SOA IFM Exam Questions With
Complete Solutions
Derivative Security (Chp. 1) - Answer-A financial instrument whose value depends on
another security.
/.Option (Chp. 1) - Answer-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) - Answer-Matches the buyers and the sellers and keeps track
of their obligations and payments.
/.Measures of Market Size and Activity (Chp. 1) - Answer-1) Trading Volumne
2) Market Value
3) Notional Value
4) Open Interest
/.Purpose of Derivatives (Chp. 1) - Answer-1) Risk Management
2) Speculation
3) Reduced Transaction Costs
4) Regulatory Arbitrage
/.Hedging (Chp. 1) - Answer-Guaranteeing a buying or selling price.
/.Derivative Perspectives (Chp. 1) - Answer-1) End User
2) Market-Maker
3) Economic Observer
/.Bid Price (Chp. 1) - Answer-The amount that a person will pay for an asset.
/.Offer Price/Ask Price (Chp. 1) - Answer-The price an asset can be bought for.
/.Bid-Ask Spread (Chp. 1) - Answer-The difference between the bid and ask prices.
/.Stock Orders (Chp. 1) - Answer-1) Market Order
2) Limit Order
3) Stop Loss Sales Order
/.Market Order (Chp. 1) - Answer-Pays the market price (ask/bid) to buy or sell stock
immediately.
/.Limit Order (Chp. 1) - Answer-Specifies the max buying price or min selling price and
not fulfilled until that price is avaliable.
,/.Stop Loss Sales Order (Chp. 1) - Answer-Specifies that the stock is sold if the price
decreases to the specified amount.
/.Long Position (Chp. 1) - Answer-Positive number of units in which the instrument was
bought.
/.Short Position (Chp. 1) - Answer-Negative number of units in which the instrument was
sold.
/.Short Selling Purposes (Chp. 1) - Answer-1) Speculation
2) Financing
3) Hedging
/.Lease Rate (Chp. 1) - Answer-The annual cost of holding an asset as a percentage of
the asset value.
/.Repo Rate/Short Rate (Chp. 1) - Answer-Repo: interst rate paid by the lender for
bonds.
Short: interst rate paid by the lender for stocks.
/.Cost of Capital (Chp. 2) - Answer-Interest rate paid to investors of the project.
/.NPV [Formula] (Chp. 2) - Answer-
/.NPV Perpetuity [Formula] (Chp. 2) - Answer-NPV = 1/i
/.NPV Growth Rate [Formula] (Chp. 2) - Answer-NPV = 1/(i-g)
/.Break - Even Analysis (Chp. 2) - Answer-Determine the value of each assumption
parameter for which the NPV is 0.
/.IRR (Chp. 2) - Answer-Internal Rate of Return
/.Sensitivity Analysis (Chp. 2) - Answer-Caluclating the change in the NPV resulting
from a change in a parameter.
/.Scenario Analysis (Chp. 2) - Answer-Calculate the NPV for various scenarios.
/.Risk Measures (Chp. 2) - Answer-1) Variance
2) Semi-Variance
3) VaR
4) TVar
/.Variance [Formula] (Chp. 2) - Answer-Var(R) = ζ² = E[(R - µ)²] = E[R²] - µ²
, /.Standard Deviation [Formula] (Chp. 2) - Answer-SD(R) = √(Var(R)) = ζ
/.Volatility (Chp. 2) - Answer-Standard Deviation = Volatility
/.Semi-Variance [Downside Semi-Variance] (Chp. 2) - Answer-The square difference
from the mean only when that difference is negative.
/.Semi-Variance [Downside Semi-Variance] [Formula] (Chp. 2) - Answer-ζ² = E[min(0,(R
- µ))²]
/.Sample Semi-Variance [Sample Downside Semi-Variance] [Formula] (Chp. 2) -
Answer-ζ² = (1/n) ∑[min(0,(Ri - R))]²
/.Value-At-Risk [VaR] [Formula] (Chp. 2) - Answer-VaRα(X) = Fx⁻¹(α)
/.Downside Tail Value-At-Risk [TVaR] [Formula] (Chp. 2) - Answer-TVaRα(X) =
E[x|x<VaRα(X)] = (∫xf(x)dx)/α
/.Upside Tail Value-At-Risk [TVaR] [Formula] (Chp. 2) - Answer-TVaRα(X) =
E[x|x>VaRα(X)] = (∫xf(x)dx)/(1-α)
/.Risk Measure Properties (Chp. 2) - Answer-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) - Answer-PV = [1 - [(1+g)/(1+r)]ⁿ]/(r-g)
/.Monte Carlo Simulation (Chp. 3) - Answer-Generates pseudorandom numbers from a
distribution.
/.Inversion for Exponential [Formula] (Chp. 3) - Answer-u = F(x) = 1 - e∧(-x/θ)
x = -θln(1-u)
/.Effective Markets Hypothesis [EMH] (Chp. 4) - Answer-It is difficult or impossible to
beat the stock market.
Complete Solutions
Derivative Security (Chp. 1) - Answer-A financial instrument whose value depends on
another security.
/.Option (Chp. 1) - Answer-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) - Answer-Matches the buyers and the sellers and keeps track
of their obligations and payments.
/.Measures of Market Size and Activity (Chp. 1) - Answer-1) Trading Volumne
2) Market Value
3) Notional Value
4) Open Interest
/.Purpose of Derivatives (Chp. 1) - Answer-1) Risk Management
2) Speculation
3) Reduced Transaction Costs
4) Regulatory Arbitrage
/.Hedging (Chp. 1) - Answer-Guaranteeing a buying or selling price.
/.Derivative Perspectives (Chp. 1) - Answer-1) End User
2) Market-Maker
3) Economic Observer
/.Bid Price (Chp. 1) - Answer-The amount that a person will pay for an asset.
/.Offer Price/Ask Price (Chp. 1) - Answer-The price an asset can be bought for.
/.Bid-Ask Spread (Chp. 1) - Answer-The difference between the bid and ask prices.
/.Stock Orders (Chp. 1) - Answer-1) Market Order
2) Limit Order
3) Stop Loss Sales Order
/.Market Order (Chp. 1) - Answer-Pays the market price (ask/bid) to buy or sell stock
immediately.
/.Limit Order (Chp. 1) - Answer-Specifies the max buying price or min selling price and
not fulfilled until that price is avaliable.
,/.Stop Loss Sales Order (Chp. 1) - Answer-Specifies that the stock is sold if the price
decreases to the specified amount.
/.Long Position (Chp. 1) - Answer-Positive number of units in which the instrument was
bought.
/.Short Position (Chp. 1) - Answer-Negative number of units in which the instrument was
sold.
/.Short Selling Purposes (Chp. 1) - Answer-1) Speculation
2) Financing
3) Hedging
/.Lease Rate (Chp. 1) - Answer-The annual cost of holding an asset as a percentage of
the asset value.
/.Repo Rate/Short Rate (Chp. 1) - Answer-Repo: interst rate paid by the lender for
bonds.
Short: interst rate paid by the lender for stocks.
/.Cost of Capital (Chp. 2) - Answer-Interest rate paid to investors of the project.
/.NPV [Formula] (Chp. 2) - Answer-
/.NPV Perpetuity [Formula] (Chp. 2) - Answer-NPV = 1/i
/.NPV Growth Rate [Formula] (Chp. 2) - Answer-NPV = 1/(i-g)
/.Break - Even Analysis (Chp. 2) - Answer-Determine the value of each assumption
parameter for which the NPV is 0.
/.IRR (Chp. 2) - Answer-Internal Rate of Return
/.Sensitivity Analysis (Chp. 2) - Answer-Caluclating the change in the NPV resulting
from a change in a parameter.
/.Scenario Analysis (Chp. 2) - Answer-Calculate the NPV for various scenarios.
/.Risk Measures (Chp. 2) - Answer-1) Variance
2) Semi-Variance
3) VaR
4) TVar
/.Variance [Formula] (Chp. 2) - Answer-Var(R) = ζ² = E[(R - µ)²] = E[R²] - µ²
, /.Standard Deviation [Formula] (Chp. 2) - Answer-SD(R) = √(Var(R)) = ζ
/.Volatility (Chp. 2) - Answer-Standard Deviation = Volatility
/.Semi-Variance [Downside Semi-Variance] (Chp. 2) - Answer-The square difference
from the mean only when that difference is negative.
/.Semi-Variance [Downside Semi-Variance] [Formula] (Chp. 2) - Answer-ζ² = E[min(0,(R
- µ))²]
/.Sample Semi-Variance [Sample Downside Semi-Variance] [Formula] (Chp. 2) -
Answer-ζ² = (1/n) ∑[min(0,(Ri - R))]²
/.Value-At-Risk [VaR] [Formula] (Chp. 2) - Answer-VaRα(X) = Fx⁻¹(α)
/.Downside Tail Value-At-Risk [TVaR] [Formula] (Chp. 2) - Answer-TVaRα(X) =
E[x|x<VaRα(X)] = (∫xf(x)dx)/α
/.Upside Tail Value-At-Risk [TVaR] [Formula] (Chp. 2) - Answer-TVaRα(X) =
E[x|x>VaRα(X)] = (∫xf(x)dx)/(1-α)
/.Risk Measure Properties (Chp. 2) - Answer-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) - Answer-PV = [1 - [(1+g)/(1+r)]ⁿ]/(r-g)
/.Monte Carlo Simulation (Chp. 3) - Answer-Generates pseudorandom numbers from a
distribution.
/.Inversion for Exponential [Formula] (Chp. 3) - Answer-u = F(x) = 1 - e∧(-x/θ)
x = -θln(1-u)
/.Effective Markets Hypothesis [EMH] (Chp. 4) - Answer-It is difficult or impossible to
beat the stock market.
