Derivability Flashcards
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
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
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.
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.
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.
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
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
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
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
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
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
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
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
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.
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
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
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
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
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
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.
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
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
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
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