SOA IFM Exam REVISED ACTUAL Exam
Questions and CORRECT Answers
Haircut - CORRECT ANSWER - Additional collateral places with the lender by the short
seller, belonging to the short seller
Short Rebate - CORRECT ANSWER - Interest earned by the short seller
Lease Rate - CORRECT ANSWER - Payment made to the lender due to the opportunity cost
of dividends lost
Physical settlement - CORRECT ANSWER - Long position pays short position and short
position delivers X shares in the form of a stock certificate
Cash Settlement - CORRECT ANSWER - Short position pays long position their profit
earned, or vice versa
Fully Leveraged Purchase - CORRECT ANSWER - Receive at time 0, pay at time T
Cash and Carry - CORRECT ANSWER - Actual forward price > theoretical price
Should short the forward, long a stock and borrow
Reverse Cash and Carry - CORRECT ANSWER - Actual forward price < theoretical price
Should long the forward, short the stock and lend money
Futures contract - CORRECT ANSWER - A standardized agreement to trade in the future in
which buyers and sellers post a margin and the contract is marked to market
,Customizing Forward vs Future - CORRECT ANSWER - Forward is customizable, future is
standardized
Settlement forward vs future - CORRECT ANSWER - Forward settled at expiration
Future has gain/loss settled frequently as it is marked to market
Credit risk forward vs futures - CORRECT ANSWER - Forward has more credit risk
Future has less because gain and loss don't accumulate
Liquidity forward vs future - CORRECT ANSWER - Forward not liquid
Future are liquid as they are exchange traded
Pricing limit forward vs future - CORRECT ANSWER - Forward no pricing limit
Future have pricing limit
Notional amount - CORRECT ANSWER - The dollar value of the assets underlying one
contract
Stock owner floor - CORRECT ANSWER - Invest in option to protect against price decline
Floor = long asset + long put = long call + long bond
Stock short seller floor - CORRECT ANSWER - Invest in option that guarantees you pay at
most K
Cap = short asset + long call = long put + short bond
Covered call - CORRECT ANSWER - Long asset so payoff increases as stock price increases
CC = short call + long asset = short put + long bond
,Covered put - CORRECT ANSWER - Short asset so payoff increases as stock price decreases
CP = short put + short asset = short call + short bond
Spread - CORRECT ANSWER - Position that consists of either all calls or all puts but not
both
Bull Spread - CORRECT ANSWER - Long K1 + Short K2
Bear Spread - CORRECT ANSWER - Short K1 + Long K2
Box spread - CORRECT ANSWER - Call bull + put bear = long bond = lend
Put Bull + call bear = short bond = borrow
Ratio spread - CORRECT ANSWER - Long m K1, short n K2
Collar - CORRECT ANSWER - Long Put K1 + Short Call K2
Collared Stock - CORRECT ANSWER - Long collar + long stock
Looks like bull spread
Straddle - CORRECT ANSWER - Long call K + long put K
Strangle - CORRECT ANSWER - Long call K1 + long put K2
Symmetric butterfly - CORRECT ANSWER - Long K1 + 2 short K2 + long K3
Asymmetric Butterfly - CORRECT ANSWER - (K3-K2)Long K1 + (K3-K1)Short K2 + (K2-
K1)Long K3
, Put Call Parity - CORRECT ANSWER - C - P = Fp(S) - Fp(K)
Call bounds European - CORRECT ANSWER - Fp(S) - Fp(K) < c < Fp(S)
Call bounds american - CORRECT ANSWER - S-K < c < S
Put bounds european - CORRECT ANSWER - Fp(K) - Fp(S) < p < K
Put bounds american - CORRECT ANSWER - K-S < p < K
When is early exercising rational for a call - CORRECT ANSWER - Pv(dividends) >
pv(interest on strike) + implicit put
When is early exercising rational for a put - CORRECT ANSWER - Pv(interest) >
pv(dividends) + implicit call
Strike price effect CALL - CORRECT ANSWER - C(k1) - c(K2) < K2 - k1
Strike price effects on put - CORRECT ANSWER - P(K2) - p(k1) < K2 - k1
Time effect on C and P - CORRECT ANSWER - C(t1) < c(t2)
No arbitrage condition of u and d - CORRECT ANSWER - D < e^(r-delta) < u
Delta - CORRECT ANSWER - Measures sensitivity of options price to underlying assets
price
Questions and CORRECT Answers
Haircut - CORRECT ANSWER - Additional collateral places with the lender by the short
seller, belonging to the short seller
Short Rebate - CORRECT ANSWER - Interest earned by the short seller
Lease Rate - CORRECT ANSWER - Payment made to the lender due to the opportunity cost
of dividends lost
Physical settlement - CORRECT ANSWER - Long position pays short position and short
position delivers X shares in the form of a stock certificate
Cash Settlement - CORRECT ANSWER - Short position pays long position their profit
earned, or vice versa
Fully Leveraged Purchase - CORRECT ANSWER - Receive at time 0, pay at time T
Cash and Carry - CORRECT ANSWER - Actual forward price > theoretical price
Should short the forward, long a stock and borrow
Reverse Cash and Carry - CORRECT ANSWER - Actual forward price < theoretical price
Should long the forward, short the stock and lend money
Futures contract - CORRECT ANSWER - A standardized agreement to trade in the future in
which buyers and sellers post a margin and the contract is marked to market
,Customizing Forward vs Future - CORRECT ANSWER - Forward is customizable, future is
standardized
Settlement forward vs future - CORRECT ANSWER - Forward settled at expiration
Future has gain/loss settled frequently as it is marked to market
Credit risk forward vs futures - CORRECT ANSWER - Forward has more credit risk
Future has less because gain and loss don't accumulate
Liquidity forward vs future - CORRECT ANSWER - Forward not liquid
Future are liquid as they are exchange traded
Pricing limit forward vs future - CORRECT ANSWER - Forward no pricing limit
Future have pricing limit
Notional amount - CORRECT ANSWER - The dollar value of the assets underlying one
contract
Stock owner floor - CORRECT ANSWER - Invest in option to protect against price decline
Floor = long asset + long put = long call + long bond
Stock short seller floor - CORRECT ANSWER - Invest in option that guarantees you pay at
most K
Cap = short asset + long call = long put + short bond
Covered call - CORRECT ANSWER - Long asset so payoff increases as stock price increases
CC = short call + long asset = short put + long bond
,Covered put - CORRECT ANSWER - Short asset so payoff increases as stock price decreases
CP = short put + short asset = short call + short bond
Spread - CORRECT ANSWER - Position that consists of either all calls or all puts but not
both
Bull Spread - CORRECT ANSWER - Long K1 + Short K2
Bear Spread - CORRECT ANSWER - Short K1 + Long K2
Box spread - CORRECT ANSWER - Call bull + put bear = long bond = lend
Put Bull + call bear = short bond = borrow
Ratio spread - CORRECT ANSWER - Long m K1, short n K2
Collar - CORRECT ANSWER - Long Put K1 + Short Call K2
Collared Stock - CORRECT ANSWER - Long collar + long stock
Looks like bull spread
Straddle - CORRECT ANSWER - Long call K + long put K
Strangle - CORRECT ANSWER - Long call K1 + long put K2
Symmetric butterfly - CORRECT ANSWER - Long K1 + 2 short K2 + long K3
Asymmetric Butterfly - CORRECT ANSWER - (K3-K2)Long K1 + (K3-K1)Short K2 + (K2-
K1)Long K3
, Put Call Parity - CORRECT ANSWER - C - P = Fp(S) - Fp(K)
Call bounds European - CORRECT ANSWER - Fp(S) - Fp(K) < c < Fp(S)
Call bounds american - CORRECT ANSWER - S-K < c < S
Put bounds european - CORRECT ANSWER - Fp(K) - Fp(S) < p < K
Put bounds american - CORRECT ANSWER - K-S < p < K
When is early exercising rational for a call - CORRECT ANSWER - Pv(dividends) >
pv(interest on strike) + implicit put
When is early exercising rational for a put - CORRECT ANSWER - Pv(interest) >
pv(dividends) + implicit call
Strike price effect CALL - CORRECT ANSWER - C(k1) - c(K2) < K2 - k1
Strike price effects on put - CORRECT ANSWER - P(K2) - p(k1) < K2 - k1
Time effect on C and P - CORRECT ANSWER - C(t1) < c(t2)
No arbitrage condition of u and d - CORRECT ANSWER - D < e^(r-delta) < u
Delta - CORRECT ANSWER - Measures sensitivity of options price to underlying assets
price
