Derivability Flashcards by shumemerut merut

For a cr ATM cap on the three-month LIBOR, what can be said about the individual caplets, in a downward-sloping terms-structure environment.

a. The short maturity caplets are ITM; long maturity caplets are OTM
b. The short maturity caplets are OTM: long maturity caplets are ITM.
c. All the caplets are ATM.

a. The short maturity caplets are ITM; long maturity caplets are OTM

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Which of the following is the riskiest single-option transaction?

a. Buying a call
b. Writing a put
c. Buying a put
d. Writing a call

d. Writing a call

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Which of these statements is most likely correct for an option?

a. Market price equals intrinsic value less time value.
b. Intrinsic value equals market prices less time value.
c. Time value equals intrinsic value less market price.
d. None of the above

b. Intrinsic value equals market prices less time value.

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Which of the following statements about options is most accurate?

a. The writer of a put option has the obligation to sell the asset to the holder of the put option.
b. The holder of a call option has the obligation to sell to the option writer should the stock’s price rise above the strike price.
c. The holder of a put option has the right to sell to the writer of the option.
d. None of the above

c. The holder of a put option has the right to sell to the writer of the option.

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Which of the following statements is correct when comparing the differences between an interest rate swap and a cross currency swap?

a. At maturity, there is no exchange of principal between the counterparties in interest rate swaps and there is an exchange of principal in cross currency swaps.
b. At maturity, there is no exchange of principal between the counterparties in cross currency swaps and there is an exchange of principal in interest rate swaps.
c. The counterparties in an interest rate swap need to consider fluctuations in exchange rates, while cross currency swap counterparties are only exposed to fluctuations in interest rates.
d. Cross Currency swap counterparties are exposed to less counterparty credit risk due to the offsetting effect of currency and interest rate risk in the transaction.

a. At maturity, there is no exchange of principal between the counterparties in interest rate swaps and there is an exchange of principal in cross currency swaps.

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Which of the following will increase the value of a put option?

a. an increase in volatility
b. decrease in the exercise price
c. decrease in time to expiration
d. decrease in volatility

a. an increase in volatility

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Which of the following statements about swaps is least likely correct?

a. The time frame of a swap is called its tenor
b. In a cross currency swap only net interest payments are made
c. In a cross currency swap, the notional principal are swapped at the termination of the swap
d. None of the above

b. In a cross currency swap only net interest payments are made

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Which of the following statements about swap markets is least likely correct?

a. In an interest rate swap, only the net interest is exchanged
b. The notional principal is swapped at termination of a cross currency swap
c. Only the net difference between the dollar interest and the foreign interest is exchanged in a currency swap
d. None of the above

c. Only the net difference between the dollar interest and the foreign interest is exchanged in a currency swap

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Which of the following statements about moneyness is FALSE? When:

a. S- X> 0, a call option is in-the-money
b. S-X = 0, a call option is at-the-money
c. S > X, a put option is in-the-money
d. S=X, a put option is at-the-money

c. S > X, a put option is in-the-money

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Which of the following statements most closely relates to the concept of moneyness?

a. The sum of money the option buyer pays the seller is called the premium
b. Both call and put option prices decline as the time to expiration becomes shorter.
c. One would never exercise a call option if the price of the underlying is below the strike price
d. One would never exercise a put option if the price of the underlying is below the strike price.

c. One would never exercise a call option if the price of the underlying is below the strike price

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Which of the following statements regarding equity forward contracts is least accurate?

a. Equity forwards may be settled in cash
b. Dividends are never included in index forwards
c. A short position in an equity forward could not hedge the risk of a purchase of that equity in the future
d. None of the above

b. Dividends are never included in index forwards

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Which of the following statements regarding futures markets is least accurate?

a. Hedgers trade to reduce some pre-existing risk exposure
b. The clearinghouse guarantees that traders in the futures market will honor their obligations
c. If an account rises to or exceeds the maintenance margin, the trader must deposit variation margin
d. None of the above

c. If an account rises to or exceeds the maintenance margin, the trader must deposit variation margin

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Which of the following statements about options on futures is true?

a. An American call is equal in value to a European call
b. An American put is equal in value to a European put
c. Put-call parity holds for both American and European options
d. None of the above statements is true

d. None of the above statements is true

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A portfolio management firm manages the fixed-rate corporate bond portfolio owned by a defined-benefit pension fund. The duration of the bond portfolio is 5 years: the duration of the pension fund’s liabilities is 7 years. assume that the fund sponsor strongly believes that rates will decline over the next six months and is concerned about the duration mismatch between portfolio assets and pension liabilities. Which of the following strategies would be the best way to eliminate the duration mismatch.

a. Enter into a swap transaction in which the firm pays fixed and receives floating.
b. Enter into a swap transaction in which the firm receives fixed and pays floating.
c. Purchase an interest rate cap expiring in six months
d. Sell Eurodollar futures contracts.

b. Enter into a swap transaction in which the firm receives fixed and pays floating.

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If an investor holds a five-year IBM bond, it will give him a return very close to the return of the following position:

a. A five-year IBM credit default swap on which he pays fixed and receives a payment in the event of default
b. A five-year IBM credit default swap on which he receives fixed and makes a payment in the event of default
c. A five-year US. Treasury bond plus a five-year IBM credit default swap on which he pays fixed and receives a payment in the event of default
d. A five-year US. Treasury bond plus a five-year IBM credit default swap on which he receives fixed and makes a payment in the event of default

d. A five-year US. Treasury bond plus a five-year IBM credit default swap on which he receives fixed and makes a payment in the event of default

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On the maturity date, stock index futures contracts require delivery date of:

a. Common stock
b. Common stock plus accrued dividends
c. Treasury bills
d. Cash

d. Cash

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According to put-call parity, writing a put is like:

a. Buying a call, buying stock, and lending
b. Writing a call, buying stock, and borrowing
c. Writing a call, buying stock, and lending
d. Writing a call, selling stock, and borrowing

b. Writing a call, buying stock, and borrowing

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A company and its bank have entered into a currency swap in which the company pays USD to the bank. The currency swap details are provided below:

provided table

a. Bank will make a payment of USD$1,000,000
b. Bank will receive a payment of USD$2,600,000
c. Company will receive a payment of EUR1,300,000
d. Company will make a payment of EUR1,000,000

b. Bank will receive a payment of USD$2,600,000

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The short in a deliverable forward contract:

a. has no default risk
b. receives a payment at contract initiation
c. is obligated to deliver the specified asset
d. makes a cash payment to the long as settlement

c. is obligated to deliver the specified asset

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The two-year risk-free rate in the Country ABC and Country DEF is 8% and 5% per annum, continuously compounded, respectively. The current DEF currency to the ABC currency exchange rate is that one unit of ABC currency costs 0.75 units of DEF currency. If the observed two-year forward price of one unit of the ABC is 0.850 units of the DEF, what is your strategy to make an arbitrage profit?

a. Borrow ABC, buy DEF and enter a short forward contract on DEF
b. Borrow ABC, buy DEF, and enter a short forward contract on ABC
c. Borrow DEF, buy ABC, and enter a short forward contract on DEF.
d. Borrow DEF, buy ABC, and enter a short forward contract on ABC.

d. Borrow DEF, buy ABC, and enter a short forward contract on ABC.

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The payoff to a swap where the investor receives fixed and pays floating can be replicated by all of the following except:

a. A short position in a portfolio of FRAs
b. A long position in a fixed-rate bond and a short position in a floating-rate bond
c. A short position in an interest rate cap and a long position in a floor
d. A long position in a floating rate note and a short position in a floor

d. A long position in a floating rate note and a short position in a floor

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Based on the put-call parity for European options, a synthetic put is most likely equivalent to a:

a. long call, short underlying asset, long bond
b. long call, long underlying asset, short bond
c. short call, long underlying asset, short bond
d. short call, short underlying asset, long bond

a. long call, short underlying asset, long bond

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An interest rate floor on a floating-rate note (from the issuer’s perspective) is equivalent to a series of:

a. Long interest rate puts
b. Short interest rate puts
c. Short interest rate calls
d. Long interest rate calls

c. Short interest rate calls

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A company treasurer needs to borrow EUR 10 million for 180 days. 60 days from now. The type of FRA and the position he should take to hedge the interest rate risk of this transaction are

a. Short 2 x 6 FRA
b. Long 2 x 8 FRA
c. Short 2 x 8 FRA
d. Long 2x 6 FRA

b. Long 2 x 8 FRA

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In the Black-Scholes expression for a European call option. the term used to compute option probability of exercise is: a. d2 b. d2 c. N(d1) d. N(d2)

d. N(d2)

A multinational corporation is considering issuing a fixed-rate bond. By using interest swaps and floating-rate notes. the issuer can achieve the same objective. To do so. the issuer should consider: a. Issuing a floating-rate note of the same maturity and entering into an interest rate swap paying fixed and receiving float. b. Issuing a floating-rate note of the same maturity and entering into an interest rate swap paying float and receiving fixed c. Buying a floating-rate note of the same maturity and entering into an interest rate swap paying fixed and receiving float. d. Buying a floating-rate note of the same maturity and entering into an interest rate swap paying float and receiving fixed

a. Issuing a floating-rate note of the same maturity and entering into an interest rate swap paying fixed and receiving float.

A long forward is equivalent to the following options a. Long a call and a put b. Short a call and a put c. Long a call and short a put d. None of the above

c. Long a call and short a put

Which statement best describes option price sensitivities? The value of a: a. Call option increases as interest rates rise b. Call option decreases as volatility increases c. Put option increases as volatility decreases. d.Put option decreases as interest rates decline

a. Call option increases as interest rates rise

Which of the following statements regarding forward contracts on 90-day T-bills is most accurate? a. The face value must be paid by the long at settlement b. There is no default risk on these forwards because T-bills are government-backed c. If short term yields increase unexpectedly after contract initiation, the short will profit on the contract d. None of the above

c. If short term yields increase unexpectedly after contract initiation, the short will profit on the contract

Epsilon Inc., a U.S. based company, must pay ¥1,000,000,000 to its Japanese component supplier in 3 months. Epsilon approaches a dealer and enters into a USD/JPY currency forward contract, containing a stipulation for physical delivery, to manage the foreign exchange risk associated with the payment to its supplier. Which of these best describes Epsilon’s currency forward contract? a. The dealer will deliver yen on expiration b. The amount of USD exchanged for JPY is determined at expiration c. Epsilon may receive or pay JPY, depending on the exchange rate at expiration d. None of the above

a. The dealer will deliver yen on expiration

Consider a 2-into-3 year Bermudan swaption (i.e an option to obtain a swap that starts in two years and matures in hive years. Which of the following statements is (are) true? A lower bound on the Bermudan price is a 2-into-3-year European swaption. An upper bound on the Bermudan price is a cap that starts in two years and matures in five years. A lower bound on the Bermudan price is a 2-into-5-year European option a. I only b. II only c. I and II d. III only

c. I and II

A portfolio manager bought a credit default swap to hedge an AA corporate bond position. If the counterparty of the credit default swap (CDS seller) is acquired by the bond issuer, then the default swap: a. Increases in value b. Decreases in value c. Decreases in value only if the corporate bond is downgraded d. Is unchanged in value

b. Decreases in value

A conversion factor in a Treasury bond contract is: a. Used to adjust the number of bonds to be delivered b. Multiplied by the face value to determine the delivery price c. Multiplied by the futures price to determine the delivery price d. None of the above

c. Multiplied by the futures price to determine the delivery price

In an equity swap: a. settlement is made only at swap termination b. shares are exchanged for the notional principal c. returns on an index can be swapped for fixed-rate payments d. shares are paid in exchange of cash

c. returns on an index can be swapped for fixed-rate payments

Prior to expiration, an American put option on a stock: *insert image* A B. Will never sell for less than its intrinsic value C D

B. Will never sell for less than its intrinsic value

Which of the following statements is FALSE? a. The traders involved in a swap are called counterparties b. In a plain vanilla interest rate swap fixed rates are traded for variable rates c. In an interest rate swap, the notional principal is swapped d. The default problem is the most important limitation to the swap market

c. In an interest rate swap, the notional principal is swapped

Which of the following most accurately describes a derivative security? A derivative: a. always increases risk b. has no expiration date c. is another type of bond d. has a payoff based on another asset

d. has a payoff based on another asset

The greater of either zero or the present value of the exercise price minus the underlying price is most likely the lower bound on the price of a(n) a. European put option. b. American put option. c. American call option d. European call option.

a. European put option.

Euribor would most likely be the interest rate quoted on a large: a. euro time deposit in Toronto b. dollar time deposit in Frankfurt c. dollar time deposit in Toronto d. Dollar time deposit in the United States

a. euro time deposit in Toronto

Which of the following statements about American and European options is most accurate? a. There will always be some price difference between American and European options because of exchange-rate risk. b. European options allow for exercise on or before the option expiration date. c. Prior to expiration an American option may have a higher value than an equivalent European option.* d. None of the above

c. Prior to expiration an American option may have a higher value than an equivalent European option.*

A long interest rate collar can be structured by: a. Buying an interest rate cap and selling an interest rate floor b. Buying an interest rate cap and buying an interest rate floor c. Selling an interest rate cap and selling an interest rate floor d. Selling an interest rate cap and buying an interest rate floor

a. Buying an interest rate cap and selling an interest rate floor

A credit default swap is an instrument that can be characterized best as a. Any swap that has one or more parties in default b. A swap that can only be valued against non-investment-grade debt securities c. An option to sell defaulted securities at par value to a third party in exchange for a series of fixed cash flows d. Any swap that defaults to a third-party guarantor should a party in swap file for bankruptcy protection

c. An option to sell defaulted securities at par value to a third party in exchange for a series of fixed cash flows

Which one of the following statements is incorrect regarding the margining of exchange-traded futures contracts? a. Day trades and spread transactions require lower margin levels. Incorrect b. If an investor fails to deposit variation margin in a timely manner, the positions may be liquidated by the carrying broker. c. Initial margin is the amount of money that must be deposited when a futures contract is opened. d. A margin call will be issued only if the investor’s margin account balance becomes negative.

d. A margin call will be issued only if the investor’s margin account balance becomes negative.

In commodity markets, the complex relationships between spot and forward prices are embodied in the commodity price curve. Which of the following statements is true? B. In a backwardation market, the discount in forward prices relative to the spot price represents a positive yield for the commodity consumer.

B. In a backwardation market, the discount in forward prices relative to the spot price represents a positive yield for the commodity consumer.

The spot price of corn on April 10 is 207 cents/bushels. The futures price of the September contract is 241.5 cents/bushels. If hedgers are net short, which of the following statements is most accurate concerning the expected spot price of corn in September? a. The expected spot price of corn is higher than 207 b. The expected spot price of corn is lower than 207. c. The expected spot price of corn is higher than 241.5 d. The expected spot price of corn is lower than 241.5

c. The expected spot price of corn is higher than 241.5

In a plain vanilla interest rate swap: a. The notional principal is swapped b. Only the net interest payments are made c. The notional principal is returned at the end of the swap d. Interest payments are exchanged

b. Only the net interest payments are made

Which of the following are needed to value a credit swap? Correlation structure for the default and recovery rates of the swap counter-party and reference credit The swap or treasury yield curve Reference credit spread curve over swap or treasury rates Swap counterparty credit spread over swap or treasury rates a. II, II and IV b. I, III and IV c. II and III d. All of the above

d. All of the above

Compared to forward contracts, futures contracts are all of the following EXCEPT a. more liquid b. standardized c. larger in size d. less subject to default risk

c. larger in size

In contrast to over-the-counter options, futures contracts: a. are not exposed to default risk b. are private, customized transactions c. represent a right rather than a commitment d. can also be traded over the counter

a. are not exposed to default risk

Which of the following transactions could be entered into in order to decrease credit risk with a specific counterparty? a. Buy a call option on the counterparty c common stock b. Sell a put option on the counterparty’s common stock. c. Go long shares of the counterparty's common stock d. Go short shares of the counterparty s common stock

d. Go short shares of the counterparty s common stock

Which of the following is a type of credit derivative? A put option on a corporate bond. A total return swap on a loan portfolio. A note that pays an enhanced yield in the case of a bond downgrade. A put option on an off-the-run Treasury bond a. I, II and III b. Il and Ill only c. l only d. All of the above

a. I, II and III

Which of the following regarding option strategies is/are/not correct? I. A long strangle involves buying a call and a put with equal strike prices. II. A short bull spread involves selling a call at lower strike price and buying another call at higher strike price. III. Vertical spreads are formed by options with different maturities. IV. A long butterfly spread is formed by buying two options at two different strike prices and selling another two options at the same strike price. a. I only b. I and III only c. I and II only d. III and IV only

b. I and III only

Which of the following combinations of options and underlying investments have similarly shaped profit/loss diagrams? a. Covered call and protective put b. Long call option combined with a short put option and a long stock position ? ?

b. Long call option combined with a short put option and a long stock position

The current spot USDCHF rate is 1.3680. The three-month USD interest rate is 1.05%, the three-month Swiss interest rate is 0.35%, both continuously compounded and per annum. A currency trader notices that the three-month forward price is USD 0.7350. In order to arbitrage, the trader should a. Borrow CHF, buy USD spot, go long Swiss franc forward b. Borrow USD, buy Swiss franc spot, go short Swiss franc forward

b. Borrow USD, buy Swiss franc spot, go short Swiss franc forward

Which of the following statements regarding early termination of a forward contract is most accurate? a. A party who terminates a forward contract early must make a cash payment

a. A party who terminates a forward contract early must make a cash payment

Which of the following will create a bull spread? a. Buy a put with a strike price of X = 50, and sell a put with K = 55.

a. Buy a put with a strike price of X = 50, and sell a put with K = 55.

Which one of the following statements is MOST CORRECT a. Payment is a total return swap is contingent on a future credit event b. Investing in a risky (credit-sensitive) bond is similar to investing in a risk-free bond plus selling a credit default swap c. In the first-to-default swap, the default event is a default on two or more assets in the basket d. Payment in a credit swap is contingent only upon the bankruptcy of the counterparty

b. Investing in a risky (credit-sensitive) bond is similar to investing in a risk-free bond plus selling a credit default swap

As your company;s risk manager, you are looking for protection against adverse interest rate changes in five years. Using Black’s model for options on futures to price a European swap option (Swaption), which gives the option holder the right to cancel seven-year swap after five-years, which of the following would you use in the model? a. The Two-year forward par swap rate starting in five years.

a. The Two-year forward par swap rate starting in five years.

Consider a forward contract on a stock market index. Identify the false statement. Everything else being constant. a. The forward price will fall if the interest rate is raised

a. The forward price will fall if the interest rate is raised

A combination of interest rate calls is referred to as an interest rate: a. Cap

a. Cap

The daily process of adjusting the margin in a futures account is called a. Marking to Market

a. Marking to Market

The Chicago Board of Trade has reduced the notional coupon of its Treasury Futures contracts from 8% to 6%. Which of the following statements are likely to be true as a result of the change? a. The cheapest-to-deliver status will become more unstable if yields hover the 6% range.

a. The cheapest-to-deliver status will become more unstable if yields hover the 6% range.

Which of the following is least likely one of the main purposes of derivatives? (I’m placing the choices out of memory) a. Reveals price volatility b. Reduce transaction costs c. Manage risk/helps in risk management d. None of the above

b. Reduce transaction costs

Which Of the following causes led MGRM into severe financial distress I. There was a mismatch of cash flows from hedge and physical transactions. II. MGRM failed to consider hedging market risk from fixed price physical sales contracts. III. MGRM held a great percentage of the total open interest on the NYMEX. IV. The futures market went from backwardation to contango. a. I, III and IV

a. I, III and IV

If the volatility of returns of an underlying security increases, then: a. both call and put option prices increase b. both call and put option prices decrease. c. call prices increase and put prices decrease d. call prices decrease and put prices increase

a. both call and put option prices increase

Which of the following statements about put and call options is least accurate? a. For put options, the higher the strike price relative to the stock’s underlying price, the more the put is worth. b. Price of the option is less volatile than the price of the underlying stock

b. Price of the option is less volatile than the price of the underlying stock

Funds deposited to meet a margin call are termed a. daily margin b. Settlement costs c. Initial margin d. Variation margin

d. Variation margin

Lambda Corp. has a floating rate liability and wants a fixed rate exposure. They enter into a 2-year quarterly-pay $4 million fixed for floating swap as the fixed rate payer. The counterparty is Gamma Corp. The fixed rate is 6% and the floating rate is 90-day LIBOR + 1% with both calculated based on a 360-day year. Realizations of LIBOR are: fifth net quarterly payment on the swap is a. 0 b. $10,000 c. $40,000 d. None

b. $10,000

Consider a bearish option strategy of buying one $50 strike put for $7. selling two $42 strike puts for S4 each, and buying one $37 put for $2. All options have the same maturity. Calculating the final profit (P/L) per share of the strategy if the underlying is trading at $33 at expiration a. $1 per share b. $2 per share c. $3 per share d. $4 per share

b. $2 per share

The table below shows the bid-ask quotes by MBTC for CDS spreads for companies A, B, and C. CSFB has excessive credit exposure to Company C and wants to reduce it through the CDS market. Since the farthest maturity of its exposure to C is three years, CSFB buys a USD 200 million three-year protection on C from MBTC. In order to make its purchase of this protection cheaper, based on its views on companies A and B, CSFB decides to sell USD 300 million five-year protection on Company A and to sell USD 100 million one-year protection on Company B to MBTC. What is the net annual premium payment made by CSFB to MBTC in the first year? a. USD 1.02 million b. USD 0.18 million c. USD 0.58 million d. USD 0.62 million

a. USD 1.02 million

Using the Black-Scholes model, calculate the value of a European call option given the following information: Spot rate = 100: Strike price = 110: Risk free rate = 10%; Time to expiry = 05 years: N(d1) = 0.457185; N(d2) = 0.374163 a. $10.90 b. $9.51 c. $6.57 d. $4.92

c. $6.57

If a stock is selling for $25. the exercise price of a put option on that stock is $20, and the time to expiration of the option is 90 days, the minimum and maximum prices for the put today are_. a. $0 and $5 b. $0 and $20 c. $5 and $20 d. $5 and $25

b. $0 and $20

An investor enters into a short position in a gold futures contract at USD 294.20. Each futures contract controls 100 troy ounces. The initial margin is USD 3,200, and the maintenance margin is USD 2,900. At the end of the first day, the futures price drops to USD 286.6. Which of the following is the amount of the variation margin at the end of the first day? a. None b. USD 34 c. USD 334 d. USD 760

a. None

An investor buys a call option with a $25 exercise price priced at $4 and writes a call option with a $40 exercise price priced at $2.50. If the price of the stock increases to $50 at expiration and the options are exercised on the expiration date, the next profit at expiration (ignoring transaction costs) is a. $8.50 b. $13.50 c. $16.50 d. $23.50

b. $13.50

An investor writes a covered call on $40 stock with an exercise price of $50 for a premium of $2. The investor's maximum: a. Gain will be $12 b. Gain will be $2 c. Loss will be $40 d. Loss will be unlimited

a. Gain will be $12

A hedge fund leverages its $100 million of investor capital by a factor of three and invests it into a portfolio of junk bonds yielding 14%. If its borrowing costs are 8%. What is the yield on investor capital? a. 14% b. 18% c. 26% d. 42%

c. 26%

A futures trader takes a long position of 10 contracts. The initial margin requirements is $10 per contract and the maintenance margin requirements is $7 per contract. She deposits the required initial margin on the trade date. On day 3, her margin account balance is $40. What is the variation margin on Day 4? a. $30 b. $60 c. $70 d. $80

b. $60

A stock is selling at $40, a 3-month put at $50 strike is selling for $11, a 3-month call at $50 is selling for $1, and the risk free rate is 6% (continuously compounded). How much, if anything, can be made on an arbitrage? a. $0 (no arbitrage) b. $0.28 c. $0.74 d. $2.83

c. $0.74

Lambda Corp has a floating-rate liability and wants a fixed-rate exposure. They enter into a 2-year quarterly-pay $4.000,000 fixed-float swap as the fixed-rate payer. The counterparty is Gamma Corp. The fixed rate is 6 percent and the floating rate is 90-day LIBOR+1% with both calculated based on a 360-day year. Realizations of LIBOR are: first swap payment a. from Gamma to Lambda b. known at the initiation of the swap* c. 5000 d. 20000

b. known at the initiation of the swap*

Lambda Corp has a floating-rate liability and wants a fixed-rate exposure. They enter into a 2-year quarterly-pay $4.000,000 fixed-float swap as the fixed-rate payer. The counterparty is Gamma Corp. The fixed rate is 6 percent and the floating rate is 90-day LIBOR+1% with both calculated based on a 360-day year. Realizations of LIBOR are: second net swap payments a. $5000 from Lambda to Gamma b. $4000 from Gamma to Lambda c. $5000 from Gamma to Lambda d. $6000 from Lambda to Gamma

c. $5000 from Gamma to Lambda

The price of a non-dividend paying stock is $20. A six-month European call option with a strike price of $18 sells for $4. A European put option on the same stock, with the same strike price and maturity. sells for $1.47. The continuously compounded risk-free interest rate is 6% per annum. Are these three securities (the stock and the two options) consistently priced? a. No, there is an arbitrage opportunity worth $2.00 b. No, there is an arbitrage opportunity worth $2.53. c. No, there is an arbitrage opportunity worth $14.00. d. Yes.

d. Yes.

Calculate the price of a 1-year forward contract on gold. Assume the storage cost for gold is $5.00 per ounce, with payment made at the end of the year. Spot gold is $290 per ounce and the risk-free rate is 5%. a. $304 86 b. $309.87 c. $310.12 d. $313.17

b. $309.87

A trader buys (takes a long position in) a Eurodollar 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. Gained $1,300 d. Lost $1,300

b. Gained $325

A portfolio manager enters into an equity swap with a swap dealer. The portfolio manager agrees to pay the return on the Value index and receive the return on the Growth index. The swap's notional principal is $50 million and the payments will be made semi-annually. The levels of the equity indices are as follows. The net amount due to the portfolio manager after 6 months is closest to: *provided table* a. $587,158.00 b. $1,007,326.00 c. $1,427,494.00 d. none of the above

c. $1,427,494.00

Bank Two has made a $200 million loan to a software company at a fixed rate of 12%. The bank wants to hedge its exposure by entering into a total return swap with a counterparty. Interloan Co. in which Bank Two promises to pay the interest on the loan plus the change in the market value of the loan in exchange for LIBOR plus 40bp. If after one year the market value of the loan has decreased by 3% and LIBOR is 11%, what will be the net obligation of Bank Two? a. Net receipt of $4.8 million b. Net payment of $4.8 million c. Net receipt of $5.2 million d. Net payment of $5.2 million

a. Net receipt of $4.8 million

Prices of a futures contract for five consecutive trading days are provided in the table below. The initial margin requirement is set at $6.00 per contract and the maintenance margin is $3.60 per contract. On day 0, a trader enters into a short position for 15 contracts. The ending balance for the margin account on day 5 is closest to: *provided table* $15.00 $60.00 $210.00 $125.00

$60.00

ABC Company has outstanding debt of three different maturities, as outlined in the table. AlL ABC Co. debt ranks pari passu, all its debt contains cross-default provisions, and the recovery value for each bond is 20. The correct price for a one-year credit default swap (sa 30/360) with the ABC Co., 9.5% 10-year bonds as a reference asset is: 1.0% per annum 2.0% per annum 2.5% per annum 3.5% per annum

1.0% per annum

Consider a $2 million FRA with a contract rate of 5% on 60-day LIBOR If 60-day LIBOR is 6% at settlement, the long will a. pay $3.333 b. receive $3.300 c. receive $3.333 d. pay $3.300

c. receive $3.333

An investor purchases ABC stock at $71 per share and executes a protective put strategy. The put option used in the strategy has a strike price of $66, expires in two months and is purchased for $1.45. At expiration, the protective put strategy breaks even when the price of ABC is closest to: $64.55 $66.50 $67.45 $72.45

$72.45

The two-year risk -free rate in the Country ABC and Country DEF is 8% and 5% per annum, continuously compounded, respectively The current costs 0.75 units of DEF currency. What is the two-year forward price of one unit of the ABC in terms of the DEF so that no arbitrage opportunity exists? a. 0.587 b. 0.706 c. 0.796 d. 0.973

b. 0.706

Suppose the price for a six-month S&P index futures contract is 552.30. If the risk-free interest rate is 7.5% per year and the dividend yield on the stock index is 4.2% per year, and the market is complete and there is no arbitrage, what is the price of the index today? a. 543.26 b. 552.11 c. 555.78 d. 560.02

a. 543.26

An investor buys 2 calls and 1 put on ABC stock, all with a strike price of $45. The calls cost $5 each and the put costs $4. If the investor closes the position when ABC is priced at $55, the investor’s per share gain or loss is : a. $4 loss b. $6 gain c. $10 gain d. $20 gain

b. $6 gain

Three 125,000 euro futures contracts are sold at a price of $1.0234.The next day the price settles at $1.0180. The mark to market for this account changes the previous day's margin by: a. +$2,025 b. -2,025 c. -$675 d. +$675

b. -2,025

A $40 call on a stock trading at $43 is priced at $5. The time value of the option is: a. $2 b. $3 c. $5 d. $8

a. $2

The following instruments are traded on an ACT/360 basis: Three-month deposit (91 days), at 4.5%; 3 × 6 FRA (92 days), at 4.6%; 6 × 9 FRA (90 days), at 4.8%; 9 × 12 FRA (92 days), at 6%; What is the one-year interest rate on an ACT/360 basis? a. 5.19% b. 5.12% c. 5.07% d. 4.98%

c. 5.07%

Bank Two enters into a five-year swap contract with ABC Co. to pay LIBOR in return for a fixed 8% rate on a principal of $100 million. Two years from now, the market rate on three-year swaps at LIBOR is 7%. At this time. ABC Co. declares bankruptcy and defaults on its swap obligation. Assume that the net payment is made only at the end of each year for the swap contract period. What is the market value of the loss incurred by Bank Two as a result of the default? a. $1.927 million b. $2.245 million c. $2.624 million d. $3.011 million

c. $2.624 million

A European call option on a non-dividend paying stock with a strike price of $25.00 expires in 3 months. The underlying stock currently trades at $29.00. The risk-free rate is 5.00%. The lower bound for the European call is closest to: a. $0 b. $2.00 c. $4.00 d. $4.30

d. $4.30

Consider a 3-year annual currency swap that takes place between a foreign firm (FF) with FC currency units and a US. firm (USF) with $ currency units. USF is the fixed-rate payer and FF is the floating-rate payer. The fixed interest rate at the initiation of the swap is 7% and 8% at the end of the swap. The variable rate is 5% currently 6% at the end of year 1. 8% at the end of year 2; and 7% at the end of year 3 At the beginning of the swap, $10 million is exchanged at an exchange rate of FC2.0 = $1.0. At the end of the swap period. the exchange rate is FC1.5 = $1.0. With this currency swap, end of period payments are based on beginning of period interest rates. At the initiation of the swap. which of the following statements is most likely correct? a. FF gives USF $1.0million b. USF gives FF $1.0million c. USF gives FF FC2.0million d. No principal exchange

b. USF gives FF $1.0million

Assume you bought a put on a stock selling for $60, with a strike of $55 for a $5 premium. What would be your maximum gain? a. $50.00 b. $55.00 c. $60.00 d. $65.00

a. $50.00

A two-year European call option as a market price of $50 with a strike price of $140. The underlying stock price is $100 with a two-year annualized interest rate of 5% and a dividend yield of 2% (annualized). What is the number closest to the market price of a two-year European put struck at $140? $77.00 $10.00 $90.00 $81.00

$81.00

Consider a bullish spread option strategy of buying one call option with a $30 exercise price at a premium of S3 and writing a call option with a $40 exercise price at a premium of $150. If the price of the stock increases to $42 at expiration and the option is exercised on the expiration date, the net profit per share at expiration (ignoring transaction costs) will be: a. $8.50 b. $9.00 c. $9.50 d. $12.50

a. $8.50

Consider a 3-year annual currency swap that takes place between a foreign firm (FF) with FC currency units and a U.S. firm (USF) with $ currency units. USF is the fixed-rate payer and FF is the floating-rate payer. The fixed interest rate at the initiation of the swap is 7% and 8% at the end of the swap. The variable rate is 5% currently; 6% at the end of year 1; 8% at the end of year 2; and 7% at the end of year 3. At the beginning of the swap, $1.0 million is exchanged at an exchange rate of FC2.0 = $1.0. At the end of the swap period, the exchange rate is FC1.5 = $1.0. With this currency swap, end of period payments are based on beginning of period interest rates. At the end of year 2: a. USF pays FC140,000, FF pays $60,000 b. USF pays FC60,000; FF pays $70,000 c. USF pays $70,000; FF pays $60,000 d. No obligation from either party

a. USF pays FC140,000, FF pays $60,000

An investor purchases 10 futures contracts priced at $100 each. The initial margin is $20 per contract and the maintenance margin requirement is $10 per contract. The investor will most likely be required to post variation margin if the end-of-day prices over the next three days are: a. Day1:$103;Day2:$98;Day3:$104 b. Day1:$103;Day2:$109;Day3:$104 c. Day 1: 106; Day 2: 98; Day 3: 89 * d. Day 1: 95; Day 2: 91; Day 3: 103

c. Day 1: 106; Day 2: 98; Day 3: 89 *

A dealer quotes a forward rate agreement (FRA) expiring in 30 days for which the underlying is 90-day LIBOR at 4.5% . An investors shorts the contract and the dealer goes along for a national principal of $15 million. At the expiration of the FRA, the rate on 90-day LIBOR is 4.0%. The investor is most likely to: a. Receive from the dealer %18,564

a. Receive from the dealer %18,564

Consider the following currency swap: Counterparty A swaps 3% on $25 million for 7.5% on 20 million sterling. There are now 18 months remaining in the swap, the term structures of interest rates are flat in both countries. With dollar rates currently at 4.25% and sterling rates currently at 7.74%. The current $ sterling exchange rate is $1.65. Calculate the value of the swap. Use continuous compounding. Assuming six month until the next annual coupon and use current market rates to discount a. - $1,237,500 b. -$4,893,963 c. -$9,073,598 d. -$8,285,111

c. -$9,073,598

Consider a 3-year annual currency swap that takes place between a foreign firm (FF) with FC currency units and a US firm (USF) with $ currency units. USF is the fixed-rate payer and FF is the floating-rate payer The fixed interest rate at the initiation of the swap is 7% and 8% at the end of the swap. The variable rate is 5% currently: 6% at the end of year 1; 8% at the end of year 2; and 7% at the end of year 3 At the beginning of the swap, $10 million is exchanged at an exchange rate of FC2.0 = $1.0. At the end of the swap period. the exchange rate is FC1.5 = $1.0. With this currency swap, end of period payments are based on beginning of period interest rates. At the end of year 3. FF will pay which of the following total amounts? a. $1.08million b. $1.07million c. FC2.6million d. none

a. $1.08million

Two parties agree to a forward contract on a dividend paying stock at a price of $103. At contract expiration, the stock trades at $105.00. In a cash-settled forward contract, the: a. Long pays the short $105.00 b. Short pays the long $2

b. Short pays the long $2

A portfolio consists of one (long) $100 million asset and a default protection contract on this asset. The probability of default over the next year is 10% for the asset and 20% for the counterparty that wrote the default protection The joint probability of default for the asset and the contract counterparty is 3% Estimate the expected loss on this portfolio due to credit defaults over the next year with a 40% recovery rate on the asset and 0% recovery rate for the counterparty a. $3.0 million b. $2.2 million c. $1.8 million d. None of the above

c. $1.8 million

What is the lower pricing bound for a european call option with a strike price of 80 and one year until expiration? The price of the underlying asset is 90, and the one-year interest rate is 5% per annum. Assume continuous compounding of interest: a. 14.61 b. 13.* c. 10 d. 5.9

b. 13.*