Jun 21, 2021 . takes a long position in 100 out-of-the-money (OTM) put option contracts when the non-dividend-paying stock price is $88.00 and its volatility is 28.0%; each contract is for 100 options. Like a few others I didn't even both buying the GARP books for Part II and went solely with BT materials. Using duration, he estimates the bond price will drop by 10.50% or $2.34287. Peter used a simple Monte Carlo simulation to estimate the price of an Asian option. The risk-free rate is 3.0% and the stock price of Discovery Communications (ticker: DISCK) is $20.00. Here are direct links: Hi Ank, no, 25/20 like the GARP practice exams, thanks. In regard to her VaR backtest over 120 days, each of the following statements is true EXCEPT which is false? Because coupons are paid semiannually on government bonds (and the final coupon is at maturity), the most recent coupon date is January 10, 2018, and the next coupon date is July 10, 2018. Passed first time. A speculative (aka, junk) bond has 15.0 years to maturity and pays a semi-annual 6 1/8 coupon; i.e., its coupon rate is 6.125% payable semi-annually. Analyst Patricia is analyzing the following four bonds: In terms of their current theoretical prices, which bonds are, respectively, the cheapest and most expensive (among the four)? If the future contracts settlement price is $99.00, then which bond is the cheapest to deliver (CTD)? It's hard to go through the recommended reading and prepare for the FRM exam. ERP, FRM, GARP and Global Association of Risk Professionals, in standard character and/or stylized form, are trademarks owned by the Global Association of Risk Professionals, Inc. We currently have over 4,500 practice questions, published in our, and in the forum. The total borrowing fee was $1,500.00. 4 Topics. The sample mean is 1.50 bugs per sheet with a (sample) standard deviation of 0.90. Specifically, GARP says, Economic capital provides the firm with a conceptually satisfying way to balance risk and reward. Thank you BT! The risk-free rate is 1.0%, and all stocks have independent firm-specific components with a standard deviation of 25%. (here is a Z lookup table snippet that you can use http://www.bionicturtle.com/images/2018/forum/082718-t4-815-1-zlookup.jpg). Consider a one-year exchange option to give up 14.0 units of Ethereum (aka, ether or ETH) for one unit of Bitcoin (BTC). Let W = 0.80*X + 0.20*Y with the assumption that X and Y are independent; that is, this W is the sum of independent, random variables. This return is possible because he will not be repaid until the bond matures in ten (10) years. A credit portfolio contains five identical bonds. Schweser Study Notes for the 2002 CFA Exam, Level 3 2022 CFA Program Curriculum Level I Box Set This is world's shortest CFA Level III core content summary.Despite its length of only 129 pages, the book covers all the core LOS's at CFA Level III, Study Session 3 through 17. Study Notes: How Do Firms Manage Financial Risk? Portfolio (A) has an expected return of 11.0% with volatility of 8.0%, Portfolio (B) has an expected return of 7.0% with volatility of 20.0% and its correlation to the market is 0.30, Portfolio (C) has a beta with respect to the market (C, M) = 1.50 and its realized return of +20.0% implies an alpha of +2.0%, Portfolio (D) has a beta with respect to the market (C, M) = 0.40 and its realized return of +9.0% implies an alpha of +2.0%, 50% invested in a zero-coupon bond with 5.0 years to maturity, plus, 50% invested in a zero-coupon bond with 8.0 years to maturity. In this case, what should be the expected return of Portfolio (C)? document.getElementById( "ak_js_1" ).setAttribute( "value", ( new Date() ).getTime() ); Quiz complete. We also include a forum link on the answer pages of the question set PDF. Which is nearest to the probability of exactly four defaults; Pr(X = 4 | binomial with mean of 4.0 and variance of 3.80)? Every study package that we offer includes access to our practice questions. If that reading is not new, we add the new questions to a set with the older questions to give our customers a large question bank to study from. Finally and importantly, assume the two-year swap rate is 4.00%. returns and 250 trading days per year. An investor purchases a European straddle with a strike price of $45.00: a straddle is a call and a put on the same stock with identical strike prices and expiration dates. The bond has a semi-annual yield of 8.0%; i.e., 8.0% per annum with semi-annual compounding. Its price is therefore $104.032 as shown below. A discrete random variable can assume a value of {1, 2, 3, 4 or 5} with the following probabilities, where the sum of f(x)*X and f(x)*X^2 is also shown: If Y = 3*X + 5, then what is the variance of Y, ^2(Y)? About risk reporting practices, the Committee says [51.] On the one hand, the bond is better than junk. On the first day, the investor buys ten (10) contracts when the futures price is $1,200.00. The promoter of a new cryptocurrency claims that its monthly price volatility is 25.0%, or more specifically, is not greater than 25.0%. and where structured in such a manner that the breadth and depth where optimal for exam preparation - clearly the exam would have been a catastrophe without BT! This spreadsheet provides the following information: Each week, David writes and posts a set of questions Monday and Wednesday in thedaily practice questionsection of the forum. All bot-views are equally likely to be located, but clearly both applications only identify a minority of the bot-views (otherwise there would be a much higher number of identified bot-views common to both applications). The pass rate for Part I of the May 2021 exam was 43%. (Please note this is based on Hulls EOC Question 3.15)[1]. To measure and hedge the risk of bond portfolios in terms of the relatively small number of liquid bonds available, in particular, on-the-run government bonds, II. If the price of a call option is $2.05, then how much will the stock price need to move in order for him to at least achieve breakeven profit (reminder that profit = final payoff +/- initial premium)? Because the initial margin is $6,000 per contact, the investor must deposit a total of $60,000 in the margin account. According to the Black-Scholes-Merton model, what is the value of the put? For each activity, firms can compare the revenue and profit they are making from an activity to the amount of economic capital required to support that activity. Each of the following statements is true about RAROC EXCEPT which is inaccurate? Yet we know that returns are fat-tailed in practice. How can Peter overcome this objection and include a fat-tailed assumption in his model? The straddle expires in nine months (0.75 years). A fund of funds divides its money equally between four hedge funds who earn 3.0%, +1.0%, +11.0%, and +21.0% before fees in a particular year. Which of the following is nearest to the convexity of the alternative barbell portfolio? The fund of funds charges 1% plus 10% and the hedge funds charge 1% plus 20% (due to competitive pressures this is reduced from 2% plus 20%). I was taking your mock exam 1 and I clicked on the link to look at the Z score so I could do a BSM. She evaluates the countries in four categories: degree of indebtedness as measured by debt as a percentage of gross domestic product; social service/pension commitments as estimated by the average age of the population; nature of the economy (e.g., diverse versus concentrated in oil as a natural resource), and monetary policy. For the purpose of updating volatility for an asset return series, your colleague Anita is trying to choose between an EWMA and a GARCH(1,1) volatility model. Bionic Turtle. This field is for validation purposes and should be left unchanged. According to GARP, each of the following was a causal factor in the 2007-2009 global financial crisis (GFC) EXCEPT which is not a causal factor? The orange rectangle conditions on the event C. For example, conditional on event C, there is a 50.0% probability that event A occurs, Pr(A | C) = 50.0%. Certain members of the finance staff function, however, disagree; the hypothesis of these Excel sympathizers is that the firms current spreadsheets contain no more than one bug per sheet. When I tried to get back into the exam I was taking, it reset my test so now. What is the expected value of the product of X and Y, E(X*Y)? Peter the Risk Analyst has employed a two-step (i.e., three months per step) binomial model to price the option, as displayed below: Peters model matches the up and down movements to his estimate of the stocks prospective volatility, which he assumes is 34.0% per annum. For a better experience, please enable JavaScript in your browser before proceeding. the quoted price of bond #4 is $129.41 and its conversion factor (CF) is 1.290. The infrastructure of risk management, which includes both physical resources and clearly defined operational processes, must be up to the task of an enterprise-wide scope.[1] However, it is a difficult and daunting task to evaluate the fitness of a firm or banks risk management system. In regard to these financial engineering cases, each of the following statements is true EXCEPT which is false? Compared to his original future value, how many dollars greater is Richards revised future principal repayment? Part 1 Full Length Interactive Mock Exam 1, http://www.bionicturtle.com/images/2018/forum/082718-t4-815-1-zlookup.jpg, FRM Exam Overview, Registration Guide, and Deadlines, Comparison of the FRM and CFA Designations, Exposure #1 has a default probability of 2.0% and unexpected loss (UL) of $597,000, Exposure #2 has a default probability of 4.0% and unexpected loss (UL) of $840,000, Exposure #3 has a default probability of 6.0% and unexpected loss (UL) of $1,023,500, S(0) = K = $100.00 and this option has a delta, N(d1) = 0.570, Volatility, = 20.0% and this option has vega = 27.8, Time to expiration, T = 0.5 years or six months, Alice (A) invested in the stock Cloudera (CLDR) and bad news (aka, new information) renders her original thesis obsolete but she is reluctant to sell today because an exit implies the realization of a -30.0% loss on the position and she much prefers to sell after her position experiences a double-digit gain, Bert (B) can buy a new smartphone for $79.00 but he cannot resist a sale and prefers to pay $100.00 because it represents a 50.0% discount from the retail (MSRP) price, Chris (C) attends an investment conference but he avoids the seminar focusing on recession risks because he is overweight homebuilders and he worries the topic will make him anxious with worry, Don (D), who enjoys food shopping, tends to be price-conscious (e.g., he seeks bargains) when he pays cash at Sprouts or Trader Joes, but when he uses his Amazon credit card at Whole Foods he doesnt worry about the cost because he doesnt look at the statement for several days or weeks, Eva (E) purchased Facebook (FB) at $160.00 because his firms price target was $200.00, and he decides to ignore new information until the price reaches this level, Fred (F) was previously a patient buy-and-hold investor who purchased high-conviction stocks and only checked his portfolio once a week, but last year he signed up for a subscription to Seeking Alpha and since that time his buy/sell transactions have quintupled because hes reading news about his portfolio holdings every day, Portfolio A: E[ER(A)] = (A,1)*F(1) + (A,2)*F(2) = 0.40*F(1) + 1.20*F(2) = 6.0%, Portfolio B: E[ER(B)] = (B,1)*F(1) + (B,2)*F(2) = 0.80*F(1) + 1.50*F(2) = 8.4%, Portfolio C has the following betas: (C,1) = 1.30 and (C,2) = 0.90, The 2-year key rate, KR01(2-year) is equal to $0.030 per 100 face amount and has a daily volatility, (bps), of 12.0 basis points, The 5-year key rate, KR01(5-year) is equal to $0.090 per 100 face amount and has a daily volatility, (bps), of 25.0 basis points, The market portfolios excess return was +6.0% (its gross return was +8.0%) with a volatility of 24.0% per annum, Peters portfolios excess return was +7.0% (his gross return was + 9.0%) with a volatility of 36.0% per annum and beta, (P,M) = 0.750, Bettys portfolios excess return was +11.0% (her gross return was + 13.0%) with a volatility of 44.0% per annum and beta, (B,M) = 1.650. Compliance with these principles should not be at the expense of each other [1]. Instructional Video: Pricing Financial Forwards and Futures. The following are well-diversified portfolios; e.g., Portfolio (A) has a beta sensitivity to factor the first factor, (F1), of 1.20 and an expected return of 13.0%: Which is the correct return-beta relationship in this economy? Further, we have hundreds of practice questions that are discussed in the. Paul is a researcher who is using Monte Carlo simulation in order to determine what effect heteroscedasticity has upon the size and power of a test for autocorrelation. What is the portfolios Sharpe measure? The chapter on IRM (Insurance Risk Management) has. Lets assume two normal variables: X ~ N(0, 3.0^2) and Y ~ N(4.0, 9.0^2). You won't find this level of depth elsewhere. If the futures price for a contract deliverable in six months is $0.0610 (i.e., about 16.39 pesos per one US dollar), then which of the following best exploits the arbitrage opportunity (this question is inspired by Hulls EOC Problem 5.14)[1]? Below is a spreadsheet that lists all of the practice questions that we have available. Portfolio A has a high volatility, (A) = 50.0% per annum, but its correlation to the market portfolio is only, (A, M) = 0.30, Portfolio B has a moderate volatility, (B) = 30.0% per annum, and its correlation to the market portfolio is, (B, M) = 0.70, Bond A is a $100.00 face value bond with 7.0 years to maturity that pays a monthly coupon at a rate of 6.0% per annum and offers a yield of 5.0% per annum (with monthly compound frequency), Bond B is a $100.00 face value bond with 10.0 years to maturity that pays a semi-annual coupon at a rate of 4.0% per annum and offers a yield of 5.0% per annum (with semi-annual compound frequency), Bond C is a $100.00 face value bond with 10.0 years to maturity that pays an annual coupon at a rate of 7.0% per annum and offers a yield of 6.0% per annum (with annual compound frequency), Bond D is a $1,000.00 face value zero-coupon bond with 30.0 years to maturity that offers a yield (aka, yield to maturity) of 8.0% per annum with semi-annual compound frequency. Chapter 2: How Do Firms Manage Financial Risk? The company goes long four contracts, each for 25,000 pounds of copper.[1]. A separate index is created for each of the subcategories. A portfolio with a volatility of 30.0% has a Treynor measure of 0.080. Regulators estimate that Deposits and Loans Corporation (DLC) will report a profit that is normally distributed with a mean of $1.30 million and a standard deviation of $3.0 million. To effectively achieve their objectives, risk reports should comply with the following principles. This section is visible to all members. Each contract was for 100 put options. In the wake of the global financial crisis (GFC), stress testing has received prominent media attention. Each of the following statements is true about stress testing EXCEPT which is false? He regressed the benchmark index returns, B(i), as the dependent (aka, response) variable against portfolio returns, R(i), as the independent (aka, explanatory) variable. and where structured in such a manner that the breadth and depth where optimal . Richard plans to invest $10,000.00 today in a zero-coupon bond with a promised return of 7.0% per annum. The forward LIBOR rate for the period between 6 and 12 months is 3.00% with semiannual compounding. Consider the probability mass function (pmf) below. Stay in the know with all things Bionic Turtle. Finish the Bionic Turtle trial period and then purchase the Bionic Turtle Advanced Package. As a hedge, she buys an out-of-the-money three-month European put option on the stock with a fixed strike price of $57.00, which is a 5.0% discount to the current stock price. I wanted to express my appreciation and gratitude to your team for your hard work in creating these materials. Alice, Bert, Chris, Don, Eva, and Fred are individual investors. He instructed his broker to short 1,000 shares. Keep up the fantastic work! GARP explains that risk management must be implemented across the entire enterprise under a set of unified policies and methodologies. They should contain the correct content and be presented to the appropriate decision-makers in a time that allows for an appropriate response. The strike price is $80.00, and the option term is six months. 409.1. Which is nearest to the bonds duration (please note that because the yield is continuously compounded, this is the special case where Macaulay duration is equal to modified duration, so we dont really need to specify which!)? Consider a European call option on a non-dividend-paying stock that has a current price, c = $6.37, if we make the following assumptions: Each of the following changes will INCREASE the value of this option, but which factor change will produce the SMALLEST change to the options value? We'll keep you informed on new forum posts, relevant blog articles, and everything you'll need to prepare for your exam. Below are given three-month Eurodollar Futures quotes for contracts with maturities of, respectively, 300, 393, and 486 days; for example, 94.50 is the Eurodollar Futures quote for a contract that matures in 300 days and settlement will be based on the then-prevailing three-month LIBOR. Passed Part I and Part II first time - absolutely could not have done it without BT. Accordingly, appropriate limits need to be developed for each business as well as for the specific risks associated with the business (as well as for the entire portfolio of the enterprise). Most institutions set two types of limits, tier 1 (one) and tier 2 (two) limits. If the riskfree rate is 4.0%, what is the formula for the capital market line (CML)? The riskfree rate is 3.0% and the market portfolios expected return is 10.0% (put another way, the markets excess expected return is 7.0%). Consider the following steeply upward-sloping spot rate (aka, zero rate) curve where the per annum zero rates are given with continuous compounding (CC): Which of the following is nearest to the implied six-month forward rate beginning in 1.5 years, F(1.5, 2.0), but where the six-month forward rate is expressed per annum with semi-annual compounding? About these limits, which of the following is TRUE? The value of each option is $4.38, and the positions value is $43,800.00.
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