sample frm part 1 answer
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FRM P ART I EXPLANATIONS SAMPLE FRM PART I
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C+ = [20.6(0.67) + 3(0.33)] / 1.08 = 13.6962
C- = [3(0.67) + 0 (0.33)] / 1.08 = 1.8611
Call value today = [13.696(0.67) + 1.8611(0.33)] / 1.08 = 9.07
Answer 6: Correct answer is A
Callable bonds are called when interest rates have declined. A deferred call provision means that thebond is initially not callable; it does not allow the investor to postpone having his bond called. Callablebonds may be called at par. The indenture specifies the call premium and the rate at which the callpremium declines over time.
Answer 7: Correct answer is D
The MYRA loan has a value of:
The concessionality is then the difference between the original loan and the MYRA loan value = 100 99.003 = $0.997 million = $997,000.
Answer 8: Correct answer is D
The buyer of a bull spread buys the call with an exercise price below the current stock price and sells thecall option with an exercise price above the stock price. The cost of the strategy is the difference betweenthe cost of buying the option with the lower exercise price and selling the option with the higher exerciseprice which is $7 - $3 = $4 to enter into this strategy.
Answer 9: Correct answer is A
The call option value will decrease since the payment of dividends reduces the value of the underlying,
and the value of a call is positively related to the value of the underlying.
Answer 10: Correct answer is C
An exchange-for-physicals involves an agreement between long and short contract holders to settle theirrespective obligations by delivery and purchase of an asset. It is executed off the floor of the exchangeand reported to exchange officials who then cancel both positions.
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