1. Are the following statements True or False? If the statement is correct, write down T. Otherwise write down F. No argument required. [25 marks) a) A call option gives its holder the right to purchase an asset for a specified price, called the exercise or strike price, on or before the specified expiration date. The price that the writer of a call option receives to sell the option is called the premium. [2.5 marks) b) Forward contracts are formalized and standardized. [2.5 marks) c) Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pays interest of $120 annually. Bond A will mature in five years, while bond B will mature in six years. If the yields to maturity on the two bonds change from 12% to 10%, both bonds will decrease in value, but bond B will decrease more than bond A. [2.5 marks) d) Suppose that Boeing has an expected rate of return of 0.08. It has a beta of 0.92. The risk-free rate is 0.04 and the market expected rate of return is 0.10. According to the Capital Asset Pricing Model, this security is overpriced. [2.5 marks) e) A two-asset portfolio with a standard deviation of zero can be formed when the assets have a correlation coefficient equal to zero. [2.5 marks) 1) You invest $1,000 in a risky asset with an expected rate of return of 0.17 and a standard deviation of 0.40 and a T-bill with a rate of return of 0.04. The slope of the capital allocation line formed with the risky asset and the risk-free asset is equal to 0.325. [2.5 marks) g) You sold short 100 shares of common stock at $45 per share. The initial margin is 50%. Your initial investment was $9,000. [2.5 marks) h) With regard to a futures contract, the short position is held by the trader who commits to delivering the commodity on the delivery date. [2.5 marks] i) Callable bonds give the bondholder the option to convert each bond into a stipulated number of shares of stocks. [2.5 marks) j) The clearinghouse guarantees that a futures contract will be fulfilled. [2.5 marks)