오답

Assume the yield curve is currently upward-sloping with yields across the curve in excess of 7%. Which of the following types of bonds is most likely the cheapest-to-deliver (CTD) bond for a T-bond futures contract? A. A low-coupon bond with a short maturity. B. A low-coupon bond with a long maturity. C. A high-coupon bond with a short maturity. D. A high-coupon bond with a long maturity

B - Yields excess of 6%: CTD bonds tend to be low-coupon, long-maturity bonds. - Upward-sloping yield curve: CTD bonds tend to have longer maturities

(이해x, 중요) You own a three year bond that is overpriced. It makes semiannual payment with a 6% coupon. You are planning to compute a replicating PF to exploit the arbitrage opportunity. One of the bonds that you plan to used to create a replicating PD and a face value of $1000. What percent of par should you allocate to this bond using a replication approach? A. 98.72 B. 99.04 C. 101.76 D. 101.88

B (new의 만기 CF/new의 face value) = (old의 만기 CF/old의 face value) - "Old의 face value"를 구하는 문제!

A stock index has an initial value of 2,450 and a dividend yield of 2.1%. Assuming that the risk-free rate is 1.75%, what is the price of a six-month forward contract on this asset? A. $2,418.91. B. $2,424.67. C. $2,474.84. D. $2,501.13

B

An analyst estimates a stock has a 40% chance of earning 10%, a 40% chance of earning 12.5%, and a 20% chance of earning 30%. Which of the following amounts is closest to the stock's SD of expected returns? A. 2.44% B. 3.87% C. 6.00% D. 7.58%

D ===== Expected value (평균): (0.4*0.1)+(0.4*0.125)+(0.2*0.3)=0.15, 15% Variance: 0.4(0.1-0.15)^2 + 0.4(0.125-0.15)^2 + 0.2(0.3-0.15)^2 = 57.5 SD: √57.5 = 7.58(%)

The spot price of gold is $800 per ounce. The annual interest rate is 6%, storage costs are 3%, and the convenience yield is 2% of the purchase price. The price of a six-month gold forward contract is $832. What would be the appropriate arbitrage strategy? A. Sell the forward contract, borrow cash, and buy the spot. B. Sell the forward contract, lend cash, and buy the spot. C. Buy the forward contract, lend cash, and sell the spot short. D. Buy the forward contract, borrow cash, and buy the spot.

A *Continuous 였음

A $1,000 par bond with 22 years to maturity and a 4% semiannual coupon has a yield to maturity of 5%. Assuming a 5 basis point change in yield, the convexity of the bond is closes to: A. 258 B. 502 C. 942 D. 129

A

To create a delta-neutral portfolio, an investor who has written 15,000 call options (that are currently exactly ATM) will have to: A. long 7,500 shares in the underlying instrument. B. short 7,500 shares in the underlying instrument. C. long 15,000 shares in the underlying instrument. D. short 15,000 shares in the underlying instrument.

A (Delta of an ATM call option = 0.5)

Ratings transition matrix는: (1) 과거에 발생한 확률을 토대로 채워진다. (2) 미래에 발생되리라 예측되는 확률로 채워진다.

(1) 과거에 발생한 확률을 토대로 채워진다.

An investor has a short position in a 20-year, 5% coupon, US T-bond with a YTM of 6% and par value of $100. Assume discounting occurs on a semiannual basis. (1) Which of the following amounts is closest to the dollar value of a basis point (DV01)? A. 0.1053 B. 0.1061 C. 0.1351 D. 0.1360 (2) Using a 30-year, 5% coupon, US T-bond yielding 5% with a DV01 of 0.1544 to hedge the interest rate risk in the 20-year bond, which of the following actions should the investor take? A. Buy $68.20 of the hedging instrument. B. Buy $68.72 of the hedging instrument. C. Buy $87.50 of the hedging instrument. D. Buy $88.08 of the hedging instrument.

(1) B - 먼저 조정 전의 가격을 계산기 활용해서 구하면: N=40 PMT=2.5 I/Y=3 FV=100 CPT -> PV=88.4426 ===== - 그 다음 조정 후의 가격을 계산기 활용해서 구하면: N=40 PMT=2.5 I/Y=3.005 (6.0에서 0.01%의 변동: 6.01, 반 나누면 3.005) FV=100 CPT -> PV=88.3365 따라서 88.4426-88.3365=0.1061 (2) B Hedge ratio: 0.1061/0.1544=0.6872 따라서 par value $100이니까 [100*0.6872]만큼 hedging instrument 매입하기 = $68.72

(중요) 같은 유형의 문제들 (1) A bank borrows USD 5 million at 4.5%, purchases euros on the spot market, and lends that amount to a German firm at 6%. The euro spot rate is EUR 1.12/USD. After one year, the exchange rate is EUR 0.84/USD. The rate of return of this loan to the bank is closest to: A. 1.5% B. 3.5% C. 36.8% D. 77.8% (2) Ion National Bank issues a 6-month, USD 1 million CD at 4% and funds a loan in Argentine pesos (ARS) at 6.50%. The spot rate for the ARS was ARS 2.27 per USD at the time of the transaction. In 6 months, the ARS depreciated to ARS 2.30 per USD. What is the realised nominal annual spread on the loan? A. -0.07% B. 0.19% C. 0.11% D. 0.13%

(1) C 1. 기관 -> 은행 $5,000,000 빌려줌 2. 은행 -> 독일 $5,000,000*1.12 = €5,600,000 빌려줌 3. 독일 -> 은행 €5,600,000*1.06 = €5,936,000 갚음 (다시 $로 전환: €5,936,000/0.84 = $7,066,667) 4. 은행 -> 기관 $5,000,000*1.045 = $5,225,000 갚음 따라서 (7,066,667 - 5,225,000)/5,000,000 = 36.8% (2) B 1. CD -> 은행 $1,000,000 빌려줌 2. 은행 -> AR $1,000,000*2.27 = 2,270,000 pesos 빌려줌 3. AR -> 은행 2,270,000*(1.0325) = 2,343,775 갚음 (다시 $로 전환: 2,343,775/2.30 = $1,019,033) 4. 은행 -> CD $1,000,000*(1.02) = $1,020,000 갚음 따라서 (1,019,033-1,020,000)/1,000,000 = -0.000967 "Annual" 구해야 하니까 -0.000967*2 = -0.19%

An investment analyst takes a random sample of 100 aggressive equity funds and calculates the average beta as 1.7. The sample betas have a standard deviation of 0.4. Using a 95% confidence interval and a z-statistic, which of the following statements about the confidence interval and its interpretation is most likely accurate? The analyst can be confident at the 95% level that the interval 1.622 to 1.778 includes the mean of the (1) sample betas OR (2) population beta. -> (1)과 (2) 중 무엇이 옳은가?

(2) Population beta - Sample beta는 이미 알려져 있다고 문제에 명시되어 있고, 100개의 sample이니까 population을 가늠할만한, 충분히 큰 data set임.

*One-tailed & two-tailed critical values 90%: 1.xx / 1.xx 95%: 1.xx / 1.xx 99%: 2.xx / 2.xx (숫자 채워넣기)

90%: 1.28 / 1.645 95%: 1.645 / 1.96 99%: 2.33 / 2.58

A bank manager is preparing a white paper on the topic of risk for the CEO of the bank. The focus of the paper is on the three primary types of risk exposure and how they should be managed going forward. Each of the following descriptions contained in the paper is accurate except: A. a bank's credit risk related to its ability to secure a strong credit rating. B. concerns over losses on trading activities from declines in investments ties to market risk. C. market risk is evaluated on a shorter time horizon than both credit risk and operational risk. D. operational risk includes both losses due to events outside of the bank and internal control failures.

A

An investment analyst calculated the intrinsic value of RTN Company and expects the stock to generate a 25% annual return over the foreseeable future. However, the analyst is concerned that her price forecast may be too high. She conducted a hypothesis test and concluded that at a 5% significance level, the null hypothesis can be rejected that RTN Company's investment return would be equal to or less than 25% per year. The one-tailed test utilised a z-test. Indicate the meaning of the significance level chosen by the analyst and state the correct rejection region. * Significance level / rejection region A. Reject a true null hypothesis 5% of the time. / z>1.645 B. Reject a false null hypothesis 95% of the time. / z<-1.645 C. Reject a true null hypothesis 5% of the time. / z<-1.645 D. Reject a false null hypothesis 95% of the time. / z>1.645

A

The standard deviation of daily price changes in the price of an NYMEX light sweet crude oil contract is 0.68, while the standard deviation of daily price changes in the price of physical crude oil is 0.75. The covariance between spot prices and the futures price changes is 0.4132. Given this information, which of the following statements is correct? A. The oil futures are 65.6% effective at hedging the variance in spot oil prices. B. The oil futures are 81.0% effective at hedging the variance in spot oil prices. C. The ratio of the size of the futures to the spot should be 0.73 for the optimal hedge. D. The ratio of the size of the futures to the spot should be 0.46 for the optimal hedge.

A

What is the standard deviation of daily changes given the data in the following table? ____/Factor 1/ Factor 2/ Factor 3 SD/8.47/4.31/1.89 Change in PF value/+3.5%/-2.7%/+1.4% A. 31.96 B. 33.48 C. 47.89 D. 61.32

A

Which of the following statements is correct regarding the factors that led to the financial crisis at MGRM? A. There was a cash flow problem that constrained the company's ability to fully execute the hedge already in place. B. The maturity mismatch between its short and long positions is widely believed to have contributed to the problems. C. The shifting of prices so that the petroleum spot prices were greater than petroleum futures prices created a significant cash flow problem. D. Gains and losses on customer contracts were realised when customers entered into the contracts.

A

An analyst is testing the hypothesis that the variance of monthly returns for Index A equals the variance of monthly returns for Index B based on samples of 50 monthly observations. The sample variance of Index A returns is 0.085, whereas the sample variance of Index B returns is 0.084. Assuming the samples are independent and the returns are normally distributed, which of the following represents the most appropriate test statistic? A. sample variance of Index A / sample variance of Index B B. (sample variance of Index A - sample variance of Index B)/SE of sample statistic C. sample variance of Index B / sample variance of Index A D. (sample variance of Index B - sample variance of Index A)/SE of sample statistic

A (Appropriate test = F-test) - A의 sample variance가 더 크니까 그게 분자로 감!

(중요) The cheapest-to-deliver (CTD) bond for a Treasury bond futures contract pays 4.0% semiannual coupons on January 1 and July 1. This CTD bond has a conversion factor of 1.12 and a quoted bond price of 98. Assume it is now April 1, 2010 and that the Treasury bond futures contract is to be delivered 180 days from today. The current risk-free rate of interest is 2.0%. What is the theoretical price for this T-bond futures contract? A. $86.58 B. $87.50 C. $96.97 D. $97.97

A 1. Quoted bond price에 다음 coupon date까지의 AI를 반영해서 dirty price를 구한다. 2. 다음에 받는 coupon을 현가화한다. 3. 해당 금액을 dirty price에서 빼서, 채권 자체의 금액만 남긴다. 4. [QB=QF*Conversion factor]에 따라, futures contract의 가격을 구한다.

An economist estimates a 60% probability that the economy will expand next year. The technology sector has a 70% probability of outperforming the market if the economy expands and a 10% probability of outperforming the market if the economy does not expand. Given the new information that the technology sector will not outperform the market, the probability that the economy will not expand is closest to: A. 67% B. 54% C. 33% D. 48%

A P(not expand I not outperform) = P(not expand and not outperform)/P(not outperform) ===== P(not expand and not outperform) = 0.40*0.90=0.36 P(not outperform) = (0.60*0.30)+(0.40*0.90) = 0.54 P(not expand I not outperform) = 0.36/0.54=0.6667 *캡처본처럼 binomial tree 그려주면 도움됨

Many different types of swaps exist including interest rate swaps, currency swaps, commodity swaps, equity swaps, and volatility swaps. A swaption is an option that gives the holder the right to enter into a swap. Which of the following statements about swaps and swaptions is most likely correct? A. Equity swap payments may be floating on both sides. B. Unlike options, premiums for swaptions are not dependent on the strike rate specified in the swaption. C. The most common reason for entering into commodity swap agreements is to speculate on commodities prices. D. For the fixed-rate payer in an S&P 500 Index swap, a negative index return does not requires a payment from the fixed-rate payer.

A [풀이] *Equity swap: 양쪽 다 floating 가능, payments unknown until the end of the settlement period. B. Like options, premiums for swaptions are dependent on the strike rate specified in the swaption. C. The most common reason for entering into commodity swap agreements is to control the costs of purchasing resources, such as oil and electricity. D. For the fixed-rate payer in an S&P 500 Index swap, a negative index return requires a payment from the fixed-rate payer to pay the percentage decline in the index.

The risk-free rate is 5% and the expected market risk premium is 10%. A portfolio manager is projecting a return of 12%. The portfolio has a beta of 0.7, and the market beta is 1.0. After adjusting for risk, this PF is expected to: A. equal the performance predicted by the CAPM. B. outperform the CAPM return. C. underperform the CAPM return. D. unable to determine based on the information provided.

A (CAPM 구할 때 첫 항인 rf는 무조건 더하기!!!!!!!!!!!!!!!)

For an option-free bond, which of the following are the effects of the convexity adjustment on the magnitude (absolute value) of the approximate bond price change in response to an increase in yield and in response to a decrease in yield, respectively? *Decrease in yield / Increase in yield A. Increase in magnitude / Decrease in magnitude B. Increase in magnitude / Increase in magnitude C. Decrease in magnitude / Decrease in magnitude D. Decrease in magnitude / Increase in magnitude

A (금리 하락에 따른 채권가격 상승은 더 많이, 금리 상승에 따른 채권가격 하락은 덜 떨어지는 것)

Firm X is looking to mitigate counterparty risk by centrally clearing trades through a central counterparty (CCP). The firm is aware of the some of the potential benefits of central clearing, but is concerned that the drawbacks have not been properly considered by its risk management department. Which of the following definitions is associated with the moral hazard problem of using a central counterparty? A. CCPs are expected to be designated as systematically important entities. B. Counterparties are likely to over-trade products for which the CCP underestimates risk. C. Losses arising from a counterparty's default are spread across all central clearing members. D. When margin calls are made, members have to liquidate sufficient assets to meet the margin calls.

A (중요한 기관이라고 정부에서도 알아주니까, CCPs may accept higher risk and may have less stringent risk management govenance - default 나도 정부에서 bail out 해줄 것이라고 생각)

(중요) Based on the information provided below, which of the following amounts are closest to the discount factors for d(0.5) and d(1.0), respectively? *Maturity / Coupon / Price 6 months / 5.70% / 101.426 1 year / 15.00% / 102.642 2 years / 8.20% / 99.574 d(0.5) / d(1) A. 0.98615 / 0.8860 B. 0.96528 / 0.8860 C. 0.98615 / 0.8760 D. 0.96528 / 0.8760

A (Discount factor 구하는건 ^0.5 같은 시간 개념 무시하고, 그냥 분자 그 자체라고 생각하기)

Bob Hatfield has his own money management firm with two clients. The accounts of the two clients are equal in value. It is Hatfield's opinion that interest rates will fall in the near future. Based upon this, Hatfield begins increasing the bond allocation of each PF. In order to comply with Best Practices in the GARP Code of Conduct, the analyst needs to: A. inform the clients of the change and tell them it is based upon an opinion and not a fact. B. make sure that the change is identical for both clients. C. file a report with the SEC of the new PF allocation D. perform all of these functions.

A (항상 opinion/fact 구분 지어서 disclose하는게 중요!)

WEB, an investment-banking firm, is the principal underwriter for MTEX's upcoming debenture issue. Lynn Black, FRM, is an analyst with WEB, and she learned from an employee in MTEXT's programming department that a serious problem was recently discovered in the software program of its major new product line. In fact, the problem is so bad that many customers have canceled their orders with MTEX. Black checked the debenture's prospectus and found no mention of this development. The red herring prospectus has already been distributed. According to the GARP Code of Conduct, Black's best course of action is to: A. inform her immediate supervisor at WEB of her discovery. B. keep quiet because this is material nonpublic inside information. C. notify potential investors of the omission on a fair and equitable basis. D. report her discovery to the Division of Corporation Finance of the SEC.

A - "Avoid disclosing any information received from a client, except to authorised fellow employees who are also working for the client." - "If the information concerns illegal activities by MTEX, Black may be obligated to report activities to authorities."

The futures market for corn is currently in backwardation. Knowing this fact, which of the following statements is most likely correct? A. Lenders require a rate of interest for lending out corn that is higher than the risk-free rate. B. The risk-free interest rate is higher than the rate of interest lenders require for buying and lending out corm. C. Annualised storage costs for corn are higher than the rate of interest lenders require for buying and lending out corn. D. The rate of interest lenders require for buying and lending out corn is higher than the annualised storage costs for corn.

A - Backwardation commodity market occurs when the lease rate is greater than the risk-free interest rate. - Storage cost는 무관한 개념

Given the information in the table below and given that the 2-year spot rate is 10.263%, what is the appropriate action of an arbitrageur? Assume annual coupons and compounding. *Bond A/B/C Maturity in years: 1/2/2 Coupon rate: 0%/0%/10% Price: 95.2381/82.6446/100 A. The arbitrageur should short the 1- and 2-year ZCBs and buy the 2-year CB. B. The arbitrageur should buy the 1- and 2-year ZCBs and short the 2-year CB. C. The arbitrageur should buy the 1-year ZCB and 2-year CB and short the 2-year ZCB D. The arbitrageur should short the 1-year ZCB and 2-year CB and buy the 2-year ZCB.

A 1. (계산기 활용) 2년 만기 ZCB의 YTM 구해서 주어진 spot rate과 비교하기: 10.00% 나오는데, 이는 주어진 10.263%보다 낮아, 이 ZCB의 가격이 비싸다는 것을 의미함. 2. 따라서 ZCB 두개를 short 하고, CB를 long 하면 차익거래 가능함.

Wierwille Systems is a start-up firm with a new technology it is seeking to bring to the marketplace. Because the technology is unproven, Wierwille is a considered a high-risk firm and carries a B-credit rating. The corporate treasurer expects interest rates to fall in the future, but given the company's start-up status he believes it is in the firm's best interest to issue high yield bonds with a coupon structure that will allow the firm to save on interest costs now while the firm is trying to get off the ground, even though it may cost them in the form of higher interest payments down the road. Given the situation, which of the following coupon structures is least likely to meet the treasurer of Wierwille Systems' goal? A. Reset bonds B. Step-up bonds C. Payment-in-kind (PIK) bonds D. Deferred-interest bonds (DIB)

A (A 제외 나머지는 early years에 돈 아낄 수 있게 해주지만, A는 매년 바뀌는거라 early years에 지출 적을 것이란 보장 X) ===== A. Reset bonds - Designated IBs periodically resetting the coupon to reflect market rates and the creditworthiness of the issue. B. Step-up bonds - A bond that pays a lower initial interest rate but allows for rate increases at periodic intervals. C. Payment-in-kind (PIK) bonds - A bond that pays interest in additional bonds rather than in cash during the initial period. D. Deferred-interest bonds (DIB) - A bond that pays all of its interest that has accrued in the form of a single payment made at a later date rather than in periodic increments.

An analyst for a brokerage firm made the following statement in a research report: "This company is expected to outperform the market based on significant forecasted increases in sales for the industry overall." The report continues with a risk analysis of the industry and company specific risks. With respect to this report, the analyst: A. did not violate the GARP Code of Conduct. B. violated the GARP Code of Conduct by failing to base recommendations on the facts. C. violated the GARP Code of Conduct by making a recommendation that may nor be suitable for all clients. D. violated the GARP Code of Conduct by failing to be familiar with all generally accepted risk management practices.

A (Industry forecasts = 적절한 근거)

VaR and ES are both measures of risk that can be applied at the PF level. Which of the following statements is most correct? A. ES does a better job that VaR at communicating the potential dollar loss below a given threshold. B. VaR will typically exceed the ES. C. ES does a better job than VaR at estimating the probability of loss. D. Both VaR and ES can show risk that is additively higher than the sum of the risk of constituent assets in the PF.

A (Subadditivity 성립 유무)

Big City Bank has contractually agreed to a $20,000,000 credit facility with Upstart Corp. Upstart will immediately access 40% of the total commitment (i.e. 60% remains outstanding). Big City Bank estimates a 1-year probability of default between 1% and 2% and assigns a 20% recovery rate. Which of the following amounts represents the difference between the minimum and maximum expected loss for Big City Bank? A. Less than $100,000 B. Between $100,000 and $200,000 C. Between $200,000 and $300,000 D. Greater than $300,000

A (Upstart에게 맡긴 40% 제외, 나머지 outstanding 60%에 대해서만 계산하기!)

An investor is following the real-time changes in the price of options on a particular asset. She notices that both a European call and a European put on the same underlying asset each have an exercise price of $45. The two options have six months to expiration and are both selling for $4. She also observes that the underlying asset is selling for $43 and that the rate of return on a 1-year T-bill is 6%. According to put-call parity, which series of transactions would be necessary to take advantage of any mispricing in this case? A. Sell the call, sell a T-bill equal to the present value of $45, buy the put, and buy the underlying asset. B. Buy the call, buy a T-bill equal to the present value of $45, sell the put, and sell the underlying asset. C. Buy the call, sell a T-bill equal to the present value of $45, sell the put, and buy the underlying asset. D. Sell the call, buy a T-bill equal to the present value of $45, buy the put, and sell the underlying asset.

A (그냥 put-call parity에 다 대입하면 됨)

A bank has $500 million in assets with a modified duration of 7 and $400 million in liabilities with a modified duration of 5. Accounting only for duration effects, the impact of a 50-basis-point parallel upward shift in the yield curve on the bank's equity value is closest to: A. $7.5 million decrease B. $7.5 million increase C. $15 million decrease D. $15 million increase

A (그냥 다 곱해서 비교하기)

(중요) The 3-month and 6-month LIBOR spot rates are 0.5% and 0.8%, respectively (assume continuous compounding). An investor enters into an FRA in which he will receive 1.3% (assuming quarterly compounding) on principal of $2,500,000 between months 3 and 6. What is the value of the FRA? A. $1,245 B. $4,950 C. $6,875 D. $7,450

A *1.1 = forward rate between 3 months and 6 months period. (FRA 가치 계산하는 공식 암기!!!!)

The standardised approach for calculating operational risk capital requirements uses beta factors for a given business line and annual gross income for business lines over a 3-year period. Which of the following business units has the highest beta factor? A. Trading and sales B. Retail banking C. Agency services D. Asset management

A ===== A. Trading and sales - 18% B. Retail banking - 12% C. Agency services 15% D. Asset management - 12%

아래 각각의 옵션이 왜 말이 되고 안되는지 설명하기 A. ATM American call option with a strike price of $50 on a stock that does not pay a dividend; exercise if the stock price doubles. B. American put option with a strike price of $25 on a stock currently selling for $50 that does not pay a dividend; exercise the option if the stock price falls by more than 80%. C. Deep ITM European call option with a strike price of $20 and a current stock price of $50; exercise immediately. D. Deep ITM American call option with a strike price of $100 where the stock has a dividend that exceeds the risk-free rate by 4%; exercise on the ex-dividend date.

A. ATM American call option with a strike price of $50 on a stock that does not pay a dividend; exercise if the stock price doubles. X -> 무배당 아메리칸 콜은 절대 조기행사 하지 않는다! B. American put option with a strike price of $25 on a stock currently selling for $50 that does not pay a dividend; exercise the option if the stock price falls by more than 80%. O -> 무배당 아메리칸 풋은 조기행사 한다! C. Deep ITM European call option with a strike price of $20 and a current stock price of $50; exercise immediately. X - 유러피안 옵션은 조기행사 불가! D. Deep ITM American call option with a strike price of $100 where the stock has a dividend that exceeds the risk-free rate by 4%; exercise on the ex-dividend date. X - 배당이 이자율보다 높으니 이 아메리칸 콜은 조기행사 가능, 단 ex-dividend date 전에 행사 해야 한다!

A US hedge fund manager is dealing largely with overseas investments. In the past six months, he was able to generate excess alpha by incorporating a strategy that was valid based on US strategies. Local customs prohibited overseas traders from making the trades during the same time intervals. Has the fund manager violated the GARP Code of Conduct? A. No, since US standards were upheld, and he is accountable to the standards of his local ordinances. B. Yes, he should seek the higher local standards when there is a conflict. C. No, there is no evidence of any violation related to illegal trading, only a difference based on international codes, which is acceptable. D. Yes, he did not indicate the accuracy of the performance and is potentially overstating future expected returns based on strategies that are unlikely to be obtainable in the futures.

B

A risk manager with Allied Investments is computing the expected return for Stock ABC with the arbitrage pricing theory (APT) model. He quickly realises that a major weakness of the APT is that it offers no guidance as to the identification of the appropriate risk factors to use when applying the model. As a result, the manager attempts to apply the Fama-French three-factor model. Given the following data for Stock ABC, what is the abnormal performances of Stock ABC after controlling for its exposures to the market, firm size, and book-to-market factors? - Expected return of Stock ABC = 6% - Risk-free rate = 2% - Market beta = 0.50 - Market risk premium = 6% - Firm size (SMB) beta = 0.25 - Firm size risk premium = 4% - Book-to-market (HML) beta = 0.3 - Book-to-market risk premium = 4% A. 1.0% B. 1.2% C. 3.0% D. 3.5%

B

Consider the following estimated time series model: Xt = -6.0+1.1(Xt-1)+0.3(Xt-2)+et. This model is estimated over 50 periods. The value of the time series for the 49th observation is 20 and the value of the time series for the 50th observation is 22. What is the out-of-sample forecast for the 52nd observation? A. 24.40. B. 27.22. C. 28.72. D. 42.00

B

The Black-Scholes-Merton put option formula differs from the BSM call option formula in that the put option formula assumes: A. a long position in the underlying security. B. a short position in the underlying security and a long position the bond. C. a nonconstant return volatility of the underlying security price. D. a long position in the bond and a higher risk-free rate.

B

The CFO of Keyland Bank in Belgium is concerned about exchange rates and the effect that rate movements may have on GDP. In particular, he is concerned with the euro appreciating against the US dollar, as he knows the US is one of Belgium's primary trading partners. He has asked his controller to assess the probability that either the euro will appreciate relative to the US dollar or GDP will fall. The controller has determined the following probabilities: - Probability that the euro will appreciate relative to the dollar: 38% - Probability that GDP will fall given that the euro has appreciated: 82% - Unconditional probability that GDP will fall: 44% Based on the information listed, the controller should determine that the probability that either the euro will appreciate or GDP will fall will be closest to: A. 31%. B. 51%. C. 65%. D. 82%.

B

Tom McDonald is in the marketing department atTail Advisers, LLc. (TA). He is trying to formulate a description for a VaR calculation to be included in TA's recently updated web page. The specific VaR value is 5 million euros, which was calculated at the daily frequency, and the statistical confidence level associated with the calculation is 95%. McDonald recognises that every VaR calculation should contain three elements when conveyed. Which of the following appropriately captures the requisite VaR information and should be used on TA's web page? A. This VaR calculation indicates that for every 5 out of 100 trading days, you should expect to lose no more than 5 million euros. B. This VaR calculation indicates that for every 5 out of 100 trading days, you should expect to lose at least 5 million euros. C. This VaR calculation indicates that for every 95 out of 100 trading days, you should expect to lose at least 5 million euros. D. This VaR calculation indicates that for every 95 out of 100 trading days, you should expect to lose no more than 4.75 million euros.

B

A trader has issued the following orders to her broker when GMB Corp. is trading at 29 and RML Corp. is trading at 17: 1. Buy 200 shares of GMB if the price increases to 31. 2. Sell 400 shares of RML for 18 or more. This trader has issued what types of market orders? A. GMB: limit buy / RML: limit sell B. GMB: stop buy / RML: limit sell C. GMB: limit buy / RML: stop sell D. GMB: stop buy / RML: stop sell

B - Limit 어쩌구: "limit price 이상/이하"의 기준 - Stop 어쩌구: 정확한 하나의 "stop price"에만 적용

The current spot price for cotton is $0.325 per pound. The annual risk-free rate is 3.0%, and the cost to store and insure cotton is $0.002 per pound per month. A 3-month futures contract for cotton is trading at $0.3368 per pound. Is there an arbitrage opportunity available, and if so, how should an investor take advantage of it? A. There is no arbitrage opportunity available. B. Yes; the investor should sell the futures contract, borrow at the risk-free rate, and buy the spot asset. C. Yes; the investor should buy the futures contract, sell the spot asset, and lend at the risk-free rate. D. Yes; the investor should buy the futures contract, borrow at the risk-free rate, and buy the spot asset.

B (Storage cost가 (So+U)로 들어가고 이 전체를 현가화해주는게 중요)

For the past four years, the returns on a PF were: 6%, 9%, 4%, and 12%. The corresponding returns of the benchmark were 7%, 10%, 4% and 14%. The risk-free rate of return is 7%, and downside deviation is 1.58%. The PF's Sortino ratio is closest to: A. 0.3000. B. 0.4747. C. 0.7000. D. 1.1068.

B - Rp: 실제 returns의 산술평균 - Rmin: 주어지지 않았으니 risk-free rate 활용하기

The conditional prepayment rate for an MBS is 0.15% for the first month after the origination, and it is estimated to increase 0.15% every month for the next 36 months. What is the single monthly mortality rate (SMM) for the seventh month, assuming a 125 PSA? A. 0.013100 B. 0.001098 C. 0.001125 D. 0.001509

B CPR을 PSA에 따라 변환해주는게 중요 (100 PSA가 기준)

Which of the following statements regarding nonparametric versus parametric VaR methods is correct? A. Nonparametric methods require adjustments for skewness and fat tails. B. The multivariate density estimation (MDE) form of nonparametric methods allows for flexibility relative to economic conditions. C. Nonparametric methods permit the use of very small sample sizes. D. The nonparametric method naturally yields large data subsets when conducting historical simulations.

B [MDE] - A version of nonparametric approaches - Permits flexibility in weightings and the introduction of economic variable dependence. *Nonparametric methods do not use data as efficiently as parametric methods - so they require much larger data sets. *HS: data sets can be fragmented & small.

An investor is considering a 10-year stripped US Treasury and a 10-year Treasury note, both with a YTM of 4.8%. Compared to the note, the strip has: A. more interest rate risk and less liquidity risk. B. less reinvestment risk and more interest rate risk. C. more liquidity risk and less interest rate risk. D. more reinvestment risk and less interest rate risk.

B [Strip = ZCB] - 중간에 쿠폰 없으니까 재투자 불가

Risk-free interest rates on a continuously compounded basis are 4% in the country of Effingham (EFG) and 6% in the country of Hijastan (HIJ). The spot exchange rate is 2.3875 EFG per unit of HIJ. The arbitrage-free 8-month forward exchange rate is closest to: A. 2.3402. B. 2.3559. C. 2.4195. D. 2.4357.

B 항상 환율이 "A per unit of B" 이면 B가 외국통화!

Colleagues Benjamin Ecko and Bernard Charles recently discussed the application of the normal distribution for random variables. Ecko claimed that the z-statistic measures the distance, in standard deviation units, that a given observation is from the population mean. Charles claimed that there is a 95% chance that the z-statistic lies above negative 1.96. Regarding the statements of Ecko and Charles: A. Ecko is correct; Charles is correct. B. Ecko is correct; Charles is incorrect. C. Ecko is incorrect; Charles is correct. D. Ecko is incorrect; Charles is incorrect.

B (Charles의 주장에서 나온 1.96라는 statistic은 two-tailed test - 5%가 쪼개져서 2.5%씩 각 tail에 위치; 온전히 95%가 다 위/아래에 있으려면 one-tailed test여야 함)

A hedge fund with a 2-plus-20% fee structure has equal probabilities of a 10% loss or a 30% gain in its first year. The expected return to an investor in the fund for the first year is closest to: A. -2.0% B. 5.2% C. 8.8% D. 17.6%

B (Loss 상황에서도 hedge fund는 2% 수수료 떼어감을 반영하는게 중요)

The CRO of a pension fund has asked an analyst to evaluate various return measures of the fund's equity portfolio. If the CRO is most interested in a measure of the fund's total risk, the analyst should calculate: A. Jensen's alpha. B. the Sharpe ratio. C. the Treynor ratio. D. the information ratio.

B (Sharpe: SD로 나누는데, SD는 systematic + unsystematic risk 둘 다 측정)

A $2 million notional swap pays a floating rate based on 6-month LIBOR and receives a 4% fixed rate semiannually. The swap has a remaining life of 15 months with pay dates at 3, 9, and 15 months. Spot LIBOR rates are as follows: - 3-month: 3.2% - 9-month: 3.5% - 15-month: 3.8% LIBOR at the last payment date was 4.2%. What is the value of the swap to the fixed rate receiver? A. -$1,958 B. -$1,719 C. +$1,719 D. +$1,958

B *B(floating) 현가화 하는 단계 잊지 말기!

You are given the following information about a call option: - Time to maturity: 3 years - Continuous risk-free rate = 3% - Continuous dividend yield = 2% - N(d1) = 0.7 What is the delta of this option? A. -0.64. B. 0.36. C. 0.66. D. 0.70.

C

An investor is looking to create an options PF on XYZ stock that will have virtually zero vega exposure while maximising the ability to profit from increases in interest rates. If the current price of XYZ is $50, which of the following would accomplish his goals? A. Sell a call with a strike price of $50. B. Buy a call with a strike price of $25. C. Sell a put with a strike price of $50. D. Buy a put with a strike price of $25.

B - Vega: 0 for deep ITM/OTM options - Rho: highest for ITM options 따라서 둘 다 충족시키기 위해서는 ITM option 중 제일 수익성이 좋은 것을 골라야 함.

There are two arbitrary parameters used to calculate VaR: the holding period and the confidence level. Assume that the given return distribution has a mean greater than zero. Which of the following pairs correctly describes the impact on VaR for increases in the holding period and increases in the confidence level, respectively? *Holding period increases / confidence interval increases A. VaR increases at a higher rate / VaR increases at an increasing rate B. VaR increases at a lower rate / VaR increases at an increasing rate C. VaR increases at a higher rate / VaR increases at an decreasing rate D. VaR increases at a lower rate / VaR increases at an decreasing rate

B (그냥 암기)

A portfolio manager runs a regression of monthly stock returns on four independent variables over 72 months. If the total sum of squares for the regression is 320 and the sum of squared errors is 140, the adjusted R^2 will be closest to: A. 40.4% B. 43.8% C. 53.6% D. 56.3%

C

A senior manager of Minan Bank in Scotland is developing the supporting documentation for the data aggregation and risk reporting practices that the bank plans to have in place by the end of the upcoming fiscal year. In following the Governance principle established by the Basel Committee for effective data aggregation and reporting, she should ensure that the practices she is documenting are: A. written and put into place by the bank's board of directors. B. adaptable to any potential changes to location or legal organisation. C. reviewed and validated by independent individuals with IT and risk reporting expertise. D. kept segregated from the data aggregation and reporting processes of any future acquired banks.

C

An investment advisor has a client base composed of high net worth individuals. In her personal portfolio, the advisor has an investment in Torex, a company that has developed software to speed up internet browsing. She has thoroughly researched Torex and believes the company is financially strong yet currently significantly undervalued. According to the GARP Code of Conduct, the investment advisor may: A. not recommend Torex as long as she has a personal investment in the stock. B. not recommend Torex to a client unless her employer gives written consent to do so. C. recommend Torex to a client, but she must disclose her investment in Torex to the client. D. recommend Torex to a client without disclosure as long as it is a suitable investment for the client.

C

Barings Bank was forced to liquidate due to Nick Leeson's trading positions. The main reason cited for the accumulation of such a large loss position has been attributed to which of the following? A. Adverse movements in Japanese equity prices. B. Inappropriate positions taken by Leeson and her traders. C. Control of the trading, accounting, and reporting activities. D. Lack of knowledge about how an arbitrage trade should be structured.

C

Isabelle Quintana of Alpha Advisor Associates determined that the appropriate single-factor model generating exceptional performance for Temp Hiring, Inc. is a function of employment. Given various expectational inputs, it was determined that Temp Hiring's expected return is 12%, and its sensitivity to employment surprises is 1.5%. What is the return generated for Temp Hiring if actual employment deviated from expected by 4%? A. 5%. B. 12%. C. 17%. D. 22%.

C

MGRM offered customers contracts to buy fixed amounts of heating oil and gasoline at a fixed price over a 5- over 10-year period. The customer contracts effectively gave MGRM a short position. MGRM hedged exposure using a rolling hedging strategy. This strategy is best described as: A. buying futures contracts of different expirations and allowing them to expire in sequence. B. buying futures contracts of different expirations and closing out the position shortly before expiration. C. using short-term futures to hedge a long-term risk exposure by replacing them with longer-term contracts shortly before they expire. D. using short-term futures contracts with a larger notional value than the long-term risk they are meant to hedge.

C

The financial crisis of 2007-9 provided an opportunity for regulators to create rules that specifically addressed risks inherent in financial institutions. Which of the following regulatory structures was created in direct response to the crises, as well as its corresponding new or additional regulatory considerations? A. Basel II to include trading and lending activities when calculating capital adequacy. B. Basel IV to include regulator and regulation concentration risks when calculating capital adequacy. C. Basel III to include firm-specific and market risks when calculating overall risk profile. D. Basel III to include commodity trading and risk-weighted asset capital adequacy impacts.

C

The following table provides the initial price of a C-STRIP, as well as its present value after application of a one basis point shift in four key rates: Initial value: 25.23168 2-year shift: 25.23362 5-year shift: 25.23968 10-year shift: 25.23968 30-year shift: 25.12508 The key-rate duration for a 30 year shift is closest to: A. -9.1 B. 31.6 C. 42.3 D. 81.9

C

An analyst derives expected returns for stocks A and B. Both are efficiently priced. If the beta for Stock A is 0.72 and the beta for Stock B is 1.18, the slope of the SML for Stock A relative to the slope of the SML for Stock B will be: A. lower B. higher C. the same D. flat

C (Since both stocks are "efficiently priced," it means that their returns are both represented by the SML. The slope of the SML is the differences between the expected return on the market and the risk-free rate, and this differential is the same along the entire SML.) *결국 efficiently priced assets는 어쨋든 다 하나의 SML 위에 놓인 것이기 때문에 베타가 달라도 같은 기울기!

Cooper Industries (Cooper) is a pay-fixed counterparty in an interest rate swap. The swap is based on a notional value of $2,000,000, and Cooper receives a floating rate based on the 6-month Hong Kong Interbank Offered Rate (HIBOR). Cooper pays a fixed rate of 7% semiannually. A swap payment has just been made. The swap has a remaining life of 18 months, with pay dates at 6, 12, and 18 months. Spot HIBER rates are shown in the table below. 6-month HIBOR = 6.5% 12-month HIBOR = 6.8% 18-month HIBOR = 7.5% 24-month HIBOR = 7.7% The value of the swap to Cooper is closest to: A. $0 B. $6,346 C. $9,431 D. $12,486

C (방금 막 swap payment가 이뤄진거니까, the value of the floating rate payments received by Cooper at the payment date is the value of the notional principal= $2,000,000.)

An analyst develops the following probability distribution about the state of the economy and the market. Initial Probability P(A) / Conditional Probability P(BIA) Good economy 60% / Bull 50%, normal 30%, bear 20% Poor economy 40% / Bull 20%, normal 30%, bear 50% Which of the following statements about this probability distribution is least likely accurate? A. The probability of a normal market is 0.30. B. The probability of having a good economy and a bear market is 0.12. C. Given that the economy is good, the chance of a poor economy and a bull market is 0.15. D. Given that the economy is poor, the combined probability of a normal or a bull market is 0.50.

C (조건이 good economy니까 poor economy일 가능성은 아예 0임)

Which of the following statements, given the information in the following table, is correct? Company / Fixed Borrowing Cost / Floating Borrowing Cost A / 5.75% / LIBOR + 35 bps B / 5.00% / LIBOR + 10 bps A. Company B has a comparative advantage in borrowing in both categories. B. There is a potential aggregate savings spread of 75 bps. C. Under a swap where both companies share the potential savings equally, Company A could end up borrowing at 5.5% fixed. D. Under a swap where both companies share the potential savings equally, Company B could end up borrowing at 4.75% fixed.

C ===== - Potential aggregate savings spread: (5.75-5.00)-([LIBOR+35bps]-[LIBOR+10bps]) = 50 bps - 위를 반씩 나눈게 각 회사의 이득! 따라서 A사는 [5.75-0.25=5.50]에 빌릴 수 있고, B사는 [(LIBOR+10bps)-0.25=(LIBOR-15bps)]에 빌릴 수 있음

A fund manager holds a $75 million portfolio with a duration of nine and a one-year hedging horizon. There is an appropriate one-year futures contract quoted at 104-13 with a duration of eight and a contract size of $100,000. Which of the following actions should the fund manager undertake to provide an appropriate hedge for small changes in yield? A. Short 639 futures contracts. B. Long 639 futures contracts. C. Short 809 futures contracts. D. Long 809 futures contracts

C *104-13 = 104+(13/32) = 104.40625 *Contract size $100,000 = 100짜리 계약 1,000개 *104.40625*1,000 = 104,406.25 (항상 PF*D/Hedging*D)

Which of the following statements is not correct regarding the use of implied volatility to predict future volatility? A. The implied volatility model assumes that asset prices follow a continuous time lognormal diffusion process. B. Options with the same underlying assets may trade at different "vol" terms. C. Implied volatility is less than actual volatility on average. D. Implied volatility data is limited to a few assets and markets.

C - 연구 결과, 주로 implied volatility > actual volatility

A buffalo farmer is concerned that the price he can get for his buffalo herd will be less than he has forecasted. To protect himself from price declines in the herd, the farmer has decided to hedge with live cattle futures. Specifically, he has entered into the appropriate number of cattle future positions for September delivery that he believes will help offset any buffalo price declines during the winter slaughter season. The appropriate position and the likely sources of basis risk in the hedge are, respectively: A. short; choice of futures delivery date. B. short; choice of futures asset. C. short; choice of futures delivery date and asset. D. long; choice of futures delivery date and asset.

C [Sources of basis risk] 1. Choice of futures delivery date: winter slaughter season에 대비하는 것 치고 9월 delivery는 기간 mismatch. 2. Choice of futures asset: cattle & buffalo price는 perfect correlation이 아니기 때문에 impacts on the basis of the cattle futures contract and spot buffalo meat.

A PF manager has a PF of investment securities for a commercial bank. The PF has a current market value equal to $5,334,500 with a daily variance of 0.0002. Over the years, the PF has increased its proportionate holdings of equity securities, and the manager is concerned that the PF may be riskier than the bank's internal regulations allow. The annual VaR (5%) assuming there are 250 trading days in a year is closest to: A. 0.52% B. 2.33% C. 36.89% D. 43.82%

C [중요] - $5,334,500는 무시해도 되는 값 - daily variance of 0.0002 -> 루트해서 SD 만들기 - 5%: one-tailed 이기 때문에 1.97 아닌 1.65 사용

Analyst Joseph Lockwood examines a single-factor regression for a hedge fund and makes the following two statements: Heteroskedasticity exists if the regression residuals are correlated with their lagged values. II. Heteroskedasticity causes the t-statistics of the regression to be incorrectly calculated using OLS methods. Which of Lockwood's claims are correct? A. Statement I and II are both correct. B. Statement I is correct and II is incorrect. C. Statement II is correct and I is incorrect. D. Statement I and II are both incorrect.

C (I. Heteroskedasticity exists if the variance of the residuals is not constant.)

The futures contracts for an investment asset and a consumption asset have the same time to maturity and interest rate. The spot prices of the two assets are also equal. Assuming the convenience yield is zero, we would expect that the futures price on the consumption asset will: A. be less than the futures price on the investment asset. B. be equal to the futures price on the investment asset. C. be greater than the futures price on the investment asset. D. start out greater than, but become less than the futures price of the investment asset as the contract approaches maturity.

C (Storage cost가 (So+U)로 들어간다는 것 기억!)

A PF manager is using a moving average model in which she assumes weights decline exponentially back through time. The original volatility was calculated at 1.5%. However, she believes a decay factor of 0.96 for an EWMA model is appropriate for modelling a more realistic variance measures. If the stock market return is 1% today, what is the new estimate volatility using the EWMA model? A. 0.97% B. 1.31% C. 1.48% D. 1.58%

C (마지막 결과값은 σ^2 니까 volatility(=SD) 구하기 위해 루트해주는게 중요)

Stampede Capital Management has entered into a currency swap with Polar Investments in which Stampede pays 3.5% per annum in euros and receives 2.8% per annum in dollars. Stampede pays a principal amount of $130 million to Polar, while Polar pays €100 million to Stampede at inception of the swap. The yield curve in both Germany and the US is upward-sloping with the following interest rates: Germany: 4.00% (1Y), 4.50% (2Y) US: 2.00% (1Y), 2.25% (2Y) The swap will last for another two years and the current exchange rate is $1.33/€. What is the value of the currency swap to Stampede? A. $0.21 million B. $0.54 million C. $0.85 million D. $1.95 million

C (쿠폰 계산할 때 크로스로 계산하는게 중요: $는 $끼리, €는 €끼리)

A $1,000 par corporate bond carries a coupon rate of 6%, pays coupons semiannually, and has 10 coupon payments remaining to maturity. Market rates are currently 5%. There are 90 days between settlement and the next coupon payment. The dirty and clean prices of the bond, respectively, are closest to: A. $1,043.76, $1,013.76 B. $1,043.76, $1,028.76 C. $1,056.73, $1,041.73 D. $1,069.70, $1,054.70

C *구한 PV에 coupon date까지 90일 남았다는 사실을 반영해준 다음 [PV*(1+r/2)^(90/180)] AI를 빼야 함.

Suppose that a call option on Stock Y with a strike price of $50 trades at $3 and that the delta on this option is equal to 0.5. A derivatives trader currently owns 10,000 shares of Stock Y and delta hedges his position with 200 call option contracts. After the hedge is initiated, the price of Stock Y increases, which increases the delta of the call option to 0.8. In order to maintain his delta hedge, he should: A. buy 4,000 shares B. sell 4,000 shares C. buy 6,000 shares D. sell 6,000 shares

C - 200 call option contracts = 20,000 shares (20,000개 가지고 10,000개를 hedge 중인 것) - 20,000*0.5=10,000 (원래 delta=0.5) - 20,000*0.8=16,000 (새로운 delta=0.8) - 따라서 10,000 -> 16,000, 6,000 shares must be bought.

Suppose a particular fixed-income instrument offers annual payments in the amount of $10 per year for 20 years (without any additional payment at maturity). The current price for this instrument is $150. The yield to maturity (YTM) on this security is closest to: A. 0.6% B. 1.4% C. 2.9% D. 8.5%

C ===== N=20 PMT=10 PV=-150 CPT -> I/y=2.91%

Assume that a fixed PF manager purchased a bond for $102 six months ago and financed this purchase at an annual rate of 0.5%. If the bond is currently selling for $110 and paid a $4 coupon today, what is the gross and net realised return for this bond? A. Gross realised return is 7.84% and net realised return is 7.34%. B. Gross realised return is 7.34% and net realised return is 7.84%. C. Gross realised return is 11.51% and net realised return is 11.76%. D. Gross realised return is 11.76% and net realised return is 11.51%.

D

In the case of Barings Bank, Nick Leeson incurred huge trading losses. Which of the following statements correctly describes one of the factors that led to the bankruptcy of Barings? A. Barings had insufficient liquidity to cover marked to market losses. B. Leeson had a supervisor control the back-office functions on his trades. C. Leeson held speculative double short positions in the market for Nikkei 225 futures contracts. D. There was ambiguity concerning who was responsible for performing specific oversight functions.

D

To equitise the cash portion of assets under management, a portfolio manager enters into a long futures position on a stock index with a multiplier of 250. The cash position is $5,000,000, which at the current futures value of 1,000 requires the manager to be long 20 contracts. If the current initial margin is $12,500 per contract, and the current maintenance margin is $10,000 per contract, the variation margin the portfolio manager needs to advance if the futures contract value falls to 985 at the end of the first day of the position is closest to: A. $25,000. B. $30,000. C. $50,000. D. $75,000

D

One of the most popular methods for estimating volatility is the generalised autoregressive conditional heteroskedastic (GARCH)(1,1) model. Assume the parameters of a GARCH(1,1) model are as follows: weighted long-run variance is 0.00005, weighting on previous period's return is 0.03, and weighting on previous volatility estimate is 0.94. If daily volatility is estimated to be 2%, and today's stock market return is 0.6%, what is the new estimate of standard deviation? A. 1.38% B. 1.45% C. 1.93% D. 2.07%

D *상황에 따라 Square/square root 잊지 말고 해주는게 중요

A risk manager is reviewing a briefing on risk put together by one of his newer colleagues. Reading over several of the different types of risk alluded to in the briefing, which of the following statements contained in the briefing is most accurate regarding the risks faced by central counterparties (CCPs)? A. The potential loss in value of sovereign bonds held as margin by counterparties is captured by margin risk. B. Wrong-way risk occurs when exposure to a counterparty is positively correlated with the credit quality of the counterparty. C. Policy risk occurs when margin funds are at risk for losses due to investment actions outside of the stated investment policy. D. Concentration risk represents a lack of diversification when clearing members and margins are located in a single geographic area.

D - The potential loss in value of sovereign bonds held as margin by counterparties is captured by sovereign risk. - Wrong-way risk occurs when exposure to a counterparty is negatively correlated with the credit quality of the counterparty. - Investment risk occurs when margin funds are at risk for losses due to investment actions outside of the stated investment policy.

An analyst observes that the beta of a traded security is 1.3, the market return is 6%, and the risk free rate is 1%. The analyst forecasts that the security will return 7% over the next year. Based on these assumptions, the security is: A. overvalued, because the forecasted return exceeds the required return. B. undervalued, because the forecasted return exceeds the required return. C. undervalued, because the required return exceeds the forecasted return. D. overvalued, because the required return exceeds the forecasted return.

D CAPM = 0.01+1.3(0.06-0.01) = 0.075 = 7.5%

What are the minimum values of an American-style and a European style 3-month call option with a strike price of $80 on a non-dividend-paying stock trading at $86 if the risk-free rate is 3%? A. A=$6.00 / E=$6.00 B. A=$5.96 / E=$6.00 C. A=$6.00 / E=$6.59 D. A=$6.59 / E=$6.59

D Minimum value 구할 때: Max(0, St - X/(1+rf)^(T-t)) 공식 활용 *(St-X) 전체를 현가화하는게 아니라, 현가화한 행사가격을 So에서 빼는 것!

Which of the following statements regarding the factors leading to the downfall of LTCM is correct? A. Their trading strategies for fixed income instruments were based on the notion that the credit spreads would ultimately increase. B. Their trading strategies for equity options were based on the notion that market volatility would ultimately increase. C. Their balance sheet leverage was far above the levels of other large investment banks. D. Their models assumed that low-frequency/high-severity events were uncorrelated over time.

D [A/B가 아닌 이유] - Credit spread/volatility가 증가하는게 아니라 결국 평균 수준으로 회귀할 것이라고 생각함 [C가 아닌 이유] - B/S leverage는 그냥 다른 은행들이랑 비슷했음

A supervisor at Country Bank is examining the Basel Committee's principles for effective risk data aggregation and reporting. Which of the following statements would be incorrect regarding the role that supervisors should play in monitoring and implementing these principles? Supervisors should: A. have a variety of tools available to address risk data aggregation and reporting deficiencies. B. test a bank's risk data aggregation and reporting capabilities for both normal and stress scenarios. C. use internal and external auditors and have access to all documentation produced from internal validations and audit reports. D. limit sharing roadblocks and constraints when evaluating the quality of risk data aggregation and reporting capabilities with supervisors in other jurisdictions.

D ("limit" 하면 안되고 오히려 나서서 share 해야 함!)

(중요) SCU stock is currently priced at $106 per shares, and the risk-free interest rate is 3.25%. Assuming that SCU does not pay any dividend, what is the lower bound of an American put option on SCU that expires in three months and has an exercise price of $110? A. $0. B. $0.48. C. $3.11. D. $4.00.

D (110-106=4)

Canadian Bank, Inc., (CBI) has the following annual gross income amounts in its business lines over its most recent three years: Retail banking: $380m(2018), $344m(2017), $326m(2016) Commercial banking: $712m(2018), $645m(2017), $599m(2016) Corporate finance: $846m(2018), $777m(2017), $687m(2016) Using the standardised approach, which of the following amounts represents CBI's operational risk capital requirement for 2019? (Assume that beta factors for retail banking, commercial banking, and corporate finance are 12%, 15%, 18%, respectively.) A. $253.2 million B. $265.8 million C. $274.9 million D. $278.4 million

D (먼저 각 BU 마다 산술평균 내고, 각각의 beta 곱해서 가중평균 내기)

(답 이해 안감) An analyst determines that there is a 50% chance the economy will grow and that there is a 50% chance the economy will go into a recession. There is also a 37.5% chance that ABC stock will rise in price. Given that ABC stock has risen in price, what is the probability the economy has grown? A. 30% B. 50% C. 70% D. 80%

D (왜 P(UIG)=0.60?)

Consider an open-end mutual fund that owns $1.5 billion in equities, $625 million in bonds, and $58 million in cash. The fund owes $2.12 million in management fees payable at this point in the quarter, and it has 41.8 million shares outstanding. What is this fund's net asset value (NAV), and how often is this value computed? *NAV / Calculation frequency A. $22.27 / Close on trading each day B. $22.27 / Continuously throughout the trading day C. $52.17 / Continuously throughout the trading day D. $52.17 / Close on trading each day

D [NAV = (total assets - total liabilities)/number of outstanding shares] *Assets include equities, bonds, and cash

You are following the banking sector and are interested in the estimated loss for Bank 1, which reports earnings in two weeks. Bank 2 has already reported, and its loss is known to be $26 million. Bank 2 just reported annual revenue of $3.2 billion, and Bank 1 is expected to report annual revenue of $2.6 billion. What is your estimated loss for Bank 1? A. $20.895 million B. $21.125 million C. $26.789 million D. $24.787 million

D (은행의 상대적 revenue 크기에 따라 estimated loss를 조정하는 scale adjustment 방식 활용; 베타 = 통상적으로 0.23) *26,000,000*(2.6/3.2)^0.23 = $24,787,499.759

Which of the following items would not fall within any one of the official Basel II defined event types regarding operation risk according to the Basel Committee on Banking Supervision? A. Criminal liability arising from tax evasion. B. Legal liability arising from employee discrimination. C. Damage arising from natural disasters. D. Loss arising from inappropriate choice of acquisition target.

D [Inappropriate choice of acquisition target] = An example of strategic risk-loss arising from a poor strategic business decision *나머지는 다 operational risk의 일종 (A=internal fraud의 예시)

Suppose you are trying to estimate the expected return and variance for a 6-day period performance of the S&P 500 Index. Assume that daily movements in the S&P 500 are binomial random variables. Based on historical data there is a 63% probability that the S&P 500 Index will increase and a 37% probability that it will decrease. Assuming that daily movements in the S&P 500 are independent, what is the expected value and variance of the number of positive days in a 6-day period? A. Expected return is 0.63 and variance is 0.26. B. Expected return is 3.14 and variance is 0.68. C. Expected return is 3.25 and variance is 1.21. D. Expected return is 3.78 and variance is 1.40.

D [Random binomial variable] - Mean = np = 6*0.63 - Variance = np(1-p) = 6*0.63*0.37

Consider a 1-year European call option with a strike price of $27.50 that is currently valued at $4.10 on a $25 stock. The 1-year risk-free rate is 6% compounded annually. Which of the following is closest to the value of the corresponding put option? A. $0.00 B. $4.95 C. $5.00 D. $5.04

D (Continuous compounding 아니고, annual compounding이라는게 중요!)

Regional Bank has been evaluating the numerous differential data sources and processes used among its units after a decade-long acquisition program. One of the interesting findings relates to the bank determining that individual customers were being represented across systems with different customer identification codes. Which of the following represents potentially the biggest risk that different identification codes have on Regional Bank? A. Marketing risk due to sending multiple offers to the same customer. B. Reputational risk due to overestimating the needs of the bank's customer base. C. Regulatory risk due to not following statutory data quality guidelines. D. Concentration risk due to data not indicating the true credit risk of individual customers.

D = Same customer's account is being represented as multiple accounts opens the door for potentially excessive credit risk to that single client.

만약 N(d1)으로 구한 delta=0.7324 & 75,000 shares in a PF: how many call options are necessary for a delta-neutral hedge?

콜(울타리)/주식(양)=1/0.7324 따라서 콜/75,000=1/0.7324, 콜=(1/0.7324)*75,000=102,403개 필요함