PRMIA 8007 : Exam II: Mathematical Foundations of Risk Measurement - 2015 Edition

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PRMIA 8007 Exam Syllabus Topics:

PRMIA Exam II: Mathematical Foundations of Risk Measurement - 2015 Edition Sample Questions:

1. Which of the following statements is true?

A) Continuous compounding can be thought as making the compounding period infinitesimally small.
B) The constant plays an important role in the mathematical description of continuous compounding.
C) Discrete and continuous compounding produce the same results if the discount rate is positive.
D) Continuous compounding is the better method because it results in higher present values compared to discrete compounding.

2. Which of the following can be used to evaluate a regression model?
(i) Magnitude of R2
(ii) Magnitude of TSS (total sum of squares)
(iii) Tests for statistical significance
(iv) Sign and magnitude of each regression parameter

A) (i), (ii), and (iii)
B) (i), (iii), and (iv)
C) (i) and (iv)
D) (i), (ii), (iii), and (iv)

3. Let N(.) denote the cumulative distribution function and suppose that X and Y are standard normally distributed and uncorrelated. Using the fact that N(1.96)=0.975, the probability that X 0 and Y 1.96 is approximately

A) 0.488%
B) 0.25%
C) 0.49%
D) 0.495%

4. In a binomial tree lattice, at each step the underlying price can move up by a factor of u = 1.1 or down by a factor of . The continuously compounded risk free interest rate over each time step is 1% and there are no dividends paid on the underlying. The risk neutral probability for an up move is:

A) 0.5292
B) 0.5286
C) 0.5290
D) 0.5288

5. A 2-step binomial tree is used to value an American put option with strike 104, given that the underlying price is currently 100. At each step the underlying price can move up by 20% or down by 20% and the risk-neutral probability of an up move is 0.55. There are no dividends paid on the underlying and the discretely compounded risk free interest rate over each time step is 2%. What is the value of the option in this model?

A) 12.33
B) 12.78
C) 12.49
D) 11.82

Solutions: