# Financial Markets and Products

## Financial Reporting / Financial Analysis

Hello,

Need to know, as I didn’t find any content in FRM related to Financial reporting or Financial statement analysis etc. so if a person working in Risk Management department of bank then he is suppose to be well versed in financial statement analysis in order to get in depth understanding of financial numbers of a company to whom the credit facilities to be approved, so how would FRM tackle with this. Thanks

## forward contract calculation

At the inception of a six-month forward contract on a stock index, the value of the index was $1,150, the interest rate was 4.4

percent, and the continuous dividend was 1.8 percent. Three months later, the value of the index is $1,075. Which of the

following statements is TRUE? The value of the:

short position is $47.56.

long position is $47.56.

long position is $82.41.

long position is -$82.41.

## Basis Risk

Colin Cooper is in possession of a large quantity of wheat and expects prices to decline. Which of the following positions is most

appropriate for Cooper?

Buying hedge.

Short the basis.

Long hedge.

Long the basis.

Answer given is long the basis

but i feel this is wrong as basis = spot - future and price to decline means spot is falling hence basis is reduced hence this will lead to loss for long basis i.e. short hedge.

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## Real exchange rate

A decline in the real USDJPY exchange rate *most likely*:

Increases a U.S. investor’s purchasing power relative to a Japanese investor’s.

Increases a Japanese investor’s purchasing power relative to a U.S. investor’s.

Increases the JPY‐denominated value of a Japanese investor’s investments in the United States.

You Answered Correctly!

## Swap valuation

You need to verify the cash flows and end‐of‐day valuation of a 3‐year pay fixed swap that is on d your esk. The end‐of‐day P&L doesn’t seem quite right and you are taking this swap as a sample to see if you have bad data or a bad model.

The swap you have on is a 500 million pay fixed 1.5% 3‐year USD swap that receives annual LIBOR.

## Explain this question to me (Question #77, GARP Practice Test)

I don’t understand why they subtract K from the forward price in the calculation. Couldn’t you just discount 1050 back 9 months to get to today’s price?

## Question about the 2011 practice exam 1, question 15.

The answer is B as given in the practice book. However, after calculation of the net cost for short position, I find that bond C should be the cheapest to deliver bond. Can anyone help me about this question?

## Hedge

I have question of “complete hedge strategy” as described in FRM books. Optimal number of contracts to short sell is calculated as follows: if you have 1,000 USD portfolio, Beta is 1.3 and S&P index price is assume 50$ and multiplier is 2 and If you would like to make “complete hedge” (i.e. aim for beta of zero) you should short 13 contracts (calculated as = 1,000*1.3/30*2) but I don’t see how this works in practice.

## Internal Rate of Return and NPV

Suppose that for a sequence of cash flows, the first cash flow in the sequence is negative and that the cash flows have a unique Internal Rate of Return of 15% per year. Is the following statement true or false?

What happens to the NPV of cashflows if you discount the cash flows using a rate of 15% per period? Is it positive, 0, or negative?

Now, I have read that the IRR equates the inflows and outflows - i.e., the NPV becomes 0. I’m just confused with the first part of the question wherein they have mentioned about the 1st CF to be negative.

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