FRM PART – 1 – FMP – PRACTICAL - QUESTIONS

1. A company intends to employ the Dutch Auction Approach (DAA) to sell 1 million shares. It receives the
following bids:

Which of the following is closest to the price all successful buyers will pay per share?
A. 37
B. 41
C. 40.5
D. 39

2. The following data gives the mortality experience among males in Europe in 1931.
Age in years Probability of death within one year Survival probability Life expectancy
30 0.001419 0.97372 47.52
31 0.001445 0.97234 46.59
32 0.001478 0.97093 45.65
33 0.001519 0.97093 44.73
Assuming that:
I. Interest rate = 4%
II. Premiums are paid annually in advance (at the beginning of the year)
III. Compounding is semi-annual

If the policy has a sum assured of $100,000, and a 30-year-old man takes up a term insurance policy that
expires in two years, then which of the following is closest to the break-even premium payable by the
policyholder?
A. 140.37
B. 123.62
C. 150
D. 80

3. A hedge fund has a beginning year value of $200 million, 2% management fee, and 20% incentive fee with
the hurdle rate of 10%. The management fee is applied to the end-of-year assets under management and
the incentive fee is calculated net of management fee. If the ending value of the fund is $300 million, then
what is the total fee of the hedge fund?
A. $18.8 million
B. $20.8 million
C. $14.8 million
D. $6 million

4. Rosy Garcia is considering investing in a hedge fund or in a fund of funds.

Garcia invests $50 million in the hedge fund and receives a yearly gross return of 10%. The fund has a '2
and 20' fee structure with no hurdle rate and management fees are calculated on an annual basis on assets

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FRM PART – 1 – FMP – PRACTICAL - QUESTIONS
under management at the beginning of the year. Incentive fees are calculated independently of
management fees.
Garcia also invests $60 million in a fund of funds (FOF) and earns a 5% yearly gross return. Assuming that
the fund of funds fee structure is '1 and 10' and that all other fee structures in the FOF are similar to that
of the hedge fund, the return to the investor of investing directly in the hedge fund will be:
A. 2.5% greater than the return generated by investing in the FOF.
B. 2.3% greater than the return generated by investing in the FOF.
C. 3.1% greater than the return generated by investing in the FOF.
D. lower than the return generated by investing in the FOF.

5. The writer of a put option sold five July put options at the bid price of $7.60 to purchase 500 shares of
Galaxy Carpets Co. at the strike price of $13.50 per share. If the price of Galaxy Carpet’s stock is $9.30 per
share at expiry, then which of the following statements accurately describes the net cash flow of the
transaction?
A. The writer of the put profited $3,800 from the transaction
B. The writer of the put lost $2,100 from the transaction
C. The buyer of the put profited $2,100 from the transaction
D. The writer of the put profited $1,700 from the transaction

6. Julia Lange, an investment manager, has constructed a portfolio with a beta of 0.78 that somewhat mirrors
the S&P 500 index. The investment manager hedged the portfolio 1 month ago by taking a short position
in the S&P 500 futures. The portfolio had a value of $672,000,000, and the S&P 500 index futures price at
the time of the purchase was 2,906, with each contract on 250 times the index. If the S&P 500 futures
contract price fell to 2,715 this month, then estimate the number of additional contracts Lange should
buy/short to hedge her portfolio, assuming that the portfolio value does not change.
A. The manager must short an additional 50 S&P 500 futures contract to hedge the portfolio
B. The manager must buy 50 S&P 500 futures contracts to hedge the portfolio
C. The manager must short an additional 2,715 S&P 500 futures contracts to hedge the portfolio
D. The manager must short an additional 772 S&P 500 futures contracts to hedge the portfolio

7. The 6-month forward foreign exchange is stated as bid 25.9 and ask 35.8. Which of the following
statements true?
A. Given that the spot bid rate is 1.6432, then the 6-month bid exchange rate is 1.6445
B. Given that the spot bid rate is 1.6432 and spot ask rate is 1.7432 then the 6-month bid ask spread is
the exchange rate is 0.64479
C. Given that the spot bid rate is 1.6432, then the 6-month bid exchange rate is 1.64579
D. Given that the spot ask rate is 1.6532, then the 6-month exchange rate is 1.6555

8. Harry Gayle is a fixed investment analyst at one of the biggest investment banks in Boston. He is analyzing
forward contracts on the bond of Cube Corp. The current price of Cube Corp is $950, and the bond pays a
semiannual coupon of 12% on the face value of $1,000. The forward contract on Cube Corp’s bond is
available for the price of $960 with maturity in 6 months, while the coupon on the bond is expected to be
received in 3 months. If the risk-free rates for 3-month and 6-month treasuries are 3% and 4.2%,
respectively, then determine the net gain or loss from the contract.
A. Net gain of $51.05

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FRM PART – 1 – FMP – PRACTICAL - QUESTIONS
B. Net loss of $10.16
C. Net gain of $49.84
D. Net loss of $42.57

9. Muhammad Zubair is the investment manager of an investment company based in Chicago that invests in
almost all financial instruments such as equities, derivatives, currencies, etc. Today, he is considering
investing 1000 Euros in 1.50-year currency futures contracts on the U.S. dollar. The 1.5-year risk-free
interest rates in the Eurozone and the U.S. are 1.25% and 1.5%, respectively, and the spot exchange rate
is 1.098 USD per Euro. According to the given data, the futures exchange rate should be 1.102 USD per
Euro. However, the 1.5-year futures exchange rate is quoted at 1.100 USD per Euro. Using this information,
calculate the arbitrage gain or loss.
A. Arbitrage gain of $2.1
B. Arbitrage loss of $15.8
C. Arbitrage loss of $1.8
D. Arbitrage loss of $7.9

10. Branden Berger is an active derivatives trader at Eclipse Funds. He has been closely monitoring the spot
prices and forward prices of corn bushel for a long time. He has noticed that the spot price and the 1-year
forward price of a corn bushel contract are identical at $6.90 per corn bushel. If the risk-free rate is 8%,
then which of the following strategy will earn him arbitrage profit?
A. Borrow the amount equal to the spot price of corn for 1 year at the risk-free rate of 8%, buy a corn
bushel at the spot price, and take a short position in a 1-year corn forward contract. At the expiration
of the contract, the investor will sell the corn bushel at the futures price and pay off the borrowed
money with interest
B. Borrow the amount equal to the spot price of corn for 1 year at the risk-free rate of 8%, buy a corn
bushel at the spot price, and take a short position in a 1-year corn forward contract. At the expiration
of the contract, the investor will sell the corn bushel at the futures price and pay off the borrowed
money with interest
C. Short sell corn at the spot price of $6.90 per bushel, lend the money for one year at the risk-free of
8%, and take a long position in a corn forward contract. After one year, the investor will receive lent
money with interest, receive the corn bushel at the expiration of the contract, and deliver the corn
bushel
D. Since the spot price of the corn bushel is equal to the 1-year forward price of the corn forward
contract, arbitrage profit is not possible.

11. A portfolio X consists of a five-year zero-coupon bond and a three-year call option on portfolio Y. The
current price of portfolio Y is $20,000, and the strike price of the option is also $20,000. The interest rate
is 7% per annum. To ensure no losses to a trader while still providing the trader with room for profits, the
premium paid to secure the call option should cost less than:
A. 20000
B. 5740.28
C. 15740.28
D. 14259.72

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FRM PART – 1 – FMP – PRACTICAL - QUESTIONS
12. A German bank and a French bank entered into a forward rate agreement contract where the German
bank will pay a fixed rate of 4.2% compounded semiannually and receive the floating rate on the principal
of €700 million. The forward rate between 0.5 years and 1 year is 5.1%. If the risk-free rate at the 1-year
is 6% with continuous compounding, then which of the following is the true value of the FRA contract
between the two banks?
A. €6,300,000
B. €6,143,344
C. €4,005,875
D. €2,966,558

13. A corporate bond has the following characteristics:

 Price: USD 106.50
 Coupon rate: 5%
 Duration: 7.5 years
 Convexity: 101
If the credit spreads narrow by 175 basis points, then what will be the price of the bond?
A. USD 114.68
B. USD 122.13
C. USD 123.78
D. USD 117.68

14. Four U.S. T-bonds currently on the market have the following characteristics:

Determine the one-year spot rate via the bootstrapping method, assuming semiannual compounding.
A. 1.98%
B. 2.61%
C. 1.31%
D. 2.25%

15. McMillan Electronics Company issued four types of debt to raise the capital of $730 million. The debt
includes $400 million raised through secured bonds, $110 million through subordinate bonds, $40 million
through unsecured loans, and $180 million through debenture bonds. If the company defaults, the total
value of the assets to be distributed is $670 million. Determine the total claim that the debenture
bondholders will receive.
A. $180 million
B. $160 million
C. $120 million
D. $0

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FRM PART – 1 – FMP – PRACTICAL - QUESTIONS
16. Suppose that an investor owns a pass-through security with an initial principal of $500 million. The
remaining mortgage balance at the beginning of a certain month is $400 million. Assuming that the SMM
is 0.4125% and the scheduled principal payment is $5 million, the estimated prepayment for the month
is:
A. $1.65 million
B. $1.25 million
C. $2.04 million
D. $1.63 million

17. A fund holds $10 million nominal of the GNMA 5.5% 30-year bond. It enters into a one month dollar roll
with a repo dealer bank in which it sells the security at a price of 100-08 and buys it back at a forward price
of par. Assuming that the security experiences a 2% paydown (scheduled principal plus prepayments)
during the term of the trade, estimate the value of the drop.
A. $200,000
B. $225,000
C. $800,000
D. $25,000

18. TBA prices of the Freddie Mac 5% for June 10 and July settlements are $104.20 and $103.00, respectively.
The accrued interest to be added to each of these prices is $0.160. The expected total principal paydown
(scheduled principal plus prepayments) is 2% of outstanding balance and the prevailing short-term rate is
1.5%. Also, assume that the actual/360 day convention is applied. An investor wishes to roll a balance of
$10 million. Determine the value of the role.
A. $436,000
B. $13,045
C. $109,680
D. $97,698

19. Consider a 15-year $500,000 mortgage with a rate of 6 percent. Ten years into the mortgage, rates have
fallen to 5 percent. What would be the monthly saving to a homeowner from refinancing the outstanding
mortgage balance at the lower rate? (Round your answer to the nearest unit.)
A. $265
B. $101
C. $0
D. $111

20. An analyst has estimated the dirty price of $100,000 face value 8% on a Treasury bond that was purchased
on April 8, 2017, with the quoted price of 93-8. The bond pays semiannual coupon on December 10th and
June 10th. If the Treasury bond has the maturity date of December 10th, 2020, then which of the following
is an accurate estimation of the bond’s dirty price?
A. $93,250
B. $94,865
C. $95,125
D. $95,865

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FRM PART – 1 – FMP – PRACTICAL - QUESTIONS
21. Alina Escobar is a junior derivatives analyst at the derivatives investment unit of a financial institution. The
company holds a mid-day meeting where managers discuss investment strategies according to recent
trends in the market. Escobar’s manager asked her to estimate the price of a March Eurodollar futures
contract that is quoted as 94.25. Estimate the effective dollar price that the firm will have to pay if the
firm ultimately decides to invest in the March Eurodollar futures contract.
A. $942,500
B. $985,625
C. $991,750
D. $1,050,870

22. Two banks, the American Dream Bank (AD) and the British Royal Bank (BR) have entered into a 2-year
currency swap agreement with annual payments, where AD agreed to pay 8% in British pound (GBP) on
the principal amount of GBP 80 million to BR. In addition, BR agreed to pay 10% to AD on the principal of
$120 million. The exchange rate is USD 1.26 per GBP. Suppose that the interest rate in the United States
and Great Britain are flat at 5.5% and 6.8%, respectively, determine the value of the currency swap to
American Dream Bank in USD.
A. USD 30.45 million
B. USD 21.69 million
C. USD 26.87 million
D. USD 20.40 million

23. To equitize the cash portion of assets under management, a portfolio manager enters into a long futures
position on the S&P 500 index with a multiplier of 250. The cash position is $15 million which at the current
futures value of 1,000, requires the manager to be long 60 contracts. If the current initial margin is $12,500
per contract, and the current maintenance margin is $10,000 per contract, what variation margin does the
portfolio manager have to advance if the futures contract value falls to 995 at the end of the first day of
the position being placed?
A. $30,000.
B. $75,000.
C. $0.
D. $300,000.

24. A bank has $100 million in assets with modified duration of 8.5, and $90 million of liabilities with modified
duration of 6.5. Accounting only for duration effects, a 50 basis point parallel downward shift would
impact the bank's equity position by an amount closest to a:
A. $100 million decrease in equity.
B. $1.325 million increase in equity.
C. $10 million increase in equity.
D. $90 million increase in equity.

25. The following Treasury zero rates are exhibited in the marketplace:
 6 months = 1.25%
 1 year = 2.35%
 1.5 years = 2.58%

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FRM PART – 1 – FMP – PRACTICAL - QUESTIONS
 2 years = 2.95%
Assuming continuous compounding, the price of a 2-year Treasury bond that pays a 6 percent semiannual
coupon is closest to:
A. 103.42.
B. 105.90.
C. 108.66.
D. 105.20.

26. At the inception of a six-month forward contract on a stock index, the value of the index was $1,150, the
interest rate was 4.4 percent, and the continuous dividend was 1.8 percent. Three months later, the value
of the index is $1,075. Which of the following statements is true? The value of the:
A. long position is −$82.41.
B. short position is $47.56.
C. long position is $82.41.
D. long position is $47.56.

27. John Jordan manages a bond portfolio valued at $11.2 million, which has a duration of five years. To hedge
against an increase in interest rates, he wishes to employ interest-rate futures. The deliverable on the
current futures contract has a duration of seven years, and the futures contract is trading at 97.5 with a
contract size of $100,000. To hedge the position, Jordan must:
A. sell 82 contracts.
B. sell 54 contracts.
C. buy 82 contracts.
D. buy 54 contracts.

28. A bank entered into a 4-year tenor plain vanilla swap exactly three years ago from today. The agreements
of the swap are to pay 6.5 percent annually, based on annual compounding with a 30/360 day-count
convention, fixed rate on a $50 million notional, and receive 1-year London Interbank Offered Rate
(LIBOR). The continuously compounded LIBOR for 1-year obligations is currently 5.75 percent. The 1-year
LIBOR at the beginning of the period was 6.25 percent. The value of the swap is closest to:
A. −$257,020.
B. $110,000.
C. $800,522.
D. −$270,000.

29. A financial institution has entered into a plain vanilla currency swap with one of its customers. The period
left on the swap is 3 years, with the institution paying 5 percent on USD20 million and receiving 2.5 percent
on JPY1,500 million annually. The current exchange rate is JPY120/USD, and the flat term structure in both
countries generates a 3 percent rate in the U.S. and a 0.75 percent rate in Japan. The current value of this
swap to the institution is closest to:
A. USD7.95 million.
B. USD6.875 million.
C. –USD6.875 million.
D. –USD7.95 million.

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FRM PART – 1 – FMP – PRACTICAL - QUESTIONS
30. A hedge fund specializing in commodity related derivatives is considering a crush spread position using
soybean and soybean oil futures contracts. Using the information in the table below, determine which of
the following statements is correct.

A. The hedge fund should establish a long position in the soybean futures contract for no more than
$7.01 and a long position in the soybean oil contract for no more than $0.29.
B. The hedge fund should establish a long position in the soybean futures contract for no more than
$7.01 and a short position in the soybean oil contract for no less than $0.28.
C. The hedge fund should establish a short position in the soybean futures contract for no less than $7.01
and a long position in the soybean oil contract for no less than $0.28.
D. The hedge fund should establish a long position in the soybean futures contract for no more than
$6.91 and a short position in the soybean oil contract for no less than $0.29.

31. Given a single monthly mortality rate (SMM) of 0.45 percent, a mortgage pool with a $200,000 principal
balance outstanding at the beginning of the 26th month, and a scheduled monthly principal payment of
$60.00 for the 26th month, the estimated prepayment is:
A. $426.38.
B. $450.00.
C. $899.73.
D. $567.89.

32. In measuring prepayment speeds for a pool of mortgages with the assumption of 125 PSA, which of the
following statements regarding the conditional prepayment rate (CPR) and single monthly mortality rate
(SMM) is least accurate?
A. The CPR in month 30 is 0.075.
B. The SMM in month 20 is 0.004265319.
C. The CPR in month 20 is 0.05.
D. The SMM in month 30 is 0.00760156.

33. Consider a pool of mortgages that were issued exactly 22 months ago (they are beginning month 23).
What is the conditional prepayment rate (CPR) and the single monthly mortality rate (SMM) assuming 150
percent PSA?
CPR SMM
A. 4.6% 0.63%
B. 6.9% 0.59%
C. 4.6% 0.59%
D. 6.9% 0.63%