1. Which of the following is an example of an arbitrage opportunity?
A.A portfolio of two securities that will produce a certain return that is greater than the riskfree rate of interest.
B.A stock with the same price as another has a higher rate of return.
C.A stock with the same price as another has a higher expected rate of return.
A B C
A
An arbitrage opportunity exists when a combination of two securities will produce a certain payoff in the future that produces a return that is greater than the risk-free rate of interest. Borrowing at the riskless rate to purchase the position will produce a certain future amount greater than the amount required to repay the loan.
2. Which of the following statements about the futures market is most accurate?
A.Speculators trade to reduce some preexisting risk exposure.
B.If a trader's account falls below the maintenance margin level they have three days to bring it back up to the maintenance margin level.
C.Open interest is the number of futures contracts for which delivery is currently obligated.
A B C
C
Open interest is the number of contracts currently in existence. Speculators take risk for return. You must bring the margin account up to the initial level by the next day's opening.
3. To account for positive cash flows from the underlying asset, we need to adjust the put-call parity formula by:
A.adding the future value of the cash flows to S.
B.adding the future value of the cash flows to X.
C.subtracting the present value of the cash flows from S.
A B C
C
If the underlying asset used to establish the put-call parity relationship generates a cash flow prior to expiration, the assets value must be reduced by the present value of the cash flow discounted at the risk-free rate.
4. Which of the following statements is most accurate?
A.Forward contracts require that both parties to the transaction have a high degree of creditworthiness.
B.Forward contracts are marked to market daily.
C.Futures contracts have more default risk than forward contracts.
A B C
A
Forward contracts are usually private transactions that do not have an intermediary such as a clearinghouse to guarantee performance by both parties. This type of transaction requires a high degree of creditworthiness for both parties.
5. An option sold for $10 is currently in-the-money $5. If the underlying is priced at $80, which of the following best describes that option?
A.Put option with an exercise price of $85.
B.Put option with an exercise price of $70.
C.Call option with an exercise price of $75.
A B C
A
A call option with an exercise price of $75 or a put option with an exercise price of $85 will be currently in-the-money $5.
6. A U. S. bank enters into a plain vanilla currency swap with a notional principal of US $100m (£ 67m). At each settlement date, the U.S. bank pays a fixed rate of 8 percent on the pounds received, and an English bank pays a variable rate equal to London interbank offered rate (LIBOR) on the U. S. dollars received. Given the following information, what payment is made to whom at the end of year 2?
The U. S. bank pays:
A.US $5.5m and the English bank pays £ 5.36m.
B.US $6m and the English bank pays £ 5.36m.
C.£ 5.36m and the English bank pays US $5.5m.
A B C
C
The U. S. bank pays 8% fixed on £ 67m, which makes for an annual payment of £ 5.36m. The variable rate to be used at time period 2 is set at time period 1 (the arrears method). Therefore, the English bank pays 5.5% times US $100m for a payment of US $5.5m.
7. The main risk faced by an individual who enters into a forward contract to buy the S&P 500 Index is that
A.the market may rise.
B.the market may fall.
C.market volatility may rise.
A B C
B
If the market falls, the buyer of a forward contract could pay more for the index, as determined by the price that was contracted for at the inception of the contract, than the index is worth when the contract matures. Although it is possible that a rise in interest rates could cause the market to fall, this might not always happens and thus is a secondary consideration.
8. Which of the following statements most accurately describes the difference between LIBOR and Euribor?
A.LIBOR is a lending rate, while Euribor is a borrowing rate.
B.LIBOR is a representative borrowing rate on U. S. dollars, while Euribor is a representative borrowing rate on euros.
C.LIBOR is a global risk-free rate, while Euribor is a European risk-free rate.
A B C
B
LIBOR is the rate at which London banks lend dollars to other London banks; Euribor is the rate at which major European banks borrow euros from each other.
9. Financial derivatives also provide a powerful tool for limiting risks that individuals and firms face in the ordinary conduct of their business. This is an example of:
A.trading efficiency.
B.speculation.
C.risk management.
A B C
C
Financial derivatives provide a powerful tool for limiting risks that individuals and firms face in the ordinary conduct of their business. This is known as risk management.
10. Which of the following statements regarding a futures trade of a deliverable contract is FALSE?
A.The long is obligated to purchase the asset.
B.The short is obligated to deliver the asset.
C.Equilibrium futures price is known only at the end of the trading day.
A B C
C
Each trade is made at the then current equilibrium price, determined by open outcry on the floor of the exchange, and is reported as it is executed. The long is obligated to buy, and the short is obligated to sell, the specified quantity of the underlying asset.
11. Which statement about equity forward contracts is least likely accurate?
A.Investors can use equity forward contracts to speculate on stock-price increases.
B.Dividend payments are usually included in equity forward contracts.
C.Equity forward contracts may require asset delivery or cash settlement.
A B C
B
Dividend payments are usually not included in equity forward contracts. Investors can use equity forwards to speculate on stock price movements. Most equity index forward contracts are settled in cash, but since they are custom instruments, forwards may specify either cash settlement or delivery of the equity shares specified in the contract.
12. Which of the following statements about put and call options is FALSE?
A.The price of the option is less volatile than the price of the underlying stock.
B.Option prices are generally higher the longer the time till the option expires.
C.For put options, the higher the strike price relative to the stock's underlying price, the more the put is worth.
A B C
A
Option prices are more volatile than the price of the underlying stock. The other statements are true. Options have time value which means price are higher the longer the time until the option expires; and a higher strike price increases the value of a put option.
13. Which of the following statements is NOT an advantage of swaps? Swaps:
A.give the traders privacy.
B.have little or no regulation.
C.minimize default risk.
A B C
C
Swaps do not minimize default risk. Swaps are agreements between two of more parties, and there are no guarantees that one of the parties will not default. Note that swaps do give traders privacy and, being private transactions, have little to no regulation and offer the ability to customize contracts to specific needs.
14. Which of the following statements about swaps is least accurate?
A.Swaps typically have zero value at initiation.
B.Swaps can have significant default risk.
C.Parties to swap contracts are often individual speculators.
A B C
C
Parties to swaps contracts are usually large institutions, rarely individual speculators or hedgers.
15. Which of the following combinations of options and underlying investments have similarly shaped profit/loss diagrams?
A.Long call option/short put option and long stock position.
B.Covered call and short stock/long call.
C.Short put option/long call option and protective put.
A B C
A
A long call and a short put will provide a nearly identical Payoff as a long stock. Professor's Note : the easiest way to see this is to draw the payoff diagram for the combined option positions.
16. Given the covered call option diagram below and the following information, what are the dollar values for points X and Y? The market price of the stock is $70, the strike price of the call is $80, and the call premium is $5.
A.$75, and point Y represents a dollar value of $15.
B.$70, and point Y represents a dollar value of $15.
C.$80, and point Y represents a dollar value of $15.
A B C
C
The kink in the diagram of a covered call is always at the exercise price of the option. Therefore, point X is $80. As the stock price rises above $80, the stock is called away and the maximum gain is the call premium plus the stock price gain ( $80 - $70 ). The maximum gain, then, at point Y is ( $5 + $10 = $15).
17. An investor who bought a floating-rate security and wishes to establish a minimum periodic cash flow on his investment could:
A.buy an interest-rate floor.
B.sell an interest-rate cap.
C.buy an interest-rate cap.
A B C
A
The buyer of a floor will receive a payment when the floating rate is below the floor rate, effectively establishing a minimum rate on the floating rate security.
18. An option's intrinsic value is equal to the amount the option is:
A.out of the money, and the time value is the market value minus the intrinsic value.
B.in the money, and the time value is the intrinsic value minus the market value.
C.in the money, and the time value is the market value minus the intrinsic value.
A B C
C
Intrinsic value is the amount the option is in the money. In effect it is the value that would be realized if the option were at expiration. Prior to expiration, the option's market value will normally exceed its intrinsic value. The difference between market value and intrinsic value is called time value.
19. If 60-day London Interbank Offered Rate (LIBOR) is 6 percent, the interest on a 60-day LIBOR-based Eurodollar deposit of $990000 is:
A.$10000.
B.$9900.
C.$60000.
A B C
B
06 × (60/360) × 990000 = $9900.
20. Prior to expiration, the maximum value of an Americana call option and an American put option, respectively, is closest to the: American put option American call option ①A. Exercise price Exercise price ②B. Exercise price Underlying price ③C. Underlying price Exercise price
A.①
B.②
C.③
A B C
B
The maximum value of a call option is the underlying price; it makes no sense to pay more for the right to buy the underlying than the value of the underlying itself, and the maximum value of an American put is the exercise price because the best outcome would be if the stock fell to zero, the holder could capture the value of the exercise price.
21. Which of the following statements regarding the mark to market of a futures account is FALSE? Marking to market of a futures account:
A.may result in a margin balance above the initial margin amount and may be done more often than daily.
B.is only done when the settlement price is below the maintenance price.
C.effectively adjusts the price of the future to the new equilibrium level.
A B C
B
Futures accounts are marked to market daily based on the new settlement price, which can result in either an addition to or subtraction from the previous margin balance. Under extraordinary circumstances (volatility) the mark to market can be required more frequently. Once the margin is marked to market, the contract is effectively a futures contract at the new settlement price.
22. Some forward contracts are termed cash settlement contracts. This means:
A.either the long or the short in the forward contract will make a cash payment at contract expiration and the asset is not delivered.
B.at settlement, the long purchases the asset from the short for cash.
C.at contract expiration, the long can buy the asset from the short or pay the difference between the market price of the asset and the contract price.
A B C
A
In a cash settlement forward contract there is a cash payment at settlement by either the long or the short depending on whether the market price of the asset is below or above the contract price at expiration. The underlying asset is not purchased or sold at settlement.
23. Option investor D sells (writes, takes a SHORT position in) one of the following call options: Type of option: call option Underlying asset: 100 shares of Disney stock Exercise price: $40 per share Premium : $2.25 per share Expiration date : January The current market price of Disney stock is $39.02 per share. Investor D already owns 500 shares of Disney stock. Which of the following describes the amount of initial margin required for this transaction?
A.Since the call option is "in the money" investor D is not required to deposit initial margin.
B.Since investor D owns at least 100 shares of Disney stock, he must deposit initial margin in the amount of 100% of the option premium.
C.Since investor D owns at least 100 shares of Disney stock, no additional margin is required.
A B C
C
If the owner (Long) of the call options exercises, investor D will be required to sell 100 shares, investor D already owns sufficient shares to deliver. As a result, his position is "covered," and no additional margin is required.
24. A financial instrument that has payoffs based on the price of an underlying physical or financial asset is a(n) :
A.option.
B.future.
C.derivative security.
A B C
C
Options, futures, and forwards are examples of types of derivative securities.
25. A trader is long four July gold futures contracts, each with a contract size of 300 oz. If the price of July gold increases from $380.20 to $381.00 per ounce the change in the margin balance will be :
A.$960.
B.- $960.
C.$240.
A B C
A
4 × 300 × (381 -380.20) = $960.
26. An investor purchases a stock for $40 a share and simultaneously sells a call option on the stock with an exercise price of $42 for a premium of $3/share. Ignoring dividends and transactions cost, what is the maximum profit that the writer of this covered call can earn if the position is held to expiration?
A.$81.
B.$6.
C.$5.
A B C
C
This is an out of the money covered call. The stock can go up $2 to the strike price and then the writer will get $3 for the premium, total $5.
27. A trader buys (takes a long position in) a T-bill futures contract ( $1 million face value) at 98.14 and closes it out at a price of 98.27. On this contract the trader has :
A.lost $325.
B.gained $325.
C.lost $1300.
A B C
B
The price is quoted as (one minus the annualized discount) in percent. Remember that the gains and losses on T-bill and Eurodollar futures are $25 per basis point of the price quote. The price is up 13 ticks and 13 × $25 is a gain of $325 for a long position.
28. Prior to expiration, an American put option on a stock:
A.is bounded by S-X/(1 +RFR)T
B.will sell for its intrinsic value.
C.will never sell for less than its intrinsic value.
A B C
C
At any time t, an American put will never sell below intrinsic value, but may sell for more than that. The lower bound is Max [ 0, X -St ].
29. Typically, forward commitments are made with respect to all the following EXCEPT:
A.inflation.
B.bonds.
C.equities.
A B C
A
Forward commitments can be customized and could be written on some measure of inflation, but typically they are not. The volume of forward commitments, including forward contracts and futures contracts, on bonds, equities, and interest rates is in the many billions of dollars.
30. ABEX Corporation common stock is selling for $50.00 per share. Both an American call option and a European call option are available on ABEX common, and each have identical strike prices and expiration dates. Which of the following statements concerning these two options is TRUE ?
A.Because the American and European options have identical terms and are written against the same common stock, they will have identical option premiums.
B.The greater flexibility allowed in exercising the American option will normally result in a higher market value relative to an otherwise identical European option.
C.The American option will have a higher option premium, because the American security markets are larger than the European markets.
A B C
B
Trading in European options is considerably less than trading in American options, because demand for them is much lower. This is due to their relative inflexibility regarding when they can be exercised. The greater exercising flexibility of American options gives them increased value to traders, which normally results in a greater market value relative to an otherwise identical European option.
31. A short position in a forward rate agreement is equivalent to:
A.writing an interest rate put and buying an interest rate call.
B.buying an interest rate put and an interest rate call.
C.writing an interest rate call and buying an interest rate put.
A B C
C
A short position in a forward rate agreement is an obligation to make a hypothetical loan at the contract rate and will be profitable when the forward rate falls. An equivalent position using interest rate options is to buy a put and write a call.
32. An investor bought a 15 call for $14 on a stock trading at $20. If the stock is trading at $24 at option expiration, what is the profit and the value of the call at option expiration? Profit Value of the Call ①A. - $5 $5 ②B. $4 - $5 ③C. - $5 $9
A.①
B.②
C.③
A B C
C
The potential gains on a call purchase are unlimited. With a stock price of $24, the call at 15 is $9 in the money. By subtracting out the 14 call price a loss of $5 results.
33. The daily process of adjusting the margin in a futures account is called:
A.initial margin.
B.variation margin.
C.marking to market.
A B C
C
The process is called marking to market. Variation margin is the funds that must be deposited when marking to market draws the margin balance below the maintenance margin.
34. Concerning efficient financial( including derivative) markets, the most appropriate description is that
A.it is often possible to earn abnormal returns.
B.the law of one price holds only in the academic literature.
C.arbitrage opportunities rarely exist and are quickly eliminated.
A B C
C
Efficient markets are characterized by the absence, or the rapid elimination, of arbitrage opportunities.
35. Consider a commercial bank that is about to make a large variable-rate loan. Which of the following would be an appropriate position for the bank to hedge its risk with this loan? Pay:
A.variable to a currency swap counterparty and receive fixed.
B.variable to an interest rate swap counterparty and receive fixed.
C.fixed to an interest rate swap counterparty and receive variable.
A B C
B
There is no problem for the bank with respect to currencies, and, therefore, this should not be a currency swap. The bank's problem is that as interest rates decrease, the bank's interest income declines. To offset this loss ( to hedge) , the bank needs to win in the swap as interest rates decrease. Therefore, the bank should pay variable and receive fixed in an interest rate swap. Floating rate receipts would then offset floating rate payments and the bank would be left with a fixed spread between assets and liabilities.
36. Which of the following statements regarding a forward commitment is FALSE? A forward commitment :
A.is a contractual promise.
B.involves an action in the future.
C.is not legally binding and can involve a stock index.
A B C
C
A forward commitment is a legally binding promise to perform some action in the future and can involve a stock index or portfolio.
The graph is a depiction of a call option with an exercise price of $100.
37. The graph shows that the:
A.the value of the call is $100.
B.the value of the call is unknown.
C.the value of the call is unlimited, in principle.
A B C
C
The graph shows that the value of the call is unlimited, in principle.
38. If the stock price were $500, at expiration, the call would be worth :
A.$0.
B.$100.
C.$400.
A B C
C
If the stock price were $500, at expiration, the call would be worth $400 as follows : Stock price - exercise price = intrinsic value $500 - $100 = $400.
39. An investor can exit a forward position prior to contract expiration by all of the following methods EXCEPT:
A.entering into an offsetting contract with the original counterparty or a second (different) counterparty.
B.exercising the early delivery option.
C.making a cash payment or accepting a cash payment by agreement with the original counterparty.
A B C
B
There is typically no early delivery option in a forward contract. The other three methods are all usual ways of terminating a forward contract prior to the settlement date specified in the contract.
40. Which of the following relationships between arbitrage and efficient markets is least accurate?
A.The concept of rationally priced financial instruments preventing arbitrage opportunities is the basis behind the no-arbitrage principle.
B.Momentary deviations from market efficiency can create an arbitrage opportunity.
C.Market efficiency refers to the low cost of trading derivatives because of the lower expense to traders.
A B C
C
Market efficiency refers to the concept of all relevant information being reflected in an assets price, not the low cost of trading derivatives. One necessary criterion for efficient markets is instantaneous adjustment of market values. Arbitrage, by trading on a price difference between identical assets, causes an imbalance between demand and supply that instantaneously corrects the pricing difference.
41. A 60-day $10 million forward rate agreement (FRA) on 90-day London Interbank Offered Rate (LIBOR) (a 2 × 5 FRA) is priced at 4 percent. If 90-day LIBOR at the expiration date is 4.1 percent, the long:
A.receives $2500.00.
B.receives $2474.63.
C.pays $2500.00.
A B C
B
[解析] /[ 1 +0.041 × (90/360) ] = $2474.63.
42. Delbert Gossert owns stock worth $32 per share. Gossert buys a put option with a strike price of $32 for $2.50. At expiration, the stock is valued at $32 per share. The profit or loss from Gossert's portfolio insurance strategy is a:
A.loss of $2.50.
B.$0, no gain or loss.
C.gain of $2.50.
A B C
A
The put option is at-the-money at expiration ( Max (0, X - S) ) and is, therefore, worthless. The stock price didn't change, so Gossert is only out the premium paid for the option, $2.50.
43. Buying an interest-rate cap and selling an interest-rate floor is equivalent to:
A.buying a series of interest-rate calls and selling a series of interest-rate puts.
B.buying a series of interest-rate puts and selling a series of interest rate calls.
C.buying a series of interest-rate puts and calls.
A B C
A
A cap is equivalent to a series of (long interest-rate calls and selling a floor is equivalent to selling a series of interest-rate puts.
44. An options investor purchases one stock put option on General Motor's stock. The put has the following characteristics : Type of option: put option Underlying asset: 100 shares of General Motor's stock Exercise price : $75 per share Premium: $1.81 per share Expiration date : November By taking a LONG position in this put option, the investor has:
A.purchased the right to decide whether to sell 100 shares of General Motor's stock and receive $181 during the specified time period (the expiration date in November)
B.purchased the right to decide whether to purchase 100 shares Of General Motor's stock and receive $181 during the specified time period (the expiration date in November)
C.none of the above
A B C
C
A Long put gives the option buyer the right to decide to sell the underlying instrument. The exercise price is 1 × 100 × 75 = 7500.
45. The motivation for entering into a swap agreement is that:
A.it provides firms that face financial risks with a flexible way to manage that risk.
B.it provides firms that face financial risks with a fixed way to manage that risk.
C.it gives you an ability to swap amongst a diverse range of products.
A B C
A
The motivation for entering into a swap agreement is that it provides firms that face financial risks with a flexible way to manage that risk.
46. Default risk in a forward contract:
A.only applies to the long, and is the probability that the short can not acquire the asset for delivery.
B.is the risk to either party that the other party will not fulfill their contractual obligation.
C.is lessened by the mark-to-market feature found in a typical forward contract.
A B C
B
Default risk in forward contracts is the risk to either party that the other party will not perform, whether that means pay cash or deliver the asset. Mark-to-market payments as the asset price changes are a feature of futures (not forward) contracts.
47. James Jackson currently owns stock in PNG, Inc. , valued at $145 per share. Thinking that PNG is overbought and will decrease in price soon, Jackson writes a call option on PNG with an exercise price of $148 for a premium of $2.40. At expiration of the option, PNG stock is valued at $152 per share. What is the profit or loss from Jackson's covered call strategy? Jackson :
A.gained $5.40.
B.lost $4.60.
C.gained $9.40.
A B C
A
The option is in-the-money at expiration (Max (0, S -X) ) and the PNG stock will be called away from Jackson at $148 per share, limiting Jackson's gain from owning the stock to $3 ( $148-145). However, Jackson also gains the $2.40 from writing the call option. Therefore, Jackson's gain from the covered call strategy is $5.40 ( $3.00 + $2.40).
48. Which of the following is NOT an over-the-counter (OTC) derivative?
A.A forward contract.
B.A swap agreement.
C.A futures contract.
A B C
C
Futures contracts are exchange-traded; forwards, swaps, and most bond options are OTC derivatives.
49. The price of a stock is $44 per share, and the October put with an exercise price of $45 is selling for $3. The intrinsic value of the option is :
A.$1.00.
B.$2.00.
C.$3.00.
A B C
A
The intrinsic value of a put option at expiration will be the greater of ( X - S) or 0. Put Value =max[0, (X-S)], or max [0, (45-44)] =1.