FIN 307 Final
Stocks options that trade in the January cycle will have contracts available that expire in
January, February, April, and July.
A type of fund that invests in real estate and/or mortgages is known as a
REIT.
One advantage gained by investing in a bond fund rather than in individual bonds is the
diversification among issuers.
If the purchaser of a futures contract fails to meet a margin call,
his/her contract will be sold at the current market price.
The maker of a put or call is the
party who writes the option.
The option premium is
the market price of the option.
A mutual fund's net asset value is determined by
the value of the securities held by the fund.
What is the fundamental value of a put contract with a strike price of $25 when the option price is $1.50 and the underlying common stock sells for $26?
$0.00
What is the time premium of a put with a strike price of $25 when the option price is $2 and the underlying common stock sells
$100
) Nowel Inc. stock is currently priced at $42. The present value of the strike price of a call option on this stock is $44. Probability one, as calculated by the Black Scholes option pricing model is .6541; probability 2 is .3722. The value of this option as calculated by Black-Scholes is
$11.10.
Eric has just purchased a heating oil contract at $2.05 per gallon. The contract size is 21,000 gallons. Initial margin is $6,075; maintenance margin is $4,500. If the price of heating oil is $2.15 when the contract expires, Eric's profit or loss is
$2,100 profit.
Roselle paid $250 to buy one put option with a strike price of $35. What is the maximum profit Roselle can earn on her option contract?
$3,250
What is the fundamental value of a call with a strike price of $30 and a market price of $33?
$300
A wheat futures contract is quoted in cents per bushel with a contract unit of 5,000 bushels. If the contract is quoted at a settle price of 685, then the value of one wheat futures contract is
$34,250.
Fred has just sold short 3 contracts of May wheat on the CBT. These are 5,000 bushel contracts. The initial deposit is $1,500 per contract with a maintenance margin of $1,200. (a)What is Fred's total initial margin? (b)How much of an increase in the price of wheat is necessary to cause a margin call?
(a) (3)($1,500) = $4,500 (b)($1,500 - $1,200)/5,000 = $0.06 The value of a contract can rise by $300 before a margin call. On a 5,000 contract $300 is equivalent to a six-cent increase per bushel.
The return on a futures contract is calculated as
(selling price - purchase price)/margin deposit.
George purchased a futures contract at 349. The contract is on 2500 units, requires a 10% margin deposit and is priced in cents per unit. George sold the contract at 278. What is George's return on invested capital?
-203.4%
What is the return on invested capital to an investor who purchased a futures contract at a price of 297 and sells the contract for 308? The contract is on 5,000 units, requires a 3% margin deposit and is priced in cents per unit.
123.5%
The price of ABC stock is currently $42 per share, but in six months you expect it to rise to $50. ABC does not pay a dividend. You buy a six-month call on ABC, with a strike price of $45. The option cost $200. What holding period return do you expect on this call? Ignore transaction costs and taxes.
150%
Last year at this time, a mutual fund had an NAV of $13.20 per share. Over the past year the fund paid dividends of $0.70 per share and had a capital gains distribution of $1.20 per share. What is the holding period return assuming that the current NAV is $14.42?
23.6%
Eric has just purchased a heating oil contract at $2.05 per gallon. The contract size is 21,000 gallons. Initial margin is $6,075; maintenance margin is $4,500. If the price of heating oil is $2.15 when the contract expires, Eric's percentage profit or loss is
34.57% profit.
Last year, Sue purchased a closed-end mutual fund that was trading at $42 and had an NAV of $38. Sue sold the fund today when the NAV is $44 and the market price is $43. The fund paid $1 in dividends over the past year. What is the Sue's holding period return?
4.8%
Fred bought 600 shares of Edgewood stock at a price of $19. The stock is currently selling for $53 a share. To protect his profits, Fred should buy
6 put options with a strike price of $50.
Which of the following statements is(are) correct concerning hedge funds?
Access is limited to institutions and high net worth or high-income individuals
Which one of the following was the first listed exchange for stock options in the United States?
Chicago Board Options Exchange
Which of the following statements best describes the legal organization of mutual funds?
Funds split their basic functions such as record keeping and investment decisions among two or more companies.
Which of the following characteristics apply to futures contracts?
I. Futures contracts are an important tool to control risk. II. Futures contracts are highly risky and involve speculation. III.Futures contracts specify both the quantity and the quality of the item.
Which of the following statements concerning options are correct?
I. Options are derivative securities. II. The value of an option is dependent upon the value of the underlying security. III. The seller of the option retains the option premium whether or not the option is exercised. IV. Options can provide leverage benefits.
Which of the following features are shared by futures contracts and options?
I. They have specified expiration dates. II. Their value is derived from changes in the value of some other asset.
Reasons to invest in mutual fund include
I. a wide range of services such automatic reinvestment and II. minimizing the time and effort spent choosing securities. IV. participation in a variety of tax-sheltered and tax-deferred retirement programs.
Which of the following are advantages of using options for futures speculation?
I. increased leverage II. Potential losses are limited to the cost of the option. III.Options are available on a broad range of commodity, index, and currency futures. IV.Investors avoid the possibility of having to take delivery of the commodity.
A futures contract
I. obligates the buyer of the contract to buy a specified amount of a commodity. IV.establishes the delivery price based on the selling price of the futures contract.
The major advantages of futures options over futures contracts include
I. positions can be hedged with a smaller commitment of capital. II. potential losses are limited to the size of the contract. III.greater leverage and the potential for higher percentage returns.
Which of the following affect the value of puts and calls written on shares of common stock?
I. price volatility of the underlying stock II. current market price of the underlying stock III. length of time until the option expiration date IV. current market interest rate
18) Shares of Lakewood, Inc. are currently selling for $52.63. You believe the stock will decline in price ranging from $30 to $32 in the next few months. Which of the following strategies will allow you to profit if your prediction is correct?
I. short the stock III. write a call at 55 IV. buy a put at 45
Which of the following are specifically stated in futures contracts?
I. the quantity of the commodity to be delivered II. the quality of the commodity to be delivered V. the time and place at which the commodity must be delivered
In January, JB stock was selling for $50 per share. When the calls and the puts with a strike price of $45 expired on March 20, JB was selling at $46. Which investors made a profit?
I. the writer of the call III. the writer of the put
Investors use mutual funds for which of the following reasons?
I. to accumulate wealth II. to minimize risk III. as a speculative vehicle IV. as a storehouse of value
Which of the following characteristics apply to closed-end mutual funds?
I. unlimited number of outstanding shares II. transactions between shareholders III. Market prices may be higher or lower than NAV.
Which of the following characteristics apply to exchange-traded funds (ETFs)?
I. unlimited number of outstanding shares II. typically track the performance of some index IV. May invest in the whole index or use a sample of securities to
If an investor is going to participate in the commodities market by buying a contract, he/she should do which of the following?
II. Be mentally prepared for an enormous loss. III.Be financially able to meet repeated margin calls.
Which of the following is(are) correct statements about the buyer of a futures contract?
II. The contract buyer wants the price of the item to increase. III.The buyer can liquidate the position with an offsetting transaction.
Which of the following statements concerning futures are correct?
II. The return on a futures contract is computed by dividing the net difference between the sale and the purchase price of the contract by the amount of the margin deposit. III.It is very easy to lose your entire investment in a futures contract in a very short period of time due to the volatility of the futures market and also the use of leverage.
Which of the following accurately describe reasons for investing in mutual funds?
II. to achieve portfolio diversification at a reasonable cost III. to invest in unfamiliar sectors or geographic regions
Value funds seek stocks
II. with potential for growth. III. with low P/E ratios.
The buyer of a listed American option has which of the following rights?
III. the right to resell the option IV. the right to let the option expire unexercised
Which one of the following statements is correct concerning players in the mutual fund industry?
Normally a bank serves as the custodian.
Which one of the following statements concerning options is correct?
Option holders can profit on movements of the price of the underlying security.
Calculate the return on invested capital on a platinum futures contract for 50 troy ounces when the purchase price is $810.40 per ounce and the sale price is $823.54 per ounce. The initial deposit is $2,500. (Show all work.)
Return = {($823.54)(50) - ($810.40)(50)}/$2,500 = 26.28%
Which of the following is a possible official expiration date for a standardized option contract?
Saturday, October 17
Seth McDonald grows corn. In May, he decides to sell 3 contracts, about half of his expected crop, for December delivery. The contract price is $3.65 per bushel and the contract size is 5,000 bushels. Shortly before the delivery date, corn is selling in the spot (immediate delivery) market for $3.85 per bushel.
Seth can hold on to his corn for several months and hope that the price to rises enough to offset his loss.
Although the major commodities exchanges continue to operate separately, ownership has been concentrated under
The Chicago Mercantile Exchange.
Which one of the following statements concerning ETFs is correct?
The ETF based on the Standard & Poor's 500 Index is priced at 1/10 the value of that index.
Based on this information, which one of the following statements is correct?
The cost of a March 2016 contract was $11,430 at the market close.
Which one of the following statements concerning mutual funds is correct?
The mutual fund industry is the largest financial intermediary in the United States.
Which of the following is true about rights?
They are a type of short-lived call option.
Which of the following statements is(are) correct concerning exchange-traded funds (ETFs)?
You can buy and sell ETFs any time during trading hours. ETFs rarely distribute any capital gains.
One reason that commodities appeal to investors is because they
act as hedges against inflation during periods of rapidly rising consumer prices.
To operate as a regulated investment company and enjoy the related tax benefits, a mutual fund must annually distribute to its shareholders
all of its realized capital gains, and at least 90 percent of its interest and dividend income.
Which type of fund is always passively managed?
an index fund
To hedge a bond portfolio, an investor should use
an interest rate future.
One drawback of investing in mutual funds is the
annual management fee.
The purchasing manager of a jewelry manufacturer is worried that the rising price of gold will have a negative impact on profit margins on items it has promised to merchants in 3 months. She should
buy a gold futures contract today.
Kyle believes the price of Ajax stock is about to decrease. If he wants to profit from the decline in price, he should ________ on Ajax stock.
buy a put
A farmer who grows soy beans can hedge against the risk that bad weather will damage her crop by
buying soy bean futures for delivery near the time of harvest.
Hedging in the commodities market is a strategy primarily used by
by producers and processors of commodities.
Returns on exchange traded funds may come from
capital gains, dividends
Investors are generally well advised to avoid mutual funds with
consistently poor historical performance.
For a call purchased on an organized security exchange, the strike price specifies the
contractual price at which each of the shares of the underlying stock can be bought.
The primary objective of an equity-income fund is
current income with capital preservation.
Which of the following are sources of income for an open-end mutual fund?
dividend and interest income, capital gains, change in NAV
Income distributed by a mutual fund from which one of the following sources receives a preferential tax rate of 15%?
dividends on common stock
Writers of option contracts
earn a profit when the option expires without being exercised.
Which of the following is NOT actively traded in the commodities futures markets?
euros
One characteristic of bond funds is the
fluctuation in value in response to changing interest rates.
One characteristic of most index funds is that such funds typically
have a very low-cost structure with respect to management fees and transaction fees.
Listed options
have readily available price information.
Purchasers of stock options
have the right to buy or sell a certain number of underlying shares.
Logan sold a corn futures contract using the initial margin of $2,700. His maintenance margin is $2,000. The price of began to rise in early summer, but Logan wants to keep his contract. When his margin falls below $2,000 (minimum maintenance)
he will need to deposit at least $700 with his broker to bring his margin back up to the initial deposit.
Performance fees based on profits earned by the fund are typical of
hedge funds.
Which of the following increase(s) the time premium of a call option?
increasing volatility in the market price of the underlying security
A fund that is designed to match the performance of a measure such as the S & P 500 or the Russell 2000 is called a(n)
index fund.
The purchaser of a futures contract
is affected by the daily procedure known as mark-to-the-market
The writer of a put
is betting the price of the underlying security will increase in value.
The return on a futures contract
is highly related to the low margin requirement.
An open-end investment company
is involved in all trades of its shares.
The seller of a futures contract
is legally bound to make delivery of the specified item on the specified day.
The amount paid at the time a futures contract is sold
is simply a refundable security deposit.
The margin deposit associated with the purchase of a futures contract
is used to cover any loss in market value of the contract resulting from adverse price fluctuations.
Closed-end funds are
less liquid than open-end funds.
The ability to obtain a given equity position at a reduced capital investment, and therefore magnify returns, is known as
leverage.
Investors in hedge funds have the legal status of
limited partners.
A mutual fund is generally more tax efficient when it has a ________ turnover rate and a ________ dividend yield.
low; low
A corn futures contract closed yesterday at a price of $2.40 a bushel. The maximum daily price range is $0.40 and the daily price limit is $0.20. Therefore, the
lowest closing price for today is $2.20 a bushel.
Benjamin bought a contract for future delivery of 5000 bushels of oats at $3.64 per bushel and sold a later contract at $3.92 a bushel. A month later, corn prices were rising and Joseph sold his long contract for $401 per bushel and covered his short by purchasing a contract for $3.99 per bushel. Ignoring trading costs, Joseph
made a profit of $1,500.
In the futures markets, gains and losses in a contract's value are calculated every day and added to or subtracted from the trader's account. This procedure is called
mark-to-the-market.
Mutual fund investors are primarily exposed to ________ and ________ risks.
market; inflation
An investor who wants to use mutual funds as a storehouse of value should invest in
money funds and short-term bond funds.
One reason that writing options can be a viable and profitable investment strategy is that
most options expire unexercised.
Income from ________ is exempt from federal income taxes?
municipal bond funds
Investors seeking tax-exempt income should invest in
municipal bond funds.
For all practical purposes, listed stock options always expire
on the third Friday of the expiration month.
An oat futures contract is for 5,000 bushels and the price can change by as much as 20 cents in either direction per trading day. If the margin requirement is $800 per contract, the maximum gain or loss in one day is
plus or minus 125%.
The most important factor affecting the market price of a put or call is the
price behavior of the underlying common stock.
Which one of the following actions would be the most appropriate hedge to a short sale of common stock?
purchase of a call
In nearly all cases, the purpose of a hedge is to
reduce or eliminate risk.
To hedge a bond portfolio against rising interest rates, an investor should
sell interest rate futures.
Larry is a corn farmer. To attempt to maximize the value of his crop, Larry is most likely to benefit from
selling a futures contract on corn for delivery at harvest time.
With futures contracts, the price at which the commodity must be delivered is
set when the futures contract is sold.
Some investors combine two or more different futures contracts into one investment position that offers the potential for generating a modest amount of profit while restricting exposure to loss. This practice is called
spreading.
BBC Inc. needs to quote a price at which it will sell oatmeal to a large supermarket chain next year. It can limit the risk from an increase in the price of oats next year by
taking long positions in oat futures.
The Chicago Mercantile Exchange recently merged with
the Chicago Board of Trade.
The value of a futures option is defined as
the difference between the option's strike price and the market price of the underlying futures contract.
A put has fundamental value as long as
the market price of the underlying financial asset is less than the strike price.
In commodities trading, open interest at the end of a trading day is equal to
the number of contracts presently outstanding.
One of the biggest differences between a futures option and a futures contract is that
the option limits the loss exposure to the price of the option.
The strike price of a put option is the price
the price at which the underlying stock can be sold.
An American call option gives the owner
the right but not the obligation to buy the stock at the strike price on or before the expiration date.
Every commodity contract specifies all the following EXCEPT
the settle price.
One of the major disadvantages of options is
their lifespan.
Nearly all mutual funds operate as regulated investment companies. This means that
they do not pay taxes on their income
The two provisions which investors should carefully consider when evaluating stock options are the
time until expiration and the strike price.