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Prepare for the PRMIA Exam I: Finance Theory, Financial Instruments, Financial Markets – 2015 Edition exam with our extensive collection of questions and answers. These practice Q&A are updated according to the latest syllabus, providing you with the tools needed to review and test your knowledge.
QA4Exam focus on the latest syllabus and exam objectives, our practice Q&A are designed to help you identify key topics and solidify your understanding. By focusing on the core curriculum, These Questions & Answers helps you cover all the essential topics, ensuring you're well-prepared for every section of the exam. Each question comes with a detailed explanation, offering valuable insights and helping you to learn from your mistakes. Whether you're looking to assess your progress or dive deeper into complex topics, our updated Q&A will provide the support you need to confidently approach the PRMIA 8006 exam and achieve success.
The questions for 8006 were last updated on Sep 1, 2026.
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Which of the following statements is not correct with respect to a European call option:
An increase in volatility increases the value of the option, and so do increases in the price of the underlying and the risk free rate. However, since a European option can only be exercised at expiry, an increase in the time to expiry may not necessarily increase the value of the option as it may increase the uncertainty around a more certain payout.
Consider the extreme case of a deep in the money European call option that has 1 day left to expiry, and a payout is certain. Now imagine the time to expiry is increased by say, 6 months. Now the payout is no longer certain as no one knows what the value of the underlying will end up at after 6 months. In such a case, the value of the option would decline. But this applies only to a European option. An American option, which can be exercised any time, will not be affected by this reasoning.
A stock has a spot price of $102. It is expected that it will pay a dividend of $2.20 per share in 6 months. What is the price of the stock 9 months forward? Assume zero coupon interest rates for 6 months to be 6%, for 9 months to be 7%, and 12 months to be 8% - all continuously compounded.
The dividend payment has a present value of $2.20*e^( -6%*6/12) = $2.14. Therefore the forward price for delivery 9 months hence should be ($102 - $2.14)*e^(7%*9/12) = $105.25
Which of the following statements is true:
1. The OTC market for foreign exchange is much larger than the exchange traded futures market for foreign currencies
II. DVP arrangements help avoid the risk of counterparty defaults on settlements
III. Exchanges offer the advantage of lower trading costs than ECNs
IV. ISDA master agreements form the basis of a large number of OTC derivative trades
The OTC market for foreign exchange is indeed much larger than the exchange traded futures market for FX. Therefore statement I is correct.
Delivery-versus-payment (DVP) arrangements make sure that title to a security passes only when payment has been made, and these arrangements, usually implemented through national clearing agencies such as the DTC in the US, help avoid the risk of counterparty defaults.
Electronic Clearing Networks (ECNs) offer cheaper trading costs than exchanges, in fact that is their primary attraction. Exchanges offer other advantages, but lower trading costs is not one of them.
ISDA master agreements provide templates that a large number of OTC market participants use to standardize their OTC trading activities. Therefore statement IV is correct.
What is the fair price for a bond paying annual coupons at 5% and maturing in 5 years. Assume par value of $100 and the yield curve is flat at 6%.
The coupon payments can be considered an annuity which can be valued using the formula for the PV of annuities= annuity . Therefore the value of the five coupon payments is 5 * ((1-1/(1.06^5))/0.06) = $21.06
Similarly the principal payment at the end of 5 years can be valued as 100/1.065 = $74.73
Therefore the total value of the bond today is $95.79
An asset manager holds an equity portfolio valued at $25m with a beta of 0.8. She would like to reduce the beta of the portfolio to 0.6 for the next 3 months using index futures. Index futures are curently trading at 1450, and the contract multiple is 250. How should the asset manager trade the index futures to get his desired result? Assume her portfolio is well diversified.
The portfolio's beta is 0.8, and therefore in order to completely hedge the portfolio (ie reduce beta to 0), the portfolio manager would need to short 0.8 * $25m/(1450*$250) = 55.17 contracts, or 55 contracts. However, the ask here is to reduce the beta to 0.6, and not 0.
The number of contracts required to reduce the beta of a portfolio from to is give by (- ) * Value of portfolio / Value of a single contract. In this case, this calculation works out to (0.8 - 0.6) * $25m/(1450*250) = 13.8, or roughly 14 contracts.
The portfolio manager should short 14 index futures contracts to reduce the total portfolio beta to 0.6.
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