Financial derivatives definition
payoffs from long forward position
ST-k
Options are traded on
both exchange and OTC
19.In which of the following cases is an asset NOT considered constructively sold? A.The owner shorts the asset B.The owner buys an in-the-money put option on the asset C.The owner shorts a forward contract on the asset D.The owner shorts a futures contract on the stock
B
2.A variable x starts at 10 and follows the generalized Wiener processdx = a dt + b dzwhere time is measured in years. If a = 3 and b =4 what is the standard deviation of the value in 4 years? A.4 B.8 C.12 D.16
B
2.Which of the following creates a bear spread?A.Buy a low strike price call and sell a high strike price call B.Buy a high strike price call and sell a low strike price call C.Buy a low strike price call and sell a high strike price put D.Buy a low strike price put and sell a high strike price call
B
How much is a basis point? A.1.0% B.0.1% C.0.01% D.0.001%
C
Speculators
who bet on the future direction
Arbitragers
who offset to lock in a profit
Hedgers
who use derivatives to reduce risk
An interest rate is 5% per annum with continuous compounding. What is the equivalent rate with semiannual compounding? A.5.06%B.5.03%C.4.97% D.4.94%
A
12.Which of the following is NOT traded by the CBOE? A.Weeklys B.Monthlys C.Binary options D.DOOM options
B
3.A variable x starts at 10 and follows the generalized Wiener processdx = a dt + b dzIf a = 3 and b =4 what is the standard deviation of the value in three months? A.1 B.2 C.3 D.4
B
Which of the following day count conventions applies to a US Treasury bond? A.Actual/360 B.Actual/Actual (in period) C.30/360 D.Actual/365
B
For a futures contract trading in April 2012, the open interest for a June 2012 contract, when compared to the open interest for Sept 2012 contracts, is usually A.Higher B.Lower C.The same D.Equally likely to be higher or lower
A
19. If e is a random sample from a standard normal distribution, which of the following is the change in a Wiener process in time dt . A.e times the square root of dt B.e times dt C.dt times the square root of e D.The square root of e times the square root of dt
A
Who initiates delivery in a corn futures contract A.The party with the long position B.The party with the short position C.Either party D.The exchange
B
Derivative are traded in
exchange（少） and OTC(多)
20. For what value of the correlation between two Wiener processes is the sum of the processes also a Wiener process? A.0.5 B.−0.5 C.0 D.1
B
A company can invest funds for five years at LIBOR minus 30 basis points. The five-year swap rate is 3%. What fixed rate of interest can the company earn by using the swap? A.2.4%B.2.7%C.3.0%D.3.3%
B
2.Which of the following is true? A.A long call is the same as a short put B.A short call is the same as a long put C.A call on a stock plus a stock the same as a put D.None of the above
D
The two-year zero rate is 6% and the three year zero rate is 6.5%. What is the forward rate for the third year? All rates are continuously compounded. A.6.75%B.7.0%C.7.25% D.7.5%
D
10.Which of the following best describes the intrinsic value of an option? A.The value it would have if the owner had to exercise it immediately or not at all B.The Black-Scholes-Merton price of the option C.The lower bound for the option's price D.The amount paid for the option
A
10.Which of the following must post margin? A.The seller of an option B.The buyer of an option C.The seller and the buyer of an option D.Neither the seller nor the buyer of an option
A
11.How can a straddle be created? A.Buy one call and one put with the same strike price and same expiration date B.Buy one call and one put with different strike prices and same expiration date C.Buy one call and two puts with the same strike price and expiration date D.Buy two calls and one put with the same strike price and expiration date
A
13.The current price of a non-dividend paying stock is $30. Use a two-step tree to value a European put option on the stock with a strike price of $32 that expires in 6 months with u = 1.1 and d = 0.9. Each step is 3 months, the risk free rate is 8%. A.$2.24B.$2.44C.$2.64D.$2.84
A
13.When a six-month option is purchased A.The price must be paid in full B.Up to 25% of the option price can be borrowed using a margin account C.Up to 50% of the option price can be borrowed using a margin account D.Up to 75% of the option price can be borrowed using a margin account
A
15.Which of the following describes a protective put? A.A long put option on a stock plus a long position in the stock B.A long put option on a stock plus a short position in the stock C.A short put option on a stock plus a short call option on the stock D.A short put option on a stock plus a long position in the stock
A
16.A trader buys a call and sells a put with the same strike price and maturity date. What is the position equivalent to? A.A long forward B.A short forward C.Buying the asset D.None of the above
A
19.A trader creates a long butterfly spread from options with strike prices $60, $65, and $70 by trading a total of 400 options. The options are worth $11, $14, and $18. What is the maximum net loss (after the cost of the options is taken into account)? A.$100 B.$200 C.$300 D.$400
A
19.Which of the following is a typical bid-offer spread on the swap rate for a plain vanilla interest rate swap? A.3 basis points B.8 basis points C.13 basis points D.18 basis points
A
19.Which of the following is true for American options? A.Put-call parity provides an upper and lower bound for the difference between call and put prices B.Put call parity provides an upper bound but no lower bound for the difference between call and put prices C.Put call parity provides an lower bound but no upper bound for the difference between call and put prices D.There are no put-call parity results
A
2.Which of the following is NOT true A.When a CBOE call option on IBM is exercised, IBM issues more stock B.An American option can be exercised at any time during its life C.An call option will always be exercised at maturity if the underlying asset price is greater than the strike price D.A put option will always be exercised at maturity if the strike price is greater than the underlying asset price.
A
3.The current price of a non-dividend-paying stock is $30. Over the next six months it is expected to rise to $36 or fall to $26. Assume the risk-free rate is zero. An investor sells call options with a strike price of $32. What is the value of each call option? A.$1.6 B.$2.0 C.$2.4 D.$3.0
A
3.When volatility increases with all else remaining the same, which of the following is true? A.Both calls and puts increase in value B.Both calls and puts decrease in value C.Calls increase in value while puts decrease in value D.Puts increase in value while calls decrease in value
A
3.Which of the following creates a bull spread? A.Buy a low strike price put and sell a high strike price put B.Buy a high strike price put and sell a low strike price put C.Buy a high strike price call and sell a low strike price put D.Buy a high strike price put and sell a low strike price call
A
4.The variance of a Wiener process in time t is A. t B. t squared C. the square root of t D. t to the power of 4
A
5.An investor has exchange-traded put options to sell 100 shares for $20. There is a $1 cash dividend. Which of the following is then the position of the investor? A.The investor has put options to sell 100 shares for $20 B.The investor has put options to sell 100 shares for $19 C.The investor has put options to sell 105 shares for $19 D.The investor has put options to sell 105 shares for $19.05
A
5.Suppose that the standard deviation of monthly changes in the price of commodity A is $2. The standard deviation of monthly changes in a futures price for a contract on commodity B (which is similar to commodity A) is $3. The correlation between the futures price and the commodity price is 0.9. What hedge ratio should be used when hedging a one month exposure to the price of commodity A? A. 0.60 B. 0.67 C. 1.45 D.0.90
A
6.The process followed by a variable X is dX = mX dt+sX dzWhat is the coefficient of dt in the process for the square of X. A.2mX2+s2X2 B.2mX2 C.mX2+2s2X2 D.mX2+s2X2
A
A trader enters into a long position in one Eurodollar futures contract. How much does the trader gain when the futures price quote increases by 6 basis points? A. $6 B. $150 C.$60 D. $600
B
6.Which of the following describes how American options can be valued using a binomial tree?A.Check whether early exercise is optimal at all nodes where the option is in-the-money B.Check whether early exercise is optimal at the final nodes C.Check whether early exercise is optimal at the penultimate nodes and the final nodes D.None of the above
A
8.Which of the following is an example of an option class? A.All calls on a certain stock B.All calls with a particular strike price on a certain stock C.All calls with a particular time to maturity on a certain stock D.All calls with a particular time to maturity and strike price on a certain stock
A
9.Which of the following is NOT true? (Present values are calculated from the end of the life of the option to the beginning.) A.An American put option is always worth less than the present value of the strike price B.A European put option is always worth less than the present value of the strike price C.A European call option is always worth less than the stock price D.An American call option is always worth less than the stock price
A
A company enters into an interest rate swap where it is paying fixed and receiving LIBOR. When interest rates increase, which of the following is true? A.The value of the swap to the company increases B.The value of the swap to the company decreases C.The value of the swap can either increase or decrease D.The value of the swap does not change providing the swap rate remains the same
A
A company knows it will have to pay a certain amount of a foreign currency to one of its suppliers in the future. Which of the following is true A.A forward contract can be used to lock in the exchange rate B.A forward contract will always give a better outcome than an option C.An option will always give a better outcome than a forward contract D.An option can be used to lock in the exchange rate
A
A haircut of 20% means that A.A bond with a market value of $100 is considered to be worth $80 when used to satisfy a collateral request B. A bond with a face value of $100 is considered to be worth $80 when used to satisfy a collateral request C.A bond with a market value of $100 is considered to be worth $83.3 when used to satisfy a collateral request D.A bond with a face value of $100 is considered to be worth $83.3 when used to satisfy a collateral request
A
A one-year call option on a stock with a strike price of $30 costs $3; a one-year put option on the stock with a strike price of $30 costs $4. Suppose that a trader buys two call options and one put option. The breakeven stock price above which the trader makes a profit is A.$35 B.$40 C.$30 D.$36
A
An interest rate is 12% per annum with semiannual compounding. What is the equivalent rate with quarterly compounding? A. 11.83%B.11.66%C.11.77% D.11.92%
A
The basis is defined as spot minus futures. A trader is hedging the sale of an asset with a short futures position. The basis increases unexpectedly. Which of the following is true? A. The hedger's position improves. B.The hedger's position worsens. C.The hedger's position sometimes worsens and sometimes improves. D.The hedger's position stays the same.
A
The frequency with which futures margin accounts are adjusted for gains and losses is A.DailyB.WeeklyC.MonthlyD.Quarterly
A
The price of a stock on February 1 is $84. A trader buys 200 put options on the stock with a strike price of $90 when the option price is $10. The options are exercised when the stock price is $85. The trader's net profit or loss is A.Loss of $1,000B.Loss of $2,000C.Gain of $200D.Gain of $1000
A
The spot price of an investment asset that provides no income is $30 and the risk-free rate for all maturities (with continuous compounding) is 10%. What is the three-year forward price? A. $40.50 B. $22.22 C. $33.00 D.$33.16
A
Which of following describes forward rates?A.Interest rates implied by current zero rates for future periods of time B.Interest rate earned on an investment that starts today and last for n-years in the future without coupons C.The coupon rate that causes a bond price to equal its par (or principal) value D.A single discount rate that gives the value of a bond equal to its market price when applied to all cash flows
A
Which of the following best describes "stack and roll"? A.Creates long-term hedges from short term futures contracts B.Can avoid losses on futures contracts by entering into further futures contracts C.Involves buying a futures contract with one maturity and selling a futures contract with a different maturity D.Involves two different exposures simultaneously
A
Which of the following best describes the term "spot price" A.The price for immediate delivery B.The price for delivery at a future time C.The price of an asset that has been damaged D.The price of renting an asset
A
Which of the following creates a bull spread?A.Buy a low strike price call and sell a high strike price call B.Buy a high strike price call and sell a low strike price call C.Buy a low strike price call and sell a high strike price put D.Buy a low strike price put and sell a high strike price call
A
Which of the following describes a call option?A.The right to buy an asset for a certain price B.The obligation to buy an asset for a certain price C.The right to sell an asset for a certain price D.The obligation to sell an asset for a certain price
A
Which of the following describes the way the futures price of a foreign currency is quoted by the CME group? A.The number of U.S. dollars per unit of the foreign currency B.The number of the foreign currency per U.S. dollar C.Some futures prices are always quoted as the number of U.S. dollars per unit of the foreign currency and some are always quoted the other way round D.There are no quotation conventions for futures prices
A
Which of the following is NOT true A.Futures contracts nearly always last longer than forward contracts B.Futures contracts are standardized; forward contracts are not. C.Delivery or final cash settlement usually takes place with forward contracts; the same is not true of futures contracts. D.Forward contracts usually have one specified delivery date; futures contract often have a range of delivery dates.
A
Which of the following is NOT true about forward and futures contracts? A.Forward contracts are more liquid than futures contracts B.The futures contracts are traded on exchanges while forward contracts are traded in the over-the-counter market C.In theory forward prices and futures prices are equal when there is no uncertainty about future interest rates D.Taxes and transaction costs can lead to forward and futures prices being different
A
Which of the following is a reason for hedging a portfolio with an index futures? A.The investor believes the stocks in the portfolio will perform better than the market but is uncertain about the future performance of the market B.The investor believes the stocks in the portfolio will perform better than the market and the market is expected to do well C.The portfolio is not well diversified and so its return is uncertain D.All of the above
A
Which of the following is true for an interest rate swap? A.A swap is usually worth close to zero when it is first negotiated B. Each forward rate agreement underlying a swap is worth close to zero when the swap is first entered into C.Comparative advantage is a valid reason for entering into the swap D.None of the above
A
Which of the following is true? A.The convenience yield is always positive or zero. B.The convenience yield is always positive for an investment asset. C.The convenience yield is always negative for a consumption asset. D.The convenience yield measures the average return earned by holding futures contracts.
A
1. A one-year forward contract is an agreement where A.One side has the right to buy an asset for a certain price in one year's time. B.One side has the obligation to buy an asset for a certain price in one year's time. C.One side has the obligation to buy an asset for a certain price at some time during the next year. D.One side has the obligation to buy an asset for the market price in one year's time.
B
1.The current price of a non-dividend-paying stock is $30. Over the next six months it is expected to rise to $36 or fall to $26. Assume the risk-free rate is zero. An investor sells call options with a strike price of $32. Which of the following hedges the position? A.Buy 0.6 shares for each call option sold B.Buy 0.4 shares for each call option sold C.Short 0.6 shares for each call option sold D.Short 0.6 shares for each call option sold
B
10.Which of the following is true of the fed funds rate A.It is the same as the Treasury rate B.It is an overnight interbank rate C.It is a rate for which collateral is posted D.It is a type of repo rate
B
11.If a variable x follows the process dx = b dz where dz is a Wiener process, which of the following is the process followed by y = exp(x). A.dy = by dz B.dy = 0.5b2y dt+by dz C.dy = (y+0.5b2y) dt+by dz D.dy = 0.5b2y dt+b dz
B
12.The current price of a non-dividend paying stock is $30. Use a two-step tree to value a European call option on the stock with a strike price of $32 that expires in 6 months. Each step is 3 months, the risk free rate is 8% per annum with continuous compounding. What is the option price when u = 1.1 and d = 0.9. A.$1.29B.$1.49C.$1.69D.$1.89
B
12.Which of the following is true? A.An American call option on a stock should never be exercised early B.An American call option on a stock should never be exercised early when no dividends are expected C.There is always some chance that an American call option on a stock will be exercised early D.There is always some chance that an American call option on a stock will be exercised early when no dividends are expected
B
14.How can a strangle trading strategy be created? A.Buy one call and one put with the same strike price and same expiration date B.Buy one call and one put with different strike prices and same expiration date C.Buy one call and two puts with the same strike price and expiration date D.Buy two calls and one put with the same strike price and expiration date
B
14.Which of the following are true for CBOE stock options? A.There are no margin requirements B.The initial margin and maintenance margin are determined by formulas and are equal C.The initial margin and maintenance margin are determined by formulas and are different D.The maintenance margin is usually about 75% of the initial margin
B
14.Which of the following is NOT true in a risk-neutral world? A.The expected return on a call option is independent of its strike price B.Investors expect higher returns to compensate for higher risk C.The expected return on a stock is the risk-free rate D.The discount rate used for the expected payoff on an option is the risk-free rate
B
14.Which of the following is true when dividends are expected? A.Put-call parity does not hold B.The basic put-call parity formula can be adjusted by subtracting the present value of expected dividends from the stock price C.The basic put-call parity formula can be adjusted by adding the present value of expected dividends to the stock price D.The basic put-call parity formula can be adjusted by subtracting the dividend yield from the interest rate
B
16.If the volatility of a non-dividend-paying stock is 20% per annum and a risk-free rate is 5% per annum, which of the following is closest to the Cox, Ross, Rubinstein parameter p for a tree with a three-month time step? A.0.50B.0.54C.0.58D.0.62
B
17. A stock price is $20. It has an expected return of 12% and a volatility of 25%. What is the stock price that has a 2.5% chance of being exceeded in one day? (For this question assume that there are 365 days in the year.) A.$20.41 B.$20.51 C.$20.61 D.$20.71
B
17.The current price of a non-dividend paying stock is $50. Use a two-step tree to value an American put option on the stock with a strike price of $48 that expires in 12 months. Each step is 6 months, the risk free rate is 5% per annum, and the volatility is 20%. Which of the following is the option price? A.$1.95B.$2.00C.$2.05D.$2.10
B
17.When the interest rate is 5% per annum with continuous compounding, which of the following creates a principal protected note worth $1000?A.A one-year zero-coupon bond plus a one-year call option worth about $59 B.A one-year zero-coupon bond plus a one-year call option worth about $49 C.A one-year zero-coupon bond plus a one-year call option worth about $39 D.A one-year zero-coupon bond plus a one-year call option worth about $29
B
20.Which of the following can be used to create a long position in a European put option on a stock? A.Buy a call option on the stock and buy the stock B.Buy a call on the stock and short the stock C.Sell a call option on the stock and buy the stock D.Sell a call option on the stock and sell the stock
B
4. Which of the following creates a bear spread?A.Buy a low strike price put and sell a high strike price put B.Buy a high strike price put and sell a low strike price put C.Buy a high strike price call and sell a low strike price put D.Buy a high strike price put and sell a low strike price call
B
7.The price of a stock, which pays no dividends, is $30 and the strike price of a one year European call option on the stock is $25. The risk-free rate is 4% (continuously compounded). Which of the following is a lower bound for the option such that there are arbitrage opportunities if the price is below the lower bound and no arbitrage opportunities if it is above the lower bound?A.$5.00 B.$5.98 C.$4.98 D.$3.98
B
7.Which of the following is true when the stock price follows geometric Brownian motion A.The future stock price has a normal distribution B.The future stock price has a lognormal distribution C.The future stock price has geometric distribution D.The future stock price has a truncated normal distribution
B
8.What is a description of the trading strategy where an investor sells a 3-month call option and buys a one-year call option, where both options have a strike price of $100 and the underlying stock price is $75? A.Neutral Calendar Spread B.Bullish Calendar Spread C.Bearish Calendar Spread D.None of the above
B
A company due to pay a certain amount of a foreign currency in the future decides to hedge with futures contracts. Which of the following best describes the advantage of hedging? A.It leads to a better exchange rate being paid B.It leads to a more predictable exchange rate being paid C.It caps the exchange rate that will be paid D.It provides a floor for the exchange rate that will be paid
B
A company enters into a long futures contract to buy 1,000 units of a commodity for $60 per unit. The initial margin is $6,000 and the maintenance margin is $4,000. What futures price will allow $2,000 to be withdrawn from the margin account? A. $58B. $62C. $64D. $66
B
A company will buy 1000 units of a certain commodity in one year. It decides to hedge 80% of its exposure using futures contracts. The spot price and the futures price are currently $100 and $90, respectively. If the spot price and the futures price in one year turn out to be $112 and $110, respectively. What is the average price paid for the commodity? A.$92 B.$96 C.$102 D.$106
B
A floating-for-fixed currency swap is equivalent to A.Two interest rate swaps, one in each currency B.A fixed-for-fixed currency swap and one interest rate swap C.A fixed-for-fixed currency swap and two interest rate swaps, one in each currency D.None of the above
B
A limit order A.Is an order to trade up to a certain number of futures contracts at a certain price B. Is an order that can be executed at a specified price or one more favorable to the investor C.Is an order that must be executed within a specified period of time D.None of the above
B
A portfolio is worth $24,000,000. The futures price for a Treasury note futures contract is 110 and each contract is for the delivery of bonds with a face value of $100,000. On the delivery date the duration of the bond that is expected to be cheapest to deliver is 6 years and the duration of the portfolio will be 5.5 years. How many contracts are necessary for hedging the portfolio? A.100 B.200 C.300 D.400
B
A silver mining company has used futures markets to hedge the price it will receive for everything it will produce over the next 5 years. Which of the following is true? A.It is liable to experience liquidity problems if the price of silver falls dramatically B.It is liable to experience liquidity problems if the price of silver rises dramatically C.It is liable to experience liquidity problems if the price of silver rises dramatically or falls dramatically D.The operation of futures markets protects it from liquidity problems
B
A trader has a portfolio worth $5 million that mirrors the performance of a stock index. The stock index is currently 1,250. Futures contracts trade on the index with one contract being on 250 times the index. To remove market risk from the portfolio the trader should A. Buy 16 contracts B.Sell 16 contracts C.Buy 20 contracts D.Sell 20 contracts
B
A trader uses 3-month Eurodollar futures to lock in a rate on $5 million for six months. How many contracts are required? A.5 B.10 C.15 D.20
B
An investor sells a futures contract an asset when the futures price is $1,500. Each contract is on 100 units of the asset. The contract is closed out when the futures price is $1,540. Which of the following is true A.The investor has made a gain of $4,000 B.The investor has made a loss of $4,000 C.The investor has made a gain of $2,000 D.The investor has made a loss of $2,000
B
An investor shorts 100 shares when the share price is $50 and closes out the position six months later when the share price is $43. The shares pay a dividend of $3 per share during the six months. How much does the investor gain? A. $1,000 B. $400 C. $700 D. $300
B
As inventories of a commodity decline, which of the following is true? A.The one-year futures price as a percentage of the spot price increases B.The one-year futures price as a percentage of the spot price decreases C.The one-year futures price as a percentage of the spot price stays the same D.Any of the above can happen
B
As the convenience yield increases, which of the following is true? A.The one-year futures price as a percentage of the spot price increases B.The one-year futures price as a percentage of the spot price decreases C.The one-year futures price as a percentage of the spot price stays the same D.Any of the above can happen
B
Futures contracts trade with every month as a delivery month. A company is hedging the purchase of the underlying asset on June 15. Which futures contract should it use? A.The June contract B.The July contract C.The May contract D.The August contract
B
In the corn futures contract a number of different types of corn can be delivered (with price adjustments specified by the exchange) and there are a number of different delivery locations. Which of the following is true A. This flexibility tends increase the futures price. B.This flexibility tends decrease the futures price. C.This flexibility may increase and may decrease the futures price. D.This flexibility has no effect on the futures price
B
One futures contract is traded where both the long and short parties are closing out existing positions. What is the resultant change in the open interest? A. No changeB.Decrease by oneC.Decrease by twoD.Increase by one
B
The bonds that can be delivered in a Treasury bond futures contract are A.Assets that provide no income B.Assets that provide a known cash income C.Assets that provide a known yield D.None of the above
B
The compounding frequency for an interest rate defines A.The frequency with which interest is paid B. A unit of measurement for the interest rate C.The relationship between the annual interest rate and the monthly interest rate D.None of the above
B
The spot price of an investment asset is $30 and the risk-free rate for all maturities is 10% with continuous compounding. The asset provides an income of $2 at the end of the first year and at the end of the second year. What is the three-year forward price? A. $19.67 B. $35.84 C. $45.15 D. $40.50
B
The time-to-maturity of a Eurodollars futures contract is 4 years and the time-to-maturity of the rate underlying the futures contract is 4.25 years. The standard deviation of the change in the short term interest rate, = 0.011. What does the model in the text estimate as the difference between the futures and the forward interest rate? A. 0.105% B. 0.103% C. 0.098% D. 0.093%
B
Which entity in the United States takes primary responsibility for regulating futures market?A.Federal Reserve Board B.Commodities Futures Trading Commission (CFTC) C.Security and Exchange Commission (SEC) D.US Treasury
B
Which of the following best describes a central clearing party A.It is a trader that works for an exchange B.It stands between two parties in the over-the-counter market C.It is a trader that works for a bank D.It helps facilitate futures trades
B
Which of the following increases basis risk? A.A large difference between the futures prices when the hedge is put in place and when it is closed out B.Dissimilarity between the underlying asset of the futures contract and the hedger's exposure C.A reduction in the time between the date when the futures contract is closed and its delivery month D.None of the above
B
Which of the following is NOT a reason why a short position in a stock is closed out? A.The investor with the short position chooses to close out the position B.The lender of the shares issues instructions to close out the position C.The broker is no longer able to borrow shares from other clients D.The investor does not maintain margins required on his/her margin account
B
Which of the following is true about a long forward contract A.The contract becomes more valuable as the price of the asset declines B.The contract becomes more valuable as the price of the asset rises C.The contract is worth zero if the price of the asset declines after the contract has been entered into D.The contract is worth zero if the price of the asset rises after the contract has been entered into
B
Which of the following is true for the party paying fixed in a newly negotiated interest rate swap when the yield curve is upward sloping? A.The early forward contracts underlying the swap have a positive value and the later ones have a negative value B.The early forward contracts underlying the swap have a negative value and the later ones have a positive value C.The swap is designed so that all forward rates have zero value D.Sometimes A is true and sometimes B is true
B
Which of the following is true? A.Principals are not usually exchanged in a currency swap B.The principal amounts usually flow in the opposite direction to interest payments at the beginning of a currency swap and in the same direction as interest payments at the end of the swap. C.The principal amounts usually flow in the same direction as interest payments at the beginning of a currency swap and in the opposite direction to interest payments at the end of the swap. D.Principals are not usually specified in a currency swap
B
Which of the following is true? A.The futures rates calculated from a Eurodollar futures quote are always less than the corresponding forward rate B.The futures rates calculated from a Eurodollar futures quote are always greater than the corresponding forward rate C.The futures rates calculated from a Eurodollar futures quote should equal the corresponding forward rate D.The futures rates calculated from a Eurodollar futures quote are sometimes greater than and sometimes less than the corresponding forward rate
B
You sell one December futures contracts when the futures price is $1,010 per unit. Each contract is on 100 units and the initial margin per contract that you provide is $2,000. The maintenance margin per contract is $1,500. During the next day the futures price rises to $1,012 per unit. What is the balance of your margin account at the end of the day? A.$1,800 B.$3,300 C.$2,200 D.$3,700
B
1.A stock price is currently $23. A reverse (i.e short) butterfly spread is created from options with strike prices of $20, $25, and $30. Which of the following is true? A.The gain when the stock price is greater that $30 is less than the gain when the stock price is less than $20 B.The gain when the stock price is greater that $30 is greater than the gain when the stock price is less than $20 C.The gain when the stock price is greater that $30 is the same as the gain when the stock price is less than $20 D.It is incorrect to assume that there is always a gain when the stock price is greater than $30 or less than $20
C
1.A variable x starts at 10 and follows the generalized Wiener processdx = a dt + b dzwhere time is measured in years. If a = 2 and b =3 what is the expected value after 3 years? A.12 B.14 C.16 D.18
C
1.When the stock price increases with all else remaining the same, which of the following is true? A.Both calls and puts increase in value B.Both calls and puts decrease in value C.Calls increase in value while puts decrease in value D.Puts increase in value while calls decrease in value
C
11.Which of the following are NOT true A.Risk-neutral valuation and no-arbitrage arguments give the same option prices B.Risk-neutral valuation involves assuming that the expected return is the risk-free rate and then discounting expected payoffs at the risk-free rate C.A hedge set up to value an option does not need to be changed D.All of the above
C
11.Which of the following best describes the capital asset pricing model? A.Determines the amount of capital that is needed in particular situations B.Is used to determine the price of futures contracts C.Relates the return on an asset to the return on a stock index D.Is used to determine the volatility of a stock index
C
11.Which of the following describes a long position in an option? A.A position where there is more than one year to maturity B.A position where there is more than five years to maturity C.A position where an option has been purchased D.A position that has been held for a long time
C
11.Which of the following describes a situation where an American put option on a stock becomes more likely to be exercised early?A.Expected dividends increase B.Interest rates decrease C.The stock price volatility decreases D.All of the above
C
12.How can a strip trading strategy be created?A.Buy one call and one put with the same strike price and same expiration date B.Buy one call and one put with different strike prices and same expiration date C.Buy one call and two puts with the same strike price and expiration date D.Buy two calls and one put with the same strike price and expiration date
C
12.If the risk-free rate is r and price of a nondividend paying stock grows at rate mwith volatility s, at what rate does a forward price of the stock grow for a forward contract maturing at a future time T. A.m B.m−s2/2 C.m−r D.r−s2/2
C
15.Clearing houses are A.Never used in futures markets and sometimes used in OTC markets B.Used in OTC markets, but not in futures markets C.Always used in futures markets and sometimes used in OTC markets D.Always used in both futures markets and OTC markets
C
15.The price of a stock is $67. A trader sells 5 put option contracts on the stock with a strike price of $70 when the option price is $4. The options are exercised when the stock price is $69. What is the trader's net profit or loss? A.Loss of $1,500 B.Loss of $500 C.Gain of $1,500 D.Loss of $1,000
C
16.A stock price is $20. It has an expected return of 12% and a volatility of 25%. What is the standard deviation of the change in the price in one day. (For this question assume that there are 365 days in the year.) A.$0.20 B.$0.23 C.$0.26 D.$0.29
C
16.The price of a European call option on a stock with a strike price of $50 is $6. The stock price is $51, the continuously compounded risk-free rate (all maturities) is 6% and the time to maturity is one year. A dividend of $1 is expected in six months. What is the price of a one-year European put option on the stock with a strike price of $50? A.$8.97B.$6.97C.$3.06D.$1.12
C
17. A European call and a European put on a stock have the same strike price and time to maturity. At 10:00am on a certain day, the price of the call is $3 and the price of the put is $4. At 10:01am news reaches the market that has no effect on the stock price or interest rates, but increases volatilities. As a result the price of the call changes to $4.50. Which of the following is correct? A.The put price increases to $6.00 B.The put price decreases to $2.00 C.The put price increases to $5.50 D.It is possible that there is no effect on the put price
C
18.Which of the following describes delta? A.The ratio of the option price to the stock price B.The ratio of the stock price to the option price C.The ratio of a change in the option price to the corresponding change in the stock price D.The ratio of a change in the stock price to the corresponding change in the option price
C
2.The current price of a non-dividend-paying stock is $30. Over the next six months it is expected to rise to $36 or fall to $26. Assume the risk-free rate is zero. What is the risk-neutral probability of that the stock price will be $36? A.0.6B.0.5C.0.4D.0.3
C
20.A tree is constructed to value an option on an index which is currently worth 100 and has a volatility of 25%. The index provides a dividend yield of 2%. Another tree is constructed to value an option on a non-dividend-paying stock which is currently worth 100 and has a volatility of 25%. Which of the following are true? A.The parameters p and u are the same for both trees B.The parameter p is the same for both trees but u is not C.The parameter u is the same for both trees but p is not D.None of the above
C
20.Six-month call options with strike prices of $35 and $40 cost $6 and $4, respectively. What is the maximum gain when a bull spread is created by trading a total of 200 options?A.$100B.$200C.$300D.$400
C
3.An investor has exchange-traded put options to sell 100 shares for $20. There is a 2 for 1 stock split. Which of the following is the position of the investor after the stock split? A.Put options to sell 100 shares for $20 B.Put options to sell 100 shares for $10 C.Put options to sell 200 shares for $10 D.Put options to sell 200 shares for $20
C
4.The current price of a non-dividend-paying stock is $40. Over the next year it is expected to rise to $42 or fall to $37. An investor buys put options with a strike price of $41. Which of the following is necessary to hedge the position?A.Buy 0.2 shares for each option purchased B.Sell 0.2 shares for each option purchased C.Buy 0.8 shares for each option purchased D.Sell 0.8 shares for each option purchased
C
5.The process followed by a variable X is dX = mX dt+sX dzWhat is the coefficient of dz in the process for the square of X. A.sX B.sX2 C.2sX2 D.msX
C
5.What is the number of different option series used in creating a butterfly spread? A.1 B.2 C.3 D.4
C
5.When interest rates increase with all else remaining the same, which of the following is true? A.Both calls and puts increase in value B.Both calls and puts decrease in value C.Calls increase in value while puts decrease in value D.Puts increase in value while calls decrease in value
C
7.In a binomial tree created to value an option on a stock, the expected return on stock is A.Zero B.The return required by the market C.The risk-free rate D.It is impossible to know without more information
C
8.If a stock price follows a Markov process which of the following could be true A.Whenever the stock price has gone up for four successive days it has a 70% chance of going up on the fifth day. B.Whenever the stock price has gone up for four successive days there is almost certain to be a correction on the fifth day. C.The way the stock price moves on a day is unaffected by how it moved on the previous four days. D.Bad years for stock price returns are usually followed by good years.
C
8.In a binomial tree created to value an option on a stock, what is the expected return on the option? A.Zero B.The return required by the market C.The risk-free rate D.It is impossible to know without more information
C
9.A variable x starts at zero and follows the generalized Wiener processdx = a dt + b dzwhere time is measured in years. During the first two years a=3 and b=4. During the following three years a=6 and b=3. What is the expected value of the variable at the end of 5 years A.16 B.20 C.24 D.30
C
9.Which of the following is correct? A.A diagonal spread can be created by buying a call and selling a put when the strike prices are the same and the times to maturity are different B.A diagonal spread can be created by buying a put and selling a call when the strike prices are the same and the times to maturity are different C.A diagonal spread can be created by buying a call and selling a call when the strike prices are different and the times to maturity are different D.A diagonal spread can be created by buying a call and selling a call when the strike prices are the same and the times to maturity are different
C
A company has a $36 million portfolio with a beta of 1.2. The futures price for a contract on an index is 900. Futures contracts on $250 times the index can be traded. What trade is necessary to increase beta to 1.8? A.Long 192 contracts B.Short 192 contracts C.Long 96 contracts D.Short 96 contracts
C
A floating for floating currency swap is equivalent to A.Two interest rate swaps, one in each currency B.A fixed-for-fixed currency swap and one interest rate swap C.A fixed-for-fixed currency swap and two interest rate swaps, one in each currency D.None of the above
C
A repo rate is A.An uncollateralized rate B.A rate where the credit risk is relative high C.The rate implicit in a transaction where securities are sold and bought back later at a higher price D.None of the above
C
A short forward contract on an asset plus a long position in a European call option on the asset with a strike price equal to the forward price is equivalent to A. A short position in a call option B.A short position in a put option C. A long position in a put option D.None of the above
C
A speculator takes a long position in a futures contract on a commodity on November 1, 2012 to hedge an exposure on March 1, 2013. The initial futures price is $60. On December 31, 2012 the futures price is $61. On March 1, 2013 it is $64. The contract is closed out on March 1, 2013. What gain is recognized in the accounting year January 1 to December 31, 2013? Each contract is on 1000 units of the commodity. A. $0 B. $1,000 C.$3,000 D.$4,000
C
An interest rate is 6% per annum with annual compounding. What is the equivalent rate with continuous compounding? A.5.79%B.6.21%C.5.83% D.6.18%
C
In a fixed-for-fixed currency swap, 3% on a US dollar principal of $150 million is received and 4% on a British pound principal of 100 million pounds is paid. The current exchange rate is 1.55 dollar per pound. Interest rates in both countries for all maturities are currently 5% (continuously compounded). Payments are exchanged every year. The swap has 2.5 years left in its life. What is the value of the swap? A. −$7.15B.−$8.15C.−$9.15D.−$10.15
C
In the U.S. what is the longest maturity for 3-month Eurodollar futures contracts? A: 2 years B: 5 years C: 10 years D: 20 years
C
The price of a stock on February 1 is $48. A trader sells 200 put options on the stock with a strike price of $40 when the option price is $2. The options are exercised when the stock price is $39. The trader's net profit or loss is A. Loss of $800 B.Loss of $200 C. Gain of $200 D.Loss of $900
C
The price of a stock on July 1 is $57. A trader buys 100 call options on the stock with a strike price of $60 when the option price is $2. The options are exercised when the stock price is $65. The trader's net profit is A. $700 B.$500 C. $300 D.$600
C
The reference entity in a credit default swap is A.The buyer of protection B.The seller of protection C.The company or country whose default is being insured against D.None of the above
C
The spot price of an asset is positively correlated with the market. Which of the following would you expect to be true? A.The forward price equals the expected future spot price. B.The forward price is greater than the expected future spot price. C.The forward price is less than the expected future spot price. D.The forward price is sometimes greater and sometimes less than the expected future spot price.
C
When LIBOR is used as the discount rate: A.The value of a swap is worth zero immediately after a payment date B. The value of a swap is worth zero immediately before a payment date C.The value of the floating rate bond underlying a swap is worth par immediately after a payment date D.The value of the floating rate bond underlying a swap is worth par immediately before a payment date
C
Which of following is applicable to corporate bonds in the United States?A.Actual/360 B.Actual/Actual C.30/360 D.Actual/365
C
Which of the following describes European options? A.Sold in Europe B.Priced in Euros C.Exercisable only at maturity D.Calls (there are no European puts)
C
Which of the following describes a known dividend yield on a stock? A.The size of the dividend payments each year is known B.Dividends per year as a percentage of today's stock price are known C.Dividends per year as a percentage of the stock price at the time when dividends are paid are known D.Dividends will yield a certain return to a person buying the stock today
C
Which of the following describes the five-year swap rate? A.The fixed rate of interest which a swap market maker is prepared to pay in exchange for LIBOR on a 5-year swap B.The fixed rate of interest which a swap market maker is prepared to receive in exchange for LIBOR on a 5-year swap C.The average of A and B D.The higher of A and B
C
Which of the following describes the five-year swap rate? A.The rate on a five-year loan to a AA-rated company B.The rate on a five-year loan to an A-rated company C.The rate that can be earned over five years from a series of short-term loans to AA-rated companies D.The rate that can be earned over five years from a series of short-term loans to A-rated companies
C
Which of the following describes the way the forward price of a foreign currency is quoted?A.The number of U.S. dollars per unit of the foreign currency B.The number of the foreign currency per U.S. dollar C.Some forward prices are quoted as the number of U.S. dollars per unit of the foreign currency and some are quoted the other way round D.There are no quotation conventions for forward prices
C
Which of the following is NOT true A.A call option gives the holder the right to buy an asset by a certain date for a certain price B.A put option gives the holder the right to sell an asset by a certain date for a certain price C.The holder of a call or put option must exercise the right to sell or buy an asset D.The holder of a forward contract is obligated to buy or sell an asset
C
Which of the following is NOT true? A.Gold and silver are investment assets B.Investment assets are held by significant numbers of investors for investment purposes C.Investment assets are never held for consumption D.The forward price of an investment asset can be obtained from the spot price, interest rates, and the income paid on the asset
C
Which of the following is a consumption asset?A.The S&P 500 index B.The Canadian dollar C.Copper D.IBM stock
C
Which of the following is true A.Both forward and futures contracts are traded on exchanges. B. Forward contracts are traded on exchanges, but futures contracts are not. C.Futures contracts are traded on exchanges, but forward contracts are not. D.Neither futures contracts nor forward contracts are traded on exchanges.
C
Which of the following is true for a consumption commodity? A.There is no limit to how high or low the futures price can be, except that the futures price cannot be negative B.There is a lower limit to the futures price but no upper limit C.There is an upper limit to the futures price but no lower limit, except that the futures price cannot be negative D.The futures price can be determined with reasonable accuracy from the spot price and interest rates
C
Which of the following is true of LIBOR A.The LIBOR rate is free of credit risk B.A LIBOR rate is lower than the Treasury rate when the two have the same maturity C.It is a rate used when borrowing and lending takes place between banks D.It is subject to favorable tax treatment in the U.S.
C
Which of the following is true? A.Gold producers should always hedge the price they will receive for their production of gold over the next three years B.Gold producers should always hedge the price they will receive for their production of gold over the next one year C.The hedging strategies of a gold producer should depend on whether it shareholders want exposure to the price of gold D.Gold producers can hedge by buying gold in the forward market
C
Which of the following is true? A.The optimal hedge ratio is the slope of the best fit line when the spot price (on the y-axis) is regressed against the futures price (on the x-axis). B.The optimal hedge ratio is the slope of the best fit line when the futures price (on the y-axis) is regressed against the spot price (on the x-axis). C.The optimal hedge ratio is the slope of the best fit line when the change in the spot price (on the y-axis) is regressed against the change in the futures price (on the x-axis). D.The optimal hedge ratio is the slope of the best fit line when the change in the futures price (on the y-axis) is regressed against the change in the spot price (on the x-axis).
C
With bilateral clearing, the number of agreements between four dealers, who trade with each other, is A.12 B.1 C.6 D.2
C
10.A variable x starts at zero and follows the generalized Wiener processdx = a dt + b dzwhere time is measured in years. During the first two years a=3 and b=4. During the following three years a=6 and b=3. What the standard deviation of the value of the variable at the end of 5 years A.6.2 B.6.7 C.7.2 D.7.7
D
10.Which of the following is true for a call option on a stock worth $50 A.As a stock's expected return increases the price of the option increases B.As a stock's expected return increases the price of the option decreases C.As a stock's expected return increases the price of the option might increase or decrease D.As a stock's expected return increases the price of the option on the stock stays the same
D
10.Which of the following is true of a box spread?A.It is a package consisting of a bull spread and a bear spread B.It involves two call options and two put options C.It has a known value at maturity D.All of the above
D
13.How can a strap trading strategy be created?A.Buy one call and one put with the same strike price and same expiration date B.Buy one call and one put with different strike prices and same expiration date C.Buy one call and two puts with the same strike price and expiration date D.Buy two calls and one put with the same strike price and expiration date
D
13.When a stock price, S, follows geometric Brownian motion with mean return m and volatility s what is the process follows by X where X = ln S. A.dX = m dt + s dz B.dX = (m−r) dt + s dz C.dX = (m−s2) dt + s dz D.dX = (m − s2/2) dt + s dz
D
Under liquidity preference theory, which of the following is always true? A.The forward rate is higher than the spot rate when both have the same maturity. B.Forward rates are unbiased predictors of expected future spot rates. C.The spot rate for a certain maturity is higher than the par yield for that maturity. D.Forward rates are higher than expected future spot rates.
D
13.Which of the following is the put-call parity result for a non-dividend-paying stock? A.The European put price plus the European call price must equal the stock price plus the present value of the strike price B.The European put price plus the present value of the strike price must equal the European call price plus the stock price C.The European put price plus the stock price must equal the European call price plus the strike price D.The European put price plus the stock price must equal the European call price plus the present value of the strike price
D
15.If the volatility of a non-dividend paying stock is 20% per annum and a risk-free rate is 5% per annum, which of the following is closest to the Cox, Ross, Rubinstein parameter u for a tree with a three-month time step? A.1.05 B.1.07 C.1.09 D.1.11
D
15.The price of a European call option on a non-dividend-paying stock with a strike price of $50 is $6. The stock price is $51, the continuously compounded risk-free rate (all maturities) is 6% and the time to maturity is one year. What is the price of a one-year European put option on the stock with a strike price of $50? A.$9.91B.$7.00C.$6.00D.$2.09
D
16.A speculator can choose between buying 100 shares of a stock for $40 per share and buying 1000 European call options on the stock with a strike price of $45 for $4 per option. For second alternative to give a better outcome at the option maturity, the stock price must be above A.$45 B.$46 C.$55 D.$50
D
16.Which of the following describes a covered call? A.A long call option on a stock plus a long position in the stock B.A long call option on a stock plus a short put option on the stock C.A short call option on a stock plus a short position in the stock D.A short call option on a stock plus a long position in the stock
D
17.The price of a stock is $64. A trader buys 1 put option contract on the stock with a strike price of $60 when the option price is $10. When does the trader make a profit? A.When the stock price is below $60 B.When the stock price is below $64 C.When the stock price is below $54 D.When the stock price is below $50
D
18.A trader creates a long butterfly spread from options with strike prices $60, $65, and $70 by trading a total of 400 options. The options are worth $11, $14, and $18. What is the maximum net gain (after the cost of the options is taken into account)? A.$100 B.$200 C.$300 D.$400
D
18.Consider a put option and a call option with the same strike price and time to maturity. Which of the following is true? A.It is possible for both options to be in the money B.It is possible for both options to be out of the money C.One of the options must be in the money D.One of the options must be either in the money or at the money
D
18.Interest rates are zero. A European call with a strike price of $50 and a maturity of one year is worth $6. A European put with a strike price of $50 and a maturity of one year is worth $7. The current stock price is $49. Which of the following is true? A.The call price is high relative to the put price B.The put price is high relative to the call price C.Both the call and put must be mispriced D.None of the above
D
18.Which of the following is NOT a property of a Wiener process? A.The change during a short period of time dt has a variance dt B.The changes in two different short periods of time are independent C.The mean change in any time period is zero D.The standard deviation over two consecutive time periods is the sum of the standard deviations over each of the periods
D
19.Which of the following describes contango? A.The futures price is below the expected future spot price B.The futures price is below today's spot price C.The futures price is a declining function of the time to maturity D.The futures price is above the expected future spot price
D
2.When the strike price increases with all else remaining the same, which of the following is true? A.Both calls and puts increase in value B.Both calls and puts decrease in value C.Calls increase in value while puts decrease in value D.Puts increase in value while calls decrease in value
D
4.A one-year call option on a stock with a strike price of $30 costs $3; a one-year put option on the stock with a strike price of $30 costs $4. Suppose that a trader buys two call options and one put option. The breakeven stock price below which the trader makes a profit is A.$25 B.$28 C.$26 D.$20
D
4.An investor has exchange-traded put options to sell 100 shares for $20. There is 25% stock dividend. Which of the following is the position of the investor after the stock dividend? A.Put options to sell 100 shares for $20 B.Put options to sell 75 shares for $25 C.Put options to sell 125 shares for $15 D.Put options to sell 125 shares for $16
D
4.When dividends increase with all else remaining the same, which of the following is true? A.Both calls and puts increase in value B.Both calls and puts decrease in value C.Calls increase in value while puts decrease in value D.Puts increase in value while calls decrease in value
D
5.The current price of a non-dividend-paying stock is $40. Over the next year it is expected to rise to $42 or fall to $37. An investor buys put options with a strike price of $41. What is the value of each option? The risk-free interest rate is 2% per annum with continuous compounding. A.$3.93B.$2.93C.$1.93D.$0.93
D
6.When the time to maturity increases with all else remaining the same, which of the following is true? A.European options always increase in value B.The value of European options either stays the same or increases C.There is no effect on European option values D.European options are liable to increase or decrease in value
D
6.Which of the following describes a short position in an option? A.A position in an option lasting less than one month B.A position in an option lasting less than three months C.A position in an option lasting less than six months D.A position where an option has been sold
D
7.Which of the following is correct? A.A calendar spread can be created by buying a call and selling a put when the strike prices are the same and the times to maturity are different B.A calendar spread can be created by buying a put and selling a call when the strike prices are the same and the times to maturity are different C.A calendar spread can be created by buying a call and selling a call when the strike prices are different and the times to maturity are different D.A calendar spread can be created by buying a call and selling a call when the strike prices are the same and the times to maturity are different
D
8.A stock price (which pays no dividends) is $50 and the strike price of a two year European put option is $54. The risk-free rate is 3% (continuously compounded). Which of the following is a lower bound for the option such that there are arbitrage opportunities if the price is below the lower bound and no arbitrage opportunities if it is above the lower bound?A.$4.00 B.$3.86 C.$2.86 D.$0.86
D
9.A stock is expected to return 10% when the risk-free rate is 4%. What is the correct discount rate to use for the expected payoff on an option in the real world? A.4% B.10% C.More than 10% D.It could be more or less than 10%
D
9.Which of the following is an example of an option series? A.All calls on a certain stock B.All calls with a particular strike price on a certain stock C.All calls with a particular time to maturity on a certain stock D.All calls with a particular time to maturity and strike price on a certain stock
D
A company enters into a short futures contract to sell 50,000 units of a commodity for 70 cents per unit. The initial margin is $4,000 and the maintenance margin is $3,000. What is the futures price per unit above which there will be a margin call? A.78 centsB.76 centsC.74 centsD.72 cents
D
A company has a $36 million portfolio with a beta of 1.2. The futures price for a contract on an index is 900. Futures contracts on $250 times the index can be traded. What trade is necessary to reduce beta to 0.9? A.Long 192 contracts B.Short 192 contracts C.Long 48 contracts D.Short 48 contracts
D
A hedger takes a long position in a futures contract on a commodity on November 1, 2012 to hedge an exposure on March 1, 2013. The initial futures price is $60. On December 31, 2012 the futures price is $61. On March 1, 2013 it is $64. The contract is closed out on March 1, 2013. What gain is recognized in the accounting year January 1 to December 31, 2013? Each contract is on 1000 units of the commodity. A. $0 B.$1,000 C.$3,000 D.$4,000
D
A short forward contract that was negotiated some time ago will expire in three months and has a delivery price of $40. The current forward price for three-month forward contract is $42. The three month risk-free interest rate (with continuous compounding) is 8%. What is the value of the short forward contract? A. +$2.00 B. −$2.00 C. +$1.96 D. −$1.96
D
Margin accounts have the effect of A.Reducing the risk of one party regretting the deal and backing out B. Ensuring funds are available to pay traders when they make a profit C.Reducing systemic risk due to collapse of futures markets D.All of the above
D
On March 1 the price of a commodity is $1,000 and the December futures price is $1,015. On November 1 the price is $980 and the December futures price is $981. A producer of the commodity entered into a December futures contracts on March 1 to hedge the sale of the commodity on November 1. It closed out its position on November 1. What is the effective price (after taking account of hedging) received by the company for the commodity? A. $1,016 B. $1,001 C.$981 D.$1,014
D
The price of a stock on February 1 is $124. A trader sells 200 put options on the stock with a strike price of $120 when the option price is $5. The options are exercised when the stock price is $110. The trader's net profit or loss isA. Gain of $1,000B.Loss of $2,000C.Loss of $2,800D.Loss of $1,000
D
What should a trader do when the one-year forward price of an asset is too low? Assume that the asset provides no income. A.The trader should borrow the price of the asset, buy one unit of the asset and enter into a short forward contract to sell the asset in one year. B.The trader should borrow the price of the asset, buy one unit of the asset and enter into a long forward contract to buy the asset in one year. C.The trader should short the asset, invest the proceeds of the short sale at the risk-free rate, enter into a short forward contract to sell the asset in one year D.The trader should short the asset, invest the proceeds of the short sale at the risk-free rate, enter into a long forward contract to buy the asset in one year
D
When moving from valuing an option on a non-dividend paying stock to an option on a currency which of the following is true? A.The risk-free rate is replaced by the excess of the domestic risk-free rate over the foreign risk-free rate in all calculations B.The formula for u changes C.The risk-free rate is replaced by the excess of the domestic risk-free rate over the foreign risk-free rate for discounting D.The risk-free rate is replaced by the excess of the domestic risk-free rate over the foreign risk-free rate when p is calculated
D
Which of the following are cash settled A.All futures contracts B.All option contracts C.Futures on commodities D.Futures on stock indices
D
Which of the following best describes central clearing parties A.Help market participants to value derivative transactions B.Must be used for all OTC derivative transactions C.Are used for futures transactions D.Perform a similar function to exchange clearing houses
D
Which of the following describes an interest rate swap? A.The exchange of a fixed rate bond for a floating rate bond B.A portfolio of forward rate agreements C.An agreement to exchange interest at a fixed rate for interest at a floating rate D.All of the above
D
Which of the following does NOT describe beta?A.A measure of the sensitivity of the return on an asset to the return on an index B.The slope of the best fit line when the return on an asset is regressed against the return on the market C.The hedge ratio necessary to remove market risk from a portfolio D.Measures correlation between futures prices and spot prices for a commodity
D
Which of the following is NOT an option open to the party with a short position in the Treasury bond futures contract? A.The ability to deliver any of a number of different bonds B.The wild card play C.The fact that delivery can be made any time during the delivery month D.The interest rate used in the calculation of the conversion factor
D
Which of the following is NOT true about call and put options: A.An American option can be exercised at any time during its life B. A European option can only be exercised only on the maturity date C.Investors must pay an upfront price (the option premium) for an option contract D.The price of a call option increases as the strike price increases
D
Which of the following is NOT true about duration? A.It equals the years-to-maturity for a zero coupon bond B.It equals the weighted average of payment times for a bond, where weights are proportional to the present value of payments C.Equals the weighted average of individual bond durations for a portfolio, where weights are proportional to the present value of bond prices D.The prices of two bonds with the same duration change by the same percentage amount when interest rate moves up by 100 basis points
D
Which of the following is a use of a currency swap? A.To exchange an investment in one currency for an investment in another currency B.To exchange borrowing in one currency for borrowings in another currency C.To take advantage situations where the tax rates in two countries are different D.All of the above
D
Which of the following is approximately true when size is measured in terms of the underlying principal amounts or value of the underlying assets A.The exchange-traded market is twice as big as the over-the-counter market. B.The over-the-counter market is twice as big as the exchange-traded market. C.The exchange-traded market is ten times as big as the over-the-counter market. D.The over-the-counter market is ten times as big as the exchange-traded market.
D
Which of the following is true? A.Hedging can always be done more easily by a company's shareholders than by the company itself B.If all companies in an industry hedge, a company in the industry can sometimes reduce its risk by choosing not to hedge C.If all companies in an industry do not hedge, a company in the industry can reduce its risk by hedging D.If all companies in an industry do not hedge, a company is liable increase its risk by hedging
D
derivative
a financial instrument whose value depends on or derives from other, more basic, underlying variables.
options
contracts that give investors the right to buy or sell stock and other financial assets
Forward Contract
is traded in the OTC market, usually between two financial institutions or between a financial institution and one of their client
Futures contract
is traded on an exchange with standardised features. The two parties do not necessarily know each other.
payoffs from short forward position
k-ST
