Pass Using 8006 Exam Dumps

A cash or nothing call is one that pays a fixed amount if the underlying exceeds a certain threshold, or nothing. An asset or nothing call is the same as the cash or nothing call except that instead of paying a fixed amount, it 'pays' the asset. Therefore the payoff profile of a long asset or nothing call has the same payoff as a long cash or nothing call and a long vanilla call.

This is best considered by building payoff diagrams which will show how the two positions are economically equivalent. Choice 'd' is the correct answer, and the rest are not.

Given covered interest parity, the currency with a lower interest rate will trade at a forward premium. Choice 'b' is the correct answer.

For an intuitive reasoning, consider a currency forward contract that matures in 3 months. The seller has agreed to sell, say JPY 1,000,000 in exchange for USD 10,000 in the future. In order to cover himself, he borrows the USD right now and converts it to JPY at spot which he puts in a JPY deposit. Assuming JPY interest rates are less than USD interest rates, he pays more on his USD borrowing than he receives on his JPY deposit. Therefore he has to price the forward contract at a premium to spot to cover the interest rate differential.

The duration matched hedge is the best hedge for the bond manager. Matched durations in the bond portfolio and the hedge positions will ensure that any decline in the bond portfolio due to interest rate changes is matched by a rise in the futures position. Hedging dollar-to-dollar will not work unless the bonds and the futures contracts are identical in duration terms. For example, if the duration of the portfolio is 7 years, and each futures contract has a duration of 3.5 years, then selling $1m in value will only cover half the risk. Choice 'b' is the right answer.

Choice 'b' lists all the factors that affect the forward price of a physical asset and is the most complete answer. Forward prices for physical assets are not affected by volatility (only options are), nor are they arbitrarily decided by any prevailing 'views'.