SS 17. Derivatives

Question 1

If a forward contract requires no cash outlay at initiation, it is most likely true that at initiation:

Answer 1

price exceeds value.

At initiation, value is equal to zero. Price is a positive number which states the amount that must be paid when the purchase takes place.

Question 2

Convenience Yields are primarily associated with:

Answer 2

Commodities

Question 3

Combining a long call and a long bond position creates a:

Answer 3

Fiduciary call

Question 4

Combining a long call, a short put and a long bond position creates a synthetic:

Answer 4

Long position

Question 5

What are the two types of derivatives?

Answer 5

Contingent Claims

Forward Commitments

Question 6

Name 5 OTC contingent claim derivatives:

Answer 6

1. Standard options on assets
2. Interest rate options
3. Callable bonds
4. Convertible bonds
5. Exotic options

Question 7

The derivatives that best allow market watchers to infer what investors feel about volatility are:

Answer 7

Options

Question 8

‘Bullish, maximum gain is the premium, maximum loss is strike minus premium’ describes a:

Answer 8

Short put position

Question 9

In contrast to a futures contract, a forward contract:

Answer 9

gains the entire value at expiration

Question 10

A short call is (bearish/bullish)

Answer 10

Bearish

Question 11

Name 5 Exchange-traded contingent claim derivatives:

Answer 11

1. Standard options on assets
2. Interest rate options
3. Warrants
4. Callable bonds
5. Convertible bonds

Question 12

Put-call parity formula:

Answer 12

Stock + put = call + strike/(1+RFR)^T

Question 13

Based on put-call parity, a trader who combines a long forward, a long bond, and a long put will create a synthetic:

Answer 13

Protective put

Question 14

Name 2 OTC Forward commitment derivatives:

Answer 14

1. Forward contracts

2. Swaps

Question 15

The underlying in a forward rate agreement is most likely a(n):

Answer 15

interest rate

Question 16

Combing a long call, long bond, short the underlying creates a:

Answer 16

Long put position

Question 17

The value of a long position in a forward contract at expiration is best defined as:

Answer 17

spot price of the underlying minus forward price agreed in the contract.

Question 18

The arbitrage-free pricing model assumes (3):

Answer 18

1. That the investors can short as much stock as required to exploit the arbitrage opportunity
2. Transaction costs are limited and will not affect pricing
3. Investors can calculate the volatility of securities accurately

Question 19

List 6 ways in which swaps are similar to forwards:

Answer 19

• Swaps typically require no payment by either party at initiation.
• Swaps are custom instruments.
• Swaps are not traded in any organized secondary market.
• Swaps are largely unregulated.
• Default risk is an important aspect of the contracts.
• Most participants in the swaps market are large institutions.

Question 20

How is the settlement price for a futures contract determined?

Answer 20

An average of the trade prices taken during the closing period