一級模擬考試題目教育

20175FRM一級模擬考試（一AMonteCarloVaRmodelispreferredovertheDelta-Normalapproach20175FRM一級模擬考試（一AMonteCarloVaRmodelispreferredovertheDelta-NormalapproachTheportfoliohaslinearexposurestomanysourcesofTheriskfactorshavenormaldistributionsandtheportfolioconsistsofoptions.TheportfoliocontainsonlyUSnon-callablegovernmentbonds.Giventhefollowinginformation,whichofthefollowingamountsisclosesttod(l.0),discountfactorforthefirstGloriaBrown,FRM,calculatedtheintrinsicvalueofRTNCompanyandexpectsthestocktogeneratea25%annualreturnovertheforeseeablefuture.However,Brownisconcernedthatherpriceforecastmaybetoohigh.Sheconductedahypothesistestandconcludedthatata5%significancelevel,thenullhypothesiscanberejectedthatRTNCompany’sinvestmentreturnwouldbeequaltoorlessthan25%peryear.Theone-tailedtestutilizedaz-test.IndicatethemeaningofthesignificancelevelchosenbyBrownandstatethecorrectrejectionSignificanceBrownwillrejectatruenullhypothesis5%ofthetimeBrownwillrejectafalsenullhypothesis95%ofthetimeBrownwillrejectatruenullhypothesis5%ofthetimeBrownwillrejectafalsenullhypothesis95%ofthetimez>1.645z<-z<-z>Assumea3-yearbondwithafacevalueof$100paysa3.5%coupononasemiannualWhatisthepriceofthebondaccordingtothefollowingspotMaturitySpotrateBondBondBondBondmaturityin12AninvestorAninvestorownsastockandisbullishovertheshortterm.Whichofthefollowingwillbethemostappropriateoneforthisinvestoriftheprimaryconcernistomakeabetonthevolatilityofthestock?AcoveredcallAprotectiveAnat-the-moneyAnat-the-moneyPaperProductsInc.’sresearchdepartmentdevelopedanewtypeofenvironmentallyfriendlypaper.Themarketingdepartmentsurveyedarandomsampleof100people.Thesurveyisdesignedtogaugecustomerinterestlevelinthenewproduct.Thesampleindicatesanaveragepurchaseof2,500reamsperyearwithavarianceof160,000reams.Theresearcher’ssupervisorisconcernedthatthesamplesizeistoosmall.Theresearcheradvisesagainstincreasingthesamplesize,statingthat“thereisariskofsamplingfrommorethanoneDeterminethestandarderrorofthesamplemeanandindicatewhetherresearcher’sstatementiscorrectorStandard88AstockindexisvaluedatUSD750andpaysacontinuousdividendattherateof2%perannum.The6-monthfuturescontractonthatindexistradingatUSD757.Therisk-freerateis3.50%continuouslycompounded.Therearenotransactioncostsortaxes.Isthefuturescontractpricedsothatthereisanarbitrageopportunity?Ifyes,whichofthenumberscomesclosesttothearbitrageprofityoucouldrealizenumberscomesclosesttothearbitrageprofityoucouldrealizebytakingapositioninfuturesThereisnoarbitrageYouaregiventhefollowinginformationaboutacalloption:Timetomaturity=2yearsContinuousrisk-freerate=Continuousdividendyield=1%N(d1)=0.64CalculatethedeltaofthisJimmyDeininger,FRM,isaportfoliomanagerwhorunsalarge$400,000,000longequityportfolio.RelativetotheS&P500,Deininger’sportfoliohasabetaof1.07.Currently,S&Pfuturesaretradingat1,368,andthefuturesmultiplieris250.DeiningerwishestocreateahedgeforhisportfolioforthenextfourmonthsusingS&Pfutures.HowmanyfuturescontractsshouldDeiningerbuyorselltohedgethisLonghedge;1,490contractsShorthedge;1,053contractsLonghedge;992contractsShorthedge;1,251Aloanportfolioismadeupoftennon-correlatedloans,eachwithavalueof$1millionandanestimatedprobabilityofdefaultof3%inanygivenyear.Recoveryinthecaseofdefaultisexpectedtobezero.Whichofthefollowingamountsisclosesttothecumulativeexpectedlossontheloanportfolioovertwo$0.03$0.059$0.30$0.591Aninsurancecompanyestimatesthat40%ofpolicyholderswhoAninsurancecompanyestimatesthat40%ofpolicyholderswhohaveonlyanautopolicywillrenewnextyear,and60%ofpolicyholderswhohaveonlyahomeownerpolicywillrenewnextyear.Thecompanyestimatesthat80%ofpolicyholderswhohavebothanautoandahomeownerpolicywillrenewatleastoneofthosepoliciesnextyear.Companyrecordsshowthat65%ofpolicyholdershaveanautopolicy,50%ofpolicyholdershaveahomeownerpolicy,and15%ofpolicyholdershavebothanautoandahomeownerpolicy.Usingthecompany’sestimates,whatisthepercentageofpolicyholdersthatwillrenewatleastonepolicynextWhataretheminimumvaluesofanAmerican-styleandaEuropean-style3-monthcallwithastrikepriceof$80onanon-dividend-payingstocktradingat$86iftherisk-freerateisIsabelleBurns,FRM,isaninvestmentadvisorforafirmwhoseclientbaseiscomposedofhighnetworthindividuals,inherpersonalportfolio,BurnshasaninvestmentinTorex,acompanythathasdevelopedsoftwaretospeedupInternetbrowsing.BurnshasthoroughlyresearchedTorexandbelievesthecompanyisfinanciallystrongyetcurrentlysignificantlyundervalued.AccordingtotheGARPCodeofConduct,BurnsNotrecommendTorexaslongasshehasapersonalinvestmentintheNotrecommendTorextoaclientunlessheremployergiveswrittenconsenttodoso.RecommendTorextoaclient,butshemustdiscloseherinvestmentinTorextotheclient.RecommendTorextoaclientwithoutdisclosureaslongasitisasuitableinvestmenttheAsinglestockhasapriceofUSD10andacurrentdailyvolatilityof2%.Usingdelta-normalmethod,theVaRatthe95%confidencelevelofalongat-the-moneycallonstockoveraone-dayholdingperiodisUSDUSDstockoveraone-dayholdingperiodisUSDUSDUSDUSDIftheexpectedvarianceofaregressionerrortermdependsonthevalueofthevariable,thenDoesnotviolatetheassumptionsoftheclassicallinearregressionWouldviolatetheassumptionsoftheclassicallinearregressionmodelandiscalledserialcorrelation.WouldviolatetheassumptionsoftheclassicallinearregressionmodelandiscalledWouldviolatetheassumptionsoftheclassicallinearregressionmodelandisA$1,000parbondwith22yearstomaturityanda4%semiannualcouponhasayieldtomaturityof5%.Assuminga5basispointchangeinyield,theconvexityofthebondisBetween1993and1995,NickLeeson’sactionsresultedinlossesofapproximately$1.25billionandforcedBaringsintobankruptcy.WhichofthefollowingactionswouldleastlikelyhavepreventedthebankruptcyofBarings’Informationonaccountgainsandlossesbeingmoretransparent.Managementbeingmoresuspiciousofhugereportedprofits.AlltradersbeingrequiredtomeetSIMEX(SingaporeInternationalMonetaryExchange)AsystemofchecksandbalancesbeingestablishedtodetectwildlyColleaguesBenjaminEckoandBernardCharlesrecentlydiscussedtheapplicationofnormaldistributionforrandomvariables.Eckoclaimedthatthez-statisticmeasuresdistance,instandarddeviationunits,thatagivenobservationisfromthepopulationCharlesdistance,instandarddeviationunits,thatagivenobservationisfromthepopulationCharlesclaimedthatthereisa95%chancethatthez-statisticliesabovenegative1.96.RegardingthestatementsofEckoandCharles:Eckoiscorrect;Charlesiscorrect.Eckoiscorrect;Charlesisincorrect.Eckoisincorrect;CharlesisEckoisincorrect;CharlesisMetallgesellschaftRefiningandMarketingofferedcustomerslong-termcontractswithpricesforpetroleumcontracts.TheirstrategytohedgethisDidnotaccountforfundingriskcreatedbyamismatchbetweenthetimingofthehedgecashflowsandthecontractcashflows.Failedbecauseofimproperinternalcontrols.Wasbasedonfraudulentreporting.SufferedfrompoorThreemonthsagoacompanyenteredinaone-yearforwardcontracttobuy100ouncesofgold.Atthetime,theone-yearforwardpricewasUSD1,000perounce.Thenine-monthforwardpriceofgoldisnowUSD1,050perounce.Thecontinuously-compoundedrisk-freerateis4%peryearforallmaturities,andtherearenostoragecosts.WhichofthefollowingisclosesttothevalueoftheUSDUSDUSDUSDYouwishtohedgeaninvestmentinzirconiumusingfutures.Unfortunately,therearenofuturesthatarebasedonthisasset.Todeterminethebestfuturescontractforyoutohedgewith,yourunaregressionofdailychangesinthepriceofzirconiumagainstdailychangesinthepricesofsimilarassetswhichdohavefuturescontractsassociatedwiththem.Basedonyourresults,futurestiedtowhichwouldlikelyintroducetheleastbasisriskintoyourhedgingChangesinPriceofZirconium=α+(ChangesinPriceofαβAAssetAAssetBAssetAssetTwofirms,Bell-ConandBit-Con,enterintoafixed-for-fixedAssetAAssetBAssetAssetTwofirms,Bell-ConandBit-Con,enterintoafixed-for-fixedcurrencyswap,withanagreementtomakeperiodicpaymentsannually.Bell-Conpays3.5%ineurosandreceives3%inU.S.dollars.Atthebeginningoftheswap,Bell-ConpaysaprincipalamounttoBro-ConofUSD250million,andBro-ConpaysEUR200milliontoBell-Con.Whatamountsareexchangedeveryperiod,andwhathappenstotheprincipalamountsattheswap’sBell-ConwillpayEUR8.75milliontoBro-Con,Bro-ConwillpayUSD6milliontoBell-Con,andtherewillbenootherpaymentsexchangedatswapconclusion.Bell-ConwillpayEUR7milliontoBro-Con,Bro-ConwillpayUSD7.5milliontoBell-Con,andtheprincipalamountswillbere-exchangedatswapconclusion.Bell-ConwillpayEUR7milliontoBra-Con,Bro-ConwillpayUSD6milliontoBell-Con,andtherewillbenootherpaymentsexchangedatswapconclusion.Bell-ConwillpayEUR8.75milliontoBra-Con,Bro-ConwillpayUSD7.5millionBell-Con,andtheprincipalamountswillbere-exchangedatswapAfinancialinstitutionhasenteredintoaplainvanillacurrencyswapwithoneofitscustomers.Theperiodleftontheswapistwoyearswiththeinstitutionpaying4.5%onUSD120millionandreceiving2%onJPY3,500millionannually.Thecurrentexchangerateis120JPY/USD,andtheflattermstructureinbothcountriesgeneratesa3%rateintheUnitedStatesanda0.5%rateinJapan.Thecurrentvalueofthisswaptotheinstitutionisclosest$93.3-$93.3$118.1-$118.1SCUstockiscurrentlypricedat$106pershare,andtherisk-freeinterestrateisAssumingthatSCUdoesnotpayanydividends,whatisthelowerboundofanAmericanputoptiononSCUthatexpiresinthreemonthsandhasanexercisepriceof$l10?BCDAninvestorislookingtocreateanoptionsportfolioonXYZstockthatwillhavevirtuallyzerovegaexposurewhilemaximizingtheabilitytoprofitfromincreasesininterestrates.IfthecurrentpriceofXYZis$50,whichofthefollowingwouldaccomplishhisAninvestorislookingtocreateanoptionsportfolioonXYZstockthatwillhavevirtuallyzerovegaexposurewhilemaximizingtheabilitytoprofitfromincreasesininterestrates.IfthecurrentpriceofXYZis$50,whichofthefollowingwouldaccomplishhisSellacallwithastrikepriceof$50Buyacallwithastrikepriceof$25Sellaputwithastrikepriceof$50BuyaputwithastrikepriceofJoeBrocatoiscurrentlyfollowingtwostocksinthepharmaceuticalindustry:ABCandXYZ.HeisbullishonABC,butbearishonXYZ.ABCiscurrentlypricedat$53.60andXYZisBrocatogathersthefollowingthreemonthsofdataonputandcalloptionsforbothstocks:Inthreemonths,assumeABChasincreasedinpriceby$1.00whileXYZhasdropped$1.67.WhichofthefollowingstrategieswouldhavebeenthemostprofitableinthreeShorttheABCputoptionwiththe$45strikeprice,andshorttheXYZcalloptionwiththe$7.50strikeprice.GolongtheABCputoptionwiththe$45strikeprice,andgolongtheXYZcalloptionwiththe$7.50strikeprice.GolongtheABCcalloptionwiththe$55strikeprice,andgoshorttheXYZputwiththe$10strike ShorttheABCcalloptionwiththe$55strikeprice,andgolongtheXYZputoptionwiththe$10strikeprice.Aforecasterwiththe$10strike ShorttheABCcalloptionwiththe$55strikeprice,andgolongtheXYZputoptionwiththe$10strikeprice.Aforecasterisleastlikelytoremoveseasonality(andfocusonforecastingfluctuations)inthecaseofatimeseriesrelatedCorporateTheconsumerpriceindexGrossdomesticproductIIIIIBothIandTherisk-freerateis5%andtheexpectedmarketriskpremiumis10%.Aportfoliomanagerisprojectingareturnof12%.Theportfoliohasabetaof0.7,andthemarketbetais1.0.adjustingforrisk,thisportfolioisexpectedEqualtheperformancepredictedbytheCAPM.OutperformtheCAPMreturn.UnderperformtheCAPMUnabletodeterminebasedontheinformationAnoildrillerrecentlyissuedUSD250millionoffixed-ratedebtat4.0%perannumtohelpfundanewproject.Itnowwantstoconvertthisdebttoafloating-rateobligationusingaswap.Aswapdeskanalystforalargeinvestmentbankthatisamarketmakerinswapshasidentifiedfourfirmsinterestedinswappingtheirdebtfromfloating-ratetofixed-rate.ThefollowingtablequotesavailableloanratesfortheoildrillerandeachFixed-rate(inFloating-rate(inOil6-monthLIBOR+Firm6-monthLIBOR+Firm6-monthLIBOR+Firm6-monthLIBOR+Firm6-monthLIBOR+AswapbetweentheoildrillerandwhichfirmofferstheAswapbetweentheoildrillerandwhichfirmoffersthegreatestpossiblecombinedFirmBFirmFirmThecurrentspotpriceforcottonis$0.325perpound.Theannualrisk-freerateis3.0%,andthecosttostoreandinsurecottonis$0.002perpoundpermonth.A3-monthfuturescontractforcottonistradingat$0.3368perpound.Isthereanarbitrageopportunityavailable,andifso,howshouldaninvestortakeadvantageofThereisnoarbitrageopportunityYes,theinvestorshouldsellthefuturescontract,borrowattherisk-freerate,andbuythespotasset.Yes,theinvestorshouldbuythefuturescontract,sellthespotasset,andlendattherisk-freerate.Yes,theinvestorshouldbuythefuturescontract,borrowattherisk-freerate,andthespotIfitisnecessarytobelong2,500deep-in-the-moneycalloptionsinordertocreateaneutralposition,whichofthefollowingactionswouldbestrestoretheoriginaldelta-neutralpositionaftertheadditionoftheoptions?Sell1,250sharesoftheunderlyingasset.Buy1,250sharesoftheunderlyingasset.Sell2,500sharesoftheunderlyingasset.Buy2,500sharesofdieunderlyingDowntownSavings(Downtown)isconsideringaloantoFitRightCorporation(FitRight).FitRighthasrequestedacreditfacilityof$10millionofwhich$2millionwillbeusedimmediately.ThebankhasassessedaninternalcreditratingofBBB+equivalenttoa2%defaultprobabilityoverthenextyear.Drawdownupondefaultisassumedtobe60%.Thebankhasadditionallyestimateda40%recoveryratebasedonpledgedcollateral.ThestandarddeviationofEDFandLGDis5%and30%,respectively.TheclosestestimateoftheDowntown’sadjustedexposureandunexpectedlossAdjustedexposureof$5,200,000andunexpectedlossof$270,000.Adjustedexposureof$5,200,000andunexpectedlossofAdjustedexposureof$6,800,000andunexpectedlossof Adjustedexposureof$6,800,000andunexpectedlossof33.Afinancialinstitutioncreatedamodeltomeasureinterestratevolatility.Thehistoricaldistributionofinterestratevolatilitydidnotappeartobenormallydistributedduetotheobviouslarge Adjustedexposureof$6,800,000andunexpectedlossof33.Afinancialinstitutioncreatedamodeltomeasureinterestratevolatility.Thehistoricaldistributionofinterestratevolatilitydidnotappeartobenormallydistributedduetotheobviouslargefat-tails.Thefirmiscontemplatingusingaregime-switchingvolatilitymodeltocapturetheapparentexistenceoftime-varyinghighandlowinterestratevolatility.Whichofthefollowingstatementsbestcharacterizetheimplementationofaregime-switchingmodelforthisTheinterestratedistributionsareconditionallynormallydistributedassumingstaticinterestratevolatility.Theassumptionofnormalityisnotappropriateinthiscase,andtherefore,aregime-switchingmodelisunlikelytoworkwell.Theprobabilityoflargedeviationsfromnormalityoccurringaremorelikelywitharegime-switchingmodel.Theregime-switchingmodelmayresolvethefat-tailWhichofthefollowingcasesoflosseswasnottheresultofunauthorizedorrogueAlliedIrishBankAGermanhousingcorporationneedstohedgeagainstrisinginterestrates.Ithaschosentousefutureson10-yearGermangovernmentbonds.Whichpositioninthefuturesshouldthecorporationtake,andTakealongpositioninthefuturesbecauserisinginterestratesleadtorisingfuturesTakeashortpositioninthefuturesbecauserisinginterestratesleadtorisingfuturesTakeashortpositioninthefuturesbecauserisinginterestratesleadtodecliningfuturesTakealongpositioninthefuturesbecauserisinginterestratesleadtodecliningAninvestorbuysastockfor$40pershareandsimultaneouslysellsacalloptiononthewithanexercisepriceof$42forapremiumof$3pershare.Ignoringdividendstransactioncosts,whichofthefollowingamountsrepresentsthemaximumtransactioncosts,whichofthefollowingamountsrepresentsthemaximumprofittheofthiscoveredcallcanearnifthepositionisheldtoAbankhas$500millioninassetswithamodifieddurationof7and$400millioninliabilitieswithamodifieddurationof5.Accountingonlyfordurationeffects,theimpactofa50-basis-pointparallelupwardshiftintheyieldcurveonthebank’sequityvalueisclosestto$7.5million$7.5million$15million$15millionItiscurrentlyAugust2010,andthespotpriceofsoybeansis$5.05/bushel.Storagecostsforsoybeansonacontinuouslycompoundedbasisare$0.45/bushelannually.Theappropriatecontinuouslycompoundedinterestrateis8%.IfasoybeanfarmerhasjustfinishedharvestinghiscropbutwouldliketosellhalfofthecropinFebruary2011andhalfinMay2011bygoingshortfuturescontracts,whichofthefollowingstatementsismostaccurate?ThefarmershouldstorehiscroponlyifFebruaryfuturescontractpriceisatleast$5.48/bushelandtheMayfuturescontractpriceisatleast$5.70/bushel.Februaryfuturescontractpriceisatleast$5.48/bushelandtheMayfuturescontractpriceisatleast$5.73/bushel.Februaryfuturescontractpriceisatleast$5.50/bushelandtheMayfuturescontractpriceisatleast$5.70/bushel.Februaryfuturescontractpriceisatleast$5.50/bushelandtheMayfuturespriceisatleastAnanalystisestimatingthesensitivityofthereturnofstockAtodifferentmacroeconomicfactors.Hepreparesthefollowingestimatesforthefactorbetas: βinterestrate=-Underbaselineexpectations,withindustrialproductiongrowthof3%andaninterestrateof1.5%,theexpectedreturnforStockAisestimatedtobe5%.Theeconomicresearchdepartmentisforecastinganaccelerationof'economicTheeconomicresearchdepartmentisforecastinganaccelerationof'economicactivityforthefollowingyear,withGDPforecasttogrow4.2%andinterestratesincreasing25basisto1.75%.WhatreturnofStockAcanbeexpectedfornextyearaccordingtothisAnoilproducerhasanobligationunderanagreementtosupplyonemillionbarrelsofoilatafixedprice.Theproducerwishestohedgethisliabilityusingfuturesinordertoaddresspossibilityofanupwardmovementinoilprices.Incomparingastriphedgetoastackandrollhedge,whichofthefollowingstatementsisAstackandrollhedgetendstoinvolvefewertransactions.Astriphedgetendstohavesmallerbid-askspreads.AstackandrollhedgetendstohavegreaterAstriphedgetendstorealizegainsandlossesmoreAlargepubliclyheldcompanyrefinescrudeoilintogasolineandsellsgasolinewholesalewithlong-termcontractsatfixedprices.Thefirmalsoownstheland,withfullrights,fromwhichitpumpscrudeoil.Thefirmfinancedthepurchaseofthelandbyissuingfloating-ratebonds.ThisfirmcouldreducethevolatilityofitsearningsbyenteringintoInterest-rateswapIonlyIIBothIandIIAportfoliomanagerhasareturn10%withavolatilityof20%.Thebenchmarkreturns8%withavolatilityof14%.Thecorrelationbetweenthetwois0.98.Therisk-freerateis3%.WhichofthefollowingstatementsisTheportfoliohashigherSRthanthebenchmark.TheportfoliohasnegativeIR.TheIRisTheIRisLong-TermCapitalManagement(LTCM)experiencedfinancialdifficultyinthelateWhichofthefollowingstatementsisfalseregardingtheirTheWhichofthefollowingstatementsisfalseregardingtheirTheamountoftheirpositionsinswapswasverylarge,butduetooffsettingpositions,theamountoftheirriskwasintheoryverysmall.LTCMrequiredtheirinvestorstoinvestforthreeyears,therebyincreasingfundingrisk.LTCMobtainedfinancingthroughrepurchaseagreementsatveryfavorableterms.Duetothesizeoftheirpositions,LTCMcouldnotliquidatetheirassetswithoutatlargeCharmaineTownsend,FRM,hasbeenmanagingagrowthportfolioforherclientsusingascreeningprocessthatidentifiescompaniesthathavehighearningsgrowthrates,Townsendhasdecidedthatbecauseofavolatileeconomy,sheisgoingtoadoptavaluestrategyusingascreeningprocessthatidentifiescompaniesthathavelowprice-earningsmultiples.TownsendwillviolatetheGARPCodeofConductifshemakesthischangeinherinvestmentprocessNotifyinghersupervisorbeforeshemakesthechange.Promptlynotifyingherclientsofthechange.GettingwrittenpermissionfromherclientsinadvanceoftheGettingpromptwrittenacknowledgmentofthechangefromherclientswithinareasonabletimeafterthechangewasmade.Supposeanexistingshortoptionpositionisdelta-neutral,buthasagammaofnegative600.Alsoassumethatthereexistsatradedoptionwithadeltaof0.75andagammaof1.50.Inordertomaintainthepositiongamma-neutralanddelta-neutral,whichofthefollowingistheappropriateBuy400optionsandsell300sharesoftheunderlyingasset.Buy300optionsandsell400sharesoftheunderlyingasset.Sell400optionsandbuy300sharesoftheunderlyingasset.Sell300optionsandbuy400sharesoftheunderlyingWhichofthefollowingstatementsisnotaproblemwithmultidimensionalscenarioCorrelationofriskfactorsisDetermininghowmanyriskfactorstoincludeisnon-trivial.Selectingatimeperiodforparametricestimationissubjective.Assigningweightstovariousscenariosisverycomplex.YourfirmusesaproprietaryforecastingmodelthatrequiresparameterestimatesofvariablesthatarebelievedtofollowthePoissondistribution.Youareattemptingtoassesstheprobabilityofthenumberofdefectsinanassemblyproductionprocessforagivencompany.AssumethatthereisavariablesthatarebelievedtofollowthePoissondistribution.Youareattemptingtoassesstheprobabilityofthenumberofdefectsinanassemblyproductionprocessforagivencompany.Assumethatthereisa0.005probabilityofadefectforeveryproductionrun.Whatistheprobabilityof7defectsin1,000productionYouareanalyzingaportfoliothathasaJensen’salphaof4.75%andanactualreturn14.2%.Therisk-freerateis4.25%andtheequityriskpremiumis6%.Basedontheinformationprovided,thebetaoftheportfolioisclosestto:Anoptiontraderisattemptingtojudgewhetheranoption’spremiumischeaporexpensive.Todoso,heemploysaGARCH(1,1)modeltoforecastvolatility.Theparticularmodelheestimateshasanintercepttermequalto0.000005,aparameterestimateonthelatestestimateofvarianceof0.85,andaparameterestimateonthelatestinnovationof0.13.Ifthelatestvolatilityestimatefromthemodelwere2.2%perdayandtheoption’sunderlyingassetchanged3%,thetrader’sestimateofthenextperiod’sstandarddeviationisclosestTheyieldcurveisupwardsloping.YouhaveashortT-Bondinterestratefuturesposition.followingbondsareeligibleforThefuturespriceis103-17/32andthematuritydateofthecontractisSeptember1.bondspaytheircouponamountsemi-annuallyonJune30andDecember31.WiththeseConversionCouponABCthecheapest-to-deliverbondBondABondBBondInsufficientinformationtothecheapest-to-deliverbondBondABondBBondInsufficientinformationtoStampedeCapitalManagementhasenteredintoacurrencyswapwithPolarInvestmentsinwhichStampedepays3.5%perannumineurosandreceives2.8%perannumindollars.Stampedepaysaprincipalamountof$130milliontoPolar,whilePolarpays€100milliontoStampedeatinceptionoftheswap.TheyieldcurveinbothGermanyandtheUnitedStatesisupward-slopingwiththefollowinginterestUnitedTheswapwilllastforanothertwoyearsandthecurrentexchangerateis$1.33/€.Whatisvalueofthecurrencyswapto$0.21$0.54$1.06$1.95Asresearchanalystathisfirm,RichardStarrisassignedthetaskofexaminingtherelevanceofthecapitalassetpricingmodelbyrunninghypothesistestsontherisk-freerateandthemarketriskpremium.Starr’ssupervisormakesthefollowingstatement:“FortheCAPMtobevalid,themean1-yearTreasurybillrateshouldequal4%andthemeanmarketriskpremiumshouldbepositive.”Starrcollectshistoricalrateofreturndatafor1-yearTreasurybillsandfortheannualmarketriskpremiumsoverthepast30years.HethenconductstestsofhypothesesusingthehistoricalTreasurybillandmarketriskpremiumdata.Toexaminetheclaimsofhissupervisor,identifywhetherStarrshouldperformone-tailedortwo-tailedtestsoftheseMarketriskpremiumOne-tailedtestTwo-tailedtestOne-tailedtestTwo-tailedtestOne-tailedtestOne-tailedtestTwo-tailedTwo-tailedAninvestorwithalongpositioninafuturescontractwantstoissueinstructionstoclosetheposition.AAninvestorwithalongpositioninafuturescontractwantstoissueinstructionstoclosetheposition.Amarket-if-touchedorderwouldbeusediftheinvestorwantsExecuteatthebestavailablepriceonceatradeoccursatthespecifiedorbetterprice.Executeatthebestavailablepriceonceabid/offeroccursatthespecifiedorworseAllowabrokertodelayexecutionoftheordertogetabetterExecutetheorderimmediatelyornotatWhichtypeofhedgefundfocusesonisolatingmispricingsinforeignexchangeFixedincomearbitragehedgefunds.Globalmacrohedgefunds.ManagedfutureshedgeConvertiblearbitragehedgeGiventheinformationinthetablebelowandgiventhatthe2-yearspotrateis10.263%,istheappropriateactionofanarbitrageur?AssumeannualcouponsandThearbitrageurshouldshortthe1-and2-yearzero-couponbondsandbuythe2-yearcouponbond.Thearbitrageurshouldbuythe1-and2-yearzero-couponbondsandshortthe2-yearcouponbond.Thearbitrageurshouldbuythe1-yearzero-couponand2-yearcouponbondandshortthe2-yearzero-couponbond.Thearbitrageurshouldshortthe1-yearzero-couponand2-yearcouponbondandthe2-yearzero-couponTheefficientfrontierisdefinedbythesetofportfoliosthat,foreachvolatilitylevel,maximizestheexpectedreturn.Accordingtothecapitalassetpricingmodel(CAPM),whichofthefollowingstatementsiscorrectwithrespecttotheefficientfrontier?Thecapitalmarketlinealwayshasapositiveslopeanditssteepnessdependsonthemarketriskpremiumandthevolatilityofthemarketportfolio.Thecapitalmarketlineisthestraightlineconnectingtherisk-freeassetwiththebetaminimumvarianceBondBondBondMaturityin122CouponInvestorswiththelowestriskaversionwilltypicallyholdtheportfolioofriskyassetsthathastheloweststandarddeviationontheefficientfrontier.Investorswiththelowestriskaversionwilltypicallyholdtheportfolioofriskyassetsthathastheloweststandarddeviationontheefficientfrontier.TheefficientfrontierallowsdifferentindividualstohavedifferentportfoliosofassetsbasedupontheirindividualforecastsforassetThecurrentpriceofastockis$25.Aputoptionwitha$20strikepricethatexpiresinsixmonthsisavailable.N(d1)=0.9737andN(d2)=0.9651.Iftheunderlyingstockexhibitsanannualstandarddeviationof25%,andthecurrentcontinuouslycompoundedris