International Investments Midterm--
Duration matching immunizes a portfolio against...
Small parallel shifts in the yield curve
Which of the following is true about a long forward contract?
The contract becomes more valuable as the price of the asset rises
You would like to speculate on a rise in the price of a certain stock. The current stock price is $29, and a three-month call with a strike of $30 costs $2.90. You have $5,800 to invest. One strategy would be to buy 200 shares. Another would be to buy 2,000 options. If the share price does badly (it goes down), which option would be the most lost?
buying the options
CVA stands for.
credit value adjustment
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?
decrease by one
When a bank's borrowing rate goes up, which of the following is true?
DVA increases so that the bank's profit goes up
What are teaser rates?
Interest rates that apply only for the first two or three years
Which of the following is NOT true?
Investment assets are never held for consumption
AIG lost money because...
It insured AAA tranches of ABS CDOs
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?
It leads to a more predictable exchange rate being paid
Suppose that the standard deviation of quarterly changes in the prices of a commodity is $0.65, the standard deviation of quarterly changes in a futures price on the commodity is $0.81, and the coefficient of correlation between the two changes is 0.8. What is the optimal hedge ratio for a three-month contract and what does it mean?
It means that the size of the futures position should be 64.2% of the size of the company's exposure in a three-month hedge
Which of the following involves the most credit risk?
OTC trading with bilateral clearing and no collateral being posted
When dividends increase with all else remaining the same, which of the following is true?
Puts increase in value while calls decrease in value
When the strike price increases with all else remaining the same, which of the following is true?
Puts increase in value while calls decrease in value
Accountants like to value a derivatives portfolio at..
the exit price
A three-year bond provides a coupon of 8% semiannually and has a cash price of 104. What is the bond's yield? Record as a percentage with 3 decimal places.
6.407
Which of the following is correct?
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
A floating for floating currency swap is equivalent to...
A fixed-for-fixed currency swap and two interest rate swaps, one in each currency
A floating-for-fixed currency swap is equivalent to..
A fixed-for-fixed currency swap and two interest rate swaps, one in each currency
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 forward contract can be used to lock in the exchange rate
Which of the following describes a protective put?
A long put option on a stock plus a long position in the stock
Which of the following describes a long position in an option?
A position where an option has been purchased
Which of the following is an example of an option class?
All calls on a certain stock
Which of the following is an example of an option series?
All calls with a particular time to maturity and strike price on a certain stock
Which of the following is true?
An American call option on a stock should never be exercised early when no dividends are expected
Which of the following tends to lead to an increase in house prices?
Banks reducing the minimum FICO score that borrowers are required to have
Explain what is meant by basis risk when futures contracts are used for hedging
Basis risk arises from the hedger's uncertainty as to the difference between the spot price and futures price at the expiration of the hedge
An ultra T-bond futures contract is one where...
Bonds with maturities greater than 25 year can be delivered
When volatility increases with all else remaining the same, which of the following is true?
Both calls and puts increase in value
Which of the following is true?
CVA and DVA must both be calculated for the whole portfolio a bank has with a counterparty
Which of the following is a consumption asset?
Copper
Which of the following describes a subprime mortgage?
the credit risk is high
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?
$1,800
A deposit account pays 4% per annum with continuous compounding, but interest is actually paid quarterly. How much interest will be paid each quarter on a $10,000 deposit?
$100.50
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?
$2.09
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?
$40.50
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)?
$400
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?
$400
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 __________
$50
The yield curve is flat at 6% per annum. What is the value of an FRA where the holder receives interest at the rate of 8% per annum for a six-month period on a principal of $1,000 starting in two years? All rates are compounded semiannually
$8.63
An investor enters into a short forward contract to sell 100,000 British pounds for U.S. dollars at an exchange rate of 1.5000 U.S. dollars per pound. How much does the investor gain or lose if the exchange rate at the end of the contract is 1.4900?
1,000
Which of the following is closest to the duration of a 2-year bond that pays a coupon of 8% per annum semiannually? The yield on the bond is 10% per annum with continuous compounding
1.88
A trader uses 3-month Eurodollar futures to lock in a rate on $5 million for six months. How many contracts are required?
10
An investor receives $1,100 in one year in return for an investment of $1,000 now. Calculate the percentage return per annum with annual compounding. Record as a percentage rounded to the nearest whole number.
10%
It is May 1. The quoted price of a bond with an Actual/Actual (in period) day count and 12% per annum coupon (paid semiannually) in the United States is 105. It has a face value of 100 and pays coupons on April 1 and October 1. What is the cash price?
105.98
It is May 1. The quoted price of a bond with a 30/360 day count and 12% per annum coupon in the United States is 105. It has a face value of 100 and pays coupons on April 1 and October 1. What is the cash price?
106.00
Use the risk-free rates below to value an FRA where you will pay 5% (compounded annually) and receive LIBOR for the third year on $1 million. The forward LIBOR rate (annually compounded) for the third year is 5.5%. Record as a dollar amount rounded to two decimal places
4,474.69
The six-month and one-year zero rates are both 5% per annum. For a bond that has a life of 18 months and pays a coupon of 4% per annum (with semiannual payments and one having just been made), the yield is 5.2% per annum. What is the 18-month zero rate? All rates are quoted with semiannual compounding. Round to 3 decimals.
5.204
Suppose that ABSs are created from portfolios of subprime mortgages with the following allocation of the principal to tranches: senior 80%, mezzanine 10%, and equity 10%. (The portfolios of subprime mortgages have the same default rates.) An ABS CDO is then created from the mezzanine tranches with the same allocation of principal. Losses on the mortgage portfolio prove to be 16%. What, as a percent of tranche principal, are losses on the senior tranche of the ABS CDO?
50%
Suppose that an ABS is created from a portfolio of subprime mortgages with the following allocation of the principal to tranches: senior 80%, mezzanine 10%, and equity 10%. Losses on the mortgage portfolio prove to be 16%. What, as a percent of tranche principal, are losses on the mezzanine tranche of the ABS?
50%
Suppose that ABSs are created from portfolios of subprime mortgages with the following allocation of the principal to tranches: senior 85%, mezzanine 10%, and equity 5%. (The portfolios of subprime mortgages have the same default rates.) An ABS CDO is then created from the mezzanine tranches with the same allocation of principal. How high can losses on the mortgages be before the senior tranche of the ABS CDO bears losses?
6.5%
Suppose that OIS rates of all maturities are 6% per annum, continuously compounded. The one-year LIBOR rate is 6.4%, annually compounded and the two-year swap rate for a swap where payments are exchanged annually is 8%, annually compounded. Which of the following is closest to the LIBOR forward rate for the second year when OIS discounting is used and the rate is expressed with annual compounding?
7.225%
Suppose that OIS rates of all maturities are 6% per annum, continuously compounded. The one-year LIBOR rate is 6.4%, annually compounded and the two-year swap rate for a swap where payments are exchanged annually is 8%, annually compounded. Which of the following is closest to the LIBOR forward rate for the second year when LIBOR discounting is used and the rate is expressed with annual compounding?
7.229%
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.
7.5%
What rate of interest with continuous compounding is equivalent to 8% per annum with monthly compounding? Round to 2 decimal places
7.97
A company has a $20 million portfolio with a beta of 1.2. It would like to use futures contracts on a stock index to hedge its risk. The index futures is currently standing at 1080, and each contract is for delivery of $250 times the index. What is the hedge that minimizes risk? Round to the nearest whole number.
89
Suppose that in September 2018 a company takes a long position in a contract on May 2019 crude oil futures. It closes out its position in March 2019. The futures price (per barrel) is $48.30 when it enters into the contract, $50.50 when it closes out its position, and $49.10 at the end of December 2018. One contract is for the delivery of 1,000 barrels. How is the profit taxed if it is (a) a hedger and (b) a speculator? Assume that the company has a December 31 year-end.
A hedger would be taxed on the whole profit of $2,200 in 2019. A speculator would be taxed on $800 in 2018 and $1,400 in 2019
Which of the following describes a covered call?
A short call option on a stock plus a long position in the stock
When the interest rate is 5% per annum with continuous compounding, which of the following creates a principal protected note worth $1000?
A one-year zero-coupon bond plus a one-year call option worth about $49
Which of the following describes a short position in an option?
A position where an option has been sold
Which of the following would be described by the term "liar loan"?
A situation where the borrower lied about the his or her income
Explain what a stop-limit order to sell at 20.30 with a limit of 20.10 means.
A stop-liIt means that as soon as there is a bid at 20.30 the contract should be sold providing this can be done at 20.10 or a higher price.
Which of the following is true for an interest rate swap?
A swap is usually worth close to zero when it is first negotiated
Suppose that ABSs are created from portfolios of subprime mortgages with the following allocation of the principal to tranches: senior 5% (rated AAA), mezzanine 0.1% (rated BBB), and equity 5% (rated C) . The portfolios of subprime mortgages have the same default rates. An ABS CDO is then created from the mezzanine tranches. Which of the following is true?
The ABS CDO tranches should all be rated BBB
Which of the following is the put-call parity result for a non-dividend-paying stock?
The European put price plus the stock price must equal the European call price plus the present value of the strike price
Which of the following describes a situation where an American put option on a stock becomes more likely to be exercised early?
The stock price volatility decreases
Suppose you call your broker and issue instructions to sell one July hogs contract. This is what happens:Live hog futures are traded by the CME Group. The broker will request some initial margin. The order will be relayed by telephone to your broker's trading desk on the floor of the exchange (or to the trading desk of another broker). It will then be sent by messenger to a commission broker who will execute the trade according to your instructions. Confirmation of the trade eventually reaches you. If there are adverse movements in the futures price your broker may contact you to request additional margin.
True
Which of the following day count conventions applies to a US Treasury bond?
actual/actual (in period)
Which of the following describes the S&P/Case-Shiller index?
an index of house prices
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 long position in a put option
What is an over-the-counter market?
a network of financial institutions, fund managers, and corporate treasurers who trade directly with each other
The compounding frequency for an interest rate defines...
a unit of measurement for the interest rate
Which of the following is NOT true?
futures contracts nearly always last longer than forward contracts
Which of the following are cash settled?
futures on stock indices
Selling a call option means....
giving someone else the right to buy an asset from you
What does a stop order to sell at $2 mean? When might it be used?
it is an order to sell at the best available price once a price of $2 or less is reached. It could be used to limit the losses from an existing long position
Which of the following best describes a central clearing party?
it stands between two parties in the over-the-counter market
Which of the following is NOT a theory of the term structure?
liquidity preference theory
When the futures prices of an asset is less than spot prices, _____________ are likely to be particularly attractive. A company that knows it will purchase a commodity in the future is able to lock in a price close to the futures price. This is likely to be particularly attractive when the futures price is less than the spot price.
long hedges
The ________________ does not always succeed in locking in the current spot price of an asset for a future transaction. For example, the use of a forward contract to hedge a known cash inflow in a foreign currency. The forward contract locks in the forward exchange rate — which is in general different from the spot exchange rate
perfect hedge
The modified duration of a bond portfolio worth $1 million is 5 years. By approximately how much does the value of the portfolio change if all yields increase by 5 basis points?
decrease of $2,500
There are advantages to the financial system of requiring CCPs to be used for all standard derivatives transactions between financial institutions. A CCP stands between the two parties in an OTC derivative transaction in much the same way that a clearing house does for exchange-traded contracts. It absorbs the credit risk but requires initial and variation margin from each side. In addition, CCP members are required to contribute to a default fund. The advantage to the financial system is that there is a lot more collateral (i.e., margin) available and it is therefore much less likely that a _________by one major participant in the derivatives market will lead to losses by other market participants. The disadvantage is that CCPs are replacing banks as the too-big-to-fail entities in the financial system. There clearly needs to be careful oversight of the management of CCPs
default
If both sides of the transaction are entering into a new contract, the open interest increases by one. If both sides of the transaction are closing out existing positions, the open interest decreases by one. If one party is entering into a new contract while the other party is closing out an existing position, the open interest ______________.
stays the same
A trader buys two July futures contracts on frozen orange juice concentrate. Each contract is for the delivery of 15,000 pounds. The current futures price is 160 cents per pound, the initial margin is $6,000 per contract, and the maintenance margin is $4,500 per contract. What price change would lead to a margin call?
the futures price of frozen orange juice falls by more than 10 cents to below 150 cents per pound.
"Options and futures are zero-sum games." What is meant by this statement?
the gain (loss) to one side equals the loss (gain) to the other side
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?
the hedgers position improves
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?
the investor has made a loss of $4,000
The open interest of a futures contract at a particular time is..
the total number of long positions outstanding
The open interest of a futures contract at a particular time is...
the total number of long positions outstanding
"An interest rate swap where six-month LIBOR is exchanged for a fixed rate 5% on a principal of $100 million for five years is a portfolio of nine FRAs." Let's explain this.The first exchange of payments is known. Each subsequent exchange of payments is an FRA where interest at 5% is exchanged for interest at LIBOR on a principal of $100 million.
true
"When the zero curve is upward sloping, the zero rate for a particular maturity is greater than the par yield for that maturity. When the zero curve is downward sloping, the reverse is true." Let's explain this.The par yield is the yield on a coupon-bearing bond. The zero rate is the yield on a zero-coupon bond. When the yield curve is upward sloping, the yield on an -year coupon-bearing bond is less than the yield on an -year zero-coupon bond. This is because the coupons are discounted at a lower rate than the -year rate and drag the yield down below this rate. Similarly, when the yield curve is downward sloping, the yield on an -year coupon bearing bond is higher than the yield on an -year zero-coupon bond
true
Which of the following describes regulatory arbitrage?
Finding a way of reducing capital requirements without changing the risks being taken
Which of the following is true?
Futures contracts are traded on exchanges, but forward contracts are not
Which of the following is true?
If all companies in an industry do not hedge, a company is liable increase its risk by hedging
A bank enters into a 3-year swap with company X where it pays LIBOR and receives 3.00%. It enters into an offsetting swap with company Y where is receives LIBOR and pays 2.95%. Which of the following is true:
If company X defaults, the swap with company Y continues
Which of the following is an argument used by Keynes and Hicks?
If hedgers hold long positions and speculators holds short positions, the futures price will tend to be higher than the expected future spot price
Which of the following describes the way a LIBOR-in-arrears swap differs from a plain vanilla interest rate swap?
Interest is paid at the beginning of the accrual period in a LIBOR-in-arrears swap
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?
$0.86
A bank has three uncollateralized transactions with a counterparty worth +$10 million, −$20 million and +$25 million. A netting agreement is in place. What is the maximum loss if the counterparty defaults today?
$15 million
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?
$150
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.
$3,000
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?
$3.06
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?
$3.98
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?
$35.84
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
$4,000
Suppose that you write a put contract with a strike price of $40 and an expiration date in three months. The current stock price is $41 and the contract is on 100 shares. What have you committed yourself to? How much could you lose in a worst case scenario? In other words, what is the total amount you could lose on this deal?
$4,000
How much is a basis point?
0.01%
Which of the following is true of a box spread?
* all of these* -It has a known value at maturity -It is a package consisting of a bull spread and a bear spread -It involves two call options and two put options
Which of the following is true?
* none of these* -A long call is the same as a short put -A call on a stock plus a stock is the same as a put -A short call is the same as a long put
Why might the treasurer of a company not hedge the company's exposure to a particular risk?
*All of these**
Which of the following is a use of a currency swap?
*all of these* -To take advantage situations where the tax rates in two countries are different -To exchange borrowing in one currency for borrowings in another currency -To exchange an investment in one currency for an investment in another currency
Which of the following is true?
*none of these* -When interest rates in the economy increase, all bond prices increase -As its coupon increases, a bond's price decreases -Longer maturity bonds are always worth more that shorter maturity bonds when the coupon rates are the same
Which of the following describes the five-year swap rate?
*the average of these two options* -The fixed rate of interest which a swap market maker is prepared to receive in exchange for LIBOR on a 5-year swap -The fixed rate of interest which a swap market maker is prepared to pay in exchange for LIBOR on a 5-year swap
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?
-$1.96
In October 2008 the three-month LIBOR-OIS spread rose to...
364 basis points
A semi-annual pay interest rate swap where the fixed rate is 5.00% (with semi-annual compounding) has a remaining life of nine months. The six-month LIBOR rate observed three months ago was 4.85% with semi-annual compounding. Today's three and nine month LIBOR rates are 5.3% and 5.8% (continuously compounded) respectively. From this it can be calculated that the forward LIBOR rate for the period between three- and nine-months is 6.14% with semi-annual compounding. If the swap has a principal value of $15,000,000, what is closest to the value of the swap to the party receiving a fixed rate of interest?
-$70.760
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?
-$9.15
An exchange rate is 0.7000 and the six-month domestic and foreign risk-free interest rates are 5% and 7% (both expressed with continuous compounding). What is the six-month forward rate?
.6930
An interest rate swap has three years of remaining life. Payments are exchanged annually. Interest at 3% is paid and 12-month LIBOR is received. A exchange of payments has just taken place. The one-year, two-year and three-year LIBOR/swap zero rates are 2%, 3% and 4%. All rates an annually compounded. What is the value of the swap as a percentage of the principal when LIBOR discounting is used.
2.66%
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?
2.7%
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?
200
Company X and Company Y have been offered the following rates... Fixed Rate Floating Rate Company X 3.5% 3-month LIBOR plus 10bp Company Y 4.5% 3-month LIBOR plus 30 bp Suppose that Company X borrows fixed and company Y borrows floating. If they enter into a swap with each other where the apparent benefits are shared equally, what is company X's effective borrowing rate?
3-month LIBOR−30bp
A 10-year, 8% coupon bond currently sells for $90. A 10-year, 4% coupon bond currently sells for $80. What is the 10-year zero rate? (Hint: Consider taking a long position in two of the 4% coupon bonds and a short position in one of the 8% coupon bonds.) Record as a percentage rounded to 2 decimal places.
3.57
Which of following is applicable to corporate bonds in the United States?
30/360
An investor receives $1,100 in one year in return for an investment of $1,000 now. Calculate the percentage return per annum with monthly compounding. Record as a percentage rounded to 2 decimal places.
9.57
An investor receives $1,100 in one year in return for an investment of $1,000 now. Calculate the percentage return per annum with semiannual compounding. Record as a percentage rounded to 2 decimal places
9.76
Suppose that 6-month, 12-month, 18-month, 24-month, and 30-month zero rates are, respectively, 4%, 4.2%, 4.4%, 4.6%, and 4.8% per annum with continuous compounding. Estimate the cash price of a bond with a face value of 100 that will mature in 30 months and pay a coupon of 4% per annum semiannually
98.04
A haircut of 20% means that...
A bond with a market value of $100 is considered to be worth $80 when used to satisfy a collateral request
Which of the following is correct?
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
Under what circumstances does a minimum-variance hedge portfolio lead to no hedging at all?
A minimum variance hedge leads to no hedging when the coefficient of correlation between the futures price changes and changes in the price of the asset being hedged is zero
Which of the following is NOT true? (Present values are calculated from the end of the life of the option to the beginning.)
An American put option is always worth less than the present value of the strike price
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?
Bullish Calendar Spread
Which of the following can be used to create a long position in a European put option on a stock?
Buy a call on the stock and short the stock
Which of the following creates a bear spread?
Buy a high strike price call and sell a low strike price call
Which of the following creates a bull spread?
Buy a low strike price put and sell a high strike price put
How can a strangle trading strategy be created?
Buy one call and one put with different strike prices and same expiration date
How can a straddle be created?
Buy one call and one put with the same strike price and same expiration date
How can a strip trading strategy be created?
Buy one call and two puts with the same strike price and expiration date
How can a strap trading strategy be created?
Buy two calls and one put with the same strike price and expiration date
When interest rates increase with all else remaining the same, which of the following is true?
Calls increase in value while puts decrease in value
Which of the following best describes "stack and roll"?
Creates long-term hedges from short term futures contracts
The frequency with which futures margin accounts are adjusted for gains and losses is...
Daily
Which of the following describes a known dividend yield on a stock?
Dividends per year as a percentage of the stock price at the time when dividends are paid are known
When the time to maturity increases with all else remaining the same, which of the following is true?
European options are liable to increase or decrease in value
Which of the following describes LEAPS?
Exchange-traded stock options with longer lives than regular exchange-traded stock options
As a bank`s borrowing rate increases, which of the following is true if a bank calculates FVA
FVA increases
Suppose that OIS rates for all maturities are 2.5% and swap rates for all maturities are 3%. Which of the following is true?
Forward LIBOR rates are the same for both OIS discounting and LIBOR discounting
Which of the following is NOT true about forward and futures contracts?
Forward contracts are more liquid than futures contracts
A trader enters into a short forward contract on 100 million yen. The forward exchange rate is $0.0090 per yen. How much does the trader gain or lose if the exchange rate at the end of the contract is $0.0084 per yen?
Gain of $60,000
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...
Loss of $1,000
Suppose that you write a put contract with a strike price of $40 and an expiration date in three months. The current stock price is $41 and the contract is on 100 shares. What have you committed yourself to? Suppose, for example, that the option is exercised when the price is $20. How much have you gained or lost?
Lost $2,000
Which of the following does NOT describe beta?
Measures correlation between futures prices and spot prices for a commodity
Which of the following survived the crisis without declaring bankruptcy or being taken over by another financial institution?
Morgan Stanley
Since the 2008 credit crisis...
OIS has replaced LIBOR as the discount rate for collateralized swaps
Consider a put option and a call option with the same strike price and time to maturity. Which of the following is true?
One of the options must be either in the money or at the money
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?
Put options to sell 200 shares for $10
Which of the following is true for American options?
Put-call parity provides an upper and a lower bound for the difference between call and put prices
The most recent settlement bond futures price is 103.5. Which of the following four bonds is cheapest to deliver?
Quoted bond price = 131; conversion factor = 1.2500.
Which of the following is true as the correlation between mortgage defaults increases?
Senior tranches become more likely to incur losses
Which of the following describes the way the forward price of a foreign currency is quoted?
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
Which of the following is true when a bank uses OIS discounting for valuing a LIBOR-for-fixed swap?
The OIS zero curve is calculated before the LIBOR/swap zero curve
The reference entity in a credit default swap is...
The company or country whose default is being insured against
Which of the following is true?
The convenience yield is always positive or zero
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?
The early forward contracts underlying the swap have a negative value and the later ones have a positive value
The spot price of an asset is positively correlated with the market. Which of the following would you expect to be true?
The forward price is less than the expected future spot price.
Which of the following is true?
The futures rates calculated from a Eurodollar futures quote are always greater than the corresponding forward rate
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?
The gain when the stock price is greater than $30 is the same as the gain when the stock price is less than $20
Which of the following describes a 3-month overnight indexed swap (OIS)?
The geometric average of overnight rates is exchanged for a fixed rate at the end of three months
Which of the following is true?
The hedging strategies of a gold producer should depend on whether it shareholders want exposure to the price of gold
Which of the following is true of a non-recourse mortgage?
The house buyer has an American-style put option on the house
Which of the following are true for CBOE stock options?
The initial margin and maintenance margin are determined by formulas and are equal
What is the quoted discount rate on a money market instrument?
The interest rate earned as a percentage of the final face value of a bond
Which of the following is NOT an option open to the party with a short position in the Treasury bond futures contract?
The interest rate used in the calculation of the conversion factor
Which of the following describes the way the futures price of a foreign currency is quoted by the CME group?
The number of U.S. dollars per unit of the foreign currency
Which of the following describes a difference between a warrant and an exchange-traded stock option?
The number of warrants is fixed whereas the number of exchange-traded options in existence depends on trading
As inventories of a commodity decline, which of the following is true?
The one-year futures price as a percentage of the spot price decreases
As the convenience yield increases, which of the following is true?
The one-year futures price as a percentage of the spot price decreases
Which of the following is true?
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)
Which of the following is approximately true when size is measured in terms of the underlying principal amounts or value of the underlying asset?
The over-the-counter market is ten times as big as the exchange- traded market
Since the credit crisis that started in 2007 which of the following have derivatives traders used as the risk-free discount rate for collateralized transactions?
The overnight indexed swap rate
In which of the following cases is an asset NOT considered constructively sold?
The owner buys an in-the-money put option on the asset
The conversion factor for a bond is approximately...
The price it would have if all cash flows were discounted at 6% per annum
When a six-month option is purchased...
The price must be paid in full
Sixty futures contracts are used to hedge an exposure to the price of silver. Each futures contract is on 5,000 ounces of silver. At the time the hedge is closed out, the basis is $0.20 per ounce. What is the effect of the basis on the hedger's financial position if the trader is hedging the sale of silver?
The price received is the futures price plus the basis. The trader therefore gains $60,000
Which of the following is NOT true about duration?
The prices of two bonds with the same duration change by the same percentage amount when interest rate moves up by 100 basis points
Which of the following is true?
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
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?
The put price increases to $5.50
A repo rate is...
The rate implicit in a transaction where securities are sold and bought back later at a higher price
In a fully collateralized transaction which of the following leads to a pricing adjustment?
The rate paid on cash collateral is both greater and less than the fed funds rate
Which of the following describes a call option?
The right to buy an asset for a certain price
What should a trader do when the one-year forward price of an asset is too low? Assume that the asset provides no income.
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
Which of the following best describes the intrinsic value of an option?
The value it would have if the owner had to exercise it immediately or not at all
In futures markets, prices are quoted as the number of U.S. dollars per unit of foreign currency. Spot and forward rates are quoted in this way for the British pound, euro, Australian dollar, and New Zealand dollar. For other major currencies, spot and forward rates are quoted as the number of units of foreign currency per U.S. dollar
True
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?
The value of the swap to the company increases
In the U.S., which of the following is true about Treasury instruments?
Their income is not subject to tax at the state level
Which of the following is true for a consumption commodity?
There is an upper limit to the futures price but no lower limit, except that the futures price cannot be negative
The party with a short position in a futures contract sometimes has options as to the precise asset that will be delivered, where delivery will take place, when delivery will take place, and so on. Do these options increase or decrease the futures price?
These options make the contract less attractive to the party with the long position and more attractive to the party with the short position. They therefore tend to reduce the futures price.
What is the difference between Trader A entering into a long forward contract when the forward price is $50 and Trader B taking a long position in a call option with a strike price of $50
Trader A is obligated to buy the asset for $50, Trader B has an option to buy the asset for $50
If the futures price is greater than the spot price during the delivery period, an arbitrageur buys the asset, shorts a futures contract, and makes delivery for an immediate profit. If the futures price is less than the spot price during the delivery period, there is no similar perfect arbitrage strategy. An arbitrageur can take a long futures position but cannot force immediate delivery of the asset. The decision on when delivery will be made is made by the party with the short position. Nevertheless companies interested in acquiring the asset may find it attractive to enter into a long futures contract and wait for delivery to be made.
True
Imagine you are the treasurer of a Japanese company exporting electronic equipment to the United States. Let's discuss how you would design a foreign exchange hedging strategy and the arguments you would use to sell the strategy to your fellow executives...The simple approach is that the treasurer should: 1) Estimate the company's future cash flows in Japanese yen and U.S. dollars 2) Enter into forward and futures contracts to lock in the exchange rate for the U.S. dollar cash flows. However, this is not the whole story. As the gold jewelry example in Table 3.1 shows, the company should examine whether the magnitudes of the foreign cash flows depend on the exchange rate. For example, will the company be able to raise the price of its product in U.S. dollars if the yen appreciates? If the company can do so, its foreign exchange exposure may be quite low. The key estimates required are those showing the overall effect on the company's profitability of changes in the exchange rate at various times in the future. Once these estimates have been produced the company can choose between using futures and options to hedge its risk. The results of the analysis should be presented carefully to other executives. It should be explained that a hedge does not ensure that profits will be higher. It means that profit will be more certain. When futures/forwards are used both the downside and upside are eliminated. With options a premium is paid to eliminate only the downside.
True
Which of the following is NOT true?
When a CBOE call option on IBM is exercised, IBM issues more stock
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?
When the stock price is below $50
Bootstrapping involves...
Working from short maturity instruments to longer maturity instruments determining zero rates at each step
The zero curve is downward sloping. Define X as the 1-year par yield, Y as the 1-year zero rate and Z as the forward rate for the period between 1 and 1.5 year. Which of the following is true?
Z is less than Y which is less than X
A company knows that it is due to receive a certain amount of a foreign currency in four months. What type of option contract is appropriate for hedging?
a long position in a four month put option
A U.S. company expects to have to pay 1 million Canadian dollars in six months. The U.S. company wants insurance against a strong Canadian dollar in six months while still allowing the company to benefit from a weak Canadian dollar at that time. What hedging strategy could they use to achieve this?
a call option
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 forward contract can be used to lock in the exchange rate
A trader buys a call and sells a put with the same strike price and maturity date. What is the position equivalent to?
a long forward
A U.S. company expects to have to pay 1 million Canadian dollars in six months. The U.S. company wants to lock in an exchange rate equal to the current forward exchange rate. What hedging strategy could they use to achieve this?
a long forward contract
In 2008 the TED spread reached a high of...
about 450 basis points
A cattle farmer expects to have 120,000 pounds of live cattle to sell in three months. The live-cattle futures contract traded by the CME Group is for the delivery of 40,000 pounds of cattle. The farmer use the contract for _________. But, from the farmer's viewpoint, there are pros and cons of this approach.The farmer can short 3 contracts that have 3 months to maturity. If the price of cattle falls, the gain on the futures contract will offset the loss on the sale of the cattle. If the price of cattle rises, the gain on the sale of the cattle will be offset by the loss on the futures contract. Using futures contracts to hedge has the advantage that the farmer can greatly reduce the uncertainty about the price that will be received. Its disadvantage is that the farmer no longer gains from favorable movements in cattle prices
hedging
A trader enters into a short forward contract on 100 million yen. The forward exchange rate is $0.0090 per yen. How much does the trader gain or lose if the exchange rate at the end of the contract is $0.0101 per yen?
loss of $110,000
Suppose that you write a put contract with a strike price of $40 and an expiration date in three months. The current stock price is $41 and the contract is on 100 shares. What have you committed yourself to? Suppose, for example, that the option is exercised when the price is $30. How much have you gained or lost?
lost $1,000
There is a difference between bilateral and central clearing for OTC derivatives. In bilateral clearing the two sides enter into a master agreement covering all outstanding transactions. The agreement defines the circumstances under which transactions can be closed out by one side, how transactions will be valued if there is a close out, how the collateral required by each side is calculated, and so on. In central clearing a CCP stands between the two sides in the same way that an exchange clearing house stands between two sides for transactions entered into on an exchange. The CCP requires initial and variation ________.
margin
An airline executive has argued: "There is no point in our using oil futures. There is just as much chance that the price of oil in the future will be less than the futures price as there is that it will be greater than this price." It may well be true that there is just as much chance that the price of oil in the future will be above the futures price as that it will be below the futures price. This means that the use of a futures contract for speculation would be like betting on whether a coin comes up heads or tails. But it might make sense for the airline to use futures for hedging rather than speculation. The futures contract then has the effect of ________________. It can be argued that an airline should not expose its shareholders to risks associated with the future price of oil when there are contracts available to hedge the risks
reducing risks
Which of the following must post margin?
seller of an option
A _________________ position improves when the basis strengthens unexpectedly and worsens when the basis weakens unexpectedly.The basis is the amount by which the spot price exceeds the futures price. A ___________ position is long the asset and short futures contracts. The value of his or her position therefore improves as the basis increases. Similarly, it worsens as the basis decreases
short hedger's
