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PRMIA Exam I: Finance Theory, Financial Instruments, Financial Markets ? 2015 Edition Exam

Certification Provider: PRMIA
Exam Name: Exam I: Finance Theory, Financial Instruments, Financial Markets ? 2015 Edition
Number of questions in our database: 287
Exam Version: Mar. 12, 2023
Exam I: Finance Theory, Financial Instruments, Financial Markets ? 2015 Edition Exam Official Topics:
  • Topic 1: Describe how arbitrage pricing theory can be used for decision-making/ The Term Structure of Interest Rates
  • Topic 2: Identify and describe risk adjusted performance measures/ Outline the components of the Capital Asset Pricing Model (CAPM)
  • Topic 3: Describe the axioms and assumptions of utility theory with respect to expected return and risk/ The CAPM and Multifactor Models
  • Topic 4: Describe the lifecycle of a trade and distinguish between dealing and settlement/ Mean-Variance Portfolio Theory
  • Topic 5: Understand the standardized characteristics of futures contract/ Discuss significant funding rates
  • Topic 6: Define and describe the various participants within financial markets/ Calculate the bond equivalent yield of money market securities
  • Topic 7: Identify and understand the components of option valuation/ Relate mean-variance portfolio theory to asset allocation decisions
  • Topic 8: Assess and analyze the capital structure of entities/ Define and describe money market securities
  • Topic 9: Participants in and the Structure of Financial Markets/ Discuss the rationale for futures markets and describe the settlement and clearing processes
  • Topic 10: Define and describe the characteristics of bond markets/ Understand probability theory including Bayesian theory

Free PRMIA Exam I: Finance Theory, Financial Instruments, Financial Markets ? 2015 Edition Exam Actual Questions

The questions for Exam I: Finance Theory, Financial Instruments, Financial Markets ? 2015 Edition were last updated On Mar. 12, 2023

Question #1

Which of the following markets are characterized by the presence of a market maker always making two-way prices?

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Correct Answer: A

Over the counter and electronic communication networks match buyers and sellers. However, there is no market making function, ie, in periods of stress liquidity may completely disappear from these markets. Exchanges normally have market makers that are required to present two way quotes on the securities they are making the market for. Therefore Choice 'a' is the correct answer.


Question #2

It is October. A grower of crops is concerned that January temperatures might be too low and destroy his crop. A heating-degree-days futures contract (HDD futures contract) is available for his city. What would be the best course of action for the grower?

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Correct Answer: B

This question is based upon a weather derivative contract traded on the CME in the US. For each day, 'Heating-Degree-Days' (HDD) is calculated as equal to 65 degrees Fahrenheit minus the daily average temperature. The daily average temperature is based upon the temperature reported by the Earth Satellite Corporation using a specified automated weather station. Based upon daily values of HDD, an aggregated number called the 'CME degree days index' is calculated for each contract month. In other words, the index for a particular month is just the aggregation of the 'HDD' value for each of the days of that month. Each contract settles at the end of the month at a value equal to $20 x Degree Days Index. (In a similar way, 'Cooling Degree Days' are also calculated and a futures contract offered, except that CDD is equal to the average daily temperature minus 65 degrees). (Source: CME's website at CMEGroup.com)

In the given question, we are interested in hedging against the possibility of the temperature being too low. This means we should buy the HDD futures contract (the lower the temperature, the higher the difference of the average temperature from 65 degrees, and the higher the settlement). Therefore Choice 'b' is the correct answer. The lower the actual temperature turns out to be, the higher the payout to the grower. It would not be wise to wait till January to buy the contract as by then the prices of the contract would have already risen if the grower's fears of a colder January appear to be coming true. He can hedge his exposure by immediately locking in the January prices.


Question #3

A refiner may use which of the following instruments to simultaneously protect against a fall in the prices of its products and a rise in the prices of its inputs:

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Correct Answer: B

The crack spread is the difference between the price of refined products and crude oil. An option on the crack spread can protect a refiner from both a fall in the price of its output and a rise in the price of its inputs. Calendar spreads are options with different maturities. Crude oil futures and swaps only protect against an adverse change in the price of crude, and not that of refined products. Choice 'b' is the correct answer.


Question #4

It is October. A grower of crops is concerned that January temperatures might be too low and destroy his crop. A heating-degree-days futures contract (HDD futures contract) is available for his city. What would be the best course of action for the grower?

Reveal Solution Hide Solution
Correct Answer: B

This question is based upon a weather derivative contract traded on the CME in the US. For each day, 'Heating-Degree-Days' (HDD) is calculated as equal to 65 degrees Fahrenheit minus the daily average temperature. The daily average temperature is based upon the temperature reported by the Earth Satellite Corporation using a specified automated weather station. Based upon daily values of HDD, an aggregated number called the 'CME degree days index' is calculated for each contract month. In other words, the index for a particular month is just the aggregation of the 'HDD' value for each of the days of that month. Each contract settles at the end of the month at a value equal to $20 x Degree Days Index. (In a similar way, 'Cooling Degree Days' are also calculated and a futures contract offered, except that CDD is equal to the average daily temperature minus 65 degrees). (Source: CME's website at CMEGroup.com)

In the given question, we are interested in hedging against the possibility of the temperature being too low. This means we should buy the HDD futures contract (the lower the temperature, the higher the difference of the average temperature from 65 degrees, and the higher the settlement). Therefore Choice 'b' is the correct answer. The lower the actual temperature turns out to be, the higher the payout to the grower. It would not be wise to wait till January to buy the contract as by then the prices of the contract would have already risen if the grower's fears of a colder January appear to be coming true. He can hedge his exposure by immediately locking in the January prices.


Question #5

If the CHF/USD spot rate is 1.1010 and the one year forward is 1.1040, what is the annualized forward premium or discount, and the one year swap rate?

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Correct Answer: C

If the spot rate is 1.1010 and the forward is 1.1040, the swap rate is 30 'points' (= 1.1040 - 1.1010). The annualized swap premium is the swap premium divided by the spot rate, and therefore =0.0030/1.1010 =0.27%, or 27 basis points.



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