Pass the PRMIA PRM Certification 8013 Questions and answers with ExamsMirror

Since Macaulay duration is 6 years, the modified duration is 6/(1+5%) = 5.71. This means that if interest rates were to rise by 1%, the bond price would decrease by 5.71%. Since interest rates have risen by 10 bps, (100bps = 1%), the bond's price would fall by roughly 0.571%, or 57 basis points

Each of the choices describes various scenarios related to the issue of bonds. A when-issued market is a market in government securities where securities are traded as forward contracts prior to their issue. Choice 'c' is the correct answer.

Choice 'd' refers to a 'bought deal'. Choice 'b' refers to the 'grey market', usually in corporate bonds. Choice 'a' refers to a fixed price re-offer mechanism.

Everything else remaining the same, an increase in the rate of dividends causes the value of call options to fall and the value of put options to rise. Therefore, Choice 'b' is the correct answer. (In the exam, the question could address either a call or a put option, so be aware of the answer in either case).

To understand this, consider how dividends are accounted for when valuing an option using the Black Scholes model. Future dividends are discounted to the present using the risk free rate and this discounted value is reduced from the spot price used in the BSM valuation. Effectively, this reduces the spot price used in the BSM formula. When the spot price reduces, and the exercise price remains the same, then the value of the call option goes down. In the same way, when spot price is reduced by thepresent value of dividends (and the exercise price stays the same), obviously the put option becomes more valuable. Therefore an increase in the rate of dividends increases the value of the put option.

There is another intuitive way to think about this: A call option is like a long position in the stock, but the holder of the call option is not entitled to receive dividends (unlike the holder of the stock). Since the holder of the call option has to forego the dividends, he is willing to pay less for the option; or in other words, the value of the call reduces.

In the same way, a put option is like having a short position in the stock. The holder of the short position has to borrow the stock in order to get into the short position in the first place. When dividends are paid, the holder of the short stock position has to make good any dividends that might be paid to the lender of the stock. The holder of a put option does not have to make any such payments. Therefore the put option is more valuable, and the existence of dividends (or an increase in dividends) increases the value of the put option.

(Try this out using the Black Scholes Excel model given under the tutorials by varying the spot price.)

The riskiest tranche of a structured product is called the equity tranche. All other choices are incorrect.

When rates are continuously compounded, we can calculate the marginal rate for year 5 as (5*5% - 4*4%) = 9%. (Note that things would be different if the rates were not continuously compounded, and they were annually compounded. In that case we would need to do a calculation of (1.05^5 / 1.04^4) - 1)

Since the equity portfolio has a beta of 1.5, we need to sell short enough number of futures contracts as to have $1 x 1.5 = $1.5m short in notional. The value of one S&P futures contract is 1000 x 250 = $250,000, and therefore in order to be short $1.5m, we need to sell 6 contracts.