PRMIA 8006 Exam With Confidence Using Practice Dumps

The fair price for the futures contract should be [1000 x ( 1 + (2%-1%)/2)] = 1005. This means the futures contract is 'rich' at 1020. The trader should therefore short the futures contract, and buy the index spot. To buy the spot index, he will incur a borrowing cost of 2%, which will be partly offset by the dividend yield of 1%, and at the end of six months he will owe a net amount of 1005 and hold the index. At the same time the futures contract would expire too, and he would be able to sell at the agreed price of 1020, making a risk free profit of 15.

The Sharpe ratio does not require investors to be risk neutral, only that for a given level of returns they prefer less risk to more risk. (Risk neutral means that investors are indifferent to the level of risk, and are only driven by a desire to maximizing expected value, regardless of risk levels.)

The ability to borrow and lend any amounts of money at the risk free rate is a fundamental assumption for the rule that optimal portfolios will maximize the Sharpe ratio.

This rule also assumes that risk preferences are completely described by return and standard deviation of returns.

Therefore Choice 'd' is the correct answer as statements I and II are correct.

A portfolio loses its delta neutrality if the delta of the portfolio changes but the underlying hedge is unchanged. The portfolio that will require the most rebalancing will be one whose delta changes by larger amounts in response to a given change in the price of the underlying. The sensitivity of the changes in delta in response to changes in the price of the underlying is measured by gamma. The higher the gamma, the more the portfolio will go out of delta neutrality given a change in the price of the underlying. Therefore Choice 'b' is the correct answer.

A portfolio with a low gamma will maintain its delta over a larger price range for the underlying, and is therefore likely to require less frequent rebalancing. The absolute level of the delta itself does not matter, what matters is the gamma. Vega is irrelevant to the delta hedging decision. Therefore the other choices are incorrect.