Derivative CFA Level 1 quiz

sukanyalal3
Posts: 4
Joined: Sun May 13, 2012 7:21 pm

Derivative CFA Level 1 quiz

Postby sukanyalal3 » Sun May 13, 2012 11:20 pm

Please explain the working of the below questions from Derivatives Quiz level 1 CFA

90-day T-Bill Future is quoted price at 98. Calculate the delivery price
Choose one answer.

a. $98

b. $980,000

c. $995,000
The correct answer is $995,000.
Incorrect
Marks for this submission: 0/1.
An FRA settles in 30 days
$1 million notional
Based on 90-day LIBOR
Forward rate of 5.5%
Actual 90-day LIBOR at settlement is 6.5%

Calculate the PV of the FRA
Choose one answer.

a. $2,453

b. $2,460

c. $2,463
The correct answer is $2,460.
Incorrect
Marks for this submission: 0/1.
Find lower bound for European call X = $75, stock is trading at $73, RFR = 5%, 3 months expiry
Choose one answer.

a. $3.5

b. $3.8

c. $3.9
The correct answer is $3.9.
Correct
Marks for this submission: 1/1.

Tags:

content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: Derivative CFA Level 1 quiz

Postby content.pristine » Mon May 14, 2012 1:29 pm

Hi Sukanyalal,

1. The way T.Bill Futures are quoted is (100-annualized yield). Here, we can use a shortcut - ever basis point change in yield means a change in price of $25.

The reason for this is because these are standardized contracts. Each contract is 90 days and for a notional amount of $1M.

Here, since 100-98=2, we are talking about a 200bps change in yield. This would cause a 200*25 = 5,000 discount from par.

Hence, $1,000,000 - $5,000 = $995,000

2. The question here is wrong. I guess they wanted to say that the price of the stock is $78.

Hope this helps.. 8-)

arvind
Posts: 2
Joined: Fri May 04, 2012 5:35 pm

Re: Derivative CFA Level 1 quiz

Postby arvind » Mon May 14, 2012 5:08 pm



Solution to the FRA Question
Steps involved in Solving this question
1. Calculate the difference between floating rates and fixed rates
2. Convert these rates into periodic form (the given rates are annualized rates)
3. Multiply this rate with the notional principal to get the interest saving or payment
4. Since this saving would happen at the end of the loan period (90 days from contract expiration), we find the present value of this amount at the time of settlement (or expiry)

The formula for calculating FRA payments is as follows:

Payment = (Notional Principal) x [(Floating Rate - Fixed Rate )x (90/360)]/ [1+ (Floating Rate x (90/360)]

"We use (90/360) to convert the annualized rates into periodic rates"

Payment = $1,000,000 x [( 6.5% - 5.5% ) x (90/360)] / [1 + 6.5% x (90/360)]

Payment = $2500/1.0162

Payment = $2460


Arvind,
Pristine

sukanyalal3
Posts: 4
Joined: Sun May 13, 2012 7:21 pm

Re: Derivative CFA Level 1 quiz

Postby sukanyalal3 » Wed May 16, 2012 9:27 pm

Hey Arvind Thanks a million! I attempted a Derivative Test and
believe the answers are wrong!!



Which of the following is correct regarding exchange traded derivatives :
Choose one answer.

a. They are highly standardized

b. The clearing house act as a buyer against every seller and seller against every buyer

c. They carry significant default risk
The correct answer is They carry significant default risk.
Incorrect
Marks for this submission: 0/1.
Compute the amount that must be repaid on $5,000,000 loan for 90 day if 90 LIBOR is quoted at 5%
Compute the amount that must be repaid on $5,000,000 loan for 90 day if 90 LIBOR is quoted at 5%
Choose one answer.

a. $5,620,500

b. $5,062,500

c. $5,250,000
The correct answer is $5,620,500.

The interest for 90 days is = $5,000,000 * 0.05 * (90/360) = $62,500. Total amount to be repaid is = $5,000,000 + $62,500 = $5,062,500.
Incorrect
Marks for this submission: 0/1.

Choose one answer.


Since we have to look at correct option in my opinion option b is right.

arvind
Posts: 2
Joined: Fri May 04, 2012 5:35 pm

Re: Derivative CFA Level 1 quiz

Postby arvind » Thu May 17, 2012 10:38 am

Hey Sukanyalal,

I think your are pretty good at derivatives because both your answers were right ( or at least u were on the right track)

I think 'question 1' should ve been -

1. Which of the following is incorrect regarding exchange traded derivatives?
Then the choice C - "they carry significant default risk" would have been correct


2. In the second question your method is absolutely correct. But I was just wondering if there were any more details given in that question. If not, then your answer is absolutely correct!

Great Going :D

Arvind,
Pristine


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