1 You are also required to compute Dirty Price & Clean Price of the Bond?
Choose one a. Dirty Price = 954.95 & Clean Price = 978.28
answer.
b. Dirty Price = 978.28 & Clean Price = 956.10
c. Dirty Price = 956.10 & Clean Price = 978.28
d. Dirty Price = 978.28 & Clean Price = 954.95
First Compute the present value of the bond, when N=5, PMT=35, I/Y=4.5, FV=1000,PV= 956.10,
Dirty Price = PV x (1+ c/2)(# of days passed after last payment/# of days in the coupon period)
= 956.10 x (1.035)(120/180) = 978.28
Clean Price = Dirty Price – Accrued Interest = 978.28 – 23.33 = 954.95
Incorrect
18
Marks: 1 According to the pure expectations hypothesis, which of the following statements is correct concerning the
expectations of market participants in an upwardsloping yield curve environment?
Choose one a. Interest rates will increase and the yield curve will flatten
answer.
b. Interest rates will increase and the yield curve will steepen
c. Interest rates will decrease and the yield curve will flatten
d. Interest rates will decrease and the yield curve will steepen
The pure expectations hypothesis implies that the slope of the yield curve indicates the market's expectation for
the direction of change of future short term interest rates. Hence, an upward sloping yield curve would suggest
that interest rates will increase and the yield curve will flatten.
Incorrect
19
Marks: 1 Which of the following would cause a downwardsloping yield curve?
An investor preference for shortterm instruments
An expected decline in interest rates
Material credit risk concerns
An expected increase in the inflation rate
Choose one a. I, II and III
answer.
5/28/2016 FRM I 2016: VaR Quiz 2 New
answer. b. II and III
c. II only
d. IV only
Expectations of lower interest rates in the future (II) could cause a downward sloping yield curve. Investors
preference for shortterm instruments (I) would lower the yields for shortterm instruments which would not
cause a downwardsloping yield curve. Credit risk concerns (III) usually lead to upward sloping yield curve since
cumulative probability of default increases on longerterm horizons. And, an expected increase in inflation
generally leads to an upward sloping yield curve.
Incorrect
20
Marks: 1 Suppose you are a fixed income portfolio manager in XYZ Ltd, and you are asked by your supervisor to find the
forward rate given the price of a 2?year zero coupon government bond is 93.45. The price of a similar 3?year
bond is 87.85. What is the one?year implied forward rate from year 2 to year 3?
Choose one a. 6.37%
answer.
b. 7.35%
c. 5.57%
d. 5.99%
1 + Forward rate = Price of 2 year bond/Price of 3 year bond = 93.45/87.85 = 1.0637 Forward Rate = 1.06371 =
6.37%
Incorrect
21
Marks: 1 Steve Richards, FRM is a portfolio manager in Chase Inc. He is evaluating three types of bonds for his portfolio.
All the bonds have par value of $1000. The other information of the bonds are as follows:
A 5year zero coupon bond priced with a YTM of 7.5%
A 5year 6% semi annual bond priced with a YTM of 7.5%
A 5year 7% semiannual bond priced with a YTM of 7.5%
Steve’s boss asked him to buy only one of the three bonds for his portfolio in terms of the highest importance of
reinvestment income of the three bonds stated above. He should select which of the bond?
Choose one a. Zero coupon Bond
answer.
b. 5year 6% semiannual bond
c. 5year 7% semiannual bond
d. None of the above
Reinvestment income is highest for the 7% semiannual pay bond followed by 6% semiannual pay bond and
lastly zero coupon bond.
Incorrect
22
Marks: 1 There is a 10 year bond paying an annual coupon of 7% and the bond is sold at a premium which reflects 9%
YTM. Two years have passed and the interest rates remain unchanged. Assume that the term structure is flat and
holding all others factors constant, the Bond price during this two year period will have:
Choose one a. Increased
answer.
b. Decreased
c. Remain Unchanged
d. Cannot be determined
Since coupon rate < YTM, the price of the bond at which it was sold must be at a discount. And now as the
interest rate was unchanged during next 2 years, the price of the Bond would move towards par value. Therefore,
the price would have increased during 2 year period.
5/28/2016 FRM I 2016: VaR Quiz 2 New
Incorrect
23
Marks: 1 Ane Smith is an investor who wants to put $500000 in some bonds which have rating of at least BBB. Smith is
considering bonds of Apple, HP and AMD and wants to choose the bond that satisfies her rating criteria and also
provides highest YTM. She has the following information for all the bonds:
Which bond should Ane Smith purchase for her investment?
Choose one a. Apple
answer.
b. HP
c. AMD
d. Apple or AMD
Since the criteria of selecting bonds is at least BBB rating. So HP bonds are below BBB rating. Now she has to
select Bond with highest YTM to invest in.
YTM of Apple is 2.44%
YTM of AMD is 2.478%
Therefore, the correct answer is C.
Incorrect
24
Marks: 1 Which of the following bonds have the HIGHEST interest rate risk and LOWEST reinvestment risk? Following is
the information for some bonds
Bond A pays semiannual coupon of 5% maturing in 2 years
Bond B is a Zero Coupon rate bond maturing in 2 years
Bond C pay annual coupon of 10.5% maturing in 2 years
Assume all the other things being equal in these bonds.
Choose one a. Interest Rate Risk = Bond C / Reinvestment Risk = Bond B
answer.
b. Interest Rate Risk = Bond B / Reinvestment Risk = Bond B
c. Interest Rate Risk = Bond A / Reinvestment Risk = Bond C
d. Interest Rate Risk = Bond C / Reinvestment Risk = Bond C
The bond with smaller coupon is more sensitive to interest rate risk. So, Bond B has the lowest coupon rate
among the three bonds.
The bond with higher coupon rate is more sensitive to reinvestment risk. So, Bond A and Bond C have higher
coupon rates than Bond B.
Both highest interest rate risk and lowest reinvestment risk is in Bond B. Therefore, option B is the correct
answer.
Incorrect
Finish review
Contact Us | Sitemap | T&C

Disclaimer
Global Association of Risk Professionals, Inc. (GARP ®) does not endorse, promote, review or warrant the accuracy of the products or services offered by EduPristine
for FRM® related information, nor does it endorse any pass rates claimed by the provider. Further, GARP ® is not responsible for any fees or costs paid by the user to
EduPristine nor is GARP ® responsible for any fees or costs of any person or entity providing any services to EduPristine Study Program. FRM®, GARP ® and Global
Association of Risk Professionals®, are trademarks owned by the Global Association of Risk Professionals, Inc
CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by EduPristine. CFA Institute, CFA ®, Claritas® and
Chartered Financial Analyst® are trademarks owned by CFA Institute.
5/28/2016 FRM I 2016: VaR Quiz 2 New
Utmost care has been taken to ensure that there is no copyright violation or infringement in any of our content. Still, in case you feel that there is any copyright
violation of any kind please send a mail to abuse@edupristine.com and we will rectify it.
2014 © Edupristine. ALL Rights Reserved.

FRM I 2016 - VaR Quiz 2 - New

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

FRM I 2016 - VaR Quiz 2 - New

Uploaded by

Copyright:

Available Formats

5/28/2016 FRM I 2016: VaR Quiz 2 New

EduPristine ► FRM I 2016 ► Quizzes ► VaR Quiz 2 New ► Review of attempt 1

You might also like

FRM I 2016 - VaR Quiz 2 - New

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

FRM I 2016 - VaR Quiz 2 - New

Uploaded by

Copyright:

Available Formats

5/28/2016 FRM I 2016: VaR Quiz 2 ­ New

EduPristine ► FRM I 2016 ► Quizzes ► VaR Quiz 2 ­ New ► Review of attempt 1

You might also like

5/28/2016 FRM I 2016: VaR Quiz 2 New

EduPristine ► FRM I 2016 ► Quizzes ► VaR Quiz 2 New ► Review of attempt 1