CIMA Exam CIMAPRA19-F03-1 Topic 4 Question 83 Discussion

Actual exam question for CIMA's CIMAPRA19-F03-1 exam

Question #: 83
Topic #: 4

G purchased a put option that grants the right to cap the interest on a loan at 10.0%. Simultaneously, G sold a call option that grants the holder the benefits of any decrease if interest rates fall below 8.5%.

Which THREE possible s would be consistent with G's behavior?

AG is willing to risk the loss of savings from a fall in interest rates if that offsets the cost of limiting the cost of rises.

BG's strategy is to ensure that its interest rates lie between 8.5% and 10.0%.

CG is concerned that interest rates may rise above 10.0%.

DG is concerned that interest rates may rise above 8.5%.

EG is concerned that interest rates may fall below 10%.

Show Suggested Answer

Suggested Answer: A, B, C

by Mattie at Apr 08, 2024, 04:54 AM

Limited Time Offer

25%

Off

Get Premium CIMAPRA19-F03-1 Questions as Interactive Web-Based Practice Test or PDF

Contribute your Thoughts:

Submit Cancel

Ahmad

12 months ago

A: I agree, it's a smart strategy to protect against both high and low interest rate scenarios.

upvoted 0 times

...

Gearldine

12 months ago

E: Yeah, it seems like G is using a combination of options to control interest rate risk.

upvoted 0 times

...

Noel

12 months ago

D: Maybe G is just trying to cap the cost of interest on the loan at 10.0%.

upvoted 0 times

...

Coral

12 months ago

C: That's true, G could be managing the risk of rates moving outside a certain range.

upvoted 0 times

...

Cherelle

12 months ago

B: But wouldn't selling a call option mean G is also concerned about rates falling below 8.5%?

upvoted 0 times

...

Marget

1 years ago

A: I think G is trying to protect against interest rates rising above 10.0%.

upvoted 0 times

...

Viki

1 years ago

I believe G's main concern is that interest rates may rise above 10.0%.

upvoted 0 times

...

Sharan

1 years ago

Yes, it seems like G wants to limit the downside risk while capping the cost of rises.

upvoted 0 times

...

Kip

1 years ago

I think G is trying to protect against interest rate fluctuations.

upvoted 0 times

...

Rima

1 years ago

Haha, G is playing both sides of the fence here. Gotta love that kind of financial gymnastics!

upvoted 0 times

...

Reita

1 years ago

Yeah, I agree with C and E for sure. G is concerned about rates rising above 10%. But I'm not sure about B - does that mean G is trying to keep rates in a specific range?

upvoted 0 times

...

Katheryn

1 years ago

Okay, let me break this down. G bought a put option to limit their exposure to rising rates, and sold a call option to benefit from falling rates. I think the answer is B, C, and E.

upvoted 0 times

...

Ciara

1 years ago

Ha, G must be a savvy investor. Capping the upside and keeping the downside potential - smart move!

upvoted 0 times

...

Tamala

1 years ago

Hmm, I see what they're getting at. G is trying to protect against interest rates rising above 10%, but also wants to benefit if they fall below 8.5%. Interesting strategy!

upvoted 0 times

...

Jules

1 years ago

This question is tricky! It's testing our understanding of interest rate options and the behavior of the person who purchased and sold them. I'm going to have to think this through carefully.

upvoted 0 times

Cecil

1 years ago

upvoted 0 times

...

Alison

1 years ago

upvoted 0 times

...

Diane

1 years ago

upvoted 0 times

...