PRMIA 8006 Exam With Confidence Using Practice Dumps

All the choices list inputs into the determination of futures prices. Therefore volatility in any of them affects the volatility of futures prices. Of course, the largest contributor to the volatility is the volatility of the spot price of the underlying. Choice 'd' is the correct answer.

We know from the put-call parity that:

Call - Put = Stock - Deposit

In the given situation,

Stock price = 100

call = 35

Put = ?

Exercise price = 100

However, we cannot use the stock price as-is, we need to adjust it for dividends that will be received during the period for which the option is valid. Dividends are $1, which need to be discounted to the present. In financial theory, dividends are often assumed to be continuously paid, though in reality they are single discrete payments at points in time. In this situation, for simplicity we assume that the dividend is paid at the end of the year, and needs to be discounted to the present and deducted from the spot price.

Therefore:

Stock price adjusted for dividends = $100 - ($1/1.05) = $100 - $0.95 = $99.05

Similarly, the bank deposit amount, which is the PV of the exercise price, can be calculated as $100/1.05 = $95.24

We can now calculate the price of the put by plugging the numbers above in the put-call parity:

35 - Put = $99.05 - $95.24

Therefore the value of the put = 31.19, which is closest to 31.20 which therefore is the correct answer.

A zero coupon bond has a Macaulay duration equal to its maturity, ie in this case 5 years. We can calculate modified duration from Macaulay duration by using the following relationship:

Modified duration = Macaulay duration/(1 + y) where y is the yield.

Therefore the correct answer is 5 / (1.05) = 4.76.

Or intuitively, all the other answers appear clearly incorrect: 5 and 5.25 are too high, and 4 is too low. Therefore the only reasonable choice is 4.76.