PRM Certification 8006 Passing Score

For a deep in the money option, the option value changes in line with the value of the underlying because at this point the option is effectively behaving like the underlying. Therefore its delta is the same as the delta of the underlying, ie 1. In the same way, its gamma will be the same as the gamma of the underlying, which is 0. Therefore Choice 'b' is the correct answer.

A CDS contract provides exposure to default risk and the credit spread for a particular credit. It does not provide an exposure to the risk of interest rates going up or down. It is an instrument that allows institutions to take a view on the price of credit risk alone. Therefore statement I is false and statement II is true.

A total return swap (TRS) exchanges the return from an asset for a fixed or floating exchange rate. It is in essence a financing arrangement where one party pays the other interest to earn a return on an asset that it does not wish to hold itself, perhaps for liquidity reasons. The financed asset is held by the party paying the asset's returns, effectively creating a 'collateral'. Therefore statement III is correct.

A credit linked note is a funded instrument where the sellers of the protection have put up the money upfront in the form of a subscription to a note in case the credit losses are realized. Therefore statement IV is not correct.

Choice 'd' is the correct answer. Continuously compounded returns are given by the log of S2/S1. The expression (S2 - S1)/S1 gives discrete returns, not continuously compounded returns.

Note that the question is only asking for the return over the given time period, not annualized returns. So t is not relevant here. If we had to find annualized returns, and t were expressed in years, then the annualized return would have been (1/t)*ln(S2/S1).

Also refer to the tutorial on interest rates and compounding for more information on continuously compounded rates.

The OTC market for foreign exchange is indeed much larger than the exchange traded futures market for FX. Therefore statement I is correct.

Delivery-versus-payment (DVP) arrangements make sure that title to a security passes only when payment has been made, and these arrangements, usually implemented through national clearing agencies such as the DTC in the US, help avoid the risk of counterparty defaults.

Electronic Clearing Networks (ECNs) offer cheaper trading costs than exchanges, in fact that is their primary attraction. Exchanges offer other advantages, but lower trading costs is not one of them.

ISDA master agreements provide templates that a large number of OTC market participants use to standardize their OTC trading activities. Therefore statement IV is correct.