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options futures and other derivatives

Questions and Answers of Options Futures And Other Derivatives

Describe how interest rate options are valued using a two-period binomial model;
Identify an arbitrage opportunity involving options and describe the related arbitrage;
Calculate the no-arbitrage values of European and American options using a two-period binomial model;
Describe and interpret the binomial option valuation model and its component terms;
16. Based on Exhibit 6 and the three-month US dollar Libor at expiration, the payment amount that the bank will receive to settle the 6 × 9 FRA is closest to:A. $19,945.B. $24,925.C. $39,781.
15. Based on Exhibit 7, the fixed rate on a new 2 × 5 FRA is closest to:A. 0.61%.B. 1.02%.C. 1.71%.
14. Based on Exhibit 7, the no-arbitrage fixed rate on a new 1 × 4 FRA is closest to:A. 0.65%.B. 0.73%.C. 0.98%.
13. From the bank’s perspective, based on Exhibits 6 and 7, the value of the 6 × 9 FRA 90 days after inception is closest to:A. $14,817.B. $19,647.C. $29,635.
12. Based on Exhibit 5, the current value of the equity swap described in Exhibit 4 would be zero if the equity index was currently trading the closest to:A. 97.30.B. 99.09.C. 100.00.
11. From the bank’s perspective, using data from Exhibits 4 and 5, the fair value of the equity swap is closest to:A. –$1,139,425.B. –$781,323.C. –$181,323.
10. Based on Exhibit 3, Johnson should determine that the annualized equilibrium fixed swap rate for Japanese yen is closest to:A. 0.0624%.B. 0.1375%.C. 0.2496%.
9. From the bank’s perspective, using data from Exhibit 1, the current value of the swap described in Exhibit 2 is closest to:A. –$2,951,963.B. –$1,967,975.C. –$1,943,000.
8. Based on Exhibit 1, Johnson should price the three-year Libor-based interest rate swap at a fixed rate closest to:A. 0.34%.B. 1.16%.C. 1.19%.
7. Based on Exhibits 2 and 3, and assuming annual compounding, the per share value of Troubadour’s short position in the TSI forward contract three months after contract initiation is closest to:A.
6. The most appropriate response to Troubadour’s supervisor’s question regarding the TSI forward contract is:A. a decrease in TSI’s share price, all else equal.B. an increase in the risk-free
5. Based on Exhibit 2, Troubadour should find that an arbitrage opportunity relating to TSI shares is A. not available.B. available based on carry arbitrage.C. available based on reverse carry
4. The value of Position 3 is closest to:A. –¥40,020.B. ¥139,913.C. ¥239,963.
3. The value of Position 2 is closest to:A. –¥149,925.B. –¥150,000.C. –¥150,075.
2. The current no-arbitrage futures price of the Nikkei 225 futures contract (Position 1) is closest to:A. 15,951.81.B. 16,047.86.C. 16,112.21.
1. Based on Exhibit 2 and assuming annual compounding, the arbitrage profit on the bond futures contract is closest to:A. 0.4158.B. 0.5356.C. 0.6195.
2. If the equity index return was −6.0% for the quarter (not annualized), the equity swap cash flow will be closest to:A. −€320,000.B. −€180,000.C. €180,000.
1. If the equity index return was 4.0% for the quarter (not annualized), the equity swap cash flow will be closest to:A. −€220,000.B. −€180,000.C. €180,000.
3. The fixed swap quarterly payments in the currency swap will be closest to:A. A$692,000 and US$55,000.B. A$220,000 and US$173,000.C. A$720,000 and US$220,000.
2. The notional amount (in US$ millions) will be closest to:A. 88.B. 100.C. 114.
1. The annual fixed swap rates for Australian dollars and US dollars, respectively, will be closest to:A. 2.80% and 0.10%.B. 2.77% and 0.25%.C. 2.65% and 0.175%.
2. The value (in thousands) for the party in the swap receiving the floating rate will be closest to:A. −€4,822.B. −€3,375.C. €5,000.
1. The value (in thousands) for the party receiving the fixed rate will be closest to:A. −€5,000.B. €3,375.C. €4,822.
The fixed rate of the swap will be closest to:A. 1.0%.B. 1.3%.C. 1.6%.
4. Suppose we are pricing a five-year Libor-based interest rate swap with annual resets(30/360 day count). The estimated present value factors, PV 1 0,ti( ), are given in the following
3. If the FRA was initially priced at 0.50%, the payment received to settle it will be closest to:A. −£1,248.75.B. £1,248.75.C. £1,250.00
2. If the FRA was initially priced at 0.60%, the payment received to settle it will be closest to:A. −£2,448.75.B. £1,248.75.C. £1,250.00.
1. The interest actually paid at maturity on the UK company’s bank deposit will be closest to:A. £10,000.B. £13,750.C. £27,500.
4. Compared to the value of a forward contract, the value of a futures contract is most likely:A. lower.B. higher.C. the same.
3. After marking to market, the futures value of the existing contract will be closest to:A. −10.35.B. 0.00.C. 10.35.
2. If a dividend payment is announced between the forward’s valuation and expiration dates, assuming the news announcement does not change the current underlying price, the forward value will most
1. If there are no other carry cash flows, the forward value of the existing contract will be closest to:A. −10.00.B. 9.24.C. 10.35.
2. An increase in which of the following parameters would result in an increase in the forward price?A. Dividends B. Risk-free interest rate C. Expected future stock price
1. The one-month forward price for Nestlé common stock will be closest to:A. CHF67.80.B. CHF67.86.C. CHF69.94.
1. Assume that at Time 0 we entered into a one-year forward contract with price F0(T) = 105.Nine months later, at Time t = 0.75, the observed price of the stock is S0.75 = 110 and the interest rate
2. If the interest rate immediately falls 50 bps to 2.25%, the three-month forward price will:A. decrease.B. increase.C. be unchanged
1. Based on the current stock price and the no-arbitrage approach, which of the following values is closest to the equilibrium three-month forward price?A. A$63.31 B. A$63.74 C. A$65.05
Calculate and interpret the no-arbitrage value of interest rate, currency, and equity swaps.
Describe and compare how interest rate, currency, and equity swaps are priced and valued;
Calculate and interpret the no-arbitrage value of equity, interest rate, fixed-income, and currency forward and futures contracts;
Describe and compare how equity, interest rate, fixed-income, and currency forward and futures contracts are priced and valued;
36. Combining a protective put with a forward contract generates equivalent outcomes at expiration to those of a:A. fiduciary call.B. long call combined with a short asset.C. forward contract
35. Which of the following circumstances will most likely affect the value of an American call option relative to a European call option?A. Dividends are declared B. Expiration date occurs C. The
34. At expiration, American call options are worth:A. less than European call options.B. the same as European call options.C. more than European call options.
33. An at-the-money American call option on a stock that pays no dividends has three months remaining until expiration. The market value of the option will most likely be:A. less than its exercise
32. Which of the following is least likely to be required by the binomial option pricing model?A. Spot price B. Two possible prices one period later C. Actual probabilities of the up and down moves
31. Which of the following transactions is the equivalent of a synthetic long call position?A. Long asset, long put, short call B. Long asset, long put, short bond C. Short asset, long call, long bond
30. Based on put-call parity, a trader who combines a long asset, a long put, and a short call will create a synthetic:A. long bond.B. fiduciary call.C. protective put.
29. A European put option on a dividend-paying stock is most likely to increase if there is an increase in:A. carrying costs.B. the risk-free rate.C. dividend payments.
28. Prior to expiration, the lowest value of a European put option is the greater of zero or the:A. exercise price minus the value of the underlying.B. present value of the exercise price minus the
27. The value of a European put option can be either directly or inversely related to the:A. exercise price.B. time to expiration.C. volatility of the underlying.
26. The table below shows three European call options on the same underlying:Time to Expiration Exercise Price Option 1 3 months $100 Option 2 6 months $100 Option 3 6 months $105 The option with the
25. The value of a European call option is inversely related to the:A. exercise price.B. time to expiration.C. volatility of the underlying.
24. If the risk-free rate increases, the value of an in-the-money European put option will most likely:A. decrease.B. remain the same.C. increase.
23. When the price of the underlying is below the exercise price, a put option is:A. in-the-money.B. at-the-money.C. out-of-the-money.
22. For a European call option with two months until expiration, if the spot price is below the exercise price, the call option will most likely have:A. zero time value.B. positive time value.C.
21. The value of a European call option at expiration is the greater of zero or the:A. value of the underlying.B. value of the underlying minus the exercise price.C. exercise price minus the value of
20. At expiration, a European put option will be valuable if the exercise price is:A. less than the underlying price.B. equal to the underlying price.C. greater than the underlying price.
19. A European call option and a European put option are written on the same underlying, and both options have the same expiration date and exercise price. At expiration, it is possible that both
18. The value of a swap is equal to the present value of the:A. fixed payments from the swap.B. net cash flow payments from the swap.C. underlying at the end of the contract.
17. The price of a swap typically:A. is zero at initiation.B. fluctuates over the life of the contract.C. is obtained through a process of replication.
16. The value of a swap typically:A. is non-zero at initiation.B. is obtained through replication.C. does not fluctuate over the life of the contract.
15. To the holder of a long position, it is more desirable to own a forward contract than a futures contract when interest rates and futures prices are:A. negatively correlated.B. uncorrelated.C.
14. In contrast to a forward contract, a futures contract:A. trades over-the-counter.B. is initiated at a zero value.C. is marked-to-market daily.
13. When interest rates are constant, futures prices are most likely:A. less than forward prices.B. equal to forward prices.C. greater than forward prices.
12. Which of the following factors most likely explains why the spot price of a commodity in short supply can be greater than its forward price?A. Opportunity cost B. Lack of dividends C. Convenience
11. If the present value of storage costs exceeds the present value of its convenience yield, then the commodity’s forward price is most likely:A. less than the spot price compounded at the
10. If the net cost of carry of an asset is positive, then the price of a forward contract on that asset is most likely:A. lower than if the net cost of carry was zero.B. the same as if the net cost
9. Stocks BWQ and ZER are each currently priced at $100 per share. Over the next year, stock BWQ is expected to generate significant benefits whereas stock ZER is not expected to generate any
8. At the initiation of a forward contract on an asset that neither receives benefits nor incurs carrying costs during the term of the contract, the forward price is equal to the:A. spot price.B.
7. The value of a forward contract at expiration is:A. positive to the long party if the spot price is higher than the forward price.B. negative to the short party if the forward price is higher than
6. With respect to a forward contract, as market conditions change:A. only the price fluctuates.B. only the value fluctuates.C. both the price and the value fluctuate.
5. Assume an asset pays no dividends or interest, and also assume that the asset does not yield any non-financial benefits or incur any carrying cost. At initiation, the price of a forward contract
4. The price of a forward contract:A. is the amount paid at initiation.B. is the amount paid at expiration.C. fluctuates over the term of the contract.
3. An arbitrage transaction generates a net inflow of funds:A. throughout the holding period.B. at the end of the holding period.C. at the start of the holding period.
2. An arbitrageur will most likely execute a trade when:A. transaction costs are low.B. costs of short-selling are high.C. prices are consistent with the law of one price.
1. An arbitrage opportunity is least likely to be exploited when:A. one position is illiquid.B. the price differential between assets is large.C. the investor can execute a transaction in large
2. The effect of dividends on a stock on early exercise of a put is to:A. make early exercise less likely.B. have no effect on early exercise.C. make early exercise more likely.
1. With respect to American calls, which of the following statements is most accurate?A. American calls should be exercised early if the underlying has reached its expected maximum price.B. American
3. Which of the following best describes the binomial option pricing formula?A. The expected payoff is discounted at the risk-free rate plus a risk premium.B. The spot price is compounded at the
2. Which of the following is not a factor in pricing a call option in the binomial model?A. The risk-free rate B. The exercise price C. The probability that the underlying will go up
1. Which of the following terms directly represents the volatility of the underlying in the binomial model?A. The standard deviation of the underlying B. The difference between the up and down
5. How does the minimum value of a call or put option differ from its exercise value?A. The exercise price is adjusted for the time value of money.B. The minimum value reflects the volatility of the
4. The loss in value of an option as it moves closer to expiration is called what?A. Time value decay B. Volatility diminution C. Time value of money
3. Why might a European put be worth less the longer the time to expiration?A. The cost of waiting to receive the exercise price is higher.B. The risk of the underlying is lower over a longer period
2. Which of the following statements imply that a European call on a stock is worth more?A. Less time to expiration B. A higher stock price relative to the exercise price C. Larger dividends paid by
1. Which of the following factors does not affect the value of a European option?A. The volatility of the underlying B. Dividends or interest paid by the underlying C. The percentage of the
2. If the present value of the payments in a forward contract or swap is not zero, which of the following is most likely to be true?A. The contract cannot legally be created.B. The contract must be
1. A swap is equivalent to a series of:A. forward contracts, each created at the swap price.B. long forward contracts, matched with short futures contracts.C. forward contracts, each created at their
3. With respect to the value of a futures contract, which of the following statements is most accurate? The value is the:A. futures price minus the spot price.B. present value of the expected payoff
2. Which of the following conditions will not make futures and forward prices equivalent?A. Interest rates are constant.B. Futures prices are uncorrelated with interest rates.C. The volatility of the
1. Which of the following best describes how futures contract payoffs differ from forward contract payoffs?A. Forward contract payoffs are larger.B. They are equal, ignoring the time value of
4. Which of the following best describes the forward rate of an FRA?A. The spot rate implied by the term structure B. The forward rate implied by the term structure C. The rate on a zero-coupon bond
3. Which of the following factors does not affect the forward price?A. The costs of holding the underlying B. Dividends or interest paid by the underlying C. Whether the investor is risk averse, risk
2. Which of the following best describes the value of the forward contract at expiration?The value is the price of the underlying:A. minus the forward price.B. divided by the forward price.C. minus
1. Which of the following best describes the difference between the price of a forward contract and its value?A. The forward price is fixed at the start, and the value starts at zero and then

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