QUESTION 1:

Gordon Gekko, the suave investment banker is considering two different structures of collateralized

mortgage obligations (CMOs) for issuance:

• Structure 1: $ 1 billion of passthroughs used as collateral for two sequential pay tranches: $

900 million worth of bonds of Tranche A and $100 million of bonds of Tranche B. The principal

of Tranche A will be paid off completely before any payment is made to Tranche B

• Structure 2: $ 750 million of passthroughs used as collateral for $700 million of C Bonds in a

planned amortization class (PAC) tranche and $50 million of D Bonds in support Tranche

Which of the following statements is least accurate? The:

(a) Bonds in Tranche A have less contraction risk than bonds in Tranche B

(b) Bonds in Tranche A have less extension risk than bonds in Tranche B

(c) Bonds C have less contraction risk than Bonds D

(d) All are correct

ANSWER:

QUESTION 2:

Put option on Reliable Industries with an exercise price of Rs 1100 is trading for Rs 45. The current

stock price is Rs 1100. What is the most likely impact on the option’s delta and gamma if the stock

price increases to Rs 1200?

(a) Both delta and gamma will increase

(b) Both delta and gamma will decrease

(c) Delta will increase and gamma will decrease

(d) Delta will decrease and gamma will increase

ANSWER:
QUESTION 3:

ChamanLal, the analyst working at Pappu Securities entered in to 1X4 FRA with a principal amount of $

1 million at 5.32%. After 10 days, 110 days LIBOR is 5.9% and 20 day LIBOR is 5.7%. Chaman wants

to calculate the value of the FRA and see if he has made a profit or loss. The value of the FRA after 10

days of initiation is:

(a) Value of FRA is $1,514

(b) Value of FRA is $1,487

(c) Value of FRA is ($1,514)

(d) Data is not sufficient

ANSWER:

QUESTION 4:

Lala Lynch is a top notch currency trader. He has made enormous amount of money by exploiting

mismatch between interest rates and exchange rates in the market. He is looking at his trading

terminal looking to exploit any mispricing in the market. He comes across the following data on his

screen – risk free rates in Munnistan are 5.25% and 6.25% in Chunnistan. The currency of Munnistan

is Munni (M) and Chunnistan is Chunni (C), he observes that the spot exchange rate is 1.6500 Munnis

per Chunni while the 75-day futures contract on the Chunni is 1.6498 Munnis. Lala Lynch does a quick

mental calculation and think of some strategies to make money. What is the most appropriate strategy

for Lala Lynch here?

(a) Short in the Chunni futures and go long in the spot market

(b) Long in the Chunni futures and go short in the spot market

(c) There is no way Chunni can make money here

(d) Not enough information

ANSWER:
QUESTION 5:

Baba Buffet is doing his MBA and he has always found pricing options using Black Scholes model very

difficult. Thus, he always use Binomial model to value options. Though he knows that the binomial

model is not accurate enough, he nevertheless feels helpless against Black Scholes model. Currently,

he is trying to value a call option on Uvitech which is trading at Rs 80. He expects the stock price to

either go up by 15% or down by certain amount each year. He assumes the risk free rate as 4% per

year. He wants to value a 2 year call option on Uvitech with an exercise price of Rs 62 and he uses a

two period model to value the option. The price of the option is closest to:

(a) Rs 19.17

(b) Rs 22.99

(c) Rs 27.11

(d) Rs 25.00

ANSWER:

QUESTION 6:

Mr. Bond enters in to 6- year plain vanilla swap in which he will receive LIBOR semiannuallly and pay

9% fixed semiannually in GBP. The notional value of the Swap is GBP 50 million and current spot rate

is USD 1.5 per GBP. Which of the following transactions would replicate the payoffs to the Mr. Bond?

(a) Issue 9% fixed GBP 50 million bond and purchase USD 33 million bond paying LIBOR

(b) Issue 9% fixed GBP 50 million bond and purchase USD 75 million bond paying LIBOR

(c) Issue LIBOR GBP 50 million bond and purchase USD 75 million bond paying 9% fixed

(d) Issue LIBOR GBP 50 million bond and purchase USD 33 million bond paying 9% fixed

ANSWER:

QUESTION 7:
Mr. Phobius is working with a very famous investment bank. To earn huge year end bonuses, he enters

in to transactions which he does not understand very well. He enters in to these transactions on the

advice of Mr. Dubious who is his senior at the bank. Mr. Phobius has taken huge open positions in

receiver swaptions in the hope that he will make handsome gains with interest rate movements.

However, he is not sure whether an interest rate rise or fall will give him profit. He comes to you for

advice. What would you tell him?

(a) Value of Receiver swaption will increase with interest rate rise while that of payer swaption will

decrease

(b) Value of Receiver swaption will decrease with interest rate rise while that of payer swaption will

increase

(c) Value of both receiver and payer swaption will decrease

(d) Value of both receiver and payer swaption will increase

ANSWER:

QUESTION 8:

RBI has recently announced that financial institutions will be able to use Credit Default swaps (CDS) in

Indian markets. Mr. Bubbarao, who is head of Credit Derivatives at Bubba Bank is very enthusiastic

about this step by RBI and hope to use CDS extensively. However, he is also very sceptical about the

misuse of this instrument as he believes that wrong positions in CDS can lead his bank to bankruptcy.

He comes to you for advice. What would you tell him?

(a) If a company is looking to restructure its capital structure, he should buy a CDS

(b) If RBI raises interest rates, he should sell a CDS

(c) If RBI decrease interest rates, he should sell a CDS

(d) If RBI decrease interest rates, he should buy a CDS

ANSWER:
QUESTION 9:

An analyst is trying to measure free cash flow to equity for a firm. He has the following data with him:

Net Income: Rs50 | Working Capital Investment: Rs4 | Beginning Gross Assets: Rs90 | Ending Gross

Assets: Rs136 | Beginning Accumulated Depreciation: Rs30 | Ending Accumulated Depreciation: Rs40 |

Depreciation Expense: Rs27 | Capex: Rs65 | Net Borrowing: 0

In addition, a piece of equipment with an original book value of Rs19 was sold for Rs10. At the time of

sale, the equipment book value was Rs2. The gain was classified as non recurring. Free cash flow to

equity is closest to:

(a) Rs6

(b) Rs10

(c) Rs18

(d) Rs14

ANSWER:

QUESTION 10:

PCS Industries recently paid a dividend of Rs 1.35 per share. It has a payout ratio of 67%, ROE of

23%, and an expected growth rate in dividends and earnings at 7.6% for foreseeable future. The

required return by shareholders is 14% on their investors. The Justified price to book value multiple is

closest to:

(a) 1.22

(b) 1.19

(c) 2.41

(d) 1.84

ANSWER:
QUESTION 11:

ABC Industries has a required return on equity of 12% and is expected to grow perpetually at a rate of

5%. The expected return on equity that would justify a price to book multiple of 2.14 is closest to :

(a) 10%

(b) 15%

(c) 20%

(d) 25%

ANSWER:

QUESTION 12:

The Private equty firm receives most of its returns in an LBO through:

(a) Terminal value of the LBO

(b) Cash dividends over the life of LBO

(c) Both of the above

(d) None of the above

ANSWER:

QUESTION 13:

The terminal value of the LBO fund equity stake is Rs 274 million in five years. The initial investments

from senior debt, junior debt, and management equity are Rs 52 million, Rs 84 million and Rs 7 million

respectively. Transaction costs at the initiation of the LBO were Rs 9 million. If the target IRR is 40%,

what is the enterprise value at time 0?

(a) Rs 185 million

(b) Rs 194 million

(c) Rs 203 million

(d) Rs 212 million

ANSWER:

QUESTION 14:

Bobby is the fund manager of endowment fund and has recently taken a significant exposure in

alternative assets to boost returns. He has hired Dimple to guide him on a measure of risk which

incorporates the concept of a minimum acceptable return. What will be Dimple’s suggestion?

(a) Maximum drawdown

(b) Clawback ratio

(c) Sortino ratio

(d) None of these

ANSWER:

QUESTION 15:

Fells Fargo which is a AAA rated bank has entered in to a 10 year interest rate swap (semiannual

payments) with PityBank which is BBB rated bank. Because of Pity’s poor rating, Fargo bank is

concerned about the exposure because of the swap deal. It can mitigate the credit risk exposure by :

(a) Decrease the frequency of coupon payments from semiannual to annual

(b) Execute the swap deal as a reset swap wherein the swap will be marked to market every six

months

(c) Both of the above

(d) None of the above

ANSWER:
QUESTION 16:

A portfolio of stock A and options on stock A is currently delta neutral, but has a positive gamma.

Which of the following will make the portfolio both delta and gamma neutral?

(a) Buy call options on stock A and sell stock A

(b) Sell call options on stock A and sell stock A

(c) Buy put options on stock A and buy stock A

(d) Sell put options on stock A and sell stock A

ANSWER:

QUESTION 17:

Compute sinking fund factor for a 10 year, 8% amortizing loan with face value of $5,000,000 with

monthly compounding

(a) 2.04%

(b) 3.46%

(c) 6.56%

(d) 7.44%

ANSWER:

QUESTION 18:

Compute capitalization rate using built-up technique for a real estate investment that will provide a

2.5% appreciation adjusted return of investment having 2% liquidity premium & 1% risk premium.

Assume that prevailing rate on government bonds, net of real estate tax savings is 5.25%
(a) 9.75%

(b) 10.00%

(c) 10.75%

(d) 11.33%

ANSWER:

QUESTION 19:

A private equity investor has a discount rate of 30% but the chance of failure in a given year is 20%.

Compute effective discount rating factoring in the company's probability of failure

(a) 50%

(b) 62.5%

(c) 71.4%

(d) 56.4%

ANSWER:

QUESTION 20:

Hedge fund indexes are least susceptible to which of the following questionable statistics?

(a) Funds are subject to survivorship bias

(b) Funds are subject to backfill bias

(c) Some constituent hedge funds are closed to new investors

(d) Serial correlation in hedge fund data results in artificially high standard deviations

ANSWER:
QUESTION 21:

Which of the following FCFF formula is incorrect?

(a) FCFF = NI + NCC + [Int * (1-tax rate)] - FCInv - WCInv

(b) FCFF = [EBIT * (1-tax rate)] + Dep - FCInv - WCInv

(c) FCFF = CFO + [Int * (1-tax rate)] - FCInv

(d) FCFF = EBITDA * (1-tax rate) + Dep - FCInv – WCInv

Where,

NCC = Non Cash Charges

FCFF = Free Cash FLow to Firm

Dep = Depreciation

FCInv = Fixed Capital Expenditure

WCInv = Working Captial Expenditure CFO = Cash flow from operations

ANSWER:

QUESTION 22:

Which of the following ratios is inconsistent

(a) P/E

(b) P/Sales

(c) EV/EBITDA

(d) P/BV

ANSWER:

QUESTION 23:

Which of the following is incorrect about ETF?

(a) ETFs achieve international diversification with high levels of liquidity

(b) ETFs can be shorted and margined

(c) ETFs are shares of portfolio which tracks and index

(d) ETFs are designed to be utilized for passive asset allocation strategies.

ANSWER:

QUESTION 24:

Identify the correct option

(a) NASDAQ is a quote driven system

(b) NSE is order driven system

(c) London stock Exchange is a quote driven system

(d) All are correct

ANSWER:

QUESTION 25:

Identify the correct option

(a) Burmeister, Roll and Ross model has 5 macroeconomic factors

(b) Pastor Stambaugh model adds a liquidity factor to the Fama-French model

(c) Fama French model is multi factor model

(d) Bond yield risk premium method is a build up method

(e) All are correct

ANSWER:
QUESTION 26:

Determine cumulative probability of default when marginal probability of default is 8% and 7% for

years 1 and 2 respectively

(a) 54.94%

(b) 87.44%

(c) 14.44%

(d) 85.56%

ANSWER:

QUESTION 27:

Which of the following increases sovereign risk?

I. Increases in interest plus amortization debt

II. Increases in total foreign exchange reserves

III. Increases in the variance of export revenue

IV. Increases in Money supply

(a) I,II and III

(b) II and IV

(c) I, III and IV

(d) I,II, III and IV

ANSWER:

QUESTION 28:

Both the Merton model and KMV model assume that the value of the firm is
(a) is observable but not necessarily following a lognormal diffusion process

(b) follows a log normal diffusion process but is not necessarily observable

(c) follows a log normal diffusion process and is observable

(d) doesn't follow a log normal diffusion process and is not observable

ANSWER:

QUESTION 29:

Which of the following should be considered when conducting a Monte Carlo simulation to estimate

potential exposure to a counterparty

I. The correlation between various market risk factors

II. Calibration of the model with using historical data

III. Some of the risk factors are a series of prices or rates

IV. The mean reversion of key inputs

(a) I and II

(b) II and III

(c) I, II and III

(d) I, II, III and IV

ANSWER:

QUESTION 30:

Economic Capital is an estimate of the amount of capital a firm must maintain to cover which of the

following?

(a) expected positive exposure

(b) potential future exposure

(c) expected losses

(d) unexpected losses

ANSWER:

QUESTION 31:

The notional principal of a default swap is $10,000,000 and the reference price is 100%. The final price

is estimated at 35% and the annual coupon rate was 7%. It has been 40 days since the last coupon

payment. What is the cash amount to settle the swap?>

(a) $3,577,778

(b) $5,800,000

(c) $6,422,222

(d) $6,500,000

ANSWER:

QUESTION 32:

Babbu partners has entered into five year, annual pay in arrears, total return swap with Dabboo Ltd.,

Babbu is the total return payer, and the underlying security is a $50 million bond issue with an annual

coupon of 8%. The fixed rate is LIBOR plus 100bp. LIBOR at the initiation of the swap is 5.5%, and at

the end of year 1 LIBOR is 6.25%. The underlying bond was priced at par at the initiation of the swap,

but has decreased in value by 10% over the first year. Assuming the swap calls for annual payments

with no netting, based on annual total return, the payment due to the payer at the end of year 1 will

be:

(a) $4 million

(b) $3.25 million

(c) $8.25 million

(d) $3.625 million

ANSWER:

QUESTION 33:

Pick the odd one out

(a) Delta

(b) Gamma

(c) Rho

(d) Vega

ANSWER:

QUESTION 34:

Pappu has just attended his lecture on Advanced Options. In the class, he got to know about Greeks

related to options. However, he has not been able to understand much in the class when the Professor

was discussing about Vega. He is not able to figure out which of the following options is most likely to

have a negative vega.

(a) A chooser option close to expiration

(b) A forward start put option before the start date

(c) An Asian put option close to the beginning of the option's life

(d) an up and out put option when the stock price is close the barrier

ANSWER:

QUESTION 35:

An Asian option can be hedged dynamically because the:

(a) average value of the underlying asset price decreases uncertainty the closer the option gets to

expiration

(b) average value of the underlying asset price increases uncertainty the closer the option gets to

expiration

(c) maximum value of the underlying asset price decreases uncertainty the closer the option gets to

expiration

(d) minimum value of the underlying asset price increases uncertainty the closer the option gets to

expiration

ANSWER: