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options futures and other derivatives

Questions and Answers of Options Futures And Other Derivatives

26. If Lopez decides to use a swaption with STI to hedge the interest rate risk relating to the expansion loan, then Lopez should:A. sell a payer swaption.B. buy a payer swaption.C. buy a receiver
25. If WMTC hedges the currency risk relating to the cash flows from its Spanish operations using the currency swap recommended by Lopez, WMTC would generate semiannual cash inflows from the swap
24. If WMTC hedges the interest rate risk on the five-year variable rate loan by using the interest rate swap recommended by Lopez, the net interest payment at the first settlement date in six months
23. WMTC can achieve the bond portfolio duration target by using an interest rate swap with a notional principal closest to:A. $343 million.B. $353 million.C. $375 million.
22. To achieve the target duration for the pension plan’s bond portfolio, WMTC should enter into an interest rate swap with a modified duration that is:A. negative, requiring WTMC to make
21. Lopez will most likely achieve the pension plan’s equity reallocation objective by entering into an equity swap whereby WMTC receives a return on:A. $320 million of the S&P 500 Index and pays a
20. To achieve the target beta on Cassidy’s diversified stock portfolio, Elbridge would sell the following number of futures contracts (rounded to the nearest whole contract):A. 13.B. 20.C. 27.
19. What is the payoff to Cassidy in the equity swap example?A. −$269,500.B. $264,500.C. $269,500.
18. If an options dealer takes the other side of the Sure option position, the dealer’s initial option delta and hedging transaction, respectively, will be:Dealer’s Initial Option Delta
16. Cassidy’s Comments #1 and #2 about the Hop protective put and Sure covered call positions, respectively, are:Protective Put Covered Call A. Correct Correct B. Correct Incorrect C. Incorrect
15. Disregarding the initial cost of the Hop collar strategy, the value per share of the strategy at expiration with the stock at $26.90 is:A. $26.05.B. $26.20.C. $26.90.
14. Based on Darc’s interest rate expectations for the euro currency zone and Switzerland, Gide’s best choice is to structure the currency swap so that Millau pays interest at a:A. fixed rate and
13. If Millau issues euro-denominated debt and enters into a fixed-rate currency swap (in concern #4), which of the following best describes transactions between Millau and the swap counterparty in
12. Darc’s statement to Gide (in concern #3) about the option strategy to use in order to profit from a volatility increase of the euro/US dollar exchange rate is:A. correct.B. incorrect, because
11. If Gide uses a six-month forward currency contract to convert the yen received from the sale of the Japanese subsidiary into euros, the annualized return in euros that Millau will realize is
10. If Gide uses a six-month forward currency contract to convert the yen received from the sale of the Japanese subsidiary into euros, the total amount Millau will receive is closest to:A.
9. A company plans to borrow $20,000,000 in two years. The loan will be for three years and pay a floating interest rate of Libor with interest payments made every quarter. The company expects
8. A diversified portfolio with a market value of $800,000,000 currently has the following allocations:Equity 80% $640,000,000 Bonds 20% $160,000,000 The equity portion of the portfolio is allocated
6. A portfolio has a total market value of $105,000,000. The portfolio is allocated as follows: $65,000,000 is invested in a broadly diversified portfolio of domestic stocks, and $40,000,000 is
5. A company based in the United Kingdom has a German subsidiary. The subsidiary generates €15,000,000 a year, received in equivalent semiannual installments of €7,500,000.The British company
4. A US company needs to raise €100,000,000. It plans to raise this money by issuing dollar-denominated bonds and using a currency swap to convert the dollars to euros. The company expects interest
3. A company issues a leveraged floating-rate note with a face value of $5,000,000 that pays a coupon of 2.5 times Libor. The company plans to generate a profit by selling the notes, using the
2. Assume that you manage a $100 million bond portfolio with a duration of 1.5 years. You wish to increase the duration of the bond portfolio to 3.5 years by using a swap. Assume the duration of a
1. A company has issued floating-rate notes with a maturity of one year, an interest rate of Libor plus 125 basis points, and total face value of $50 million. The company now believes that interest
A German company issues a five-year noncallable bond with a face value of €40 million. The bond pays a coupon annually of 10%, of which 3% is estimated to be a credit premium.A. The company would
A company is engaged in a two-year swap with quarterly payments. It is paying 6% fixed and receiving Libor. It would like the flexibility to terminate the swap at any time prior to the end of the
A company plans to take out a $10 million floating-rate loan in two years. The loan will be for five years with annual payments at the rate of Libor. The company anticipates using a swap to convert
The CEO of a corporation owns 100 million shares of his company’s stock, which is currently priced at €30 a share. Given the tremendous exposure of his personal wealth to this one company, he has
A Canadian trust fund holds a portfolio of C$300 million of Canadian domestic stock. The manager would like to sell off C$100 million and invest the funds in a pan-European portfolio. The manager
The manager of a charitable foundation’s $50 million stock portfolio is concerned about the portfolio’s heavy concentration in one stock, Noble Petroleum (NBP). Specifically, the fund has $20
From the perspective of the issuer, construct a synthetic dual-currency bond in which the principal is paid in US dollars and the interest is paid in Swiss francs. The face value will be $20 million,
A Canadian corporation with a French subsidiary generates cash flows of €10 million a year. It wants to use a currency swap to lock in the rate at which it converts to Canadian dollars. The current
A Japanese company issues a bond with face value of ¥1.2 billion and a coupon rate of 5.25%. It decides to use a swap to convert this bond into a euro-denominated bond. The current exchange rate is
A company issues an inverse floating-rate note with a face value of $30 million and a coupon rate of 14% minus Libor. It uses the proceeds to buy a bond with a coupon rate of 8%.A. Explain how the
A company issues a floating-rate note that pays a rate of twice Libor on notional principal FP. It uses the proceeds to buy a bond paying a rate of ci. It also enters into a swap with a fixed rate of
A $250 million bond portfolio has a duration of 5.50. The portfolio manager wants to reduce the duration to 4.50 by using a swap. Consider the possibility of using a one-year swap with monthly
Consider a bank that holds a $5 million loan at a fixed rate of 6% for three years, with quarterly payments. The bank had originally funded this loan at a fixed rate, but because of changing interest
demonstrate the use of an interest rate swaption (1) to change the payment pattern of an anticipated future loan and (2) to terminate a swap?
explain how equity swaps can be used to diversify a concentrated equity portfolio, provide international diversification to a domestic portfolio, and alter portfolio allocations to stocks and bonds;
demonstrate how a firm can use a currency swap to convert a series of foreign cash receipts into domestic cash receipts;
explain how a company can generate savings by issuing a loan or bond in its own currency and using a currency swap to convert the obligation into another currency;
determine the notional principal value needed on an interest rate swap to achieve a desired level of duration in a fixed-income portfolio;
explain the effect of an interest rate swap on an entity’s cash flow risk;
calculate and interpret the duration of an interest rate swap;
demonstrate how an interest rate swap can be used to convert a floating-rate (fixed-rate) loan to a fixed-rate (floating-rate) loan;
12. Based on the data in Exhibit 1, Singh would advise Tills that the call option with the largest gamma would have a strike price closest to:A. $ 55.B. $ 67.50.C. $ 80.
11. Based upon Exhibit 1, and assuming the market price of Walnut’s shares at expiration is$66, the profit or loss, on a per share basis, from investing in Strategy 3, is closest to:A. –$1.57.B.
10. Based upon Exhibit 1, the maximum profit, on a per share basis, from investing in Strategy 2, is closest to:A. $2.26.B. $2.74.C. $5.00.
9. Based upon Exhibit 1, Strategy 1 is profitable when the share price at expiration is closest to:A. $63.24.B. $65.24.C. $69.49.
8. The option strategy that Singh is most likely to recommend to French is a:A. straddle.B. butterfly.C. box spread.
7. The option strategy Singh is most likely to recommend to Hopewell is a:A. collar.B. covered call.C. protective put.
6. You believe that the market will be volatile in the near future, but you do not feel particularly strongly about the direction of the movement. With this expectation, you decide to buy both a call
5. A stock is currently trading at a price of $80. You decide to place a collar on this stock.You purchase a put option on the stock, with an exercise price of $75 and a premium of$3.50. You
4. A stock is currently trading at a price of $114. You construct a butterfly spread using puts of three different strike prices on this stock, with the puts expiring at the same time. You go long
3. A stock is currently trading at a price of $114. You construct a butterfly spread using calls of three different strike prices on this stock, with the calls expiring at the same time. You go long
2. You expect a currency to depreciate with respect to the US dollar. The currency is currently trading at a price of $0.75. You decide to go long one put option on the currency with an exercise
1. You are bullish about an underlying that is currently trading at a price of $80. You choose to go long one call option on the underlying with an exercise price of $75 and selling at$10, and go
State Bank and Trust (SBT) is a lender in the floating-rate instrument market, but it has been hurt by recent interest rate decreases. SBT often makes loan commitments for its customers and then
On 10 January, ResTex Ltd. determines that it will need to borrow $5 million on 15 February at 90-day Libor plus 300 basis points. The loan will be an add-on interest loan in which ResTex will
Consider a box spread consisting of options with exercise prices of 75 and 85. The call prices are 16.02 and 12.28 for exercise prices of 75 and 85, respectively. The put prices are 9.72 and 15.18
Consider a stock worth $49. A call with an exercise price of $50 costs $6.25 and a put with an exercise price of $50 costs $5.875. An investor buys a straddle.A. Determine the value at expiration and
The holder of a stock worth $42 is considering placing a collar on it. A put with an exercise price of $40 costs $5.32. A call with the same premium would require an exercise price of $50.59.A.
Consider three put options on a currency that is currently selling for $1.45. The exercise prices are $1.30, $1.40, and $1.50. The put prices are $0.08, $0.125, and $0.18, respectively. The puts all
Consider two put options on a bond selling for $92 per $100 par. One put has an exercise price of $85 and is selling for $3. The other put has an exercise price of $95 and is selling for $11. Both
Consider two call options on a stock selling for $72. One call has an exercise price of$65 and is selling for $9. The other call has an exercise price of $75 and is selling for $4.Both calls expire
Consider a currency selling for $0.875. A put option selling for $0.075 has an exercise price of $0.90. Answer the following questions about a protective put.A. Determine the value at expiration and
Consider a bond selling for $98 per $100 face value. A call option selling for $8 has an exercise price of $105. Answer the following questions about a covered call.A. Determine the value of the
Consider a put option selling for $4 in which the exercise price is $60 and the price of the underlying is $62.A. Determine the value at expiration and the profit for a buyer under the following
Consider a call option selling for $7 in which the exercise price is $100 and the price of the underlying is $98.A. Determine the value at expiration and the profit for a buyer under the following
interpret the gamma of a delta-hedged portfolio and explain how gamma changes as in-themoney and out-of-the-money options move toward expiration.
explain why and how a dealer delta hedges an option position, why delta changes, and how the dealer adjusts to maintain the delta hedge;
calculate the payoffs for a series of interest rate outcomes when a floating rate loan is combined with 1) an interest rate cap, 2) an interest rate floor, or 3) an interest rate collar;
calculate the effective annual rate for a given interest rate outcome when a borrower (lender)manages the risk of an anticipated loan using an interest rate call (put) option;
calculate and interpret the value at expiration, profit, maximum profit, maximum loss, breakeven underlying price at expiration, and general shape of the graph for the following option strategies:
6. A. Consider a US company, GateCorp, that exports products to the United Kingdom.GateCorp has just closed a sale worth £200,000,000. The amount will be received in two months. Because it will be
5. A pension fund manager expects to receive a cash inflow of $50,000,000 in three months and wants to use futures contracts to take a $17,500,000 synthetic position in stocks and $32,500,000 in
4. Consider a portfolio with a 65% allocation to stocks and 35% to bonds. The portfolio has a market value of $200 million. The beta of the stock position is 1.15, and the modified duration of the
3. An investment management firm has a client who would like to temporarily reduce his exposure to equities by converting a $25 million equity position to cash for a period of four months. The client
2. Consider an asset manager who wishes to create a fund with exposure to the Russell 2000 stock index. The initial amount to be invested is $300,000,000. The fund will be constructed using the
1. An investment management firm wishes to increase the beta for one of its portfolios under management from 0.95 to 1.20 for a three-month period. The portfolio has a market value of $175,000,000.
explain the limitations to hedging the exchange rate risk of a foreign market portfolio and discuss feasible strategies for managing such risk.
explain exchange rate risk and demonstrate the use of forward contracts to reduce the risk associated with a future receipt or payment in a foreign currency;
Demonstrate the use of futures to adjust the allocation of a portfolio across equity sectors and to gain exposure to an asset class in advance of actually committing funds to the asset class?
Demonstrate the use of equity and bond futures to adjust the allocation of a portfolio between equity and debt.
Explain the use of stock index futures to convert a long stock position into synthetic cash?
Construct a synthetic stock index fund using cash and stock index futures (equitizing cash)?
Demonstrate the use of equity futures contracts to achieve a target beta for a stock portfolio and calculate and interpret the number of futures contracts required?
24. Are Kreuzer’s statements about an advantage of VaR and about the Sharpe ratio, respectively, correct?Statement about an Advantage of VaR Statement about the Sharpe Ratio A. No No B. No Yes C.
23. Is Kreuzer correct in predicting the independent effects of the increase in the expected return and the increase in the correlation, respectively, on the calculated VaR of the Muth
22. To make the desired change in Kalton’s credit risk exposure in corporate bonds, Kreuzer could recommend that Kalton take a position as a:A. seller in a credit default swap.B. buyer in a credit
21. Regarding Kalton’s two derivatives positions, is Kreuzer correct about which party is bearing the credit risk of the currency forward contract and the put option on the DJ Euro STOXX Index,
20. Regarding the three statements in the report that Stulz is preparing for Stimson Industries, the statement that is incorrect is:A. Statement #1.B. Statement #2.C. Statement #3.
19. The monthly VaR that Stulz wants to estimate for the Stimson portfolio is closest to:A. €0.8 million.B. €2.9 million.C. €3.9 million.
18. Following are four methods for calculating risk-adjusted performance: the Sharpe ratio, risk-adjusted return on capital (RAROC), return over maximum drawdown (RoMAD), and the Sortino ratio.
17. Tony Smith believes that the price of a particular underlying, currently selling at $96, will increase substantially in the next six months, so he purchases a European call option expiring in six
16. Ricardo Colón, an analyst in the investment management division of a financial services firm, is developing an earnings forecast for a local oil services company. The company’s ?
15. Indicate which of the following statements about credit risk is (are) false, and explain why.A. Because credit losses occur often, it is easy to assess the probability of a credit loss.B. One
14. An organization’s 5% daily VaR shows a number fairly consistently around €3 million.A backtest of the calculation reveals that, as expected under the calculation, daily portfolio losses in
13. A. A firm runs an investment portfolio consisting of stocks as well as options on stocks.Management would like to determine the VaR for this portfolio and is thinking about which technique to
12. Consider a $10 million portfolio of stocks. You perform a Monte Carlo simulation to estimate the VaR for this portfolio. You choose to perform this simulation using a normal distribution of

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