SOA FM Exam Answered And Graded
Reasons for Using Derivatives - Correct Answer 1) Risk Management (Hedging)
2) Speculation
3) Reducing Transaction Cost
4) Regulatory Arbitrage
Bid Price - Correct Answer The price at which brokers will buy and end-users will sell at
Ask Price - Correct Answer The price at which brokers will sell at and end-users will buy at.
Bid Ask Spread - Correct Answer Ask Price - Bid Price
Long Position - Correct Answer When an asset benefits from an increase in the price of the
asset (when it is bought)
Short Position - Correct Answer When as asset benefits from a decrease in the price of the
asset (when it is sold)
Short-Selling - Correct Answer 1) Borrow the asset from a lender
2) Immediately sell the asset and receive the current market value
3) Make deposit into margin account (refill if there is a margin call)
4) Buy the asset back at later time and return to lender (close/cover short position)
Haircut - Correct Answer Additional collateral/margin placed with the lender by the short seller
Short Rebate - Correct Answer Interest rate paid by the haircut
, Reasons for Short-Selling - Correct Answer 1) Speculation (Think the price will go down)
2) Financing (Borrow money for additional financing)
3) Hedging (To hedge the risk of owning an asset or derivative)
4) Option Moneyness:
--In-the-money (Positive payoff if the option is exercised immediately)
--At-the-money (The spot price and strike price are approximately equal)
--Out-of-the-money (Negative payoff if the option is exercised immediately)
Option Styles - Correct Answer 1) European-style: Only exercised at expiration
2) American-style: Can be exercised at any time during the life of the option
3) Bermudan-style: Can be exercised during the specified periods
Insuring a long position in an asset - Correct Answer Long Asset + Long Put = Long Call+Lending
Insuring a short position in an asset - Correct Answer Short Asset + Long Call = Long Put +
borrowing
Protective Put - Correct Answer Long asset + Long Put
Covered Call - Correct Answer Long asset + Short Call
Covered Put - Correct Answer Short asset + short put
Synthetic Forward - Correct Answer Synthetic Long: Long Call + Short Put
Synthetic Short: Short Call + Long Put
Reasons for Using Derivatives - Correct Answer 1) Risk Management (Hedging)
2) Speculation
3) Reducing Transaction Cost
4) Regulatory Arbitrage
Bid Price - Correct Answer The price at which brokers will buy and end-users will sell at
Ask Price - Correct Answer The price at which brokers will sell at and end-users will buy at.
Bid Ask Spread - Correct Answer Ask Price - Bid Price
Long Position - Correct Answer When an asset benefits from an increase in the price of the
asset (when it is bought)
Short Position - Correct Answer When as asset benefits from a decrease in the price of the
asset (when it is sold)
Short-Selling - Correct Answer 1) Borrow the asset from a lender
2) Immediately sell the asset and receive the current market value
3) Make deposit into margin account (refill if there is a margin call)
4) Buy the asset back at later time and return to lender (close/cover short position)
Haircut - Correct Answer Additional collateral/margin placed with the lender by the short seller
Short Rebate - Correct Answer Interest rate paid by the haircut
, Reasons for Short-Selling - Correct Answer 1) Speculation (Think the price will go down)
2) Financing (Borrow money for additional financing)
3) Hedging (To hedge the risk of owning an asset or derivative)
4) Option Moneyness:
--In-the-money (Positive payoff if the option is exercised immediately)
--At-the-money (The spot price and strike price are approximately equal)
--Out-of-the-money (Negative payoff if the option is exercised immediately)
Option Styles - Correct Answer 1) European-style: Only exercised at expiration
2) American-style: Can be exercised at any time during the life of the option
3) Bermudan-style: Can be exercised during the specified periods
Insuring a long position in an asset - Correct Answer Long Asset + Long Put = Long Call+Lending
Insuring a short position in an asset - Correct Answer Short Asset + Long Call = Long Put +
borrowing
Protective Put - Correct Answer Long asset + Long Put
Covered Call - Correct Answer Long asset + Short Call
Covered Put - Correct Answer Short asset + short put
Synthetic Forward - Correct Answer Synthetic Long: Long Call + Short Put
Synthetic Short: Short Call + Long Put
