Why should I choose AnalystNotes?

Simply put: AnalystNotes offers the best value and the best product available to help you pass your exams.

Basic Question 3 of 6

A price-linked derivative security pays $300 if the oil price over the next year increases by more than 5%, an event that can happen with a 60% probability. Otherwise, it pays $50. If the expected return on the security is 15%, how much does the security cost?

A. $174
B. $180
C. $168

User Contributed Comments 7

User Comment
Gina why divided by 1.15 (vs multiplied by it) since the 15% return increases the value?
logicMan the expected payoff is the future value, and the cost is the current value. You are asked to get the cost so 200 should be divided by 1.15.
arkot90 it says that the expected return is 15% which means that when you will multiply the cost of the security with 15% it will give you 200(the expected pay off). Specifically:
x *1,15=200 so 200/1,15=x and x=174
magicchip or alternatively FV=200, I/Y=.15 N=1 yr therefore PV = -173.91 (174)
A TVM calc.
DonAnd Magicchip is definitely building on previous concepts and that what the CFA is all about.Taking knowledge gained in previous LOS and building on them or applying them in different settings.
sgossett86 P(value)=.6(300)+.4(50)
=200

still doesn't tell us value of it.
gives us expected return, time from now.

fv=200 n=1 i/y=15

cpt: pv 173.9
RoL9833Y 15% is viewed as holding period return in this question !
CFA question may be like this one!
You need to log in first to add your comment.
I am using your study notes and I know of at least 5 other friends of mine who used it and passed the exam last Dec. Keep up your great work!
Barnes

Barnes

Learning Outcome Statements

calculate expected values, variances, and standard deviations and demonstrate their application to investment problems

CFA® 2025 Level I Curriculum, Volume 1, Module 4.