CFA Chapter 15 Part 1
An investor deposits an initial margin of $40,000 for a futures trade and the following day makes a $15,000 loss on the trade. If the maintenance requirement is $30,000, then he must deposit a variation margin of:
$15,000.
Ace Inc. shorts a futures contract at a futures price of $185. The initial margin requirement is $20, and the required maintenance margin is $12. The settlement price is $200 on the day Ace Inc. entered the contract and the company receives a margin call. To avoid closing out the position, the company should deposit:
$15.
A put option on a stock has an exercise price of $25, the stock is trading at $22, and the price of the put option is $3.50. The option is:
$3 in-the-money.
A trader sells one wheat futures contract, which is for 5,000 bushels of wheat, at $4 per bushel. The trader posts an initial margin of $1,500. If the required maintenance margin is $1,100, the trader would first receive a maintenance margin call at a wheat price closest to:
$4.08 per bushel.
Catherine Hutchison has bought a call option on a stock for $5, and the exercise price is $20. The current stock price is $27. Therefore, the option is:
$7 in-the-money.
Which of the following is not an example of a forward commitment?
A call option
The following statements about credit derivatives are true, except for:
A credit spread option is the most widely used type of credit derivative.
Which of the following statements is most accurate with respect to forward and futures contracts?
A futures contract is a type of forward agreement, but futures contracts have highly standardized contract terms.
Which of the following statements concerning futures and forward contracts is most accurate?
A futures contract is a type of forward commitment that has standardized contract terms.
Which of the following statements is most accurate?
A long position in an options transaction, regardless if the option is a call or a put, can both provide gains and protect against losses. The option buyer (long) pays a premium in order to produce gains if the underlying moves in the right direction (speculative trade) or to protect the value of an existing exposure (hedge trade).
A university endowment finance committee is concerned with portfolio level risk management techniques. Which of the following instruments would they be least likely to use in their risk management process?
A stock option contract.
Which of the following is true of swaps?
A swap is more or less just a series of forwards.
Which of the following derivatives requires ongoing cash payments between the long buyer and short seller of the instrument?
A swap.
The clearinghouse of a futures exchange:
Acts as counterparty to each transaction on the exchange.
Which of the following is least likely an example of a derivative?
An exchange-traded equity fund.
The following are purposes of derivative markets, except for:
Arbitrage.
Over-the-counter (OTC) derivatives relative to exchange-traded derivatives generally:
Are less transparent.
Which of the following instruments is least likely an example of an over-the-counter derivative?
Call option.
Banks and investment banking firms engage in derivative transactions that make markets. Buying and selling derivatives is a natural extension of the activity these banks normally undertake in financial markets. These commercial and investment banks are also called:
Derivative dealers.
The derivatives markets can help price discovery since:
Derivatives prices may react more quickly to new information than the spot market prices.
Which of the following is not a criticism or misuse of derivatives?
Derivatives require little to no investment.
Arbitrage is a process through which an investor can buy an asset or combination of assets at one price and concurrently sell at a higher price. Which of the following does arbitrage prevent?
Different selling prices for two assets with identical payoffs
An investor believes that the S&P index is going to decline sharply over the next 2 years. Which of the following strategies would be consistent with this view?
Enter into a 2-year equity swap to receive a fixed payment and pay an equity payment based on the performance of the S&P index.
_________________ are created, authorized, and traded on an organized facility for trading derivatives. They are standardized instruments with respect to certain terms and conditions of the contract.
Exchange-traded derivatives
The least appropriate way to close a futures position is by:
Exercise.
Brent manages a portfolio of corporate fixed-income assets and he is concerned about the potential for a large recession. If he wants to protect his portfolio with derivatives, which of the following derivatives would he least likely use?
Fixed-income futures contracts.
Which of the following is not a difference between forward commitments and contingent claims?
Forward commitments have a higher degree of leverage than contingent claims.
Daily settlement in the futures market refers to:
Gains and losses being added or deducted from the margin position held with a trader on a daily basis.
Consider the following statements about derivatives. If the price of an asset decreases after inception of the contract, then the buyer benefits while the seller loses out. Futures are generally immune to counterparty credit risk. In a credit default swap (CDS), the buyer obtains protection against default risk embedded in the reference obligation. Which of the following is most likely correct?
II and III.
Which of the following gives the correct definition of risk management?
It is the process of identifying the desired level of risk, identifying the actual level of risk, and altering the latter equal to the former.
Which of the following statements about forward commitments is most accurate?
It refers to a contract pertaining to the future sale or purchase of a security with a specified price and date.
Which of the following provides the best definition for a credit default swap?
It transfers credit risk related to an underlying entity or a portfolio of underlying entities from one party to another without transferring the underlying(s).
The profit of a seller of a put option is:
Limited to the amount of the option premium.
The buyer in a credit default swap:
Makes periodic payments to the protection seller.
Which of the following statements is not true with respect to arbitrage?
Markets in which arbitrage opportunities are nonexistent are relatively inefficient markets.
The value of a put option at expiry is:
Maximum of (1) zero and (2) exercise price minus stock price.
The following statements regarding futures contracts are true, except for:
On any day in which the amount of money in the margin account at the end of the day falls below the maintenance margin requirement, the trader must deposit sufficient funds to bring the balance back up to the maintenance margin requirement.
Consider the following statements about options. Statement 1: As the option buyer does not have to exercise the option beyond the initial payment of the premium, there is no obligation of the option buyer to the option seller. Statement 2: Default in options is possible only from the long to the short. Statement 3: The put holder should exercise the put at expiration if the underlying asset is worth less than the exercise price. Which of the following is most likely?
Only Statements 1 and 3 are correct.
Contingent claims are derivatives in which payoffs occur if a specific event happens. Which of the following is a contingent claim?
Options
Which of the following is not a type of forward commitment contract?
Options contract.
Which of the following is least likely to be an example of a forward commitment?
Options.
A Kansas farmer sells short a 3-month futures contract for 1 million bushels of wheat he expects to produce and deliver at a price of $5/bushel even though the current price of wheat is $6/bushel. What is this farmer most likely trying accomplish with this futures trade?
Protect against falling prices.
The least likely benefit for an investor if a market includes financial derivatives is:
Regulatory protection.
A holder takes a long position in 10 futures contract with an initial margin requirement of $10 per contract and a maintenance margin requirement of $7 per contract. Upon the opening of the transaction, the futures price is $100. The settlement price after the first day is at $98.20. After the second day, it further decreased to $96.00. As of the third day, it increased to $102.00. Identify the ending balance of the account on the second and third day. Assume the following additional information: The trader puts in the exact initial margin requirement at the beginning. The trader meets all margin calls. Does not withdraw any excess margin. Day 2Day 3a. $40$80b. $60$96c. $60$160
Row C
If a trader has opened a position by buying a call option, he can close the position by:
Selling a call.
Which of the following statements is correct?
Settlement is a practice wherein the gains and losses on a futures position are credited and charged to the trader's margin account on a daily basis.
Which of the following statements is most accurate concerning two options that have the same terms except that one is an American-style option and one is a European-style option?
The American-style option can be exercised at any point before expiry and is worth at least as much as the European-style option.
On April 10, 2016, Samuel Jackson, CFA, purchased a call option for 2,000 shares of Apple at $4.00 per share. Jackson paid $350 for the option that is exercisable at any time until May 10, 2016. On May 10, when Apple stocks were selling at $4.60, Jackson exercised the option. Which of the following statements is false?
The call option is European.
A put option grants the holder:
The choice to sell the underlying.
The value of a call option on a stock at expiration is:
The greater of (1) zero and (2) the stock price minus the exercise price.
The following statements regarding swaps are true, except for:
The participants on swaps consist mostly of individuals.
Which of the following is not true about the payoff of the holder of a short position in a forward contract?
The payoff is equal to the difference between the spot price of the underlying at the contract initiation and the forward price of the underlying.
Which of the following statements about derivative contracts is false?
The price for immediate purchase of an underlying asset is called the forward price.
A hedge portfolio consists of a dividend-paying stock and a forward contract to eliminate the uncertainty of the selling price of the stock. The forward price should be such that it forces the hedge portfolio to earn a return equal to:
The risk-free rate minus the dividend yield.
An investor deposits an initial margin of $20,000 for a futures trade and the next day makes a $2,000 loss on the trade. The next day, he makes a further loss of $2,000. If the maintenance requirement is $15,000, then he must deposit a variation margin of:
There is no requirement to pay a variation margin.
Which of the following attributes least likely characterizes options?
They are based on forward commitments.
Which of the following statements regarding exchange-traded derivatives is least likely correct?
They are customized instruments.
Which of the following features is least likely true of over-the-counter (OTC) derivatives?
They are less liquid than the derivatives traded in the exchange market.
A forward contract:
has zero value at the start.
As compared to over-the-counter derivatives, exchange-traded derivatives are more likely to exhibit:
higher transparency.
As compared to the underlying, derivatives are least likely to exhibit:
lower relative degree of leverage.
The notional principal in a plain vanilla interest rate swap is:
never paid.
The value of a European call option at the time of expiration is equal to the:
payoff at the time of exercising the call option.
In a plain-vanilla interest rate swap:
there is an element of counterparty credit risk in swaps, as the party that owes the greater amount can default.
