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Preguntas del test (199)
1A one-year forward contract is an agreement where
- AOne side has the right to buy an asset for a certain price in one year’s time.
- BOne side has the obligation to buy an asset for a certain price in one year’s time.
- COne side has the obligation to buy an asset for a certain price at some time during the next year.
- DOne side has the obligation to buy an asset for the market price in one year’s time
2Which of the following is NOT true
- Ao When a CBOE call option on IBM is exercised, IBM issues more stock
- Bo An American option can be exercised at any time during its life
- Co An call option will always be exercised at maturity if the underlying asset price is greater than the strike price
- Do A put option will always be exercised at maturity if the strike price is greater than the underlying asset price
35. Which of the following is true about a long forward contract
- Ao The contract becomes more valuable as the price of the asset declines
- Bo The contract becomes more valuable as the price of the asset rises
47. Which of the following is NOT true
- Ao A put option gives the holder the right to sell an asset by a certain date for a certain price
- Bo The holder of a call or put option must exercise the right to sell or buy an asset
- Co The holder of a forward contract is obligated to buy or sell an asset
- Do A call option gives the holder the right to buy an asset by a certain date for a certain price
58. A trader has a portfolio worth $5 million that mirrors the performance of a stock index. The stock index is currently 1,250. Futures contracts trade on the index with one contract being on 250 times the index. To remove market risk from the portfolio the trader should
- Ao Buy 16 contracts
- Bo Sell 16 contracts
- Co Buy 20 contracts
- Do Sell 20 contracts
610. Which of the following is NOT true about call and put options:
- Ao An American option can be exercised at any time during its life
- Bo A European option can only be exercised only on the maturity date
- Co Investors must pay an upfront price (the option premium) for an option contract
- Do The price of a call option increases as the strike price increases
711. Which of the following describes European options?
- Ao Prices in Euros
- Bo Exercisable only at maturity
- Co Calls (there are no European puts)
- Do Sold in Europe
812. 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
- Ao A short position in a call option
- Bo A short position in a put option
- Co A long position in a put option
- Do None of the above
914. The price of a stock on July 1 is $57. A trader buys 100 call options on the stock with a strike price of $60 when the option price is $2. The options are exercised when the stock price is $65. The trader’s net profit is
- Ao 700
- Bo 500
- Co 300
- Do 600
1015. A one-year call option on a stock with a strike price of $30 costs $3; a one-year put option on the stock with a strike price of $30 costs $4. Suppose that a trader buys two call options and one put option. The breakeven stock price above which the trader makes a profit is
- Ao 35
- Bo 40
- Co 30
- Do 36
1116. A one-year call option on a stock with a strike price of $30 costs $3; a one-year put option on the stock with a strike price of $30 costs $4. Suppose that a trader buys two call options and one put option. The breakeven stock price below which the trader makes a profit is
- Ao 28
- Bo 26
- Co 20
- Do 25
1217. 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
- Ao The investor has made a gain of $2,000
- Bo The investor has made a loss of $2,000
- Co The investor has made a gain of $4,000
- Do The investor has made a loss of $4,000
1318. 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
- Ao 55
- Bo 50
- Co 45
- Do 46
1419. 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.
- Ao 0
- Bo 1000
- Co 3000
- Do 4000
1520. 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.
- Ao 0
- Bo 1000
- Co 3000
- Do 4000
1622. Which of the following is true
- Ao Futures contracts are traded on exchanges, but forward contracts are not.
- Bo Neither futures contracts nor forward contracts are traded on exchanges
- Co Both forward and futures contracts are traded on exchanges.
- Do Forward contracts are traded on exchanges, but futures contracts are not.
1723. A haircut of 20% means that
- Ao A bond with a market value of $100 is considered to be worth $83.3 when used to satisfy a collateral request
- Bo A bond with a face value of $100 is considered to be worth $83.3 when used to satisfy a collateral request
- Co A bond with a face value of $100 is considered to be worth $80 when used to satisfy a collateral request
- Do A bond with a market value of $100 is considered to be worth $80 when used to satisfy a collateral request
1824. The frequency with which futures margin accounts are adjusted for gains and losses is
- Ao Daily
- Bo Weekly
- Co Monthly
- Do Quarterly
1925. Which of the following is NOT true
- Ao Futures contracts nearly always last longer than forward contracts
- Bo Futures contracts are standardized; forward contracts are not.
- Co Delivery or final cash settlement usually takes place with forward contracts; the same is not true of futures contracts.
- Do Forward contracts usually have one specified delivery date; futures contract often have a range of delivery dates.
2027. 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?
- Ao Decrease by one
- Bo Decrease by two
- Co Increase by one
- Do No change
2128. Clearing houses are
- Ao Never used in futures markets and sometimes used in OTC markets
- Bo Used in OTC markets, but not in futures markets
- Co Always used in futures markets and sometimes used in OTC markets
- Do Always used in both futures markets and OTC markets
2229. Which of the following best describes central clearing parties
- Ao Help market participants to value derivative transactions
- Bo Must be used for all OTC derivative transactions
- Co Are used for futures transactions
- Do Perform a similar function to exchange clearing houses
2330. For a futures contract trading in April 2012, the open interest for a June 2012 contract, when compared to the open interest for Sept 2012 contracts, is usually
- Ao Higher
- Bo Lower
- Co The same
- Do Equally likely to be higher or lower
2431. Margin accounts have the effect of
- Ao Reducing the risk of one party regretting the deal and backing out
- Bo Ensuring funds are available to pay traders when they make a profit
- Co Reducing systemic risk due to collapse of futures markets
- Do All of the above
2532. Who initiates delivery in a corn futures contract
- Ao The party with the long position
- Bo The party with the short position
- Co Either party
- Do The exchange
2633. Which of the following are cash settled
- Ao All futures contracts
- Bo All option contracts
- Co Futures on commodities
- Do Futures on stock indices
2734. In the corn futures contract a number of different types of corn can be delivered (with price adjustments specified by the exchange) and there are a number of different delivery locations. Which of the following is true
- Ao This flexibility tends increase the futures price.
- Bo This flexibility tends decrease the futures price.
- Co This flexibility may increase and may decrease the futures price.
- Do This flexibility has no effect on the futures price
2835. A company enters into a short futures contract to sell 50,000 units of a commodity for 70 cents per unit. The initial margin is $4,000 and the maintenance margin is $3,000. What is the futures price per unit above which there will be a margin call?
- Ao 78 cents
- Bo 76 cents
- Co 74 cents
- Do 72 cents
2936. A company enters into a long futures contract to buy 1,000 units of a commodity for $60 per unit. The initial margin is $6,000 and the maintenance margin is $4,000. What futures price will allow $2,000 to be withdrawn from the margin account?
- Ao 58
- Bo 64
- Co 62
- Do 66
3037. With bilateral clearing, the number of agreements between four dealers, who trade with each other, is
- Ao 6
- Bo 2
- Co 12
3138. The price of a stock on February 1 is $48. A trader sells 200 put options on the stock with a strike price of $40 when the option price is $2. The options are exercised when the stock price is $39. The trader’s net profit or loss is
- Ao Loss of $800
- Bo Gain of $200
- Co Loss of $900
- Do Loss of $200
3239. The price of a stock on February 1 is $124. A trader sells 200 put options on the stock with a strike price of $120 when the option price is $5. The options are exercised when the stock price is $110. The trader’s net profit or loss is
- Ao Gain of $1,000
- Bo Loss of $2,800
- Co Loss of $1,000
- Do Loss of $2,000
3340. 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
- Ao Loss of $1,000
- Bo Loss of $2,000
- Co Gain of $200
- Do Gain of $,1000
3441. The price of a stock is $67. A trader sells 5 put option contracts on the stock with a strike price of $70 when the option price is $4. The options are exercised when the stock price is $69. What is the trader’s net profit or loss?
- Ao Loss of $1,500
- Bo Loss of $500
- Co Gain of $1,500
- Do Loss of $1,000
3542. Which of the following is NOT traded by the CBOE?
- Ao Weeklys
- Bo Monthlys
- Co Binary options
- Do DOOM options
3643. Which of the following are true for CBOE stock options?
- Ao The initial margin and maintenance margin are determined by formulas and are different
- Bo The maintenance margin is usually about 75% of the initial margin
- Co There are no margin requirements
- Do The initial margin and maintenance margin are determined by formulas and are equal
3744. An investor has exchange-traded put options to sell 100 shares for $20. There is a $1 cash dividend. Which of the following is then the position of the investor?
- Ao The investor has put options to sell 100 shares for $20
- Bo The investor has put options to sell 100 shares for $19
- Co The investor has put options to sell 105 shares for $19
- Do The investor has put options to sell 105 shares for $19.05
3845. 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?
- Ao Put options to sell 100 shares for $20
- Bo Put options to sell 100 shares for $10
- Co Put options to sell 200 shares for $10
- Do Put options to sell 200 shares for $20
3946. An investor has exchange-traded put options to sell 100 shares for $20. There is 25% stock dividend. Which of the following is the position of the investor after the stock dividend?
- Ao Put options to sell 100 shares for $20
- Bo Put options to sell 75 shares for $25
- Co Put options to sell 125 shares for $15
- Do Put options to sell 125 shares for $16
4047. 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?
- Ao When the stock price is below $60
- Bo When the stock price is below $64
- Co When the stock price is below $54
- Do When the stock price is below $50
4148. Which of the following must post margin?
- Ao The seller of an option
- Bo The buyer of an option
- Co The seller and the buyer of an option
- Do Neither the seller nor the buyer of an option
4249. Which of the following describes a call option?
- Ao The right to buy an asset for a certain price
- Bo The obligation to buy an asset for a certain price
- Co The right to sell an asset for a certain price
4351. Which of the following describes a short position in an option?
- Ao A position in an option lasting less than one month
- Bo A position in an option lasting less than three months
- Co A position in an option lasting less than six months
- Do A position where an option has been sold
4452. Which of the following describes a long position in an option?
- Ao A position where there is more than one year to maturity
- Bo A position where there is more than five years to maturity
- Co A position where an option has been purchased
- Do A position that has been held for a long time
4553. Which of the following is an example of an option class?
- Ao All calls on a certain stock
- Bo All calls with a particular strike price on a certain stock
- Co All calls with a particular time to maturity on a certain stock
- Do All calls with a particular time to maturity and strike price on a certain stock
4654. A trader buys a call and sells a put with the same strike price and mature date. What is the position equivalent to?
- Ao A long forward
- Bo A short forward
- Co Buying the asset
- Do None of the above
4755. When a six-month option is purchased
- Ao The price must be paid in full
- Bo Up to 25% of the option price can be borrowed using a margin account
- Co Up to 75% of the option price can be borrowed using a margin account
- Do Up to 50% of the option price can be borrowed using a margin account
4856. Consider a put option and a call option with the same strike price and time to maturity. Which of the following is true?
- Ao It is possible for both options to be in the money
- Bo It is possible for both options to be out of the money
- Co One of the options must be in the money
- Do One of the options must be either in the money or at the money
4957. Which of the following describes a difference between a warrant and an exchange-traded stock option?
- Ao In a warrant issue, someone has guaranteed the performance of the option seller in the event that the option is exercised
- Bo Exchange-traded stock options have a strike price
- Co The number of warrants is fixed whereas the number of exchange-traded options in existence depends on trading
- Do Warrants cannot be traded after they have been purchased
5058. Which of the following is true?
- Ao A long call is the same as a short put
- Bo A call on a stock plus a stock the same as a put
- Co A short call is the same as a long put
- Do None of the above
5159. Which of the following describes LEAPS?
- Ao Options which are partly American and partly European
- Bo Options on the average stock price during a period of time
- Co Options where the strike price changes through time
- Do Exchange-traded stock options with longer lives than regular exchange-traded stock options
5260. 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?
- Ao X is less than Y which is less than Z
- Bo Y is less than X which is less than Z
- Co X is less than Z which is less than Y
- Do Z is less than Y which is less than X
5361. The zero curve is upward 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?
- Ao X is less than Y which is less than Z
- Bo Y is less than X which is less than Z
- Co X is less than Z which is less than Y
- Do Z is less than Y which is less than X
5462. A company invests $1,000 in a five-year zero-coupon bond and $4,000 in a ten-year zero-coupon bond. What is the duration of the portfolio?
- Ao 6 years
- Bo 8 years
- Co 9 years
- Do 7 years
5563. Which of the following is NOT a theory of the term structure
- Ao Expectations theory
- Bo Market segmentation theory
- Co Liquidity preference theory
- Do Maturity preference theory
5665. Which of the following is true of LIBOR
- Ao The LIBOR rate is free of credit risk
- Bo It is a rate used when borrowing and lending takes place between banks
- Co It is subject to favorable tax treatment in the U.S.
- Do A LIBOR rate is lower than the Treasury rate when the two have the same maturity
5766. Which of the following is true?
- Ao When interest rates in the economy increase, all bond prices increase
- Bo As its coupon increases, a bond’s price decreases
- Co Longer maturity bonds are always worth more that shorter maturity bonds when the coupon rates are the same
- Do None of the above
5867. Which of the following is true of the fed funds rate
- Ao It is the same as the Treasury rate
- Bo It is an overnight interbank rate
- Co It is a rate for which collateral is posted
- Do It is a type of repo rate
5968. The six month and one-year rates are 3% and 4% per annum with semiannual compounding. Which of the following is closest to the one-year par yield expressed with semiannual compounding? (%)
- Ao 3.99
- Bo 3.97
- Co 3.96
- Do 3.98
6069. A repo rate is
- Ao An uncollateralized rate
- Bo A rate where the credit risk is relative high
- Co The rate implicit in a transaction where securities are sold and bought back later at a higher price
- Do None of the above
6170. An interest rate is 6% per annum with annual compounding. What is the equivalent rate with continuous compounding? (%)
- Ao 5.79
- Bo 5.83
- Co 6.21
- Do 6.18
6271. An interest rate is 12% per annum with semiannual compounding. What is the equivalent rate with quarterly compounding? (%)
- Ao 11.83
- Bo 11.77
- Co 11.66
- Do 11.92
6372. 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?
- Ao Increase of $2,500
- Bo Increase of $25,000
- Co Decrease of $25,000
- Do Decrease of $2,500
6473. Under liquidity preference theory, which of the following is always true?
- Ao The forward rate is higher than the spot rate when both have the same maturity.
- Bo Forward rates are unbiased predictors of expected future spot rates.
- Co The spot rate for a certain maturity is higher than the par yield for that maturity.
- Do Forward rates are higher than expected future spot rates
6574. 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.
- Ao 9.12
- Bo 9.02
- Co 8.88
- Do 8.63
6675. Bootstrapping involves
- Ao Calculating the yield on a bond
- Bo Working from short maturity instruments to longer maturity instruments determining zero rates at each step
- Co Working from long maturity instruments to shorter maturity instruments determining zero rates at each step
- Do The calculation of par yields
6776. The compounding frequency for an interest rate defines
- Ao The frequency with which interest is paid
- Bo A unit of measurement for the interest rate
- Co The relationship between the annual interest rate and the monthly interest rate
- Do None of the above
6877. An interest rate is 5% per annum with continuous compounding. What is the equivalent rate with semiannual compounding? (%)
- Ao 5.06
- Bo 5.03
- Co 4.94
- Do 4.97
6978. Which of following describes forward rates?
- Ao Interest rates implied by current zero rates for future periods of time
- Bo Interest rate earned on an investment that starts today and last for n-years in the future without coupons
- Co The coupon rate that causes a bond price to equal its par (or principal) value
- Do A single discount rate that gives the value of a bond equal to its market price when applied to all cash flows
7079. 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. (%)
- Ao 6.75
- Bo 7
- Co 7.25
- Do 7.5
7180. 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?
- Ao $19.67
- Bo $35.84
- Co $45.15
- Do $40.50
7281. Which of the following is NOT true?
- Ao Gold and silver are investment assets
- Bo Investment assets are held by significant numbers of investors for investment purposes
- Co The forward price of an investment asset can be obtained from the spot price, interest rates, and the income paid on the asset
- Do Investment assets are never held for consumption
7382. 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?
- Ao $40.50
- Bo $33.00
- Co $22.22
- Do $33.16
7483. Which of the following is NOT true about forward and futures contracts?
- Ao Forward contracts are more liquid than futures contracts
- Bo The futures contracts are traded on exchanges while forward contracts are traded in the over-the-counter market
- Co In theory forward prices and futures prices are equal when there is no uncertainty about future interest rates
- Do Taxes and transaction costs can lead to forward and futures prices being different
7584. Which of the following describes contango?
- Ao The futures price is below today’s spot price
- Bo The futures price is a declining function of the time to maturity
- Co The futures price is above the expected future spot price
- Do The futures price is below the expected future spot price
7685. Which of the following describes the way the futures price of a foreign currency is quoted by the CME group?
- Ao The number of U.S. dollars per unit of the foreign currency
- Bo The number of the foreign currency per U.S. dollar
- Co Some futures prices are always quoted as the number of U.S. dollars per unit of the foreign currency and some are always quoted the other way round
- Do There are no quotation conventions for futures prices
7786. Which of the following is true for a consumption commodity?
- Ao There is no limit to how high or low the futures price can be, except that the futures price cannot be negative
- Bo There is a lower limit to the futures price but no upper limit
- Co The futures price can be determined with reasonable accuracy from the spot price and interest rates
- Do There is an upper limit to the futures price but no lower limit, except that the futures price cannot be negative
7887. The spot price of an asset is positively correlated with the market. Which of the following would you expect to be true?
- Ao The forward price equals the expected future spot price.
- Bo The forward price is greater than the expected future spot price.
- Co The forward price is less than the expected future spot price.
- Do The forward price is sometimes greater and sometimes less than the expected future spot price.
7988. 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?
- Ao $1,000
- Bo $400
- Co $700
- Do $300
8089. What should a trader do when the one-year forward price of an asset is too low? Assume that the asset provides no income.
- Ao The trader should borrow the price of the asset, buy one unit of the asset and enter into a short forward contract to sell the asset in one year.
- Bo The trader should borrow the price of the asset, buy one unit of the asset and enter into a long forward contract to buy the asset in one year.
- Co The trader should short the asset, invest the proceeds of the short sale at the risk-free rate, enter into a short forward contract to sell the asset in one year
- Do 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
8190. 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?
- Ao 0.707
- Bo 0.7177
- Co 0.7249
- Do 0.693
8291. Which of the following is NOT a reason why a short position in a stock is closed out?
- Ao The investor with the short position chooses to close out the position
- Bo The lender of the shares issues instructions to close out the position
- Co The broker is no longer able to borrow shares from other clients
- Do The investor does not maintain margins required on his/her margin account
8392. 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?
- Ao +$2.00
- Bo −$2.00
- Co $1.96
- Do -$1.96
8493. Which of the following is an argument used by Keynes and Hicks?
- Ao If hedgers hold long positions and speculators holds short positions, the futures price will tend to be lower than today’s spot price
- Bo If hedgers hold long positions and speculators holds short positions, the futures price will tend to be higher than the expected future spot price
- Co If hedgers hold long positions and speculators holds short positions, the futures price will tend to be higher than today’s spot price
- Do If hedgers hold long positions and speculators holds short positions, the futures price will tend to be lower than the expected future spot price
8594. Which of the following is a consumption asset?
- Ao The Canadian dollar
- Bo Copper
- Co IBM stock
- Do The S&P 500 index
8695. Which of the following describes a known dividend yield on a stock?
- Ao The size of the dividend payments each year is known
- Bo Dividends per year as a percentage of today’s stock price are known
- Co Dividends will yield a certain return to a person buying the stock today
- Do Dividends per year as a percentage of the stock price at the time when dividends are paid are known
8796. Which of the following describes the way the forward price of a foreign currency is quoted?
- Ao The number of U.S. dollars per unit of the foreign currency
- Bo The number of the foreign currency per U.S. dollar
- Co 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
- Do There are no quotation conventions for forward prices
8897. Which of the following is true?
- Ao The convenience yield is always positive for an investment asset.
- Bo The convenience yield measures the average return earned by holding futures contracts
- Co The convenience yield is always negative for a consumption asset.
- Do The convenience yield is always positive or zero.
8998. As inventories of a commodity decline, which of the following is true?
- Ao The one-year futures price as a percentage of the spot price increases
- Bo The one-year futures price as a percentage of the spot price stays the same
- Co The one-year futures price as a percentage of the spot price decreases
- Do Any of the above can happen
9099. As the convenience yield increases, which of the following is true?
- Ao The one-year futures price as a percentage of the spot price increases
- Bo The one-year futures price as a percentage of the spot price decreases
- Co The one-year futures price as a percentage of the spot price stays the same
- Do Any of the above can happen
91100. Which of the following increases basis risk?
- Ao A large difference between the futures prices when the hedge is put in place and when it is closed out
- Bo Dissimilarity between the underlying asset of the futures contract and the hedger’s exposure
- Co A reduction in the time between the date when the futures contract is closed and its delivery month
- Do None of the above
92101. 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?
- Ao It provides a floor for the exchange rate that will be paid
- Bo It caps the exchange rate that will be paid
- Co It leads to a more predictable exchange rate being paid
- Do It leads to a better exchange rate being paid
93102. Which of the following is true?
- Ao The optimal hedge ratio is the slope of the best fit line when the spot price (on the y-axis) is regressed against the futures price (on the x-axis).
- Bo The optimal hedge ratio is the slope of the best fit line when the futures price (on the y-axis) is regressed against the spot price (on the x-axis).
- Co 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).
- Do The optimal hedge ratio is the slope of the best fit line when the change in the futures price (on the y-axis) is regressed against the change in the spot price (on the x-axis).
94103. On March 1 the price of a commodity is $1,000 and the December futures price is $1,015. On November 1 the price is $980 and the December futures price is $981. A producer of the commodity entered into a December futures contracts on March 1 to hedge the sale of the commodity on November 1. It closed out its position on November 1. What is the effective price (after taking account of hedging) received by the company for the commodity?
- Ao $1,001
- Bo $981
- Co $1,014
- Do 1016
95104. A company has a $36 million portfolio with a beta of 1.2. The futures price for a contract on an index is 900. Futures contracts on $250 times the index can be traded. What trade is necessary to increase beta to 1.8?
- Ao Long 192 contracts
- Bo Long 96 contracts
- Co Short 96 contracts
- Do Short 192 contracts
96105. Which of the following describes tailing the hedge?
- Ao A strategy where the hedge position is increased at the end of the life of the hedge
- Bo A strategy where the hedge position is increased at the end of the life of the futures contract
- Co A more exact calculation of the hedge ratio when forward contracts are used for hedging
- Do None of the above
97106. Which of the following best describes “stack and roll”?
- Ao Creates long-term hedges from short term futures contracts
- Bo Can avoid losses on futures contracts by entering into further futures contracts
- Co Involves buying a futures contract with one maturity and selling a futures contract with a different maturity
- Do Involves two different exposures simultaneously
98107. A silver mining company has used futures markets to hedge the price it will receive for everything it will produce over the next 5 years. Which of the following is true?
- Ao It is liable to experience liquidity problems if the price of silver falls dramatically
- Bo It is liable to experience liquidity problems if the price of silver rises dramatically
- Co It is liable to experience liquidity problems if the price of silver rises dramatically or falls dramatically
- Do The operation of futures markets protects it from liquidity problems
99108. Which of the following is a reason for hedging a portfolio with an index futures?
- Ao The investor believes the stocks in the portfolio will perform better than the market but is uncertain about the future performance of the market
- Bo The investor believes the stocks in the portfolio will perform better than the market and the market is expected to do well
- Co The portfolio is not well diversified and so its return is uncertain
- Do All of the above
100109. Which of the following best describes the capital asset pricing model?
- Ao Determines the amount of capital that is needed in particular situations
- Bo Is used to determine the price of futures contracts
- Co Relates the return on an asset to the return on a stock index
- Do Is used to determine the volatility of a stock index
101110. On March 1 a commodity’s spot price is $60 and its August futures price is $59. On July 1 the spot price is $64 and the August futures price is $63.50. A company entered into futures contracts on March 1 to hedge its purchase of the commodity on July 1. It closed out its position on July 1. What is the effective price (after taking account of hedging) paid by the company?
- Ao 59.5
- Bo 60.5
- Co 61.5
- Do 63.5
102111. A company has a $36 million portfolio with a beta of 1.2. The futures price for a contract on an index is 900. Futures contracts on $250 times the index can be traded. What trade is necessary to reduce beta to 0.9?
- Ao Long 192 contracts
- Bo Long 48 contracts
- Co Short 48 contracts
- Do Short 192 contracts
103112. Which of the following does NOT describe beta?
- Ao A measure of the sensitivity of the return on an asset to the return on an index
- Bo The slope of the best fit line when the return on an asset is regressed against the return on the market
- Co The hedge ratio necessary to remove market risk from a portfolio
- Do Measures correlation between futures prices and spot prices for a commodity
104113. 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?
- Ao The hedger’s position improves.
- Bo The hedger’s position worsens.
- Co The hedger’s position sometimes worsens and sometimes improves.
- Do The hedger’s position stays the same.
105114. Futures contracts trade with every month as a delivery month. A company is hedging the purchase of the underlying asset on June 15. Which futures contract should it use?
- Ao The June contract
- Bo The July contract
- Co The May contract
- Do The August contract
106115. A company will buy 1000 units of a certain commodity in one year. It decides to hedge 80% of its exposure using futures contracts. The spot price and the futures price are currently $100 and $90, respectively. If the spot price and the futures price in one year turn out to be $112 and $110, respectively. What is the average price paid for the commodity?
- Ao 92
- Bo 96
- Co 102
- Do 106
107116. Which of the following is true?
- Ao Gold producers should always hedge the price they will receive for their production of gold over the next three years
- Bo Gold producers can hedge by buying gold in the forward market
- Co Gold producers should always hedge the price they will receive for their production of gold over the next one year
- Do The hedging strategies of a gold producer should depend on whether it shareholders want exposure to the price of gold
108117. Suppose that the standard deviation of monthly changes in the price of commodity A is $2. The standard deviation of monthly changes in a futures price for a contract on commodity B (which is similar to commodity A) is $3. The correlation between the futures price and the commodity price is 0.9. What hedge ratio should be used when hedging a one month exposure to the price of commodity A?
- Ao 0.6
- Bo 0.67
- Co 1.45
- Do 0.9
109118. Which of the following is true?
- Ao Hedging can always be done more easily by a company’s shareholders than by the company itself
- Bo If all companies in an industry do not hedge, a company is liable increase its risk by hedging
- Co If all companies in an industry do not hedge, a company in the industry can reduce its risk by hedging
- Do If all companies in an industry hedge, a company in the industry can sometimes reduce its risk by choosing not to hedge
110119. 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.
- Ao 1.82
- Bo 1.85
- Co 1.92
- Do 1.88
111120. The most recent settlement bond futures price is 103.5. Which of the following four bonds is cheapest to deliver?
- Ao Quoted bond price = 110; conversion factor = 1.0400
- Bo Quoted bond price = 160; conversion factor = 1.5200
- Co Quoted bond price = 131; conversion factor = 1.2500.
- Do Quoted bond price = 143; conversion factor = 1.3500
112121. Which of the following is NOT an option open to the party with a short position in the Treasury bond futures contract?
- Ao The ability to deliver any of a number of different bonds
- Bo The wild card play
- Co The interest rate used in the calculation of the conversion factor
- Do The fact that delivery can be made any time during the delivery month
113122. An ultra T-bond futures contract is one where
- Ao Bonds with maturities less than 3 years can be delivered
- Bo Bonds with maturities less than 10 years can be delivered
- Co Bonds with maturities greater than 25 year can be delivered
- Do Bonds with maturities greater than 15 years can be delivered
114123. What is the quoted discount rate on a money market instrument?
- Ao The interest rate earned as a percentage of the initial price of a bond
- Bo The interest rate earned as a percentage of the average price of a bond
- Co The risk-free rate used to calculate the present value of future cash flows from a bond
- Do The interest rate earned as a percentage of the final face value of a bond
115124. Which of following is applicable to corporate bonds in the United States?
- Ao Actual/360
- Bo Actual/Actual
- Co 30/360
- Do Actual/365
116125. Which of the following day count conventions applies to US Treasury Bond?
- Ao Actual/Actual
- Bo 30/360
- Co Actual/365
- Do Actual/360
117126. 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?
- Ao 106
- Bo 106.02
- Co 105.98
- Do 106.04
118127. It is May 1. The quoted price of a bond with an 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?
- Ao 106
- Bo 106.02
- Co 105.98
- Do 106.04
119128. In the U.S. what is the longest maturity for 3-month Eurodollar futures contracts?
- Ao 2 years
- Bo 5 years
- Co 10 years
- Do 20 years
120129. 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?
- Ao $6
- Bo $150
- Co $60
- Do $600
121130. The bonds that can be delivered in a Treasury bond futures contract are
- Ao Assets that provide no income
- Bo Assets that provide a known cash income
- Co Assets that provide a known yield
- Do None of the above
122131. Which of the following is NOT true about duration?
- Ao It equals the weighted average of payment times for a bond, where weights are proportional to the present value of payments
- Bo The prices of two bonds with the same duration change by the same percentage amount when interest rate moves up by 100 basis points
- Co It equals the years-to-maturity for a zero coupon bond
- Do Equals the weighted average of individual bond durations for a portfolio, where weights are proportional to the present value of bond prices
123132. Duration matching immunizes a portfolio against
- Ao Any parallel shift in the yield curve
- Bo All shifts in the yield curve
- Co Changes in the steepness of the yield curve
- Do Small parallel shifts in the yield curve
124133. The conversion factor for a bond is approximately
- Ao The price it would have if all cash flows were discounted at 6% per annum
- Bo The price it would have if all cash flows were discounted at 8% per annum
- Co The price it would have if it paid coupons at 8% per annum
- Do The price it would have if it paid coupons at 6% per annum
125134. The time-to-maturity of a Eurodollars futures contract is 4 years and the time-to-maturity of the rate underlying the futures contract is 4.25 years. The standard deviation of the change in the short term interest rate, s = 0.011. What does the model in the text estimate as the difference between the futures and the forward interest rate?
- A1. 0.105%
- B3. 0.098%
- C4. 0.093%
- D2. 0.103%
126135. 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?
- Ao 100
- Bo 300
- Co 200
- Do 400
127136. Which of the following is true?
- Ao The futures rates calculated from a Eurodollar futures quote are always less than the corresponding forward rate
- Bo The futures rates calculated from a Eurodollar futures quote are always greater than the corresponding forward rate
- Co The futures rates calculated from a Eurodollar futures quote should equal the corresponding forward rate
- Do The futures rates calculated from a Eurodollar futures quote are sometimes greater than and sometimes less than the corresponding forward rate
128137. A trader uses 3-month Eurodollar futures to lock in a rate on $5 million for six months. How many contracts are required?
- Ao 5
- Bo 15
- Co 10
- Do 20
129138. How much is a basis point?
- Ao 0.01
- Bo 1E-3
- Co 1E-4
- Do 1.0000000000000001E-5
130139. A floating-for-fixed currency swap is equivalent to
- Ao Two interest rate swaps, one in each currency
- Bo A fixed-for-fixed currency swap and one interest rate swap
- Co A fixed-for-fixed currency swap and two interest rate swaps, one in each currency
- Do None of the above
131140. 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?
- Ao The early forward contracts underlying the swap have a positive value and the later ones have a negative value
- Bo The early forward contracts underlying the swap have a negative value and the later ones have a positive value
- Co Sometimes A is true and sometimes B is true
- Do The swap is designed so that all forward rates have zero value
132141. Which of the following is true?
- Ao Principals are not usually exchanged in a currency swap
- Bo Principals are not usually specified in a currency swap
- Co 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.
- Do The principal amounts usually flow in the same direction as interest payments at the beginning of a currency swap and in the opposite direction to interest payments at the end of the swap.
133142. 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?
- Ao 2.4%
- Bo 3.0%
- Co 2.7%
- Do 3.3%
134143. Which of the following is a use of a currency swap?
- Ao To exchange an investment in one currency for an investment in another currency
- Bo To exchange borrowing in one currency for borrowings in another currency
- Co To take advantage situations where the tax rates in two countries are different
- Do All of the above
135144. 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 the value of the swap to the party receiving a fixed rate of interest?
- Ao $74,250
- Bo −$11,250
- Co $103,790
- Do −$70,760
136145. 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?
- Ao −$7.15
- Bo −$9.15
- Co −$10.15
- Do −$8.15
137146. Which of the following describes the five-year swap rate?
- Ao The rate on a five-year loan to a AA-rated company
- Bo The rate that can be earned over five years from a series of short-term loans to A-rated companies
- Co The rate that can be earned over five years from a series of short-term loans to AA-rated companies
- Do The rate on a five-year loan to an A-rated company
138147. Which of the following describes the five-year swap rate?
- Ao The fixed rate of interest which a swap market maker is prepared to pay in exchange for LIBOR on a 5-year swap
- Bo The fixed rate of interest which a swap market maker is prepared to receive in exchange for LIBOR on a 5-year swap
- Co The average of A and B
- Do The higher of A and B
139148. The reference entity in a credit default swap is
- Ao The buyer of protection
- Bo The company or country whose default is being insured against
- Co The seller of protection
- Do None of the above
140149. Which of the following is a typical bid-offer spread on the swap rate for a plain vanilla interest rate swap?
- Ao 3 basis points
- Bo 8 basis points
- Co 13 basis points
- Do 18 basis points
141150. 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:
- Ao If company X defaults, the swap with company Y is null and void
- Bo If company X defaults, the swap with company Y continues
- Co The bank’s bid-offer spread is 0.5 basis points
- Do If company X defaults, the bank will be able to replace company X at no cost
142151. When LIBOR is used as the discount rate:
- Ao The value of a swap is worth zero immediately after a payment date
- Bo The value of a swap is worth zero immediately before a payment date
- Co The value of the floating rate bond underlying a swap is worth par immediately after a payment date
- Do The value of the floating rate bond underlying a swap is worth par immediately before a payment date
143152. Company X and Company Y have been offered the following rates: The fixed and floating rates for company X are 3.5% and 3-month LIBOR plus 10bp. For company Y these rates are 4.5% and 3-month LIBOR plus 30bp. 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?
- Ao 3-month LIBOR−30bp
- Bo 3.1%
- Co 3-month LIBOR−10bp
- Do 3.3%
144153. 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.
- Ao 0.00
- Bo 2.66
- Co 2.06
- Do 1.06
145154. Which of the following is true for an interest rate swap?
- Ao A swap is usually worth close to zero when it is first negotiated
- Bo Each forward rate agreement underlying a swap is worth close to zero when the swap is first entered into
- Co Comparative advantage is a valid reason for entering into the swap
- Do None of the above
146155. Which of the following describes the way a LIBOR-in-arrears swap differs from a plain vanilla interest rate swap?
- Ao Interest is paid at the beginning of the accrual period in a LIBOR-in-arrears swap
- Bo Interest is paid at the end of the accrual period in a LIBOR-in-arrears swap
- Co No floating interest is paid until the end of the life of the swap in a LIBOR-in-arrears swap, but fixed payments are made throughout the life of the swap
- Do Neither floating nor fixed payments are made until the end of the life of the swap
147156. A floating for floating currency swap is equivalent to
- Ao Two interest rate swaps, one in each currency
- Bo A fixed-for-fixed currency swap and one interest rate swap
- Co A fixed-for-fixed currency swap and two interest rate swaps, one in each currency
- Do None of the above
148157. 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?
- Ao The value of the swap to the company increases
- Bo The value of the swap to the company decreases
- Co The value of the swap does not change providing the swap rate remains the same
- Do The value of the swap can either increase or decrease
149158. Which of the following describes an interest rate swap?
- Ao The exchange of a fixed rate bond for a floating rate bond
- Bo A portfolio of forward rate agreements
- Co An agreement to exchange interest at a fixed rate for interest at a floating rate
- Do All of the above
150159. Which of the following describes a covered call?
- Ao A long call option on a stock plus a long position in the stock
- Bo A short call option on a stock plus a long position in the stock
- Co A long call option on a stock plus a short put option on the stock
- Do A short call option on a stock plus a short position in the stock
151160. What is the number of different option series used in creating a butterfly spread?
- A1
- B2
- C3
- D4
152161. How can a straddle be created?
- Ao Buy one call and one put with the same strike price and same expiration date
- Bo Buy one call and one put with different strike prices and same expiration date
- Co Buy two calls and one put with the same strike price and expiration date
- Do Buy one call and two puts with the same strike price and expiration date
153162. Six-month call options with strike prices of $35 and $40 cost $6 and $4, respectively. What is the maximum gain when a bull spread is created by trading a total of 200 options?
- Ao $100
- Bo $200
- Co $400
- Do $300
154163. 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 loss (after the cost of the options is taken into account)?
- Ao $100
- Bo $200
- Co $300
- Do $400
155164. 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)?
- Ao $100
- Bo $200
- Co $300
- Do $400
156165. Which of the following creates a bull spread?
- Ao Buy a low strike price call and sell a high strike price call
- Bo Buy a high strike price call and sell a low strike price call
- Co Buy a low strike price call and sell a high strike price put
- Do Buy a low strike price put and sell a high strike price call
157166. Which of the following creates a bull spread?
- Ao Buy a low strike price put and sell a high strike price put
- Bo Buy a high strike price put and sell a low strike price put
- Co Buy a high strike price call and sell a low strike price put
- Do Buy a high strike price put and sell a low strike price call
158167. Which of the following is true of a box spread?
- Ao It is a package consisting of a bull spread and a bear spread
- Bo It involves two call options and two put options
- Co It has a known value at maturity
- Do All of the above
159168. Which of the following creates a bear spread?
- Ao Buy a low strike price call and sell a high strike price call
- Bo Buy a high strike price call and sell a low strike price call
- Co Buy a low strike price call and sell a high strike price put
- Do Buy a low strike price put and sell a high strike price call
160169. Which of the following creates a bear spread?
- Ao Buy a low strike price put and sell a high strike price put
- Bo Buy a high strike price put and sell a low strike price put
- Co Buy a high strike price call and sell a low strike price put
- Do Buy a high strike price put and sell a low strike price call
161170. How can a strangle trading strategy be created?
- Ao Buy one call and one put with the same strike price and same expiration date
- Bo Buy one call and one put with different strike prices and same expiration date
- Co Buy one call and two puts with the same strike price and expiration date
- Do Buy two calls and one put with the same strike price and expiration date
162171. 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?
- Ao Neutral Calendar Spread
- Bo Bullish Calendar Spread
- Co Bearish Calendar Spread
- Do None of the above
163172. Which of the following is correct?
- Ao A calendar spread can be created by buying a call and selling a put when the strike prices are the same and the times to maturity are different
- Bo A calendar spread can be created by buying a put and selling a call when the strike prices are the same and the times to maturity are different
- Co A calendar 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
- Do 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
164173. 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?
- Ao The gain when the stock price is greater than $30 is less than the gain when the stock price is less than $20
- Bo The gain when the stock price is greater than $30 is greater than the gain when the stock price is less than $20
- Co The gain when the stock price is greater than $30 is the same as the gain when the stock price is less than $20
- Do It is incorrect to assume that there is always a gain when the stock price is greater than $30 or less than $20
165174. When the interest rate is 5% per annum with continuous compounding, which of the following creates a principal protected note worth $1000?
- Ao A one-year zero-coupon bond plus a one-year call option worth about $59
- Bo A one-year zero-coupon bond plus a one-year call option worth about $49
- Co A one-year zero-coupon bond plus a one-year call option worth about $39
- Do A one-year zero-coupon bond plus a one-year call option worth about $29
166175. Which of the following is correct?
- Ao A diagonal spread can be created by buying a call and selling a put when the strike prices are the same and the times to maturity are different
- Bo A diagonal spread can be created by buying a put and selling a call when the strike prices are the same and the times to maturity are different
- Co A diagonal 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
- Do 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
167176. Which of the following describes a protective put?
- Ao A long put option on a stock plus a long position in the stock
- Bo A long put option on a stock plus a short position in the stock
- Co A short put option on a stock plus a short call option on the stock
- Do A short put option on a stock plus a long position in the stock
168177. Which of the following is true for American options?
- Ao Put-call parity provides an upper and lower bound for the difference between call and put prices
- Bo Put call parity provides an upper bound but no lower bound for the difference between call and put prices
- Co Put call parity provides an lower bound but no upper bound for the difference between call and put prices
- Do There are no put-call parity results
169178. When the strike price increases with all else remaining the same, which of the following is true?
- Ao Both calls and puts increase in value
- Bo Both calls and puts decrease in value
- Co Calls increase in value while puts decrease in value
- Do Puts increase in value while calls decrease in value
170179. Which of the following describes a situation where an American put option on a stock becomes more likely to be exercised early?
- Ao Expected dividends increase
- Bo Interest rates decrease
- Co The stock price volatility decreases
- Do All of the above
171180. 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?
- Ao $9.91
- Bo $7.00
- Co $6.00
- Do $2.09
172181. 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?
- Ao $8.97
- Bo $6.97
- Co $3.06
- Do $1.12
173182. When dividends increase with all else remaining the same, which of the following is true?
- Ao Both calls and puts increase in value
- Bo Both calls and puts decrease in value
- Co Calls increase in value while puts decrease in value
- Do Puts increase in value while calls decrease in value
174183. Which of the following is true when dividends are expected?
- Ao Put-call parity does not hold
- Bo The basic put-call parity formula can be adjusted by subtracting the present value of expected dividends from the stock price
- Co The basic put-call parity formula can be adjusted by adding the present value of expected dividends to the stock price
- Do The basic put-call parity formula can be adjusted by subtracting the dividend yield from the interest rate
175184. 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?
- Ao $5.00
- Bo $5.98
- Co $4.98
- Do $3.98
176185. When the stock price increases with all else remaining the same, which of the following is true?
- Ao Both calls and puts increase in value
- Bo Both calls and puts decrease in value
- Co Calls increase in value while puts decrease in value
- Do Puts increase in value while calls decrease in value
177186. When interest rates increase with all else remaining the same, which of the following is true?
- Ao Both calls and puts increase in value
- Bo Both calls and puts decrease in value
- Co Calls increase in value while puts decrease in value
- Do Puts increase in value while calls decrease in value
178187. When volatility increases with all else remaining the same, which of the following is true?
- Ao Both calls and puts increase in value
- Bo Both calls and puts decrease in value
- Co Calls increase in value while puts decrease in value
- Do Puts increase in value while calls decrease in value
179188. 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?
- Ao The put price increases to $6.00
- Bo The put price decreases to $2.00
- Co The put price increases to $5.50
- Do It is possible that there is no effect on the put price
180189. Interest rates are zero. A European call with a strike price of $50 and a maturity of one year is worth $6. A European put with a strike price of $50 and a maturity of one year is worth $7. The current stock price is $49. Which of the following is true?
- Ao The call price is high relative to the put price
- Bo The put price is high relative to the call price
- Co Both the call and put must be mispriced
- Do None of the above
181190. Which of the following is NOT true? (Present values are calculated from the end of the life of the option to the beginning.)
- Ao An American put option is always worth less than the present value of the strike price
- Bo A European put option is always worth less than the present value of the strike price
- Co A European call option is always worth less than the stock price
- Do An American call option is always worth less than the stock price
182191. Which of the following best describes the intrinsic value of an option?
- Ao The value it would have if the owner had to exercise it immediately or not at all
- Bo The Black-Scholes-Merton price of the option
- Co The lower bound for the option’s price
- Do The amount paid for the option
183192. 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?
- Ao $4.00
- Bo $3.86
- Co $2.86
- Do $0.86
184193. When the time to maturity increases with all else remaining the same, which of the following is true?
- Ao European options always increase in value
- Bo The value of European options either stays the same or increases
- Co There is no effect on European option values
- Do European options are liable to increase or decrease in value
185194. Which of the following is the put-call parity result for a non-dividend-paying stock?
- Ao The European put price plus the European call price must equal the stock price plus the present value of the strike price
- Bo The European put price plus the present value of the strike price must equal the European call price plus the stock price
- Co The European put price plus the stock price must equal the European call price plus the strike price
- Do The European put price plus the stock price must equal the European call price plus the present value of the strike price
186195. Which of the following can be used to create a long position in a European put option on a stock?
- Ao Buy a call option on the stock and buy the stock
- Bo Buy a call on the stock and short the stock
- Co Sell a call option on the stock and buy the stock
- Do Sell a call option on the stock and sell the stock
187196. Which of the following is true?
- Ao An American call option on a stock should never be exercised early
- Bo An American call option on a stock should never be exercised early when no dividends are expected
- Co There is always some chance that an American call option on a stock will be exercised early
- Do There is always some chance that an American call option on a stock will be exercised early when no dividends are expected
188197. The current price of a non-dividend-paying stock is $30. Over the next six months it is expected to rise to $36 or fall to $26. Assume the risk-free rate is zero. An investor sells call options with a strike price of $32. What is the value of each call option?
- Ao $1.6
- Bo $2.0
- Co $2.4
- Do $3.0
189198. A stock is expected to return 10% when the risk-free rate is 4%. What is the correct discount rate to use for the expected payoff on an option in the real world?
- Ao 4%
- Bo 10%
- Co More than 10%
- Do It could be more or less than 10%
190199. In a binomial tree created to value an option on a stock, the expected return on stock is
- Ao Zero
- Bo The return required by the market
- Co The risk-free rate
- Do It is impossible to know without more information
191200. The current price of a non-dividend-paying stock is $40. Over the next year it is expected to rise to $42 or fall to $37. An investor buys put options with a strike price of $41. Which of the following is necessary to hedge the position?
- Ao Buy 0.2 shares for each option purchased
- Bo Sell 0.2 shares for each option purchased
- Co Buy 0.8 shares for each option purchased
- Do Sell 0.8 shares for each option purchased
192201. The current price of a non-dividend-paying stock is $30. Over the next six months it is expected to rise to $36 or fall to $26. Assume the risk-free rate is zero. An investor sells call options with a strike price of $32. Which of the following hedges the position?
- Ao Buy 0.6 shares for each call option sold
- Bo Buy 0.4 shares for each call option sold
- Co Short 0.6 shares for each call option sold
193202. The current price of a non-dividend-paying stock is $40. Over the next year it is expected to rise to $42 or fall to $37. An investor buys put options with a strike price of $41. What is the value of each option? The risk-free interest rate is 2% per annum with continuous compounding.
- Ao $3.93
- Bo $2.93
- Co $1.93
- Do $0.93
194203. Which of the following is true for a call option on a stock worth $50
- Ao As a stock’s expected return increases the price of the option increases
- Bo As a stock’s expected return increases the price of the option decreases
- Co As a stock’s expected return increases the price of the option might increase or decrease
- Do As a stock’s expected return increases the price of the option on the stock stays the same
195204. Which of the following describes how American options can be valued using a binomial tree?
- Ao Check whether early exercise is optimal at all nodes where the option is in-the-money
- Bo Check whether early exercise is optimal at the final nodes
- Co Check whether early exercise is optimal at the penultimate nodes and the final nodes
- Do None of the above
196205. The current price of a non-dividend-paying stock is $30. Over the next six months it is expected to rise to $36 or fall to $26. Assume the risk-free rate is zero. What is the risk-neutral probability of that the stock price will be $36?
- Ao 0.6
- Bo 0.5
- Co 0.4
- Do 0.3
197206. Which of the following are NOT true
- Ao Risk-neutral valuation and no-arbitrage arguments give the same option prices
- Bo Risk-neutral valuation involves assuming that the expected return is the risk-free rate and then discounting expected payoffs at the risk-free rate
- Co A hedge set up to value an option does not need to be changed
- Do All of the above
198207. Which of the following describes delta?
- Ao The ratio of the option price to the stock price
- Bo The ratio of the stock price to the option price
- Co The ratio of a change in the option price to the corresponding change in the stock price
- Do The ratio of a change in the stock price to the corresponding change in the option price
199208. Which of the following is NOT true in a risk-neutral world?
- Ao The expected return on a call option is independent of its strike price
- Bo Investors expect higher returns to compensate for higher risk
- Co The expected return on a stock is the risk-free rate
- Do The discount rate used for the expected payoff on an option is the risk-free rate
Información
- Descripción
- Test sobre FRM, creado por carolina salcedo el 09/08/2021.
- Autor
- carolina salcedo
- Idioma
- English
- Visitas
- 2
- Valoración
- Aún sin valoraciones Valora este test