Exam 1 - Review Flashcards
All of the following are contingent claims, except: A. futures B. stock options C. options on futures D. interest rate options
A. futures
In ____________ market, the futures price exceeds the spot price and the two prices converge over time.
a contango
Which of the following is a primary difference between forwards and futures?
A. forwards are marked-to-market B. futures trade over-the-counter C. futures are marked-to-market D. futures are riskier than forwards
C. futures are marked-to-market
An FRA that expires in 90 days and is based on 180-day LIBOR is referred to as a _________________
3 x 9
A U.S company transacts in London and expects to receive payment in pounds in the next three months and wants to protect against a decline in the value of the pound. The U.S risk-free rate is 4%. The British risk-free rate is 5%. If the current spot price is $.50, what would the price of a 180-day forward contract be for the U.S company? Assume a 360-day year.
0.4976
180/360 = .5 ((.50/1.05)^.5)(1.04)^5 = 0.4976
Gold futures contracts have an initial margin requirement of $2025/contract and a maintenance margin of 1500/contract. If an investor buys 3 contracts, what is the initial margin that must be deposited in an account?
$6,075
$2,025 x 3 = $6,075
If the June Eurodollar futures contract is trading for 97.50, what is the annualized LIBOR rate priced into this contract?
2.50%
100 - 97.50 = 2.50
Assume that an equity futures contract has a dividend yield of 3% and the current risk-free rate is 4%. If the futures contract is properly priced, the market is ________________.
in contango
You own a security worth $800. There are no coupons or dividends. You enter into a forward contract to sell the security in 145 days. The risk-free rate is 4%. What is the forward price assuming a 365-day year?
$812.56
= 800(1.04)^(145/365)
= 800(1.04)^(0.3973)
= 812.56
A speculator thinks that oil prices are going down. To trade on this belief, the speculator should:
sell oil futures
A manufacturer will need silver in three months. To hedge against an unexpected price change the manufacturer should:
buy silver futures
A speculator thinks that interest rates will rise. Which of the following trades should the speculator do?
A. buy T-Bill futures B. buy Treasury note futures C. buy an FRA D. buy Treasury bond futures
C. buy an FRA
A portfolio manager wants to reduce the duration of her portfolio. The portfolio manager should:
A. sell stock index futures. B. buy stock index futures. C. buy Treasury note futures. D. sell Treasury bond futures.
D. sell Treasury bond futures.
A portfolio manager wants to increase the beta on an equity portfolio. The portfolio manager should:
A. sell stock index futures B. buy stock index futures C. buy Treasury note futures D. sell Treasury bond futures
B. buy stock index futures
A portfolio manager of a bond and equity portfolio wants to increase allocation to stocks, The portfolio manger should:
buy stock index futures and sell bond futures
A portfolio manager of a bond and equity portfolio wants to increase allocation to bonds, The portfolio manger should:
sell stock index futures and buy bond futures
A $200 million bond portfolio has a modified duration of 12.6. The portfolio manager wishes to reduce the modified duration to 7.0. Futures contracts are priced at $110,000, have a modified duration of 8.80 and the appropriate yield beta for the portfolio is 1.06. What is the appropriate position for the portfolio manager?
sell 1,226 contracts
= ((7.0 - 12.6)/8.80)(200,000/110,000)(1.06)
= (-0.6364)(1,818.1818)(1.06)
= -1,226.5164
= -1,226
Consider a portfolio manager with a 60% allocation to stocks and 40% to bonds. The market value of the portfolio is $250 million. The stock position has a beta of 1.20 and the bond position has a modified duration of 8.6. The manager wants to increase stock allocation to 80%. The modified duration of cash equivalents is 0.25. Stock index futures are priced at $125,000 and have a beta of 0.98. The bond futures contract is priced at $110,000 and has a modified duration of 6.30. What are the appropriate positions for the portfolio manager?
buy 490 stock index contracts, sell 602 bond futures contracts
= 250 x 80 = 200,000,000 (50,000,000 more in stocks)
= 250 x 20 = 50,000,000 (50,000,000 less in bonds)
= (1.20/0.98)(50,000,000/125,000)
= 490
= ((8.6 - .25)/6.30)(-50,000,000/110,000)
= -602
A $500 million bond portfolio has a modified duration of 14.6. The portfolio manager wishes to reduce the modified duration to 5.0. Futures contracts are priced at $110,000, have a modified duration of 8.75 and the appropriate yield beta for the portfolio is 0.98. What is the appropriate position for the portfolio manager?
Sell 4,887 contracts
= ((5.0 - 14.6)/8.75)(500,000/110,000)(0.98)
= (-1.0971)(4,545.4545)(0.98)
= - 4887
A $200 million stock portfolio has a beta of 0.65. The portfolio manager wishes to increase the beta to 1.25. Futures contracts are priced at $105,200 and have a beta of 0.99. What is the appropriate position for the portfolio manager?
buy 1,152 contracts
= ((1.25 - 0.65)/0.99)(200,000,000/105,200)
= 1,152
A $200 million stock portfolio has a beta of 0.80. The portfolio manager wishes to fully hedge the portfolio. Futures contracts are priced at $105,200 and have a beta of 1.04. What is the appropriate position for the portfolio manager?
sell 1,462 contracts
= ((0-.80)/1.04)(200,000,000/105,200)
= - 1,462
What is the gross payoff at expiration for one long put option on GOOG if the strike price is 600 and the underlying price is $575?
$2500
Po = (X - So)
= (600 - 575)x100
= 2500
What is the gross payoff at expiration for two long call options on GOOG if the strike price is $600 and the underlying price is $620.
$4000
So = (S1 - X)
= (620 - 600) x 200
= 4000
Which of the following statements is true regarding an out-of-the -money call option, everything else being equal?
A. As time passes its delta will approach one. B. As time passes its value will approach zero. C. As time passes its theta will remain constant. D. As time passes its intrinsic value will decline.
B. As time passes its value will approach zero
If a call option has a delta of .8 and a gamma of .1 and currently sells for $4.00, which of the following is true?
A. If the stock price increases by $1, the option price is
expected to increase to $4.20.
B. If the stock price increases by $1, the option price is
expected to decrease to $2.40.
C. If the stock price increases by $1, the option delta is
expected to decrease to 0.70 and the option price is
expected to increase to 4.90.
D. If the stock price increases by $1, the option delta is
expected to increase to 0.90 and the option price is
expected to increase to 4.80.
D. If the stock price increases by $1, the option delta is
expected to increase to 0.90 and the option price is
expected to increase to 4.80.
Which of the following statements is true?
A. Delta is always greater than one. B. Delta is never less than zero. C. Delta is never greater than minus one. D. Delta is never greater than one.
D. Delta is never greater than one.
If a call is deep in the money,
A. as time passes its delta will approach one. B. as time passes its value will approach zero. C. as time passes its theta will remain constant. D. as time passes its intrinsic value will decline.
A. as time passes its delta will approach one.
If a call option is deep in the money,
A. as time passes its delta will approach zero. B. as time passes its gamma will approach zero. C. as time passes its theta will increase. D. as time passes its intrinsic value will decline.
B. as time passes its gamma will approach zero.
Which of the following statements is false regarding the Black/Sholes/Merton option pricing model?
A. It assumes a constant volatility. B. It works best for options with very long maturities. C. It assumes a constant interest rate. D. It ignores trading costs.
B. It works best for options with very long maturities.
