SOA IFM EXAM QUESTIONS AND
ANSWERS
Cash Settlement ANSW✅✅Short position pays long position their profit earned, or vice versa
Fully Leveraged Purchase ANSW✅✅Receive at time 0, pay at time T
Cash and Carry ANSW✅✅Actual forward price > theoretical price
Should short the forward, long a stock and borrow
Reverse Cash and Carry ANSW✅✅Actual forward price < theoretical price
Should long the forward, short the stock and lend money
Futures contract ANSW✅✅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 ANSW✅✅Forward is customizable, future is standardized
Settlement forward vs future ANSW✅✅Forward settled at expiration
Future has gain/loss settled frequently as it is marked to market
Credit risk forward vs futures ANSW✅✅Forward has more credit risk
Future has less because gain and loss don't accumulate
Haircut ANSW✅✅Additional collateral places with the lender by the short seller, belonging to the
short seller
Short Rebate ANSW✅✅Interest earned by the short seller
Lease Rate ANSW✅✅Payment made to the lender due to the opportunity cost of dividends lost
,Physical settlement ANSW✅✅Long position pays short position and short position delivers X
shares in the form of a stock certificate
Liquidity forward vs future ANSW✅✅Forward not liquid
Future are liquid as they are exchange traded
Pricing limit forward vs future ANSW✅✅Forward no pricing limit
Future have pricing limit
Notional amount ANSW✅✅The dollar value of the assets underlying one contract
Stock owner floor ANSW✅✅Invest in option to protect against price decline
Floor = long asset + long put = long call + long bond
Stock short seller floor ANSW✅✅Invest in option that guarantees you pay at most K
Cap = short asset + long call = long put + short bond
Covered call ANSW✅✅Long asset so payoff increases as stock price increases
CC = short call + long asset = short put + long bond
Covered put ANSW✅✅Short asset so payoff increases as stock price decreases
CP = short put + short asset = short call + short bond
Spread ANSW✅✅Position that consists of either all calls or all puts but not both
Bull Spread ANSW✅✅Long K1 + Short K2
Bear Spread ANSW✅✅Short K1 + Long K2
Box spread ANSW✅✅Call bull + put bear = long bond = lend
,Put Bull + call bear = short bond = borrow
Ratio spread ANSW✅✅Long m K1, short n K2
Collar ANSW✅✅Long Put K1 + Short Call K2
Collared Stock ANSW✅✅Long collar + long stock
Looks like bull spread
Straddle ANSW✅✅Long call K + long put K
Strangle ANSW✅✅Long call K1 + long put K2
Symmetric butterfly ANSW✅✅Long K1 + 2 short K2 + long K3
Asymmetric Butterfly ANSW✅✅(K3-K2)Long K1 + (K3-K1)Short K2 + (K2-K1)Long K3
Put Call Parity ANSW✅✅C - P = Fp(S) - Fp(K)
Call bounds European ANSW✅✅Fp(S) - Fp(K) < c < Fp(S)
Call bounds american ANSW✅✅S-K < c < S
Put bounds european ANSW✅✅Fp(K) - Fp(S) < p < K
Put bounds american ANSW✅✅K-S < p < K
When is early exercising rational for a call ANSW✅✅Pv(dividends) > pv(interest on strike) +
implicit put
, When is early exercising rational for a put ANSW✅✅Pv(interest) > pv(dividends) + implicit call
Strike price effect CALL ANSW✅✅C(k1) - c(K2) < K2 - k1
Strike price effects on put ANSW✅✅P(K2) - p(k1) < K2 - k1
Time effect on C and P ANSW✅✅C(t1) < c(t2)
No arbitrage condition of u and d ANSW✅✅D < e^(r-delta) < u
Delta ANSW✅✅Measures sensitivity of options price to underlying assets price
Gamma ANSW✅✅Measures sensitivity of delta to underlying assets price
Theta ANSW✅✅Partial derivative of options value corresponding to passage of time
Vega ANSW✅✅Measures change in options value corresponding to an increase in volatility
Rho ANSW✅✅Measures the change in the options value corresponding to an increase in the risk
free rate
Psi ANSW✅✅Measures the change in the options value when the dividend yield increases
Guaranteed minimum death benefit ANSW✅✅Guarantee minimum amount paid to beneficiary
when policyholder dies
Guaranteed minimum accumulation benefit ANSW✅✅Guaranteed minimum value for underlying
account after some period of time
Guaranteed minimum withdrawal benefit ANSW✅✅Guarantee that upon certain age a minimum
withdrawal over specified amount is provided
ANSWERS
Cash Settlement ANSW✅✅Short position pays long position their profit earned, or vice versa
Fully Leveraged Purchase ANSW✅✅Receive at time 0, pay at time T
Cash and Carry ANSW✅✅Actual forward price > theoretical price
Should short the forward, long a stock and borrow
Reverse Cash and Carry ANSW✅✅Actual forward price < theoretical price
Should long the forward, short the stock and lend money
Futures contract ANSW✅✅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 ANSW✅✅Forward is customizable, future is standardized
Settlement forward vs future ANSW✅✅Forward settled at expiration
Future has gain/loss settled frequently as it is marked to market
Credit risk forward vs futures ANSW✅✅Forward has more credit risk
Future has less because gain and loss don't accumulate
Haircut ANSW✅✅Additional collateral places with the lender by the short seller, belonging to the
short seller
Short Rebate ANSW✅✅Interest earned by the short seller
Lease Rate ANSW✅✅Payment made to the lender due to the opportunity cost of dividends lost
,Physical settlement ANSW✅✅Long position pays short position and short position delivers X
shares in the form of a stock certificate
Liquidity forward vs future ANSW✅✅Forward not liquid
Future are liquid as they are exchange traded
Pricing limit forward vs future ANSW✅✅Forward no pricing limit
Future have pricing limit
Notional amount ANSW✅✅The dollar value of the assets underlying one contract
Stock owner floor ANSW✅✅Invest in option to protect against price decline
Floor = long asset + long put = long call + long bond
Stock short seller floor ANSW✅✅Invest in option that guarantees you pay at most K
Cap = short asset + long call = long put + short bond
Covered call ANSW✅✅Long asset so payoff increases as stock price increases
CC = short call + long asset = short put + long bond
Covered put ANSW✅✅Short asset so payoff increases as stock price decreases
CP = short put + short asset = short call + short bond
Spread ANSW✅✅Position that consists of either all calls or all puts but not both
Bull Spread ANSW✅✅Long K1 + Short K2
Bear Spread ANSW✅✅Short K1 + Long K2
Box spread ANSW✅✅Call bull + put bear = long bond = lend
,Put Bull + call bear = short bond = borrow
Ratio spread ANSW✅✅Long m K1, short n K2
Collar ANSW✅✅Long Put K1 + Short Call K2
Collared Stock ANSW✅✅Long collar + long stock
Looks like bull spread
Straddle ANSW✅✅Long call K + long put K
Strangle ANSW✅✅Long call K1 + long put K2
Symmetric butterfly ANSW✅✅Long K1 + 2 short K2 + long K3
Asymmetric Butterfly ANSW✅✅(K3-K2)Long K1 + (K3-K1)Short K2 + (K2-K1)Long K3
Put Call Parity ANSW✅✅C - P = Fp(S) - Fp(K)
Call bounds European ANSW✅✅Fp(S) - Fp(K) < c < Fp(S)
Call bounds american ANSW✅✅S-K < c < S
Put bounds european ANSW✅✅Fp(K) - Fp(S) < p < K
Put bounds american ANSW✅✅K-S < p < K
When is early exercising rational for a call ANSW✅✅Pv(dividends) > pv(interest on strike) +
implicit put
, When is early exercising rational for a put ANSW✅✅Pv(interest) > pv(dividends) + implicit call
Strike price effect CALL ANSW✅✅C(k1) - c(K2) < K2 - k1
Strike price effects on put ANSW✅✅P(K2) - p(k1) < K2 - k1
Time effect on C and P ANSW✅✅C(t1) < c(t2)
No arbitrage condition of u and d ANSW✅✅D < e^(r-delta) < u
Delta ANSW✅✅Measures sensitivity of options price to underlying assets price
Gamma ANSW✅✅Measures sensitivity of delta to underlying assets price
Theta ANSW✅✅Partial derivative of options value corresponding to passage of time
Vega ANSW✅✅Measures change in options value corresponding to an increase in volatility
Rho ANSW✅✅Measures the change in the options value corresponding to an increase in the risk
free rate
Psi ANSW✅✅Measures the change in the options value when the dividend yield increases
Guaranteed minimum death benefit ANSW✅✅Guarantee minimum amount paid to beneficiary
when policyholder dies
Guaranteed minimum accumulation benefit ANSW✅✅Guaranteed minimum value for underlying
account after some period of time
Guaranteed minimum withdrawal benefit ANSW✅✅Guarantee that upon certain age a minimum
withdrawal over specified amount is provided
