FINC 381 Review

A stock with a current market price of $50 and a strike price of $45 has an associated call option priced at $6.50. This call has an intrinsic value of ______ and a time value of _____. A. $5; $1.50 B. $1.50; $5 C. $0; $6.50 D. $6.50; $0

A. $5; $1.50

Which one of the following refers to the daily settlement of obligations on future positions? A. Marking to market B. The convergence property C. The open interest D. The triple witching hour

A. Marking to market

Which of the following provides the profit to a short position at contract maturity? A. Original futures price - Spot price at maturity B. Spot price at maturity - Original futures price C. Zero D. Basis

A. Original futures price - Spot price at maturity

The hedge ratio is often called the option's _______. A. delta B. gamma C. theta D. beta

A. delta

The Black-Scholes hedge ratio for a long call option is equal to __________. A.N(d1) B.N(d2) C.N(d1) - 1 D.N(d2) - 1

A.N(d1)

A futures contract __________. A. is a contract to be signed in the future by the buyer and the seller of a commodity B. is an agreement to buy or sell a specified amount of an asset at a predetermined price on the expiration date of the contract C. is an agreement to buy or sell a specified amount of an asset at whatever the spot price happens to be on the expiration date of the contract D. gives the buyer the right, but not the obligation, to buy an asset some time in the future

B. is an agreement to buy or sell a specified amount of an asset at a predetermined price on the expiration date of the contract

Which one of the following is a true statement? A. A margin deposit can only be met by cash B. All futures contracts require the same margin deposit C. The maintenance margin is the amount of money you post with your broker when you buy or sell a futures contract D. The maintenance margin is the value of the margin account below which the holder of a futures contract receives a margin call

D. The maintenance margin is the value of the margin account below which the holder of a futures contract receives a margin call

Interest rate futures contracts exist for all of the following except __________. A. Federal funds B. Eurodollars C. banker's acceptances D. repurchase agreements

D. repurchase agreements

Which one of the following is a true statement? A. A margin deposit can be met only by cash. B. All futures contracts require the same margin deposit. C. The maintenance margin is the amount of money you post with your broker when you buy or sell a futures contract. D. The maintenance margin is the value of the margin account below which the holder of a futures contract receives a margin call.

The maintenance margin is the value of the margin account below which the holder of a futures contract receives a margin call.

If the S&P 500 Index futures contract is overpriced relative to the spot S&P 500 Index, you should __________. A. buy all the stocks in the S&P 500 and write put options on the S&P 500 Index B. sell all the stocks in the S&P 500 and buy call options on S&P 500 Index C. sell S&P 500 Index futures and buy all the stocks in the S&P 500 D. sell short all the stocks in the S&P 500 and buy S&P 500 Index futures

sell S&P 500 Index futures and buy all the stocks in the S&P 500

The current stock price of KMW is $27, the risk-free rate of return is 4%, and the standard deviation is 30%. What is the price of a 63-day call option with an exercise price of $25? A. $2.50 B. $2.65 C. $2.89 D. $3.12

B. $2.65

The intrinsic value of an out of the money call option ___________. A. is negative B. is positive C. is zero D. can not be determined

C. is zero

A bank has made long term fixed rate mortgages and has financed them with short term deposits. To hedge out the bank's interest rate risk they could ________. A. sell T-bond futures B. buy T-bond futures C. buy stock index futures D. sell stock index futures

A. sell T-bond futures

You are considering purchasing a put option on a stock with a current price of $33. The exercise price is $35, and the price of the corresponding call option is $2.25. According to the put-call parity theorem, if the risk-free rate of interest is 4% and there are 90 days until expiration, the value of the put should be ____________. A. $2.25 B. $3.91 C. $4.05 D. $5.52

B. $3.91

You would like to hold a protective put position on the stock of Avalon Corporation to lock in a guaranteed minimum value of $50 at year-end. Avalon currently sells for $50. Over the next year, the stock price will increase by 10% or decrease by 10%. The T-bill rate is 5%. Unfortunately, no put options are traded on Avalon Co. Suppose the desired put options with X = 50 were traded. What would be the hedge ratio for the option? A. -1 B. -.5 C. .5 D. 1

B. -.5

Which of the following provides the profit to a long position at contract maturity? A. Original futures price - Spot price at maturity B. Spot price at maturity - Original futures price C. Zero D. Basis

B. Spot price at maturity - Original futures price

Violation of the spot-futures parity relationship results in _______________. A. fines and other penalties imposed by the SEC B. arbitrage opportunities for investors who spot them C. suspension of delivery privileges D. suspension of trading

B. arbitrage opportunities for investors who spot them

A __________ is an option valuation model based on the assumption that stock prices can move to only two values over any short time period. A. nominal model B. binomial model C. time model D. Black-Scholes model

B. binomial model

According to the put-call parity theorem, the payoffs associated with ownership of a call option can be replicated by __________________. A. shorting the underlying stock, borrowing the present value of the exercise price, and writing a put on the same underlying stock and with the same exercise price B. buying the underlying stock, borrowing the present value of the exercise price, and buying a put on the same underlying stock and with the same exercise price C. buying the underlying stock, borrowing the present value of the exercise price, and writing a put on the same underlying stock and with the same exercise price D. shorting the underlying stock, lending the present value of the exercise price and buying a put on the same underlying stock and with the same exercise price

B. buying the underlying stock, borrowing the present value of the exercise price, and buying a put on the same underlying stock and with the same exercise price

Margin requirements for futures contracts can be met by ______________. A. cash only B. cash or highly marketable securities such as Treasury bills C. cash or any marketable securities D. cash or warehouse receipts for an equivalent quantity of the underlying commodity

B. cash or highly marketable securities such as Treasury bills

All else equal, call option values are _____ if the _____ is lower.S-83036 A. higher; stock price B. higher; exercise price C. lower; dividend payout D. higher; lower volatility.

B. higher; exercise price

A person with a long position in a commodity futures contract wants the price of the commodity to ______. A. decrease substantially B. increase substantially C. remain unchanged D. increase or decrease substantially

B. increase substantially

The daily settlement of obligations on futures positions is called _____________. A. a margin call B. marking to market C. a variation margin check D. the initial margin requirement

B. marking to market

The daily settlement of obligations on futures positions is called _____________. A. a margin call B. marking to market C. a variation margin check D. initial margin requirement

B. marking to market

A put option with several months until expiration has a strike price of $55 when the stock price is $50. The option has _____ intrinsic value and _____ time value. A. negative; positive B. positive; positive C. zero; zero D. zero; positive

B. positive; positive

A corporation will be issuing bonds in 6 months and the Treasurer is concerned about unfavorable interest rate moves in the interim. The best way for her to hedge the risk is to _________________. A. buy T-bond futures B. sell T-bond futures C. buy stock index futures D. sell stock index futures

B. sell T-bond futures

If you expect a stock market downturn, one potential defensive strategy would be to __________. A. buy stock index futures B. sell stock index futures C. buy stock index options D. sell foreign exchange futures

B. sell stock index futures

A stock is selling for $75 and it will be either $90 or $70 next year. RF rate is 5% and the exercise price is $80. The call is currently selling for $4.50. What will be the arbitrage profit from this per call? A. $0 B. -$0.50 C. $0.35 D. $1.25

C. $0.35

A 1-year gold futures contract is selling for $1,645. Spot gold prices are $1,592 and the 1-year risk-free rate is 3%. The arbitrage profit implied by these prices is _____________. A. $3.27 B. $4.39 C. $5.24 D. $6.72

C. $5.24

Which one of the following contracts requires no cash to change hands when initiated? A. Listed put option B. Short futures contract C. Forward contract D. Listed call option

C. Forward contract

If you know that a call option will be profitably exercised, then the Black-Scholes model price will simplify to _______. A. S0 - X B. X - S0 C. S0 - PV(X) D. PV(X) - S0

C. S0 - PV(X)

Forward contracts _________ traded on an organized exchange, and futures contracts __________ traded on an organized exchange. A. are; are B. are; are not C. are not; are D. are not; are not

C. are not; are

An investor would want to __________ to exploit an expected fall in interest rates. A. sell S&P 500 Index futures B. sell Treasury-bond futures C. buy Treasury-bond futures D. buy wheat futures

C. buy Treasury-bond futures

An investor would want to __________ to exploit an expected fall in interest rates. A. sell S&P 500 index futures B. sell treasury bond futures C. buy treasury bond futures D. buy wheat futures

C. buy treasury bond futures

In the futures market the short position's loss is ___________ the long position's gain. A. greater than B. less than C. equal to D. sometimes less than and sometimes greater than

C. equal to

A hedge ratio of 0.70 implies that a hedged portfolio should consist of ________. A. long .70 calls for each short stock B. long .70 shares for each long call C. long .70 shares for each short call D. short .70 calls for each long stock

C. long .70 shares for each short call

If an asset price declines, the investor with a _______ is exposed to the largest potential loss. A. long call option B. long put option C. long futures contract D. short futures contract

C. long futures contract

An established value below which a trader's margin may not fall is called the ________. A. daily limit B. daily margin C. maintenance margin D. convergence limit

C. maintenance margin

You would like to hold a protective put position on the stock of Avalon Corporation to lock in a guaranteed minimum value of $50 at year-end. Avalon currently sells for $50. Over the next year, the stock price will increase by 10% or decrease by 10%. The T-bill rate is 5%. Unfortunately, no put options are traded on Avalon Co. What portfolio position in stock and T-bills will ensure you a payoff equal to the payoff that would be provided by a protective put with X = $50? A. ½ share of stock and $25 in bills B. 1 share of stock and $50 in bills C. ½ share of stock and $26.19 in bills D. 1 share of stock and $25 in bills

C. ½ share of stock and $26.19 in bills

The stock price of Harper Corp. is $33 today. The risk-free rate of return is 6%, and Harper Corp. pays no dividends. A put option on Harper Corp. stock with an exercise price of $30 and an expiration date 73 days from now is worth $.95 today. A call option on Harper Corp. stock with an exercise price of $30 and the same expiration date should be worth __________ today. A. $2.25 B. $3.14 C. $3.99 D. $4.31

D. $4.31

A market timer now believes that the economy will soften over the rest of the year as the housing market slump continues and he also believes that foreign investors will stop buying U.S. fixed income securities in such large quantities as they have in the past. One way the timer could take advantage of this forecast is to ________________. A. buy T-bond futures and sell stock index futures B. sell T-bond futures and but stock index futures C. buy stock index futures and buy T-bond futures D. sell stock index futures and sell T-bond futures

D. sell stock index futures and sell T-bond futures

A market timer now believes that the economy will soften over the rest of the year as the housing market slump continues, and she also believes that foreign investors will stop buying U.S. fixed-income securities in the large quantities that they have in the past. One way the timer could take advantage of this forecast is to ________________. A. buy T-bond futures and sell stock-index futures B. sell T-bond futures and buy stock-index futures C. buy stock-index futures and buy T-bond futures D. sell stock-index futures and sell T-bond futures

D. sell stock-index futures and sell T-bond futures

A call option with several months until expiration has a strike price of $55 when the stock price is $50. The option has _____ intrinsic value and _____ time value. A. negative; positive B. positive; negative C. zero; zero D. zero; positive

D. zero; positive