8006 Exam Dumps : Exam I: Finance Theory Financial Instruments Financial Markets - 2015 Edition

There was no event such as the CDO squeeze in 2008. (Quite on the contrary, securitized products were selling at distressed prices.).

The silver squeeze of 1979-80 (Hunt brothers), the Chicago fire of 1872 (leading to a short squeeze on wheat), and the wheat squeeze (Hutchingson) of 1866 are real historical events that led to short squeezes in commodity markets. Choice 'b' is therefore the correct answer.

For the PRM exam, you should try to remember the event broadly, and the commodity involved.

Futures contracts carry no gamma. Only options have gamma. Choice 'a' is the correct answer. Any instrument whose price varies in a linear fashion with respect to the underlying will have gamma equal to zero.

This question requires us to use the CAPM.

Recall that according to CAPM the expected return on an asset = The risk free rate + β x Market risk premium.

Using the beta and expected return of security A, we can determine the market risk premium to be (8% - 3%)/1.2 = 4.1667%. The excess return is the return over the risk free rate, and for security B, this is nothing but the beta multiplied by the market risk premium. Therefore the correct answer is 4.1667% x 1.5 = 6.25%. Note that this is the 'excess return', and not the total return. (Total return will include the risk free rate).