Chapter 20-23 MC sam

Suppose that the risk-free rates in the United States and in the United Kingdom are 5% and 4%, respectively. The spot exchange rate between the dollar and the pound is $1.80/BP. What should the futures price of the pound for a one-year contract be to prevent arbitrage opportunities, ignoring transactions costs?

$1.82/BP $1.80(1.05/1.04)= $1.82

. You purchased one silver future contract at $3 per ounce. What would be your profit (loss) at maturity if the silver spot price at that time is $4.10 per ounce? Assume the contract size is 5,000 ounces and there are no transactions costs

$5,500 profit $4.10-$3.00 = $1.10 x 5,000 = $5,500

Commodity futures pricing

- must be related to spot prices. - includes cost of carry. - converges to spot prices at maturity.

In volatile markets, dynamic hedging may be difficult to implement because

- prices move too quickly for effective rebalancing - as volatility increases, historical deltas are too low - price quotes may be delayed so that correct hedge ratios cannot be computed - volatile markets may cause trading halts.

The put-call parity theorem

- represents the proper relationship between put and call prices. - allows for arbitrage opportunities if violated. - may be violated by small amounts, but not enough to earn arbitrage profits, once transaction costs are considered.

A portfolio consists of 100 shares of stock and 1500 calls on that stock. If the hedge ratio for the call is 0.7, what would be the dollar change in the value of the portfolio in response to a one dollar decline in the stock price?

-$1,150 −$100 + [−$1,500(0.7)] = −$1,150

A Eurodollar futures contract has a 7.5% rate. The listing for this contract would show a value of

92.5 100-7.5 = 92.5

Financial futures contracts are actively traded on the following indices except A. the S&P 500 Index. B. the New York Stock Exchange Index. C. the Nikkei Index. D. the Dow Jones Industrial Index. E. All of these indices have actively traded futures contracts.

All of these indices have actively traded futures contracts

Which of the following items is specified in a futures contract? I) the contract size II) the maximum acceptable price range during the life of the contract III) the acceptable grade of the commodity on which the contract is held IV) the market price at expiration V) the settlement price

I) the contract size III) the acceptable grade of the commodity on which the contract is held V) the settlement price

Which of the following variables influence the value of options I) Level of interest rates II) Time to expiration of the option III) Dividend yield of underlying stock IV) Stock price volatility

I, II, III, and IV

The Black-Scholes formula assumes that: I) the risk-free interest rate is constant over the life of the option. II) the stock price volatility is constant over the life of the option. III) the expected rate of return on the stock is constant over the life of the option. IV) there will be no sudden extreme jumps in stock prices.

I, II, and IV The risk-free rate and stock price volatility are assumed to be constant but the option value does not depend on the expected rate of return on the stock. The model also assumes that stock prices will not jump markedly.

Portfolio A consists of 150 shares of stock and 300 calls on that stock. Portfolio B consists of 575 shares of stock. The call delta is 0.7. Which portfolio has a higher dollar exposure to a change in stock price?

Portfolio B 300 calls (0.7) = 210 shares + 150 shares = 360 shares; 575 shares = 575 shares.

Which one of the following stock index futures has a multiplier of $250?

S&P 500 Index

Which of the following is/are example(s) of interest rate futures contracts? A. Corporate bonds. B. Treasury bonds. C. Eurodollars. D. Treasury bonds and Eurodollars E. Corporate bonds and Treasury bonds

Treasury bonds and Eurodollars

An American call option allows the buyer to

buy the underlying asset at the exercise price on or before the expiration date

Hedging one commodity by using a futures contract on another is called

cross hedging

The maximum loss the writer of a stock put option can suffer is equal to

exercise price - put premium

Foreign Exchange Futures markets are __________ and the Foreign Exchange Forward markets are __________.

formal; informal

The elasticity of a stock call option is always

greater than one option prices are much more volatile than stock prices, as option premiums are much lower than stock prices.

Credit risk in the swap market

is limited to the difference between the values of the fixed rate and floating rate obligations

Delivery of stock index futures

is made by a cash settlement based on the index value

The expectations hypothesis of futures pricing

is the simplest theory of futures pricing and states that the futures price equals the expected value of the future spot price of the asset

The dollar change in value of a stock call option is always

lower than the dollar change in the value of the stock.

Open interest includes

only long or short positions but not both

You hold one long corn futures contract that expires in April. To close your position in corn futures before the delivery date you must

sell one April corn futures contract.

A European put option allows the holder to

sell the underlying asset at the striking price on the expiration date.

If you determine that the S&P 500 Index futures is overpriced relative to the spot S&P 500 Index you could make an arbitrage profit by

selling S&P 500 Index futures and buying all the stocks in the S&P 500

If a stock index futures contract is overpriced, you would exploit this situation by

selling the stock index futures and simultaneously buying the stocks in the index

The terms of futures contracts such as the quality and quantity of the commodity and the delivery date are

specified by the futures exchanges

Futures contracts are regulated by

the Commodities Futures Trading Corporation

Before expiration, the time value of a call option is equal to

the actual call price minus the intrinsic value of the call

The maximum loss a buyer of a stock call option can suffer is equal to

the call premium

If a company unexpectedly announces it will pay its first-ever dividend 3 months from today, you would expect that

the call price would decrease Call value moves opposite of strike price and dividends

According to the put-call parity theorem, the value of a European put option on a non-dividend paying stock is equal to

the call value plus the present value of the exercise price minus the stock price.

In the equation Profits = a + b*($/₤ exchange rate), b is a measure of

the sensitivity of profits to the exchange rate

The gamma of an option is

the sensitivity of the delta to the stock price

The value of a stock put option is positively related to the following factors except

the stock price

The intrinsic value of an OTM call options is equal to

zero

A callable bond should be priced the same as

a straight bond plus a call option

A put option on the S&P 500 index will best protect

a portfolio that corresponds to the S&P 500.