SOA IFM EXAM QUESTIONS AND CORRECT ANSWERS

SOA IFM EXAM QUESTIONS AND
CORRECT ANSWERS
Hedging (Chp. 1) ANSW✅✅Guaranteeing a buying or selling price.



Derivative Perspectives (Chp. 1) ANSW✅✅1) End User

2) Market-Maker

3) Economic Observer



Bid Price (Chp. 1) ANSW✅✅The amount that a person will pay for an asset.



Offer Price/Ask Price (Chp. 1) ANSW✅✅The price an asset can be bought for.



Bid-Ask Spread (Chp. 1) ANSW✅✅The difference between the bid and ask prices.



Stock Orders (Chp. 1) ANSW✅✅1) Market Order

2) Limit Order

3) Stop Loss Sales Order



Market Order (Chp. 1) ANSW✅✅Pays the market price (ask/bid) to buy or sell stock immediately.



Limit Order (Chp. 1) ANSW✅✅Specifies the max buying price or min selling price and not fulfilled
until that price is avaliable.



Stop Loss Sales Order (Chp. 1) ANSW✅✅Specifies that the stock is sold if the price decreases to
the specified amount.



Long Position (Chp. 1) ANSW✅✅Positive number of units in which the instrument was bought.



Short Position (Chp. 1) ANSW✅✅Negative number of units in which the instrument was sold.

,Derivative Security (Chp. 1) ANSW✅✅A financial instrument whose value depends on another
security.



Option (Chp. 1) ANSW✅✅An agreement allowing the buyer of the option to buy or sell an asset at
a specific price on a specific day.



Clearinghouses (Chp. 1) ANSW✅✅Matches the buyers and the sellers and keeps track of their
obligations and payments.



Measures of Market Size and Activity (Chp. 1) ANSW✅✅1) Trading Volumne

2) Market Value

3) Notional Value

4) Open Interest



Purpose of Derivatives (Chp. 1) ANSW✅✅1) Risk Management

2) Speculation

3) Reduced Transaction Costs

4) Regulatory Arbitrage



Short Selling Purposes (Chp. 1) ANSW✅✅1) Speculation

2) Financing

3) Hedging



Lease Rate (Chp. 1) ANSW✅✅The annual cost of holding an asset as a percentage of the asset
value.



Repo Rate/Short Rate (Chp. 1) ANSW✅✅Repo: interst rate paid by the lender for bonds.

Short: interst rate paid by the lender for stocks.



Cost of Capital (Chp. 2) ANSW✅✅Interest rate paid to investors of the project.



NPV [Formula] (Chp. 2) ANSW✅✅

,NPV Perpetuity [Formula] (Chp. 2) ANSW✅✅NPV = 1/i



NPV Growth Rate [Formula] (Chp. 2) ANSW✅✅NPV = 1/(i-g)



Break - Even Analysis (Chp. 2) ANSW✅✅Determine the value of each assumption parameter for
which the NPV is 0.



IRR (Chp. 2) ANSW✅✅Internal Rate of Return



Sensitivity Analysis (Chp. 2) ANSW✅✅Caluclating the change in the NPV resulting from a change
in a parameter.



Scenario Analysis (Chp. 2) ANSW✅✅Calculate the NPV for various scenarios.



Risk Measures (Chp. 2) ANSW✅✅1) Variance

2) Semi-Variance

3) VaR

4) TVar



Variance [Formula] (Chp. 2) ANSW✅✅Var(R) = σ² = E[(R - µ)²] = E[R²] - µ²



Standard Deviation [Formula] (Chp. 2) ANSW✅✅SD(R) = √(Var(R)) = σ



Volatility (Chp. 2) ANSW✅✅Standard Deviation = Volatility



Semi-Variance [Downside Semi-Variance] (Chp. 2) ANSW✅✅The square difference from the mean
only when that difference is negative.



Semi-Variance [Downside Semi-Variance] [Formula] (Chp. 2) ANSW✅✅σ² = E[min(0,(R - µ))²]

, Sample Semi-Variance [Sample Downside Semi-Variance] [Formula] (Chp. 2) ANSW✅✅σ² = (1/n)
∑[min(0,(Ri - R))]²



Value-At-Risk [VaR] [Formula] (Chp. 2) ANSW✅✅VaRα(X) = Fx⁻¹(α)



Downside Tail Value-At-Risk [TVaR] [Formula] (Chp. 2) ANSW✅✅TVaRα(X) = E[x|x<VaRα(X)] =
(∫xf(x)dx)/α



Upside Tail Value-At-Risk [TVaR] [Formula] (Chp. 2) ANSW✅✅TVaRα(X) = E[x|x>VaRα(X)] =
(∫xf(x)dx)/(1-α)



Risk Measure Properties (Chp. 2) ANSW✅✅1) Translation Invariance

g(x+c) = g(x) + c



2) Positive Homogeneity

g(cx) = (c)g(x)



3) Subadditivity

g(x+y) ≤ g(x) + g(y) [Upside]

g(x+y) ≥ g(x) + g(y) [Downside]



4) Monotonicity

g(x) ≤ g(y) if Pr(x ≤ y) = 1 [Upside]

g(x) ≥ g(y) if Pr(x ≥ y) = 1 [Downside]



PV with Growth Rate [Formula] (Chp. 2) ANSW✅✅PV = [1 - [(1+g)/(1+r)]ⁿ]/(r-g)



Monte Carlo Simulation (Chp. 3) ANSW✅✅Generates pseudorandom numbers from a
distribution.



Inversion for Exponential [Formula] (Chp. 3) ANSW✅✅u = F(x) = 1 - e∧(-x/θ)

x = -θln(1-u)