CFA Exam Prep Derivatives Jan 31st
A call option has an exercise price of $120, and the stock price is $105 at expiration. The expiration day value of the call option is:
$0.
Mosaks, Inc., has a put option with an exercise price of $105. If Mosaks stock price is $115 at expiration, the value of the put option is:
$0.
A call option has a strike price of $35 and the stock price is $47 at expiration. What is the expiration day value of the call option?
$12.
A put option has an exercise price of $80, and the stock price is $75 at expiration. The expiration day value of the put option is:
$5.
Consider a call option with an exercise price of $32. If the stock price at expiration is $41, the value of the call option is:
$9.
Which of the following will increase the value of a call option?
An increase in volatility.
Which of the following is typically equal to zero at the initiation of an interest rate swap contract?
Its value.
Which of the following portfolios has the same future cash flows as a protective put?
Long call option, long risk-free bond.
Which of the following is most likely to increase the no-arbitrage forward price of an asset?
Lower convenience yield for a commodity.
Which of the following instruments is a component of the put-call-forward parity relationship?
The present value of the forward price of the underlying asset.
A fiduciary call is a portfolio that is made up of:
a call option and a bond that pays the exercise price of the call at option expiration.
For a futures contract, the adjustment for the change in settlement price from one day to the next will result in:
a change in contract price but no change in contract value.
A financial instrument with a payoff that depends on a specified event occurring is most accurately described as:
a contingent claim.
The value of a put option at expiration is most likely to be increased by:
a higher exercise price.
In futures markets, the primary role of the clearinghouse is to:
act as guarantor to both sides of a futures trade.
The settlement price for a futures contract is:
an average of the trade prices over a period at the end of a trading session.
Time value is the amount by which
an option's premium exceeds its intrinsic value.
At expiration, exercise value is equal to time value for:
an out-of-the-money call or an out-of-the-money put.
Intrinsic value is
another term for exercise value
The calculation of derivatives values is based on an assumption that:
arbitrage opportunities are exploited rapidly.
Payments on interest rate futures
are linear (no convexity).
Which of the following statements about long positions in put and call options is most accurate? Profits from a long call:
are positively correlated with the stock price and the profits from a long put are negatively correlated with the stock price.
A derivative is defined as a security that has a value:
based on another security, commodity, or index.
An investor could best replicate the position of the floating rate payer in a swap by:
borrowing at a floating rate and buying a fixed-rate bond.
An investor has bought a European put option and written a European call option. Other things equal, a decrease in the risk-free rate will increase the value of:
both of these option positions.
A call option gives the holder the right to
buy an asset at a specified price on a specific future date
If the interest rate swap is used to convert the floating-rate payments on a bond liability to fixed-rate payments, it would be considered a
cash flow hedge.
We can use the risk-free rate to value an option with a one-period binomial model because:
combining options with the underlying asset in a specific ratio will produce a risk-free future payment.
Because payments on forward rate agreements are discounted to the beginning of the loan period at the realized rate, they exhibit
convexity
A decrease in the riskless rate of interest, other things equal, will:
decrease call option values and increase put option values.
A net benefit from holding the underlying asset of a forward contract will:
decrease the no-arbitrage forward price at initiation.
Dividends or interest paid by the asset underlying a call option:
decrease the value of the option.
The value of a forward or futures at expiration is the
difference between the spot price and the contract price
At expiration, the value of a European call option is:
equal to its intrinsic value.
The time value of an option is most accurately described as:
equal to the entire premium for an out-of-the-money option.
The call holder will exercise if the market price
exceeds the exercise price.
An interest rate swap is used to
exchange a floating-rate obligation for a fixed-rate obligation.
Compared to an interest rate futures contract, an otherwise equivalent forward rate agreement will:
exhibit greater convexity.
Time value is zero at an option's
expiration date
A corporation that employs hedge accounting and uses an interest rate swap to offset changes in the value of fixed rate bond liability is said to be employing a:
fair value hedge.
A corporation that employs hedge accounting and uses derivatives to reduce the volatility of the value of its inventory is most likely using a:
fair value hedge.
Using derivatives to hedge the changes in value of inventory is considered a
fair value hedge.
One method of valuing a call option with a one-period binomial model involves:
finding a combination of the call option and the underlying that will have the same value regardless of the price of the underlying at expiration.
Credit default swaps are least accurately characterized as:
forward commitments.
Bea Moran wants to establish a long derivatives position in a commodity she will need to acquire in six months. Moran observes that the six-month forward price is 45.20 and the six-month futures price is 45.10. This difference most likely suggests that for this commodity:
futures prices are negatively correlated with interest rates.
For exchange-traded derivatives, the role of the central clearinghouse is to:
guarantee that all obligations by traders will be honored.
A call option that is in the money:
has an exercise price less than the market price of the asset.
An option's intrinsic value is equal to the amount the option is:
in the money, and the time value is the market value minus the intrinsic value.
Basil, Inc., common stock has a market value of $47.50. A put available on Basil stock has a strike price of $55.00 and is selling for an option premium of $10.00. The put is:
in-the-money by $7.50.
An increase in the riskless rate of interest, other things equal, will:
increase call option values and decrease put option values.
Other things equal, an increase in storage costs of the underlying asset will:
increase the no-arbitrage forward price.
A call option's intrinsic value:
increases as the stock price increases above the strike price, while a put option's intrinsic value increases as the stock price decreases below the strike price.
A futures investor receives a margin call. If the investor wishes to maintain her futures position, she must make a deposit that restores her account to the:
initial margin.
The price of a fixed-for-floating interest rate swap contract:
is established at contract initiation.
A higher exercise price increases the exercise value of a put option because
it gives the holder the right to sell the underlying asset for a higher price.
The price (or premium) of an option is
its intrinsic value plus its time value.
The time value of an option (either a put or a call) is equal to
its market price minus its exercise value.
A forward commitment is a
legally binding promise to perform some action in the future and can involve a stock index or portfolio.
The time value of a European call option with 30 days to expiration will most likely be:
less than the current option premium if the option is currently in-the-money.
An investor will exercise a European put option on a stock at its expiration date if the stock price is:
less than the exercise price.
The most likely use of a forward rate agreement is to:
lock in an interest rate for future borrowing or lending.
A synthetic European put option consists of
long position in a European call option, a long position in a risk-free bond that pays the exercise price on the expiration date, and a short position in the underlying asset.
Using put-call parity, it can be shown that a synthetic European call can be created by a portfolio that is:
long the stock, long the put, and short a pure discount bond that pays the exercise price at option expiration.
In a credit default swap (CDS), the buyer of credit protection:
makes a series of payments to a credit protection seller.
A put's exercise value is the
maximum of zero or its exercise price minus the stock price.
Compared to an otherwise identical European put option, one that has a longer time to expiration:
may be worth less than the put that is nearer to expiration.
Long forward contracts without central clearing may be preferred to equivalent futures contracts when interest rates are:
negatively correlated with the price of the underlying.
A hedge using foreign currency derivatives to hedge the reported value (in domestic currency) of the equity of a foreign subsidiary is termed a
net investment hedge.
The price of a swap contract is set such that the contract has a value
of zero at initiation
On the expiration date of a put option, if the spot price of the underlying asset is less than the exercise price, the value of the option is:
positive.
Long futures contracts may be preferred to equivalent forward contracts without central clearing when interest rates are:
positively correlated with the price of the underlying.
An agreement that gives the holder the right, but not the obligation, to sell an asset at a specified price on a specific future date is a:
put option.
An investor calculates that the premium of a European put option is less than its value based on put-call parity. In exploiting this arbitrage opportunity, the investor is most likely to:
sell the call option.
Using put-call parity, it can be shown that a synthetic European put can be created by a portfolio that is:
short the stock, long the call, and long a pure discount bond that pays the exercise price at option expiration.
For an underlying asset that has no holding costs or benefits, the value of a forward contract to the long during the life of the contract is the:
spot price minus the present value of the forward price.
Other things equal, the no-arbitrage forward price of an asset will be higher if the asset has:
storage costs.
The breakeven for the buyer and the seller of call options is
the exercise price plus the premium.
The value of a fixed-for-floating interest rate swap contract may vary over its life as
the floating rate changes
For an underlying asset that has no holding costs or benefits, the no-arbitrage forward price at initiation of a forward contract is:
the future value of the spot price.
If the price of a forward contract is greater than the price of an identical futures contract, the most likely explanation is that:
the futures contract requires daily settlement and the forward contract does not.
The value of an option at expiration is
the greater of zero or its exercise value.
The mark to market adjustment to futures contracts resets the price of the futures contract to
the new settlement price, which returns the value of the contract to zero each day.
Other things equal, a short put position would become more valuable as a result of an increase in:
the price of the underlying asset.
The price of a forward or futures contract is defined as
the price specified in the contract at which the two parties agree to trade the underlying asset on a future date.
The risk-free interest rate and volatility of the underlying asset price only affect
the time value of options, which is zero at expiration.
A synthetic European put option includes a short position in:
the underlying asset.
Hedge accounting with a net investment hedge most likely refers to a company that is using derivatives to reduce the volatility of:
the value of a foreign subsidiary.
The relationship referred to as put-call-forward parity states that at time = 0, if there is no arbitrage opportunity, the value of a call at X on an asset that has no holding costs or benefits plus the present value of X is equal to:
the value of a put option at X plus the present value of the forward contract price.
For a European style put option:
time value is equal to its market price minus its exercise value.
The value of a forward or futures contract is:
typically zero at initiation.
At expiration, the value of a call option is the greater of zero or the:
underlying asset price minus the exercise price.
For a series of forward contracts to replicate a swap contract, the forward contracts must have:
values at swap initiation that sum to zero.
When replicating a swap with a series of forward contracts, each forward contract is likely to
values at swap initiation that sum to zero.
Consider a European call option and put option that have the same exercise price, and a forward contract to buy the same underlying asset as the two options. An investor buys a risk-free bond that will pay, on the expiration date of the options and the forward contract, the difference between the exercise price and the forward price. According to the put-call-forward parity relationship, this bond can be replicated by:
writing the call option and buying the put option.
An out-of-the-money option has an intrinsic value of
zero
As with other derivatives, the price of an interest rate swap (the fixed rate specified in the contract) is typically set such that the value of the swap is
zero at initiation.
A European call option on a stock has an exercise price of 42. On the expiration date, the stock price is 40. The value of the option at expiration is:
zero.
Ed Verdi has a long position in a European put option on a stock. At expiration, the stock price is greater than the exercise price. The value of the put option to Verdi on its expiration date is:
zero.
An investor buys a call option that has an option premium of $5 and an exercise price of $22.50. The current market price of the stock is $25.75. At expiration, the value of the stock is $23.00. The net profit/loss of the call position is closest to:
−$4.50.
