Topic 35 to 39

Test ID: 8451033

Question #1 of 96

Question ID: 439133

Connor Brooski, FRM is examining a Eurodollar contract for a futures contract that is maturing in six months. At that time, the
90-day forward LIBOR six months from now is relatively low, around 1.75%. Brooski has been following the daily marking to
market of the futures contract and has noted differences between actual forward rates, and those rates implied by the futures
contracts. What effect does the use of the convexity adjustment have on this difference?
A) The difference is increased by using the convexity adjustment.
B) The difference is reduced by using the convexity adjustment.
C) The convexity adjustment will eliminate the difference.
D) There is no difference in the adjustment to the rates as a result of the convexity adjustment.

Question #2 of 96

Question ID: 439070

The minimum variance hedge ratio is equal to the product of the correlation coefficient between the spot and futures price
changes and the ratio of the:
A) standard deviation of the spot to the standard deviation of the futures.
B) variance of the futures to the variance of the spot.
C) variance of the spot to the variance of the futures.
D) standard deviation of the futures to the standard deviation of the spot.

Question #3 of 96

Question ID: 438680

Which of the following increases the cost of rolling a long hedge (i.e., using long futures contracts to hedge a pre-existing short
position)?
I. Futures prices rising above the spot price.
II. Futures prices falling below the spot price.

A) Neither I nor II.

B) II only.
C) Both I and II.
D) I only.

Question #4 of 96

Question ID: 439157

Two analysts are discussing the proper use of swaps, and work with clients to design all types of swaps. Which of the following
types of swaps allow swap payments to be floating on both sides, with payments not known until the end of each period?

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A) Equity swap.
B) Volatility swap.
C) Interest rate swap.
D) Commodity swap.

Question #5 of 96

Question ID: 439134

John Jordan manages a bond portfolio valued at $11.2 million, which has a duration of five years. To hedge against an increase
in interest rates, he wishes to employ interest-rate futures. The deliverable on the current futures contract has a duration of
seven years, and the futures contract is trading at 97.5 with a contract size of $100,000. To hedge the position, Jordan must:
A) buy 54 contracts.
B) sell 54 contracts.
C) sell 82 contracts.
D) buy 82 contracts.

Question #6 of 96

Question ID: 439093

A 12-year, 8 percent semiannual coupon bond with $100 par value currently trades at $78.75 and has an effective duration of 9.8
years and a convexity of 130.0. What is the price of the bond if the yield falls by 150 basis points?
A) $95.43.
B) $86.47.
C) $67.17.
D) $91.48.

Question #7 of 96

Question ID: 439117

A semi-annual pay bond with a $100 par value pays coupons on March 1 and September 1. The annual coupon is 8%, and it is
currently June 13. Compute the accured interest of this bond as a T-bond.
A) $2.29.
B) $4.58.
C) $4.52.
D) $2.26.

Question #8 of 96

Question ID: 439137

Company A and Company B enter into a 2 year plain vanilla interest rate swap. Company A agrees to pay Company B a periodic fixed
rate on a notional principal over the swap's tenor. In exchange, Company B agrees to pay Company A a periodic floating rate on the

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same notional principal. Assume currency is the same. The payments will be made semi-annually. The reference rate is the 6-month
LIBOR. The fixed rate of the swap is 0.95%, and the notional principal is $100 million. 6-month LIBOR rates are as follows:
Beginning of Period

LIBOR

0.65%

0.85%

1.10%

1.45%

1.55%

What is the net payment due to Company B at the end of period 2?

A) $50,000.
B) $425,000.
C) -$100,000.
D) -$50,000.

Question #9 of 96

Question ID: 439104

In examining the relationship between forward and futures prices, which statement is the most accurate?
A) Assuming forward and futures prices are the same is an approximation.
B) The law of arbitrage guarantees that the payoffs between the two will not be identical.
C) Forward and futures prices can be shown to be the same.
D) Forward prices have a tendency to be more volatile.

Question #10 of 96

Question ID: 439153

Company J enters into a fixed-for-fixed currency swap with Company K. Company J is paying 3% in Euros to Company K, and
receiving 2.5% in USD from Company K. What is the value of the swap in USD to Company J?
A) PV of the USD payments - (Spot rate in USD per Euro PV of the Euro-denominated payments)
B) FV of the USD payments - FV of the Euro-denominated payments
C) PV of the Euro-denominated payments - (Spot rate in USD per Euro PV of the USD payments)
D) Spot rate of the USD payments - (Spot rate in USD per Euro PV of the Euro-denominated
payments)

Question #11 of 96

Question ID: 439156

What is the most common use of a commodity swap, and how does it typically work?

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A) To manage the cost of purchasing energy resources; one firm agrees to pay a fixed rate for multiperiod delivery and receive a corresponding floating rate based on spot rates at time of delivery.
B) To manage the cost of grain; one firm agrees to pay a floating rate for multi-period delivery and
receive a corresponding fixed rate based on spot rates at time of delivery.
C) Farmers managing crop production costs; one firm agrees to pay a fixed rate for multi-period delivery
and receive a corresponding floating rate based on spot rates at time of delivery.
D) To manage energy costs; one firm agrees to pay a fixed rate for multi-period delivery and receive a
corresponding floating rate based on LIBOR at time of delivery.

Question #12 of 96

Question ID: 439130

When dealing with Treasury bond futures, locating the cheapest-to-deliver bond is a critical decision. When yields are fairly low
(below 6%), as they are at present, which of the following types of bonds tend to be the cheapest-to-deliver?
A) Zero-coupon, long maturity.
B) High-coupon, long maturity.
C) Low-coupon, long maturity.
D) High-coupon, short maturity.

Question #13 of 96

Question ID: 439063

An airline company wants to protect itself from large jet fuel price increases and has decided to use the futures markets and
establish a long position. What is the term for this strategy?
A) Anticipatory hedge.
B) Expectations hedge.
C) Minimum variance hedge.
D) Volatility hedge.

Question #14 of 96

Question ID: 439110

Lisa Traina, FRM, is short a series of copper futures contracts. At present, copper's carrying cost is greater than the
convenience yield. What should Traina do?
A) Take the opposite position shortly before contract expiration.
B) Deliver when futures price and spot price converges.
C) Deliver the contract early.
D) Deliver the contract at expiration.

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Question #15 of 96

Question ID: 439100

Assume that the short-term interest rate in London is 4 percent and that the short-term interest rate in the US is 2 percent. If the
current exchange rate between the euro and dollar is 1=US$1.2217, using the continuous time futures pricing model, what is the
price of a three-month futures contract?
A) $1.2144.
B) $1.2207.
C) $1.2235.
D) $1.2156.

Question #16 of 96

Question ID: 439074

Craig Fullen is a portfolio manager with a $25,000,000 value portfolio with a beta of 0.75 relative to the S&P 500. Fullen is
concerned the market will fall, and wants to hedge the risk to his portfolio using S&P 500 futures contracts. If the current value of
the S&P 500 is 1,050, what action should Fullen take to hedge his portfolio? Assume the contract multiplier for S&P 500 index
futures is 250.
A) Sell 119 futures contracts.
B) Buy 95 futures contracts.
C) Sell 71 futures contracts.
D) Sell 95 futures contracts.

Question #17 of 96

Question ID: 439091

A bank has $100 million in assets with modified duration of 8.5, and $90 million of liabilities with modified duration of 6.5.
Accounting only for duration effects, a 50 basis point parallel downward shift would impact the bank's equity position by an
amount closest to a:
A) $1.325 million increase in equity.
B) $90 million increase in equity.
C) $10 million increase in equity.
D) $100 million decrease in equity.

Question #18 of 96

Question ID: 439125

If the issuer of a bond is in default, the bond will be trading:

A) off the market.

B) registered.
C) flat.
D) on accrual.

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Question #19 of 96

Question ID: 439106

An FRM candidate is studying commodity futures, specifically income and storage costs associated with consumption assets.
Which statement is correct, concerning consumption assets and storage costs?
A) Consumption assets' actual storage costs may be expressed as either a known cash flow or as a
yield.
B) The storage costs associated with consumption assets are offset by the income, in most cases.
C) Consumption assets' actual storage costs must be expressed as a known cash flow.
D) Consumption assets' actual storage costs must be expressed as a yield.

Question #20 of 96

Question ID: 439144

A bank entered into a 4-year tenor plain vanilla swap exactly three years ago from today. The agreements of the swap are to pay
6.5 percent annually, based on annual compounding with a 30/360 day-count convention, fixed rate on a $50 million notional, and
receive 1-year London Interbank Offered Rate (LIBOR). The continuously compounded LIBOR for 1-year obligations is currently
5.75 percent. The 1-year LIBOR at the beginning of the period was 6.25 percent. The value of the swap is closest to:
A) $110,000.
B) -$270,000.
C) $800,522.
D) -$257,020.

Question #21 of 96

Question ID: 439121

Scott Malooly recently paid 109.05 for a $1,000 face value, semi-annual coupon bond with a quoted price of 105.19. Assuming that
transaction costs are zero, which of the following statements is most accurate?

A) The price Malooly paid includes the discounted amount of accrued interest due to seller.
B) The bond was trading ex-coupon.
C) Malooly purchased the bond between coupon dates.
D) The price Malooly paid covers the amount of the next coupon payment not earned by the seller.

Question #22 of 96

Question ID: 439109

Using the continuous time forward pricing model, what is the no-arbitrage price of a 9-month forward contract if the interest rate
is 2.4 percent and the spot price of the asset is $1,650?
A) $1,664.
B) $1,689.
C) $1,680.

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D) $1,621.

Question #23 of 96

Question ID: 439062

Burton Futura, FRM is short a well-known tech stock and wishes to engage in a futures transaction to protect against losses in
his short position. What would be the best futures transaction for this situation, particularly if Futura expects the price of the tech
stock to increase?
A) Offset hedge.
B) Straddle.
C) Long hedge.
D) Short hedge

Question #24 of 96

Question ID: 439145

A firm has entered into a $22.5 MM plain vanilla interest rate swap in which it pays fixed at 4.2 percent and receives LIBOR. At
inception, what is the firm's credit exposure on this swap if LIBOR is 3.2 percent?
A) $0.
B) $225,000.
C) $22.5 MM.
D) $11.25 MM.

Question #25 of 96

Question ID: 439116

The day count convention used to calculate accrued interest on U.S. Treasury bonds is:
A) actual/actual.
B) 30/365.
C) 30/360.
D) actual/360.

Question #26 of 96

Question ID: 439075

A portfolio manager would like to use S&P 500 stock index futures to help increase his exposure to movements in the stock
market over the next three months. The current S&P500 futures contracts are trading at 1,205 with a multiplier of $250, and the
portfolio manager would like to increase the portfolio beta from 0.92 to 1.05. If the value of the asset portfolio is $15 million, the
position taken for stock index futures would be closest to which of the following?
A) Sell 50 contracts.
B) Purchase 50 contracts.

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C) Sell 6 contracts.
D) Purchase 6 contracts.

Question #27 of 96

Question ID: 439080

The following Treasury zero rates are exhibited in the marketplace:

6 months = 1.25%
1 year = 2.35%
1.5 years = 2.58%
2 years = 2.95%
Assuming continuous compounding, the price of a 2-year Treasury bond that pays a 6 percent semiannual coupon is closest to:

A) 105.20.
B) 105.90.
C) 108.66.
D) 103.42.

Question #28 of 96

Question ID: 439146

A forward rate agreement (FRA):

A) is risk-free when based on the Treasury bill rate.
B) is settled by making a loan at the contract rate.
C) is priced in dollars.
D) can be used to hedge the interest rate exposure of a floating-rate loan.

Question #29 of 96

Question ID: 439102

At the inception of a six-month forward contract on a stock index, the value of the index was $1,150, the interest rate was 4.4
percent, and the continuous dividend was 1.8 percent. Three months later, the value of the index is $1,075. Which of the
following statements is TRUE? The value of the:
A) short position is $47.56.
B) long position is $47.56.
C) long position is $82.41.
D) long position is -$82.41.

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Question #30 of 96

Question ID: 439129

Marty Moore, FRM is an investor with a short position and is preparing to deliver a bond. From his bond portfolio, he has four positions to
choose from. The last settlement price, also the quoted futures price, is $97.85. Which bond would be the "worst choice" for Parks to
deliver?
Bond

Quoted Bond Price

Conversion Factor

101

1.03

116

1.12

105

1.07

124

1.23

A) Bond D.
B) Bond B.
C) Bond C.
D) Bond A.

Question #31 of 96

Question ID: 439078

A Treasury bill, with 45 days until maturity, has an effective annual yield of 12.50%. The bill's holding period yield is closest to:
A) 12.50%.
B) 1.46%.
C) 1.54%.
D) 1.57%.

Question #32 of 96

Question ID: 439073

Jimmy Deininger, FRM is a portfolio manager and runs a large $400,000,000 value portfolio. Relative to the S&P 500,
Deininger's portfolio has a beta of 1.07. Currently, S&P futures are trading at 1,368, and the multiplier is 250. Deininger has
created a hedge for his portfolio value for the next four months.
If Deininger wishes to correct for any possible over-hedging through a "tailing the hedge" strategy, how would he implement this
strategy? Assume the futures price is now 1,380 and the spot price is 1,325. After making a "tailing the hedge" adjustment, how
many S&P futures contracts are needed?

A) Multiply the hedge ratio by the daily spot price to futures price ratio; 1,201 contracts.
B) Multiply the hedge ratio by the futures price to daily spot price ratio; 1,012 contracts.
C) Multiply the hedge ratio by the futures price to daily spot price ratio; 1,385 contracts.
D) Multiply the hedge ratio by the daily spot price to futures price ratio; 986 contracts.

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Question #33 of 96

Question ID: 439072

The purpose of computing a minimum variance hedge ratio is to minimize the variance of the:
A) correlation estimator.
B) combined hedged and hedging instrument portfolio.
C) hedging instrument.
D) instrument to be hedged.

Question #34 of 96

Question ID: 439113

A quantitative analyst is studying the relationship between commodity futures prices and current spot prices. How would a
situation referred to as "contango" best be described?
A) Futures price is greater than the spot price.
B) Spot price is greater than the futures price.
C) There is a benefit to holding the asset.
D) Spot price is greater than the futures price, and the futures contract exhibits positive systematic risk

Question #35 of 96

Question ID: 439126

A 5% coupon bond with semi-annual coupon payments on a coupon payment date when the coupon has not been paid yet and
the bond has a $1,000 par value. What is the accrued interest of the bond and what is the bond's full price?
Accrued
Interest

Full Price

A) $50

$1,000

B) $50

$1,050

C) $25

$1,025

D) $25

$1,000

Question #36 of 96

Question ID: 439089

Understanding that duration is a good approximation for changes in price for a standard, option-free bond, what benefit does
determining the amount of convexity add?
A) Convexity accounts for the amount of error in the estimated price change based on duration.
B) Convexity estimates the basis point change in yield as time passes until the bond's maturity using a
continuous compounding method.
C) Convexity measures the standard error of estimate.

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D) Convexity measures the difference between actual and estimated prices and how that difference
narrows as yield swings grow.

Question #37 of 96

Question ID: 439099

Which of the following is an important effect of dividends on the cost-of-carry model? Dividends:

A) reduce the cost of carry.

B) eliminate arbitrage opportunities.
C) do not affect the cost-of-carry model.
D) reduce the value of the spot prices.

Question #38 of 96

Question ID: 439067

A weakening of the basis is a consequence of the:

A) spot price increasing faster than the futures price over time.
B) futures price increasing faster than the spot price over time.
C) spot price moving according to hyper-arithmetic Brownian motion.
D) futures price moving according to hyper-arithmetic Brownian motion.

Question #39 of 96

Question ID: 439097

If a short seller is faced with a "short squeeze", what transpires?

A) The deposit the short seller has with the broker is wiped out.
B) The underlying stock drops dramatically.
C) Short seller may have to close his position.
D) Counterparty must pay the dividends.

Question #40 of 96

Question ID: 439088

An investor has entered into a forward rate agreement (FRA) where she has contracted to pay a fixed rate of 5 percent on
$5,000,000 based on the quarterly rate in three months. If interest rates are compounded quarterly, and the floating rate is 2
percent in three months, what is the payoff at the end of the sixth month? The investor will:

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A) receive a payment of $37,500.

B) make a payment of $75,000.
C) receive a payment of $75,000.
D) make a payment of $37,500.

Question #41 of 96

Question ID: 439101

The S&P 500 index is trading at 1015. The S&P 500 pays an expected dividend yield of 2 percent and the current risk-free rate
is 4.1 percent. The value of a 3-month futures contract on the S&P 500 is closest to:
A) 979.86.
B) 997.68.
C) 1,350.59.
D) 1,020.34.

Question #42 of 96

Question ID: 439098

Which of the following would be considered a key difference between a forward contract and a futures contract?
A) Futures contract is marked to market regularly, while a forward contract is not.
B) Only forward contracts can be set up as cash settlement contracts.
C) The owner of the forward contract receives cash flows from the underlying asset between contract
origination and delivery.
D) One clearinghouse is the counterparty to all forward contracts.

Question #43 of 96

Question ID: 439147

A financial institution has entered into a plain vanilla currency swap with one of its customers. The period left on the swap is 3
years, with the institution paying 5 percent on USD20 million and receiving 2.5 percent on JPY1,500 million annually. The current
exchange rate is JPY120/USD, and the flat term structure in both countries generates a 3 percent rate in the U.S. and a 0.75
percent rate in Japan. The current value of this swap to the institution is closest to:
A) -USD7.95 million.
B) USD6.875 million.
C) -USD6.875 million.
D) USD7.95 million.

Question #44 of 96

Question ID: 439076

Which of the following factors is (are) often considered to be a problem with hedged positions?

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I. Uncertainty with roll-over of the hedging instrument.

II. Perfect correlation between the asset and the hedging instrument.
III. Certainty with the date of the underlying asset's purchase or sale.
IV. Imperfect correlation between the hedged asset and the hedging instrument.

A) II and III only.

B) I and IV only.
C) I only.
D) I and II only.

Question #45 of 96

Question ID: 439118

The per annum discount rate of a 180-day T-bill with a cash price of 98 is closest to:
A) 2%.
B) 4%.
C) 1%.
D) 3%.

Question #46 of 96

Question ID: 439131

Calculate the theoretical futures price for a Treasury bond futures contract given the following information:

Accrued interest: 0.7

Cash price of cheapest-to-deliver bond: 103.1
Cash futures price: 97.69
Quoted futures price: 96.99
Conversion factor: 1.15

A) 84.34.
B) 86.76.
C) 90.12.
D) 88.88.

Question #47 of 96

Question ID: 439124

The dirty, or full, price of a bond:

A) applies if an issuer has defaulted.
B) is paid when a security trades ex-coupon.

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C) equals the present value of all cash flows, plus accrued interest.
D) is usually less than the clean price.

Question #48 of 96

Question ID: 439154

Assume that a currency swap is established, and it must be valued using a sequence of forward rate agreements (FRAs) to Company J.
Further assume:
USD 1.57 = GBP 1
Forward Rates:
Year 1: $1.57 /
Year 2: $1.52 /
Year 3: $1.49 /
Cash flows as follows:
Time

USD Cash Flow

GBP Cash Flow

10

6.36

10

6.36

10

6.36

250

159.23

What is the total of the net cash flows to Company J in year 3 only?

A) 13.27.
B) 13.19.
C) 13.01.
D) 13.45.

Question #49 of 96

Question ID: 439127

Assume a bond's quoted price is 105.22 and the accrued interest is $3.54. The bond has a par value of $100. What is the bond's clean
price?

A) $108.76.
B) $100.00.
C) $105.22.
D) $103.54.

Question #50 of 96

Question ID: 439148

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Two banks enter into a 1-year plain vanilla interest-rate swap with the following terms:
Notional principal is $500,000,000.
The fixed component of the swap is 7%.
The floating component of the swap is LIBOR + 200bps where LIBOR equals 5%.
If the current risk-free rate is 4 percent, the value for this swap at inception is closest to:

A) $8,750,000.
B) $0.
C) $35,000,000.
D) $500,000,000.

Question #51 of 96

Question ID: 439086

Calculate the forward rate for a coupon bond for these spot rates:

One year rate: 2.92%

Two year rate: 3.77%

A) 4.62%.
B) 4.64%.
C) 4.66%.
D) 4.68%.

Question #52 of 96

Question ID: 439150

Which statement is most accurate regarding the mechanics of a currency swap?

A) Currency swaps are typically fixed-for-variable, and periodic cash flows are netted.
B) A currency swap exchanges principal and interest payments at the swap's inception using the spot
exchange rate, and periodic cash flows are not netted.
C) A currency swap exchanges principal and interest payments at the swap's inception using forward
rates corresponding to the swap's tenor, and periodic payments are netted.
D) A currency swap exchanges interest payments with payments in different currencies and the periodic
cash flows are not netted.

Question #53 of 96

Question ID: 439155

The credit risks to the fixed-rate payer in a swap:

A) are greatest at the inception of the swap.

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B) increase when floating rates rise above the swap rate.

C) are greatest just prior to maturity.
D) increase when floating rates are below the swap rate.

Question #54 of 96

Question ID: 439092

A bond has an effective duration of 7.5 and a convexity of 104.0. If yields rise by 82 bps, the price of the bond will:
A) decrease by 5.80%.
B) increase by 6.15%.
C) decrease by 6.15%.
D) increase by 6.50%.

Question #55 of 96

Question ID: 439143

What is the proper discount rate to use when valuing an interest rate swap using a sequence of forward rate agreement, rather,
at what rate are the swap cash flows discounted?
A) Corresponding forward rates implied by the forward rate agreements.
B) LIBOR forward rates.
C) Corresponding spot rate from a LIBOR spot curve.
D) Corresponding forward rates implied by Eurodollar futures.

Question #56 of 96

Question ID: 439138

Assuming interest rates change markedly during the period of time of a plain vanilla interest rate swap, what effect will this have
on the two parties involved?
A) The fixed rate payer has the advantage.
B) The receiver of the floating rate payment has the advantage in most cases.
C) Interest rate risk exposure for the parties will completely change for each party.
D) This swap limits the liability to both parties.

Question #57 of 96

Question ID: 439136

When is a duration-based hedging strategy least successful?

A) When there are minimal changes in yield.
B) When changes in interest rates are large and nonparallel.
C) When interest rates are rising.

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D) When yield changes are nearly perfectly correlated.

Question #58 of 96

Question ID: 439095

If 1-year rates are 5 percent, 1-year rates one year from now are expected to be 5.75 percent, and 1-year rates two years from
now are expected to be 6.25 percent, then the unbiased expectations theory of interest rates would indicate current 3-year rates
should be closest to:
A) 6.37%.
B) 5.29%.
C) 5.67%.
D) 8.75%.

Question #59 of 96

Question ID: 439132

An analyst has been asked to calculate the theoretical futures price for a Treasury bond futures contract without any convexity
adjustment. It is a 3-month Eurodollar futures contract, $25 movement per "tick", or basis point. The contract is a $1 million
contract. If the quoted price for the Eurodollar futures price is 97.1, what is the theoretical price?
A) 991,900.
B) 992,750.
C) 993,100.
D) 992,750.

Question #60 of 96

Question ID: 439085

Calculate bond yield given the information below. Assume semi-annual coupon payments and a bond price of $103.07.

PMT = 3
N=6
FV = 100

A) 5.39%.
B) 2.44%.
C) 4.89%.
D) 3.67%.

Question #61 of 96

Question ID: 439140

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What is the term for the standardized contract, or Master Agreement, which outlines details of a particular swap, and what trade
organization created it?
A) Confirmation, International Swaps and Derivatives Association (ISDA).
B) Tenor agreement, Bond Market Association (BMA).
C) Swap contract, Bond Market Association (BMA).
D) Acceptance, International Swaps and Derivatives Association (ISDA).

Question #62 of 96

Question ID: 439122

Austin Traynor is considering buying a $1,000 face value, semi-annual coupon bond with a quoted price of 104.75 and accrued
interest since the last coupon of $33.50. If Traynor pays the dirty price, how much will the seller receive at the settlement date?

A) $1,081.00.
B) $1,033.50.
C) $1,047.50.
D) $1,014.00.

Question #63 of 96

Question ID: 439069

Which of the following is closest to the correct value for the basis associated with a spot position valued at $15 per unit and a
futures contract with a value of $18 per unit?
A) $5.0.
B) $3.0.
C) $2.0.
D) -$3.0.

Question #64 of 96

Question ID: 439135

Jon Crandell, FRM is a fixed income portfolio manager, and he wishes to create a T-bond futures hedge to alter his portfolio's
duration. What should he do if he wishes to shorten the duration of his portfolio with minimal disruption to the underlying portfolio,
and what will this action do to the portfolio's interest rate sensitivity?
A) Sell futures; decrease portfolio's interest rate sensitivity.
B) Buy futures; decrease portfolio's interest rate sensitivity.
C) Sell futures; increase portfolio's interest rate sensitivity.
D) Buy futures; increase portfolio's interest rate sensitivity.

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Question #65 of 96

Question ID: 439107

Actual ownership of a physical commodity may provide benefits not afforded to holders of the futures contracts. What are these
benefits?
A) Arbitrage benefit.
B) Convenience yield.
C) Cost of carry advantage.
D) Physical advantage.

Question #66 of 96

Question ID: 439065

A corn grower is concerned that the price he can get from the field in mid-September will be less than he has forecasted. To
protect himself from price declines, the farmer has decided to hedge. The best available futures contract he can find is for August
delivery. Which of the following is the appropriate direction of his position and the source of basis risk that may impact the
farmer?
A) Long futures; rollover.
B) Short futures; rollover.
C) Short futures; correlation.
D) Long futures; correlation.

Question #67 of 96

Question ID: 439119

An investor has a 90-day T-bill with a quoted price of two. The face value is 100. Compute the true interest rate.
A) 1.0523%.
B) 0.7995%.
C) 0.5126%.
D) 0.5025%.

Question #68 of 96

Question ID: 439087

A bank has entered into a 3 x 6 forward rate agreement to receive a fixed rate of 3.35 percent on $12 million in six months. If the
applicable rate in three months is 3.62 percent, the cash flow associated with this forward rate agreement for the bank would be
closest to:
A) $16,200.
B) $32,400.
C) -$32,400.
D) -$8,100.

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Question #69 of 96

Question ID: 439079

The effective annual yield (EAY) of a loan with a quoted rate of 8%, compounded quarterly is equivalent to the EAY of a loan with
a continuously compounded quoted rate of:
A) 8.08%.
B) 7.92%.
C) 8.16%.
D) 8.24%.

Question #70 of 96

Question ID: 439142

The success of the currency swap markets has been explained by which of the following?
A) Floating interest rate risk arguments.
B) Comparative advantage arguments.
C) Efficient exchange rate pricing arguments.
D) Reduced counterparty risk arguments.

Question #71 of 96

Question ID: 439094

Estimated price changes using only duration tend to:

A) underestimate the decrease in price that occurs with an increase in yield for large changes in yield.
B) overestimate the increase in price that occurs with a decrease in yield for large changes in yield.
C) underestimate the increase in price that occurs with a decrease in yield for large changes in yield.
D) overestimate the increase in price that occurs with a decrease in yield for small changes in yield.

Question #72 of 96

Question ID: 439151

Larry Kardaras, FRM and Luke Robertson, FRM are discussing the proper role that currency swaps play in a firm's overall risk
management program.
Kardaras states: "A currency swap can actually transform the currency backing any asset, or liability, into a different currency
entirely."
Robertson states: "A currency swap can reduce a firm's borrowing costs and produce enhanced investment returns."
Are Kardaras and Robertson correct in their statements?

A) Both Kardaras and Robertson are correct.

B) Kardaras is correct, Robertson is not.
C) Neither are correct.

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D) Robertson is correct, Kardaras is not.

Question #73 of 96

Question ID: 439111

Which of the following increases the cost of rolling a long hedge (i.e., using long futures contracts to hedge a pre-existing short
position)?
I. A market shift from normal backwardation to contango.
II. A market shift from contango to normal backwardation.

A) II only.
B) I only.
C) Neither I nor II.
D) Both I and II.

Question #74 of 96

Question ID: 439112

Economist John Maynard Keynes found the widely used method of expressing the futures price as a function of the expected
spot price F0 = (ST) to be flawed because it did not provide justification for speculators to enter the market. To entice speculators
to bear the risk of futures contracts, the futures contract must be less than the expected spot price at maturity. What is the name
of the frequently used model, and what is the market force that causes the price of the futures contract to be less than the
expected spot price at maturity?

A) Cost of carry model; contango.

B) No arbitrage model; backwardation.
C) Expectations model; normal backwardation.
D) Future expectations model; normal contango.

Question #75 of 96

Question ID: 439152

Assume that two firms are considering entering into a currency swap, and that their respective borrowing rates (U.S. dollars and Swiss
francs) are as shown below:
Company

USD Borrowing Rate

CHF Borrowing Rate

Apple

2%

4%

Orange

3%

4.5%

What is the net potential borrowing savings by entering into a swap for both companies, Apple and Orange?

A) 100 basis points.

B) 150 basis points.
C) 50 basis points.

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D) 0 basis points.

Question #76 of 96

Question ID: 439120

Suppose a bond's quoted price is 105 7/32 and the accrued interest is $23.54. If the bond has a par value of $1,000, what is the
bond's flat price?
A) $1,075.73.
B) $1,023.54.
C) $1,052.19.
D) $1,000.00.

Question #77 of 96

Question ID: 439149

Brody Oakley, FRM, is valuing an interest rate swap based on a sequence of forward rate agreements (FRAs). Oakley is looking
at a $12 million notional swap which pays a floating rate based on the 6-month LIBOR and receives a 4% fixed rate
semiannually. 9 months remain on the swap. Pay dates are at 3 and 9 months. The spot LIBOR rates are 3 months at 3.6% and
9 months at 3.75%. LIBOR at the last payment date was 3.3%. In calculating the value of the swap to the fixed-rate receiver
using the FRA methodology, Oakley must first determine the first floating rate cash flow. What is that cash flow?
A) $432,000.
B) $216,000.
C) $396,000.
D) $198,000.

Question #78 of 96

Question ID: 439064

Which of the following is TRUE concerning basis risk? In a hedge using futures contracts:

A) basis risk is eliminated but price risk still exists.

B) both basis risk and price risk are eliminated.
C) basis risk of the hedged security is replaced with price risk.
D) price risk of the hedged security is replaced with basis risk.

Question #79 of 96

Question ID: 439141

A primary criticism with the comparative advantage argument as justification for the existence of swaps is related to which of the
following?
A) Perceived advantage in one market over the other.
B) Credit risk.

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C) Inefficient credit markets.

D) Constant spreads over London Interbank Offered Rate (LIBOR).

Question #80 of 96

Question ID: 439068

Which of the following is a definition of basis risk? Basis risk is the uncertainty about the difference between the:

A) current spot price and the expected spot price over the hedging horizon.
B) spot and futures price over the hedging horizon.
C) current spot price and the spot price at the time the hedge is removed.
D) current spot price and the current futures price.

Question #81 of 96

Question ID: 439071

How will the value of a portfolio of non-callable corporate bonds hedged with Treasury futures change if the yield curve shifts up
in a parallel manner by an anticipated amount? The value of the newly hedged portfolio:
A) increases.
B) decreases.
C) stays the same.
D) may increase or decrease.

Question #82 of 96

Question ID: 439139

Which statement would be considered the most accurate regarding the swaps marketplace and the role of a financial
intermediary?
A) While swaps have become more standardized, there is still credit risk involved, and the financial
intermediary helps mitigate credit risk.
B) The swaps market is regulated, and banks typically serve as financial intermediaries.
C) Swaps are not traded in any organized secondary market, and financial intermediaries earn a spread
by bring two nonfinancial firms together in a swap agreement.
D) Swaps are custom instruments, and swap participants are largely individuals.

Question #83 of 96

Question ID: 439115

In the context of bonds, accrued interest:

A) covers the part of the next coupon payment not earned by seller.
B) is discounted along with other cash flows to arrive at the dirty, or full price.

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C) equals interest earned from the previous coupon to the sale date.
D) applies only to bonds with semi-annual or quarterly coupon payments.

Question #84 of 96

Question ID: 439108

Using the continuous time forward pricing model, what is the no-arbitrage price of a 3-month forward contract if the interest rate
is 3.2 percent and the spot price of the asset is $750?
A) $729.
B) $780.
C) $744.
D) $756.

Question #85 of 96

Question ID: 439123

Peter Stone is considering buying a $100 face value, semi-annual coupon bond with a quoted price of 105.19. His colleague
points out that the bond is trading ex-coupon. Which of the following choices best represents what Stone will pay for the bond?
A) $105.19 plus accrued interest.
B) $105.19 minus accrued interest.
C) $105.19 minus the coupon payment.
D) $105.19.

Question #86 of 96

Question ID: 439114

Which of the following statements regarding accrued interest is most accurate?

A) The bond is trading flat if the bond issuer is in default and the bond is trading without accrued
interest.
B) If the buyer must pay the seller the accrued interest, the bond is said to be trading ex-coupon.
C) If the seller must pay the buyer accrued interest, the bond is said to be trading cum-par.
D) The accrued interest is paid by the seller of the bond to the buyer (new owner) of the bond.

Question #87 of 96

Question ID: 439103

At the inception of a one-year forward contract on a stock index, the price of the index was 1,100, the interest rate was 2.6
percent, and the continuous dividend was 1.2 percent. Six months later, the price of the index is 1,125. Which of the following
statements is TRUE? The value of the:
A) long position is -$17.17.
B) short position is -$17.17.

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C) short position is -$22.19.

D) long position is $25.00.

Question #88 of 96

Question ID: 439105

Jan Echtenkamp, FRM is studying the interest rate parity relationship between the U.S. dollar and the Swiss franc. On what does
the interest rate parity relationship depend?
A) An arbitrage opportunity between the currencies.
B) Spot and forward exchange rates between the two currencies.
C) The forward contract taking on a non-zero value after contract is entered into.
D) Future convergence of exchange rates between the two currencies.

Question #89 of 96

Question ID: 439128

Because there are a large number of available Treasury bonds (T-bonds) available for delivery on the futures market, which of
the following defines the price received by the short position of the futures contract?
A) Conversion factor.
B) Chicago Board of Trade (CBOT) factor.
C) Market yield option.
D) Wild card option.

Question #90 of 96

Question ID: 439096

Gold would be an example of what type of asset?

A) Depreciating.
B) Investment.
C) Consumption.
D) Intangible.

Questions #91-93 of 96
Use a stated rate of 9% compounded periodically to answer the following three questions. Select the choice that is the closest to
the correct answer.

Question #91 of 96

Question ID: 439082

The semi-annual effective rate is:

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A) 10.25%.
B) 9.20%.
C) 9.00%.
D) 9.31%.

Question #92 of 96

Question ID: 439083

The quarterly effective rate is:

A) 9.31%.
B) 9.40%.
C) 9.20%.
D) 9.00%.

Question #93 of 96

Question ID: 439084

The continuously compounded rate is:

A) 9.67%.
B) 9.20%.
C) 9.45%.
D) 9.42%.

Question #94 of 96

Question ID: 439077

In reviewing historical interest rate trends and patterns, what rate do traders typically use as a proxy for the short-term risk-free
rate?
A) Treasury rates, such as T-bill or T-bond.
B) LIBOR.
C) U.S. interbank offered rate.
D) Repo rate.

Question #95 of 96

Question ID: 439090

A 12-year, 6 percent, option-free bond is currently trading at par. The bond has a duration of 8.38 years and a convexity of
91.93. Your estimate of the percent price change (PPC) associated with a 100 basis point decrease in yield is closest to:
A) 8.84 percent decrease.
B) 7.92 percent decrease.
C) 8.84 percent increase.
D) 7.92 percent increase.

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Question #96 of 96

Question ID: 439066

A portfolio manager has a $15 million mid-cap portfolio that has a beta of 1.3 relative to the S&P 400. S&P 500 futures are
trading at 1,150 and have a multiplier of 250. The most significant risk this manager faces in attempting to hedge his position is:
A) improper profit forecasts of the underlying position.
B) basis risk resulting from a cross-hedge.
C) correlation risk resulting from a rollover of positions between the S&P 400 and S&P 500.
D) volatility risk arising from unstable correlation predictions.

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