### CFA Practice Question

There are 410 practice questions for this study session.

### CFA Practice Question

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

The expected payoff on the security equals 0.6 * 300 + 0.4 * 50 = 200. Since the expected return is 15%, the security must cost 200/1.15 = \$173.9.

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