Master PRMIA 8006 Exam with Reliable Practice Questions

Correct : C

If the spot rate is 1.1010 and the forward is 1.1040, the swap rate is 30 'points' (= 1.1040 - 1.1010). The annualized swap premium is the swap premium divided by the spot rate, and therefore =0.0030/1.1010 =0.27%, or 27 basis points.

Correct : D

Futures initial margins are determined by the exchange. SPAN is the name of a framework the CME uses to determine margins. Only Choice 'd' is correct.

Correct : B

Convenience yield is the benefit from having access to the commodity - and if the convenience yield is very high, for example in a market where manufacturers must never run out of a particular raw material, then these can switch the total cost of carry (which include interest and storage costs, less convenience yields) to being negative. This causes forward prices to become lower than spot prices, a phenomenon known as backwardation.

Therefore Choice 'b' is the correct answer. If convenience yields are less than other carrying costs, then backwardation will not happen. The sign of convenience yields does not matter, what matters is their relative magnitude when compared to the other costs of carry.

To understand this in an intuitive way, consider that forward prices are nothing but spot prices, plus interest, plus storage costs, less convenience yields. If interest and storage costs are less than the convenience yield, the market will be backwarded.

Correct : D

All the choices list inputs into the determination of futures prices. Therefore volatility in any of them affects the volatility of futures prices. Of course, the largest contributor to the volatility is the volatility of the spot price of the underlying. Choice 'd' is the correct answer.

Correct : B

There was no event such as the CDO squeeze in 2008. (Quite on the contrary, securitized products were selling at distressed prices.).

The silver squeeze of 1979-80 (Hunt brothers), the Chicago fire of 1872 (leading to a short squeeze on wheat), and the wheat squeeze (Hutchingson) of 1866 are real historical events that led to short squeezes in commodity markets. Choice 'b' is therefore the correct answer.

For the PRM exam, you should try to remember the event broadly, and the commodity involved.