1. Arbitrage is a transaction designed to capture profits resulting from market efficiency

True False

2. 2. If the initial margin is 11,000, the maintenance margin is $5,500 and your balance is $3,000, how much must you deposit?

$2,500 $1,500 $8,000 8,500 5,500

3. 3. Open interest is:

demand for derivatives minimum volume number of futures contracts outstanding number of option contracts in default number of investors asking for a specific investment vehicle

4. 4. Most forward contracts are closed by

delivery offset exercise default none of the above

5. 5. Which of the following duties is performed by the clearinghouse?

holding margin deposits negotiating prices between buyers and sellers setting prices for securities lending money to meet margin requirements none of the above

6. 6. Futures prices differ from spot prices by which one of the following factors?

the systematic risk the cost of carry the spread the risk premium none of the above

7. 7. Suppose there is a risk premium of $1.00. The spot price is $10 and the futures price is $12. What is the expected spot price at expiration?

$22.00 $13.00 $11.00 $10.00 $9.00

8. 8. Suppose it is currently December. The January futures price is $50 and the March futures price is $52. What does the spread of $2 represent?

the cost of carry from December to January the expected risk premium from December to March the cost of carry from January to March the expected risk premium from January to March none of the above

9. 9. Margin in a futures transaction differs from margin in a stock transaction because

stock transactions are much smaller delivery occurs immediately in a stock transaction no money is borrowed in a futures transaction futures are much more volatile none of the above

10. 10. Which of the following correctly orders the process of daily settlement?

clearinghouse officials establish a settlement price; each account is marked to market; accounts of those holding long/short positions are credited/debited appropriately; differences between todays settlement price and the previous days settlement price are determined clearinghouse officials establish a settlement price; each account is marked to market; differences between todays settlement price and the previous days settlement price are determined; accounts of those holding long/short positions are credited/debited appropriately differences between todays settlement price and the previous days settlement price are determined; accounts are marked to market; clearinghouse officials establish a settlement price; accounts of those holding long/short positions are credited/debited appropriately clearinghouse officials establish a settlement price; differences between todays settlement price and the previous days settlement price are determined; accounts of those holding long/short positions are credited/debited appropriately; each account is marked to market differences between todays settlement price and the previous days settlement price are determined; accounts are marked to market; clearinghouse officials establish a settlement price; accounts of those holding long/short positions are credited/debited appropriately

11. 11. Why is the initial value of a futures contract zero?

the futures is immediately marked-to-market you do not pay anything for it the basis will converge to zero the expected profit is zero because the futures price and spot price will be the same at expiration

12. 12. You are trying to see if there is an arbitrage opportunity. Current US interest rate is 4%. The spot rate for US/EUR is 2.5 while the forward rate for a year is 2. If the current interest rate in Germany is 30%. What should be done?

Borrow in US and convert money to Euros, invest in Germany and after a year convert back to US dollars. Borrow in Germany and convert to US dollars at spot rate, invest in US and after a year convert back to Euros at forward rate Borrow Euros in Germany and invest in Germany, wait for a year and then convert to dollars using the forward rate. Borrow dollars in US, invest in US, wait for a year and convert to Euros at Forward rate and invest in Germany There is no arbitrage with these numbers, so you must invest in your native nation

13. 13. A market in which the price doesn't equal the intrinsic value

has a risk-free component will not be profitable is normal is inefficient all of the above

14. 14. Determine the annualized implied repo rate on a Treasury bond spread in which the March is bought at 60 and the June is sold at 61.5. The March CF is 1.1 and the June CF is 1.14. The accrued interest as of March 1 is 1.15 and the accrued interest as of June 1 is 1.3. (due to calculator precision, pick the closest answer)

21% 23% 28% 35% 31%

15. 15. A call option gives the writer

the obligation to buy something the right to sell something the right to buy something the obligation to sell something none of the above

16. 16. A call option priced at $2 with a current stock price of $30 in the market and an exercise price of $35 would be worth (you don't own the stock)?

$2 $32 $3 -$2 $35

17. 17. A put option in which the stock price is $21.5 and the exercise price is $22 is said to be

in-the-money out-of-the-money at-the-money exercisable none of the above

18. 18. The option price is also referred to as the

strike spread premium fee none of the above

19. 19. You are the purchaser of a call option with $10 premium and $120 exercise price. You bought this option when the stock price was $130. If the stock price now is $120, what is the net cash flow to you if you exercise?

-$5 $5 $10 -$10 0

20. 20. You are the purchaser of a put option where the premium is $6 and exercise price is $52. You bought this option when the stock price was $50. If the stock price is $54 right now (and you're at expiration), what is your net cash flow from this investment?

negative $4 negative $6 $4 negative $2 $2

21. 21. The maximum loss of the purchaser of a put option with a premium of $3 and exercise price of $120 would be:

unlimited $120 $117 $3 $123

22. 22. The maximum gain of the writer of a call option with a premium of $3 and an exercise price of $120 would be

unlimited $3 $117 $120 $123

23. 23. You have the following information: S=52, X=50, T=1, r=0, C=5, P=5 Evaluating the situation from a Put-Call Parity framework, what steps would you take to implement an arbitrage strategy?

Sell Call, Buy Put, Short Stock, Invest remainder Sell Call, Buy Put, Buy Stock, Borrow remainder Buy Call, Sell Put, Buy Stock, Borrow remainder Buy Call, Sell Put, Short Stock, Invest remainder Buy Call, Sell Put, Short Stock, Borrow remainder

24. 24. Using the information and the solution from the previous (Q23), what would be the final arbitrage amount? (approximately)

If S>X or SX then $7, if SX or SX then $3, if SX or S

25. 25. You have the following information: S=18, E=15, r=2%, t=3 (years), standard deviation=0.25 Using the Black-Scholes Model, calculate the approximate Call price (Points : 4)

$2.33 $5.10 $4.05 $1.59 $7.21

26. 26. You have the following information: Put: X=$40, Premium=$4 Call: X=$50, Premium=$6 You bought the stock at $45 Scenarios: S=15, S=45, S=55 Given above information, please calculate the net payouts for a collar strategy for each different scenario.

-$3, $2, $7 -$30, $0, $10 -$28, $2, $12 -$4, $0, $6 $4, $0, -$6