章节2-模考串讲二任务1讲义v1frm11月一级

金程教育

专业·领先·增值

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102.97.

103.07.

Aninvestorownsastockandisbullishovertheshortterm.Whichofthefollowingstrategieswillbethemostappropriateoneforthisinvestoriftheprimaryconcernistomakeabetonthevolatilityofthestock?

Acoveredcall

Aprotectiveput

Anat-the-moneystrip

Anat-the-moneystrap

PaperProductsInc.’sresearchdepartmentdevelopedanewtypeofenvironmentallyfriendlypaper.Themarketingdepartmentsurveyedarandomsampleof100people.Thesurveyisdesignedtogaugecustomerinterestlevelinthenewproduct.Thesampleindicatesanaveragepurchaseof2,500reamsperyearwithavarianceof160,000reams.Theresearcher’ssupervisorisconcernedthatthesamplesizeistoosmall.Theresearcheradvisesagainstincreasingthesamplesize,statingthat“thereisariskofsamplingfrommorethanonepopulation.”Determinethestandarderrorofthesamplemeanandindicatewhethertheresearcher’sstatementiscorrectorincorrect.

Standarderror Researcher’sstatement

8 Correct

40 Incorrect

8 Incorrect

40 Correct

NicholasisresponsiblefortheassetandliabilitymanagementofJerseyBeechBank,asmallretailbankwithUSD300millionininterest-bearingassetsthatyieldapproximay70bpaboveLIBOR.Thedurationoftheinterest-bearingassetsis2.5years.Duetotherecentfinancialturmoil,thebankseekstoreducepotentialnegativeimpactsonearningsfromadversemovesininterestrates.Thus,thebankdecidestohedge50%ofitsinterestrateexposuresusingTreasurybondfutures.NicholasdecidestouseSeptemberT-bondfuturesthattradeat106-22andwillmatureinthreemonths,thecheapest-to-deliverbondassociatedwiththiscontractisa7-year,10%coupon,withacurrentdurationof5years.Atthematurityofthefuturescontract,thedurationofthebank’sinterestratesensitiveassetswillnotchange;however,thedurationofthecheapest-to-deliverbondwillfallto

4.9.HowmanycontractsshouldNicholasbuyorsell?

Buy703contracts.

Sell703contracts.

Buy717contracts.

Sell717contracts.

Youaregiventhefollowinginformationaboutacalloption:Timetomaturity=2years

Continuousrisk-rate=4%Continuousdividendyield=1%N(d1)=0.64

Calculatethedeltaofthisoption.

-0.64

0.36

0.63

0.64

JimmyDeininger,FRM,isaportfoliomanagerwhorunsalarge$400,000,000longequityportfolio.RelativetotheS&P500,Deininger’sportfoliohasabetaof1.07.Currently,S&Pfuturesaretradingat1,368,andthefuturesmultiplieris250.DeiningerwishestocreateahedgeforhisportfolioforthenextfourmonthsusingS&Pfutures.HowmanyfuturescontractsshouldDeiningerbuyorselltohedgethisportfolio?

Longhedge;1,490contracts.

Shorthedge;1,053contracts.

Longhedge;992contracts.

Shorthedge;1,251contracts.

Aloanportfolioismadeupoftennoncorrelatedloans,eachwithavalueof$1millionandanestimatedprobabilityofdefaultof3%inanygivenyear.Recoveryinthecaseofdefaultisexpectedtobezero.Whichofthefollowingamountsisclosesttothecumulativeexpectedlossontheloanportfolioovertwoyears?

$0.03million.

$0.059million.

$0.30million.

$0.591million.

Anystdeterminesthatthereisa50%chancetheeconomywillgrowandthatthereisa50%chancetheeconomywillgointoarecession.Iftheeconomygrows,thereisa60%chancethatABCstockwillriseinpriceanda40%chanceitwillfallinprice.Ifarecessionoccurs,thereisa15%chanceABC’Sstockpricewillriseandan85%chancethepricewillfall.GiventhatABCstockhasriseninprice,whatistheprobabilitytheeconomyhasgrown?

30%.

50%.

70%.

80%.

WhataretheminimumvaluesofanAmerican-styleandaEuropean-style3-monthcalloptionwithastrikepriceof$80onanon-dividend-payingstocktradingat$86iftherisk-rateis3%?

American

European

A. $6.00

$6.00

B. $5.96

$6.00

C. $6.00

$6.59

D. $6.59

$6.59

IsabelleBurns,FRM,isaninvestmentadvisorforafirmwhosebaseiscomposedofhighnetworthindividuals,inher alportfolio,BurnshasaninvestmentinTorex,a thathas

developedsoftwaretospeedupInternetbrowsing.BurnshasthoroughlyresearchedTorexandbelievesthe isfinanciallystrongyetcurrentlysignificantlyundervalued.AccordingtotheGARPCodeofConduct,Burnsmay:

Not mendTorexaslongasshehasa alinvestmentinthestock.

Not mendTorextoa unlessheremployergiveswrittenconsenttodoso.

mendTorextoa ,butshemustdiscloseherinvestmentinTorextothe .

mendTorextoa withoutdisclosureaslongasitisasuitableinvestmentforthe

.

AsinglestockhasapriceofUSD10andacurrentdailyvolatilityof2%.Usingthedelta-normalmethod,theVaRatthe95%confidencelevelofalongat-the-moneycallonthisstockoveraone-dayholdingperiodisapproximay:

USD1.645

USD0.16

USD0.33

USD0.23

Iftheexpectedvarianceofaregressionerrortermdependsonthevalueoftheindependentvariable,thenthis:

Doesnotviolatetheassumptionsoftheclassicallinearregressionmodel.

Wouldviolatetheassumptionsoftheclassicallinearregressionmodelandiscalledserialcorrelation.

Wouldviolatetheassumptionsoftheclassicallinearregressionmodelandiscalledhomoskedasticity

Wouldviolatetheassumptionsoftheclassicallinearregressionmodelandiscalledheteroskedasticity

A$1,000parbondwith22yearstomaturityanda4%semiannualcouponhasayieldtomaturityof5%.Assuminga5basispointchangeinyield,theconvexityofthebondisclosestto:

258

502

942

129

Between1993and1995,NickLeeson’sactionsresultedinlossesofapproximay$1.25billionanddBaringsintobankruptcy.WhichofthefollowingactionswouldleastlikelyhavepreventedthebankruptcyofBarings’Bank?

Informationonaccountgainsandlossesbeingmoretransparent.

Managementbeingmoresuspiciousofhugereportedprofits.

AlltradersbeingrequiredtomeetSIMEX(SingaporeInternationalMonetaryExchange)standards.

Asystemofchecksandbalancesbeingestablishedtodetectwildlyspeculativepositions.

ColleaguesBenjaminEckoandBernardCharlesrecentlydiscussedtheapplicationofthenormaldistributionforrandomvariables.Eckoclaimedthatthez-statisticmeasuresthedistance,in

standarddeviationunits,thatagivenobservationisfromthepopulationmean.Charlesclaimedthatthereisa95%chancethatthez-statisticliesabovenegative1.96.RegardingthestatementsofEckoandCharles:

Eckoiscorrect;Charlesiscorrect.

Eckoiscorrect;Charlesisincorrect.

Eckoisincorrect;Charlesiscorrect.

Eckoisincorrect;Charlesisincorrect.

MetallgesellschaftRefiningandMarketingofferedcustomerslong-termcontractswithfixedpricesforpetroleumcontracts.Theirstrategytohedgethisexposure:

Didnotaccountforfundingriskcreatedbyamismatchbetweenthetimingofthehedgecashflowsandthecontractcashflows.

Failedbecauseofimproperinternalcontrols.

Wasbasedonfraudulentreporting.

Sufferedfrompoordiversification.

Therearevariousbondinterestpaymentclassificationsinuse.Ignoringtheriskofdefault,whichofthefollowingtypesofbondsmayresultinpaymentoflessthanthespecifiedorimpliedamount/rateofinterest?

ebonds

Zero-couponbonds

Floating-ratebonds

Participatingbonds

TheS&P500indexistradingat1,025.TheS&P500paysanexpecteddividendyieldof1.2%andthecurrentrisk-rateis2.75%.Thevalueofa3-monthfuturescontractontheS&P500indexisclosestto:

$1,028.98

$1,108.59

$984.86

$1,025.00

Twofirms,Bell-ConandBit-Con,enterintoafixed-for-fixedcurrencyswap,withanagreementtomakeperiodicpaymentsannually.Bell-Conpays3.5%ineurosandreceives3%inU.S.dollars.Atthebeginningoftheswap,Bell-ConpaysaprincipalamounttoBro-ConofUSD250million,andBro-ConpaysEUR200milliontoBell-Con.Whatamountsareexchangedeveryperiod,andwhathappenstotheprincipalamountsattheswap’sconclusion?

Bell-ConwillpayEUR8.75milliontoBro-Con,Bro-ConwillpayUSD6milliontoBell-Con,andtherewillbenootherpaymentsexchangedatswapconclusion.

Bell-ConwillpayFUR7milliontoBro-Con,Bro-ConwillpayUSD7.5milliontoBell-Con,andtheprincipalamountswillbere-exchangedatswapconclusion.

Bell-ConwillpayEUR7milliontoBra-Con,Bro-ConwillpayUSD6milliontoBell-Con,andtherewillbenootherpaymentsexchangedatswapconclusion.

Bell-ConwillpayFUR8.75milliontoBra-Con,Bro-ConwillpayUSD7.5milliontoBell-Con,andtheprincipalamountswillbere-exchangedatswapconclusion.

Afinancialinstitutionhasenteredintoainvanillacurrencyswapwithoneofitscustomers.Theperiodleftontheswapistwoyearswiththeinstitutionpaying4.5%onUSD120millionandreceiving2%onJPY3,500millionannually.Thecurrentexchangerateis120JPY/USD,andtheflattermstructureinbothcountriesgeneratesa3%rateintheUnitedStatesanda0.5%rateinJapan.Thecurrentvalueofthisswaptotheinstitutionisclosestto:

$93.3million

-$93.3million

$118.1million

-$118.1million

SCUstockiscurrentlypricedat$106pershare,andtherisk-interestrateis3.25%.AssumingthatSCUdoesnotpayanydividends,whatisthelowerboundofanAmericanputoptiononSCUthatexpiresinthreemonthsandhasanexercisepriceof$l10?

$0.

$0.48.

$3.11.

$4.00.

AninvestorislookingtocreateanoptionsportfolioonXYZstockthatwillhavevirtuallyzeroVegaexposurewhile izingtheabilitytoprofitfromincreasesininterestrates.IfthecurrentpriceofXYZis$50,whichofthefollowingwould plishhisgoals?

Sellacallwithastrikepriceof$50.

Buyacallwithastrikepriceof$25.

Sellaputwithastrikepriceof$50.

Buyaputwithastrikepriceof$25.

JoeBrocatoiscurrentlyfollowingtwostocksinthepharmaceuticalindustry:ABCandXYZ.HeisbullishonABC,butbearishonXYZ.ABCiscurrentlypricedat$53.60andXYZiscurrentlypricedat$9.80.Heisconsideringanoptionsstrategytocapitalizeonhisexpectations.Brocatogathersthefollowingthreemonthsofdataonputandcalloptionsforbothstocks:

ABC:

call

strike

put

$8.50

$45.00

$0.20

4.40

$50.00

$0.50

$1.10

$55.00

$2.75

XYZ:

Call

Strike

Put

$2.50

$7.50

$0.15

$0.55

$10.00

$0.75

$0.10

$12.50

$2.75

Inthreemonths,assumeABChasincreasedinpriceby$1.00whileXYZhasdroppedby$1.67.Whichofthefollowingstrategieswouldhavebeenthemostprofitableinthreemonths?

ShorttheABCputoptionwiththe$45strikeprice,andshorttheXYZcalloptionwiththe

$7.50strikeprice.

GolongtheABCputoptionwiththe$45strikeprice,andgolongtheXYZcalloptionwiththe$7.50strikeprice.

GolongtheABCcalloptionwiththe$55strikeprice,andgoshorttheXYZputoptionwiththe$10strikeprice.

ShorttheABCcalloptionwiththe$55strikeprice,andgolongtheXYZputoptionwiththe

$10strikeprice

Assumethatabinomialinterest-ratetreeindicatesa6-monthperiodspotrateof2.5%andthepriceofthebondifratesdeclineis$98.45,andifratesincreaseis$96.Therisk-neutralprobabilitiesrespectivelyassociatedwithadeclineandincreaseinratesifthemarketpriceofthebondis$97correspondto:

0.1/0.9

0.9/0.1

0.2/0.8

0.8/0.2

Therisk-rateis5%andtheexpectedmarketriskpremiumis10%.Aportfoliomanagerisprojectingareturnof12%.Theportfoliohasabetaof0.7,andthemarketbetais1.0.Afteradjustingforrisk,thisportfolioisexpectedto:

EqualtheperformancepredictedbytheCAPM.

OutperformtheCAPMreturn.

UnderperformtheCAPMreturn.

Unabletodeterminebasedontheinformationprovided.

Delta-normal,historicalsimulationandMonteCarloarevariousmethodsavailabletocomputeVaR.Ifunderlyingreturnsarenormallydistributed,thenthe

Delta-normalmethodVaRwillbeidenticaltothehistorical-simulationVaR.

Delta-normalmethodVaRwillbeidenticaltotheMonte-CarloVaR.

Monte-CarloVaRwillapproachthedelta-normalVaRasthenumberofreplications(“draws”)increases.

Monte-CarloVaRwillbeidenticaltothehistorical-simulationVaR.

Thecurrentspotpriceforcottonis$0.325perpound.Theannualrisk-rateis3.0%,andthecosttostoreandinsurecottonis$0.002perpoundpermonth.A3-monthfuturescontractforcottonistradingat$0.3368perpound.Isthereanarbitrageopportunityavailable,andifso,howshouldaninvestortakeadvantageofit?

Thereisnoarbitrageopportunityavailable.

Yes;theinvestorshouldsellthefuturescontract,borrowattherisk-rate,andbuythespotasset.

Yes;theinvestorshouldbuythefuturescontract,sellthespotasset,andlendattherisk-rate.

Yes;theinvestorshouldbuythefuturescontract,borrowattherisk-rate,andbuythespotasset.

Ifitisnecessarytobelong2,500deep-in-the-moneycalloptionsinordertocreateag

neutralposition,whichofthefollowingactionswouldbestrestoretheoriginaldelta-neutralpositionaftertheadditionoftheoptions?

Sell1,250sharesoftheunderlyingasset.

Buy1,250sharesoftheunderlyingasset.

Sell2,500sharesoftheunderlyingasset.

Buy2,500sharesofdieunderlyingasset

DowntownSavings(Downtown)isconsideringaloantoFitRightCorporation(FitRight).FitRighthasrequestedacreditfacilityof$10millionofwhich$2millionwillbeusedimmediay.ThebankhasassessedaninternalcreditratingofBBB+equivalenttoa2%defaultprobabilityoverthenextyear.Drawdownupondefaultisassumedtobe60%.Thebankhasadditionallyestimateda40%recoveryratebasedonpledgedcollal.ThestandarddeviationofEDFandLGDis5%and30%,respectively.TheclosestestimateoftheDowntown’sadjustedexposureandunexpectedlossis:

Adjustedexposureof$5,200,000andunexpectedlossof$270,000.

Adjustedexposureof$5,200,000andunexpectedlossof$350,000.

Adjustedexposureof$6,800,000andunexpectedlossof$270,000.

Adjustedexposureof$6,800,000andunexpectedlossof$350,000.

Afinancialinstitutioncreatedamodeltomeasureinterestratevolatility.Thehistoricaldistributionofinterestratevolatilitydidnotappeartobenormallydistributedduetotheobviouslargefat-tails.Thefirmiscontemtingusingaregime-switchingvolatilitymodeltocapturetheapparentexistenceoftime-varyinghighandlowinterestratevolatility.Whichofthefollowingstatementsbestcharacterizetheimplementationofaregime-switchingmodelforthisfirm?

Theinterestratedistributionsareconditionallynormallydistributedassumingstaticinterestratevolatility

Theassumptionofnormalityisnotappropriateinthiscase,andtherefore,aregime-switchingmodelisunlikelytoworkwell

Theprobabilityoflargedeviationsfromnormalityoccurringaremorelikelywitharegime-switchingmodel

Theregime-switchingmodelmayresolvethefat-tailproblem

Whichofthefollowingcasesoflosseswasnottheresultofunauthorizedorroguetrading?

Long-TermCapitalManagement

AlliedIrishBank

Sumitomo

Daiwa

Earlyexerciseofanoptionismorelikelyforwhichofthefollowingtypesofoptions?

Europeancalloptionsonstockspayinglargedividends

Americancalloptionsonstockspayingsmalldividends.

Americancalloptionsclosetomaturity.

Americanputoptionsonstockspayinglargedividends.

Aninvestorbuysastockfor$40pershareandsimultaneouslysellsacalloptiononthestockwith

anexercisepriceof$42forapremiumof$3pershare.Ignoringdividendsandtransactioncosts,whichofthefollowingamountsrepresentsthe umprofitthewriterofthiscoveredcallcanearnifthepositionisheldtoexpiration?

$1

$2

$3

$5

Abankhas$500millioninassetswithamodifieddurationof7and$400millioninliabilitieswithamodifieddurationof5.Accountingonlyfordurationeffects,theimpactofa50-basis-pointparallelupwardshiftintheyieldcurveonthebank’sequityvalueisclosesttoa:

$7.5milliondecrease

$7.5millionincrease

$15milliondecrease

$15millionincrease

ItiscurrentlyAugust2010,andthespotpriceofsoybeansis$5.05/bushel.Storagecostsforsoybeansonacontinuouslycompoundedbasisare$0.45/bushelannually.Theappropriatecontinuouslycompoundedinterestrateis8%.IfasoybeanfarmerhasjustfinishedharvestinghiscropbutwouldliketosellhalfofthecropinFebruary2011andhalfinMay2011bygoingshortfuturescontracts,whichofthefollowingstatementsismostaccurate?Thefarmershouldstorehiscroponlyifthe:

Februaryfuturescontractpriceisatleast$5.48/bushelandtheMayfuturescontractpriceisatleast$5.70/bushel.

Februaryfuturescontractpriceisatleast$5.48/bushelandtheMayfuturescontractpriceisatleast$5.73/bushel.

Februaryfuturescontractpriceisatleast$5.50/bushelandtheMayfuturescontractpriceisatleast$5.70/bushel.

Februaryfuturescontractpriceisatleast$5.50/bushelandtheMayfuturescontractpriceisatleast$5.73/bushel.

Ifa91-dayU.S.Treasurybill(T-kill)ispricedatadiscountof5.8%,whatwillaninvestoractuallypayfora$10,000billatissuance?

$9,320

$9,850

$9,853

$9,860

Therearebothabsoluterisk(measuredwithoutreferencetoabenark)andrelativerisk(measuredagainstabenark)measuresofmarketrisk.Whichofthefollowingisanabsolutemeasureofmarketrisk?

Trackingerror.

Volatilityoftotalreturns.

Correlationwithabenarkportfolio.

Deviationsfromaben arkindex.

Alargepubliclyheld refinescrudeoilintogasolineandsellsgasolinewholesalewithlong-termcontractsatfixedprices.Thefirmalsoownstheland,withfullrights,fromwhichitpumpscrudeoil.Thefirmfinancedthepurchaseofthelandbyissuingfloating-ratebonds.Thisfirmcouldreducethevolatilityofitsearningsbyenteringintoa(n):

Interest-rateswap.

Oilcommodityswap.

Ionly

IIonly

BothIandII

NeitherInorII

Aportfoliomanagerreturns10%withavolatilityof20%.Thebenarkreturns8%withavolatilityof14%.Thecorrelationbetweenthetwois0.98.Therisk-rateis3%.Whichofthefollowingstatementsiscorrect?

TheportfoliohashigherSRthanthebenark

TheportfoliohasnegativeIR

TheIRis0.35

TheIRis0.29

Long-TermCapitalManagement(LTCM)experiencedfinancialdifficultyinthelate1990s.Whichofthefollowingstatementsisfalseregardingtheirtroubles?

Theamountoftheirpositionsinswapswasverylarge,butduetooffsettingpositions,theamountoftheirriskwasintheoryverysmall.

LTCMrequiredtheirinvestorstoinvestforthreeyears,therebyincreasingfundingrisk.

LTCMobtainedfinancingthroughrepurchaseagreementsatveryfavorableterms.

Duetothesizeoftheirpositions,LTCMcouldnotliquidatetheirassetswithoutsellingatlargediscounts.

CharmaineTownsend,FRM,hasbeenmanagingagrowthportfolioforhersusingascreeningprocessthatidentifiescompaniesthathavehighearningsgrowthrates,Townsendhasdecidedthatbecauseofavolatileeconomy,sheisgoingtoadoptavaluestrategyusingascreeningprocessthatidentifiescompaniesthathavelowprice-earningsmultiples.TownsendwillviolatetheGARPCodeofConductifshemakesthischangeinherinvestmentprocesswithout:

Notifyinghersupervisorbeforeshemakesthechange.

Promptlynotifyinghersofthechange.

Gettingwrittenpermissionfromhersinadvanceofthechange.

Gettingpromptwrittenacknowledgmentofthechangefromherswithinareasonabletimeafterthechangewasmade.

Supposeanexistingshortoptionpositionisdelta-neutral,buthasag ofnegative600.Alsoassumethatthereexistsatradedoptionwithadeltaof0.75andag of1.50.Inordertomaintainthepositiong-neutralanddelta-neutral,whichofthefollowingistheappropriatestrategy?

Buy400optionsandsell300sharesoftheunderlyingasset.

Buy300optionsandsell400sharesoftheunderlyingasset.

Sell400optionsandbuy300sharesoftheunderlyingasset.

Sell300optionsandbuy400sharesoftheunderlyingasset.

Whichofthefollowingstatementsisnotaproblemwithmultidimensionalscenario ysis?

Correlationofriskfactorsisignored.

Determininghowmanyriskfactorstoincludeisnon-trivial.

Selectingatimeperiodforparametricestimationissubjective.

Assigningweightstovariousscenariosisverycomplex.

YourfirmusesaproprietaryforecastingmodelthatrequiresparameterestimatesofrandomvariablesthatarebelievedtofollowthePoissondistribution.Youareattemptingtoassesstheprobabilityofthenumberofdefectsinanassemblyproductionprocessforagiven.Assumethatthereisa0.005probabilityofadefectforeveryproductionrun.Whatistheprobabilityof7defectsin1,000productionruns?

3.0%

4.4%

8.6%

10.4%

YouareyzingaportfoliothathasaJensen’salphaof4.75%andanactualreturnof14.2%.Therisk-rateis4.25%andtheequityriskpremiumis6%.Basedontheinformationprovided,thebetaoftheportfolioisclosestto:

0.77

0.87

0.97

1.07

Anoptiontraderisattemptingtojudgewhetheranoption’spremiumischeaporexpensive.Todoso,heemploysaGARCH(1,1)modeltoforecastvolatility.Theparticularmodelheestimateshasanintercepttermequalto0.000005,aparameterestimateonthelatestestimateofvarianceof0.85,andaparameterestimateonthelatestinnovationof0.13.Ifthelatestvolatilityestimatefromthemodelwere2.2%perdayandtheoption’sunderlyingassetchanged3%,thetrader’sestimateofthenextperiod’sstandarddeviationisclosestto:

0.07%.

2.31%.

5.20%.

2.62%.

Bonds

Spot-Price(USD)

ConversionFactor

CouponRate

A

102.44

0.98

4%

B

106.59

1.03

5%

Theyieldcurveisupwardslo.YouhaveashortT-Bondinterestratefuturesposition.Thefollowingbondsareeligiblefordelivery:

C

98.38

0.95

3%

Thefuturespriceis103-17/32andthematuritydateofthecontractisSeptember1.Thebondspaytheircouponamountsemi-annuallyonJune30andDecember31.Withthesedata,thecheapest-to-deliverbondis:

BondA

BondB

BondC

Insufficientinformationtodetermine

StampedeCapitalManagementhasenteredintoacurrencyswapwithPolarInvestmentsinwhichStampedepays3.5%perannumineurosandreceives2.8%perannumindollars.Stampedepaysaprincipalamountof$130milliontoPolar,whilePolarpays€100milliontoStampedeatinceptionoftheswap.TheyieldcurveinbothGermanyandtheUnitedStatesisupward-slowiththefollowinginterestrates:

1-Year 2-Year

Germany 4.00% 4.50%

UnitedStates 2.00% 2.25%

Theswapwilllastforanothertwoyearsandthecurrentexchangerateis

$1.33/€.WhatisthevalueofthecurrencyswaptoStampede?

$0.21million.

$0.54million

$1.06million

$1.95million

Asresearchystathisfirm,RichardStarrisassignedthetaskofexaminingtherelevanceofthecapitalassetpricingmodelbyrunninghypothesistestsontherisk-rateandthemarketriskpremium.Starr’ssupervisormakesthefollowingstatement:“FortheCAPMtobevalid,themean1-yearTreasurybillrateshouldequal4%andthemeanmarketriskpremiumshouldbepositive.”Starrcollectshistoricalrateofreturndatafor1-yearTreasurybillsandfortheannualmarketriskpremiumsoverthepast30years.HethenconductstestsofhypothesesusingthehistoricalTreasurybillandmarketriskpremiumdata.Toexaminetheclaimsofhissupervisor,identifywhetherStarrshouldperformone-tailedortwo-tailedtestsofthesehypotheses.

Risk-ratehypothesis Marketriskpremiumhypothesis

One-tailedtest One-tailedtest

One-tailedtest Two-tailedtest

Two-tailedtest One-tailedtest

Two-tailedtest Two-tailedtest

AnystatBergmanInternationalBankhasbeenaskedtoexinthecalculationofVARforlinearderivativestothenewlyhiredjuniorysts.WhichofthefollowingstatementsbestdescribesthecalculationofVARforalinearderivativeontheS&P500Index?

Forafuturescontract,multiplytheVARoftheS&P500Indexbyasensitivityfactorreflectingthepercentchangeinthevalueofthefuturescontractfora1%changeintheindexvalue.

Foranoptionscontract,multiplytheVARoftheS&P500Indexbyasensitivityfactor

reflectingthepercentchangeinthevalueofthefuturescontractfora1%changeintheindexvalue.

Forafuturescontract,dividetheVARoftheS&P500Indexbyasensitivityfactorreflectingtheabsolutechangeinthevalueofthefuturescontractperabsolutechangeintheindexvalue.

Foranoptionscontract,dividetheVARoftheS&P500Indexbyasensitivityfactorreflectingthepercentchangeinthevalueofthefuturescontractfora1%changeintheindexvalue.

Anystisconductingatwo-tailedz-testtodetermineifsmallcapreturnsaresignificantlydifferentfrom10%.Thesamplesizeis200andthecomputedz-statisticis2.3.Usinga5%levelofsignificance,whichofthefollowingstatementsismostaccurate?

Rejectthenullhypothesisandconcludethatsmallcapreturnsarenotsignificantlydifferentfrom10%.

Failtorejectthenullhypothesisandconcludethatsmallcapreturnsaresignificantlydifferentfrom10%.

Failtorejectthenullhypothesisandconcludethatsmallcapreturnsarecloseenoughto10%thatwecannotsaytheyaresignificantlydifferentfrom10%.

Rejectthenullhypothesisandconcludethatsmallcapreturnsaresignificantlydifferentfrom10%.

Giventheinformationinthetablebelowandgiventhatthe2-yearspotrateis10.263%,whatistheappropriateactionofanarbitrageur?Assumeannualcouponsandcompounding.

BondA BondB BondC

Maturityinyears

1

2

2

Couponrate

0%

0%

10%

Price

95.2381

82.6446

100

Thearbitrageurshouldshortthe1-and2-yearzero-couponbondsandbuythe2-yearcouponbond.

Thearbitrageurshouldbuythe1-and2-yearzero-couponbondsandshortthe2-yearcouponbond.

Thearbitrageurshouldbuythe1-yearzero-couponand2-yearcouponbondandshortthe2-yearzero-couponbond.

Thearbitrageurshouldshortthe1-yearzero-couponand2-yearcouponbondandbuythe2-yearzero-couponbond.

Youwanttotestatthe0.05levelofsignificancethatthemeanpriceofluxurycarsisgreaterthan

$80,000.Arandomsampleof50carshasameanpriceof$88,000.Thepopulationstandarddeviationis$15,000.Whatisthealternativehypothesis?

Thepopulationmeanisgreaterthanorequalto$80,000

Thepopulationmeanislessthan$80,000

Thepopulationmeanisnotequalto$80,000

Thepopulationmeanisgreaterthanis$80,000

Thecurrentpriceofastockis$25.Aputoptionwitha$20strikepricethatexpir