SOA EXAM IFM QUESTIONS AND
ANSWERS
Determine which of the following is the most likely NOT a typical feature of convertible
preferred stock.
A
Guarantee on initial investment
B
Anti-dilution protection
C
Board membership
D
Participation rights
E
Liquidation preference - Correct Answers -A
Long Floor - Correct Answers -Buy Stock, Buy Put -> Guarantees minimum selling price
Written Covered put - Correct Answers -Short stock, short put -> guarantees max loss
Long Box Spread - Correct Answers -Long Call Bull and Long Put Bear -> can flip call
and put and can short to get same result
Ratio Spread - Correct Answers -Long X calls K1 and Short Y calls K2. Doesn't matter
what K1, K2, X, Y are
Long Collar - Correct Answers -Long Put K1, Short Call K2 K1 < K2
Long Cap - Correct Answers -Long Stock, short call -> guarantees max purchase price
Written Covered Call - Correct Answers -Buy Stock, Short Call
Bull Spread - Correct Answers -Long Call K1 Short Call K2 K1 < K2 can be done with
puts too
Bear Spread - Correct Answers -Short Call K1 Long Call K2 K1 < K2 can be done with
puts too
Collared Stock - Correct Answers -Long Put K1, Short Call K2, Long Stock
, S&P 500 multipliers for forward contracts - Correct Answers -250
Determine which of the following statements regarding capital structure in a perfect
capital market is FALSE.
A
The relative proportions of debt, equity, and other securities that a firm has outstanding
constitute its capital structure.
B
The total value of a firm's securities is equal to the book value of the total cash flows
generated by its assets.
C
The cost of issuing equity is zero.
D
Firms with identical assets but different amounts of debts have the same value.
E
The cost of capital of levered equity increases with the firm's market value debt-to-value
ratio in a non-linear manner. - Correct Answers -B
Straddle - Correct Answers -Long Call Long Put same K
Strangle - Correct Answers -Long Call K2 Long Put K1 K2 > K1
Ways to Create a Butterfly Spread - Correct Answers -Long Call K1, Long Call K3,
Short 2 Calls K2
Long Put K1, Long Put K3, Short 2 Puts K2
Long Bull, Long Bear same option type
Long Strangle, Write Straddle
Cash and Carry vs Reverse Cash and Carry - Correct Answers -Real forward
overpriced, short forward, long stock with borrowed money (buy call sell put at K)
Real forward underpriced, long forward, short stock and lend money (sell call and buy
put at K)
Futures vs Forwards (6 diffs) - Correct Answers -Traded on exchange
Standardized size, exp, underlying
More liquid
Marked-to-market
Minimal credit risk
ANSWERS
Determine which of the following is the most likely NOT a typical feature of convertible
preferred stock.
A
Guarantee on initial investment
B
Anti-dilution protection
C
Board membership
D
Participation rights
E
Liquidation preference - Correct Answers -A
Long Floor - Correct Answers -Buy Stock, Buy Put -> Guarantees minimum selling price
Written Covered put - Correct Answers -Short stock, short put -> guarantees max loss
Long Box Spread - Correct Answers -Long Call Bull and Long Put Bear -> can flip call
and put and can short to get same result
Ratio Spread - Correct Answers -Long X calls K1 and Short Y calls K2. Doesn't matter
what K1, K2, X, Y are
Long Collar - Correct Answers -Long Put K1, Short Call K2 K1 < K2
Long Cap - Correct Answers -Long Stock, short call -> guarantees max purchase price
Written Covered Call - Correct Answers -Buy Stock, Short Call
Bull Spread - Correct Answers -Long Call K1 Short Call K2 K1 < K2 can be done with
puts too
Bear Spread - Correct Answers -Short Call K1 Long Call K2 K1 < K2 can be done with
puts too
Collared Stock - Correct Answers -Long Put K1, Short Call K2, Long Stock
, S&P 500 multipliers for forward contracts - Correct Answers -250
Determine which of the following statements regarding capital structure in a perfect
capital market is FALSE.
A
The relative proportions of debt, equity, and other securities that a firm has outstanding
constitute its capital structure.
B
The total value of a firm's securities is equal to the book value of the total cash flows
generated by its assets.
C
The cost of issuing equity is zero.
D
Firms with identical assets but different amounts of debts have the same value.
E
The cost of capital of levered equity increases with the firm's market value debt-to-value
ratio in a non-linear manner. - Correct Answers -B
Straddle - Correct Answers -Long Call Long Put same K
Strangle - Correct Answers -Long Call K2 Long Put K1 K2 > K1
Ways to Create a Butterfly Spread - Correct Answers -Long Call K1, Long Call K3,
Short 2 Calls K2
Long Put K1, Long Put K3, Short 2 Puts K2
Long Bull, Long Bear same option type
Long Strangle, Write Straddle
Cash and Carry vs Reverse Cash and Carry - Correct Answers -Real forward
overpriced, short forward, long stock with borrowed money (buy call sell put at K)
Real forward underpriced, long forward, short stock and lend money (sell call and buy
put at K)
Futures vs Forwards (6 diffs) - Correct Answers -Traded on exchange
Standardized size, exp, underlying
More liquid
Marked-to-market
Minimal credit risk
