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Assuming the stock price and all other variables remain the same, what will be the impact of an increase in the risk-free interest rate on the price of an american put option? Answer B} negative As interest rates increase, investors require higher expected returns from stock and the...

I didn't think we had to know the Merton model - is this for level 2?

Are we expected to know the formulas for GMB and BScholes (including d1 and d2). Should we expect simple pricing questions and calculating St based on mean, St-1 and sigma? thanks in advance.

David: FRAs show up in the curriculum several times but haven't seen too many problems on the GARP practice exams. How should be prepared to handle these problems. Should we know how to calculate the value of an FRA at time t, duration, and coupon pricing?

David: thanks for the prompt response. With regards to the generalized formula F = Se^(rf + storage - dividend yield - convenience yield)*T. Risk Free rate is applicable to all futures. Storage costs are applicable only to commodities, dividend yield only applies to Coupon paying bonds and...

David, I am a bit overwhelmed by all of the different formulas for futures and forward pricing. I see that commodity futures are positively related to cost while fixed income futures deduct the continuous yield to maturity and there are many forms. Do you have a concise consolidated study sheet...

Are GARP's practice exams essentially a collection of reject questions, or do some of these question pop up on the test?

in 2009, Question 36 Your firm's finxed income portfolio has interest only CMOs, callable corporate bonds, inverse floaters, noncallable corporate bonds. Your boss wants to know which of the following securities can lose value as yields decline... Answer c: IO strips and callable...

David, Thanks for the reply. I think I have a better understanding of it now, but still confused why the short seller can deliver a bond that is not of the same maturity as the futures contract. Why would Buyer of a 10-year futures contract want a 2 year bond?

In addition; the rule of thumb from the text implies that if the relevant yield on the curve is greater than 6 then you should deliver low coupon, long maturity bonds and if its less than 6 then you have to deliver high coupon, short maturity bonds. Could you explain the intuition for this...

There's an AIM that explains the effect of correlation between interest rates and underlying assets on pricing of forwards and futures. The rule is that if interest rates are negatively correlated with the underlying asset then forwards are greater than futures and vice versa. Could you provide...

David: do we have to measure the characteristics of all the distributions that the core text discusses. Which distributions mean, variance and properties do you think we have to know cold to do well.

I am confused about the settling of T-bond Futures. My understanding is this: At maturity the seller needs to deliver a physical bond to the buyer. The seller could essentially deliver the cheapest Bond with that maturity. To circumvent that, there is a conversion factor equal to Sum over t of...

Don't really understand this concept. If you're discounting a FI security by the yield curve, then changes in 2 year yields only pertain to 2 year maturities. Is the question asking you to extrapolate the changes in yields given the change in 2 year yields?

Q 18 - GARP 2010 Practice Exam Here are the prices for 2 out of 3 US Treasury Notes for settlement on August 30, 2008. All 3 bonds will mature exactly 1 year later on August 30, 2009. Assume annual coupon payments and that all three bonds have the same coupon payment date. Coupon Price...