Try 2_CFA Institute_Derivatives

C. value and constant price.

Over time, a forward contract most likely has variable: A. price and constant value. B. value and variable price. C. value and constant price.

A. exploit pricing differentials. Replication is the process of creating an asset or portfolio from another asset, portfolio and/or derivative. It is used to exploit pricing differentials.

Replication is most likely used to: A. exploit pricing differentials. B. increase leverage. C. reduce portfolio risk.

C. equal to the risk-free rate. If a risk-free position earns a return that is different from the risk-free return, arbitrage will lead to the elimination of the mispricing.

A perfectly hedged position consisting of a derivative and its underlying asset will most likely yield a return that is: A. greater than the risk-free rate. B. smaller than the risk-free rate. C. equal to the risk-free rate.

B. different prices due to differences in the cost of carry. Due to differences in the cost of carry, implied forward contracts will have different prices. The differences in the cost of carry stem from the timing differences of the payments.

A swap that involves the exchange of a fixed payment for a floating payment can be interpreted as a series of forward contracts with different expiration dates. These implied forward contracts will most likely have: A. different prices due to differences in the price of the underlying at expiration. B. different prices due to differences in the cost of carry. C. identical prices.

B. off-market forward contracts. Since the cost of carrying an asset over different time periods will vary, the values of the implicit forward contracts embedded in the swap will not be equal., some maybe positive and some maybe negative. Off-market forward contracts satisfy this condition, as they can be set at any value.

A swap that involves the exchange of a fixed payment for a floating payment is most likely equivalent to a series of: A. forward contracts that all have an initial value equal to the fixed payment. B. off-market forward contracts. C. forward contracts that all have an initial positive value .

A. positive relationship with the time to expiration. The value of a European call option is directly related to the time to expiration. That is all else held equal, the value of a European call option is higher the longer the time to expiration.

All, else held equal, the value of a European call option is best characterized as having a: A. positive relationship with the time to expiration. B. negative relationship with the volatility of the underlying. C. negative relationship with the price of the underlying.

A. $21.40.

An investor has purchased a share of stock for $190. A call option on this stock, expiring in seven months and with an exercise price of $200, is priced at $11.40. If the investor enters into a covered call now, the profit on this strategy if the stock price at expiration is $215 is closest to: A. $21.40. B. $28.60. C. -$3.60.

B. $72.45. To break even, the underlying stock must be at least as high as the amount expended up front to establish the position. To establish the protective put, the investor would have spent $71 + $1.45 = $72.45.

An investor purchases ABC stock at $71 per share and executes a protective put strategy. The put option used in the strategy has a strike price of $66, expires in two months, and is purchased for $1.45. At expiration, the protective put strategy breaks even when the price of ABC is closest to: A. $64.55. B. $72.45. C. $67.45.

B. buy calls on shares of ABC. Buying a call gives the owner the right to buy the stock at the exercise price. The investor predicts that the stock will increase to $95 at the end of two months. He will likely be able to sell his calls for at least $7 and realize a profit.

An investor with $5,000 to invest believes that the price of ABC Corp. stock will appreciate by $7 to $95 in two months. The two-month at-the-money put on one share of ABC stock costs $1.76, whereas the two-month at-the-money call costs $1.56. To profit from his view on ABC stock, he will most likely: A. sell puts on shares of ABC. B. buy calls on shares of ABC. C. sell calls on shares of ABC.

C. exercise value, but no time value. At expiration, options have no time value, but if they are in-the-money, they have exercise value.

At expiration, an option that is in-the-money will most likely have: A. time value, but no exercise value. B. both time value and exercise value. C. exercise value, but no time value.

C. risk-free interest rate increases. The value of a European put option will decrease as the risk-free interest rate increases.

Holding other factors constant, the value of a European put option will most likely decrease as the: A. volatility of the underlying increases. B. value of the underlying decreases. C. risk-free interest rate increases.

A. price is equal to value. At initiation, value is equal to zero. Price is a positive number which states the amount that must be paid when the purchase takes place.

If a forward contract requires no cash outlay at initiation, it is most likely true that at initiation: A. price is equal to value. B. price exceeds value. C. value exceeds price.

C. decrease. A European call option is worth less the more dividends are paid by the underlying.

If dividends paid by the underlying increase, the value of a European call option will most likely: A. increase. B. not change. C. decrease.

B. equal to zero. If the exercise price of a European put option is below the underlying price at expiration, the option is worthless and has a value of zero.

If the exercise price of a European put option at expiration is below the price of the underlying, the value of the option is most likely: A. greater than zero. B. equal to zero. C. less than zero.

B. the general level of market uncertainty has gone up. One benefit of derivatives markets is information discovery. Implied volatility reveals information about the risk of the underlying. Increases in implied volatility are an implication of increased market uncertainty.

If the implied volatility for options on a broad-based equity market index goes up, then it is most likely that: A. the broad-based equity market index has gone up in value. B. the general level of market uncertainty has gone up. C. market interest rates have gone up.

C. set at initiation and constant over time. Swaps have both a price and a value. Price in the context of a swap is a reference to the fixed rate payment on the swap which is constant over time. The value of a swap is zero at initiation but can change over the life of the swap as market interest rates change.

The price of an interest rate swap that involves the exchange of a fixed payment for a floating payment is most likely: A. equal to its value at expiration. B. affected by changes in the floating payment. C. set at initiation and constant over time.

B. spot price of the underlying minus forward price agreed in the contract. The value of a long position in a forward contract at expiration is defined as spot price of the underlying minus forward price agreed in the contract.

The value of a long position in a forward contract at expiration is best defined as: A. forward price agreed in the contract minus spot price of the underlying. B. spot price of the underlying minus forward price agreed in the contract. C. value of the forward at initiation minus spot price of the underlying.

A. Transaction costs Transaction costs may render an arbitrage strategy unprofitable and can therefore prevent precise convergence of prices.

What is the most likely reason why arbitrage will not completely eliminate all pricing discrepancies for derivatives? A. Transaction costs B. Differences in risk aversion C. Inaccurate forecasts

A. exhibit lower volatility compared with the spot market. Derivative markets are not necessarily more or less volatile than spot markets. Derivative markets reveal prices and volatilities of the underlying assets and facilitate risk management.

Which of the following is least likely one of the main benefits of derivative markets? Derivative markets: A. exhibit lower volatility compared with the spot market. B. enable companies to more easily practice risk management. C. reveal prices and volatility of the underlying assets.

C. A swap agreement A swap agreement is equivalent to a series of forward agreements, which can be described as forward commitments.

Which of these is best classified as a forward commitment? A. A convertible bond B. A call option C. A swap agreement