Explanation
The greater the rebalancing frequency, the more effective the hedge. But the higher the rebalancing frequency (ie the how often the hedge is true-ed up as a response to changes in the market), higher are the transaction costs. Higher transaction costs reduce hedge performance. Therefore transaction costs limit the ability of traders to continuously trade and keep delta at or close to zero. Transaction costs include a number of elements, including market impact costs, dollar costs per trade, and the bid-offer spread on the security.
Traders have to strike a balance between transaction costs and the rebalancing frequency when making decisions on hedging. Bid-offer spreads, cost per trade and the rebalancing frequency are therefore relevant considerations. The volatility of the underlying is not something the trader would consider when taking decisions to delta hedge (unless as part of an active bet on future volatility) and therefore Choice 'c' is irrelevant to the trader's decision, and is the correct answer.

Explanation
The buyer of an FRA is considered 'long', and a 3 x 6 FRA allows him or her to borrow funds at the agreed rate starting at the end of month 3 till the end of month 6. (ie, 3 x 6 indicates that the borrowing period commences at 3 months, and ends at 6 months, for a period of 6 - 3 = 3 months). The seller has exactly the opposite position, ie he or she is committed to lend funds at the agreed rate for 3 months starting at the end of
3 months from today (for a 3 x 6 FRA). [Note that the obligation to borrow or lend in and FRA does not mean that either parties will actually do that, instead they will just exchange cash flows to get to get to an identical economic situation.] Since the seller, or the short, is committed to lending in the future starting 3 months from now, it is akin to borrowing now for 3 months, and investing the borrowed amount for 6 months. During the first 3 months, the amounts borrowed and lent 'cancel' out (conceptually) and after the 3 months the short returns the amount borrowed, and is left with just the net amount lent, ie the FRA.
Thus the correct answer is Choice 'd'. Choice 'b' describes the position of the FRA buyer. Choice 'a' and Choice 'c' are nonsensical.

Explanation
A portfolio is considered dominated when it is not on the efficient frontier, which is another way of saying that there exists another portfolio with a better risk reward payoff. Therefore Choice 'a' is the correct answer.If the portfolio has a higher mean and the same or lower standard deviation than any other portfolio, this means it is already on the efficient frontier and is not dominated. The other choices do not make any sense in the context of the question.

Explanation
Treasury bond futures do not specify which bond can be used to effect delivery, but allow the seller to pick from a number of available bonds. As a result, one of these eligible bonds emerges as being the 'cheapest' to deliver, and this CTD bond is determined by the basis between the cash price of the bond and the futures spot price as adjusted by the conversion factor for this specific bond. (ie, basis = Cash Price of the Bond - (Futures Price x Conversion Factor).) The bond with the lowest basis is generally the CTD. In the given question, the three basis calculations are:
1) 97 - (0.9 x 105) = 2.5
2) 101 - (1 x 105) = -4
3) 106 - (1.1 x 105) = -9.5
Since the third bond with a quote of 106 has the lowest basis, Choice 'b' is the correct answer.

Explanation
Given a choice, decision makers will maximize expected utility. The four basic axioms on which the principle of maximizing expected utility is based are:
- Transitivity of choice,
- Continuity of choice,
- Independence of choice, and
- Stochastic dominance.