Most Recent PRMIA 8006 Exam Dumps

In terms of beta, his exposure is $10m*0.7 = $7m. This exposure is long. In order order to neutralize his long exposure, he needs to have an equal an identical short position with the same beta as this long position (of course, in the short direction). We need to figure out how many contracts will have a beta equal to his held position. (The beta of a futures contract is slightly different from 1 when compared to spot, but in the absence of other information in the question it is always okay to assume that the beta of the futures contract is 1. Such precision does not matter because of other errors such as rounding etc that cannot be anyway done away with.)

He needs to short futures contracts on the index with $7m in notional value. The value of each contract is currently 1000*250 =$250,000. He therefore needs to short $7m/$250,000 = 28 contracts to become market or beta neutral.

The basis point value is equal to $102 x 5 /10000 = $0.051. Therefore Choice 'd' is the correct answer.

The basis point value, also called the PV01, is the dollar value change in the price of a bond as a result of a 1 basis point (=1/10000) change in interest rates. Since the modified duration is 5, it means a 1% change in interest rates produces a 5% change in the price of the bond, and a 1 bps change will therefore produce a 0.05% change in the value of the bond. Since the bond is currently valued at $102, the change works out to $102 x 0.05% = $0.051.

A short squeeze results when short sellers are trying to cover their short positions by buying in the spot markets, which do not have adequate supply. This results in sharp spikes in spot prices, which further forces any other shorts to try cut their losses. The result is a sharp rise in spot prices.

Choice 'a' is the correct answer, the other choices do not describe a short squeeze.

The investor's needs to sell futures contracts, as his current position is long. He needs to sell ($1,000,000 x (2.5-1)) / ($240,000 x 1.2) = 5.2 contracts, or rounded to 5 contracts.

It is important to note here that the investor wishes to retain a beta of 1, and does not want to get rid of all market exposure.

The transformation line represents the combination of a 'risky bundle' and the risk free asset. Investors can choose different combinations of these assets depending upon their risk appetite. The transformation line meets the y-axis (portfolio returns) at the point equal to the risk free rate. Choice 'b' is the correct answer and the rest are incorrect. The highest possible transformation line, ie the transformation line with the maximum slope, is the transformation line joining the risk free rate on the y-axis and the portfolio with the maximum Sharpe ratio on the efficient frontier. This line is called the 'capital markets line'. Investors can pick any point on this line according to their risk appetite, and doing so would maximize the return they can obtain for their desired level of risk. The capital markets line is tangential to the efficient frontier. The Sharpe ratio stays constant throughout the CML.