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1 Which of the following is NOT true? a. When a CBOE call option on IBM is exercised, IBM does NOT issue more stock b.

1
  1. Which of the following is NOT true?

    a.

    When a CBOE call option on IBM is exercised, IBM does NOT issue more stock

    b.

    An American option can be exercised at any time during its life

    c.

    A call option will always be exercised at maturity if the underlying asset price is less than the strike price

    d.

    A put option will always be exercised at maturity if the strike price is greater than the underlying asset price

2 points

QUESTION 2
  1. Which of the following is approximately true when size is measured in terms of the underlying principal amounts or value of the underlying assets

    a.

    The exchange-traded market is one-tenth as big as the over-the-counter market

    b.

    The exchange-traded market is twice as big as the over-the-counter market

    c.

    The over-the-counter market is twice as big as the exchange-traded market

    d.

    The over-the-counter market is one hundred times as big as the exchange-traded market

2 points

QUESTION 3
  1. Which of the following describes American options?

    a.

    Sold in America.

    b.

    Priced in U.S. dollars.

    c.

    Exercisable only at maturity.

    d.

    Exercisable before maturity.

2 points

QUESTION 4
  1. A short forward contract on an asset plus a long position in a European call option on the asset with a strike price equal to the forward price is equivalent to

    a.

    A short position in a call option

    b.

    A long position in a put option

    c.

    A short position in a put option

    d.

    None of the above

2 points

QUESTION 5
  1. The price of a stock on June 1 is $48. A trader sells 200 put options on the stock with a strike price of $40 when the option price is $2. The options are exercised when the stock price is $39. The traders net profit or loss is

    a.

    Loss of $900

    b.

    Loss of $800

    c.

    Loss of $200

    d.

    Gain of $200

2 points

QUESTION 6
  1. Which of the following is NOT true

    a.

    Futures contracts nearly always last longer than forward contracts

    b.

    Futures contracts are standardized; forward contracts are not.

    c.

    Delivery or final cash settlement usually takes place with futures contracts; the same is not true of forward contracts.

    d.

    Forward contracts usually have one specified delivery date; futures contract often have a range of delivery dates.

2 points

QUESTION 7
  1. A company enters into a short futures contract to sell 50,000 units of a commodity for 70 cents per unit. The initial margin is $4,000 and the maintenance margin is $2,000. What is the futures price per unit above which there will be a margin call?

    a.

    72 cents

    b.

    74 cents

    c.

    76 cents

    d.

    78 cents

2 points

QUESTION 8
  1. Two futures contract is traded where both the long and short parties are closing out existing positions. What is the resultant change in the open interest?

    a.

    No change

    b.

    Decrease by one

    c.

    Decrease by two

    d.

    Increase by one

2 points

QUESTION 9
  1. Which of the following are cash settled

    a.

    All futures contracts

    b.

    All option contracts

    c.

    Futures on commodities

    d.

    Futures on stock indices

2 points

QUESTION 10
  1. Futures contracts trade with every month as a delivery month. A company is hedging the purchase of the underlying asset on June 20. Which futures contract should it use?

    a.

    The May contract

    b.

    The June contract

    c.

    The July contract

    d.

    The August contract

2 points

QUESTION 11
  1. Which of the following is true?

    a.

    Hedging can always be done more easily by a companys shareholders than by the company itself

    b.

    If all companies in an industry hedge, a company in the industry can sometimes reduce its risk by choosing not to hedge

    c.

    If all companies in an industry do not hedge, a company in the industry can reduce its risk by hedging

    d.

    If all companies in an industry do not hedge, a company is liable to increase its risk by hedging

2 points

QUESTION 12
  1. Suppose that the standard deviation of monthly changes in the price of commodity A is $3. The standard deviation of monthly changes in a futures price for a contract on commodity B (which is similar to commodity A) is $2. The correlation between the futures price and the commodity price is 0.9. What hedge ratio should be used when hedging a one month exposure to the price of commodity A?

    a.

    0.60

    b.

    0.67

    c.

    0.90

    d.

    1.35

2 points

QUESTION 13
  1. A company has a $36 million portfolio with a beta of 1.2. The futures price for a contract on an index is 900. Futures contracts on $250 times the index can be traded. What trade is necessary to reduce beta to 0.9?

    a.

    Short 192 contracts

    b.

    Long 192 contracts

    c.

    Short 48 contracts

    d.

    Long 48 contracts

2 points

QUESTION 14
  1. Since the credit crisis that started in 2007 which of the following have derivatives traders started to use as the risk-free rate for some transactions

    a.

    The LIBOR rate

    b.

    The Treasury Bill rate

    c.

    The overnight indexed swap rate

    d.

    The repurchase agreement rate

2 points

QUESTION 15
  1. Which of following describes forward rates?

    a.

    The coupon rate that causes a bond price to equal its par (or principal) value

    b.

    Interest rates implied by current zero rates for future periods of time

    c.

    The coupon rate that causes a bond price to equal its par (or principal) value

    d.

    A single discount rate that gives the value of a bond equal to its market price when applied to all cash flows

2 points

QUESTION 16
  1. An interest rate is 6% per annum with semi-annual compounding. What is the equivalent rate with continuous compounding?

    a.

    5.79%

    b.

    5.83%

    c.

    5.91%

    d.

    6.00%

2 points

QUESTION 17
  1. The two-year zero rate is 6% and the three year zero rate is 7.0%. What is the forward rate for the third year? All rates are continuously compounded.

    a.

    7.50%

    b.

    8.00%

    c.

    9.00%

    d.

    10.00%

2 points

QUESTION 18
  1. A 1.5-year Treasury instrument pays $5 coupon semi-annually. This bond sells for $96 today. If the six-month zero rate is 11.50 percent per annum and the one-year zero rate is 12.50 per annum, what is the 1.5-year zero rate?

    a.

    11.50 %

    b.

    11.64 %

    c.

    12.50%

    d.

    12.64%

2 points

QUESTION 19
  1. Which of the following is NOT true about forward and futures contracts?

    a.

    Forward contracts are lessliquid than futures contracts

    b.

    The futures contracts are traded on exchanges while forward contracts are traded in theover-the-counter market

    c.

    In theory forward pricesand futures prices are equal when there is no uncertainty about future interest rates

    d.

    Taxes and transactioncosts are the same for forward and futures contracts.

2 points

QUESTION 20
  1. As inventories of a commodity decline, which of the following is true?

    a.

    The one-year futures price as a percentage of the spot price increases

    b.

    The one-year futures price as a percentage of the spot price decreases

    c.

    The one-year futures price as a percentage of the spot price stays the same

    d.

    Any of the above can happen

2 points

QUESTION 21
  1. The spot price of an investment asset that provides no income is $50 and the risk-free rate for all maturities (with continuous compounding) is 12%. What is the three-year forward price?

    a.

    $68.00

    b.

    $71.67

    c.

    $88.18

    d.

    $150.00

2 points

QUESTION 22
  1. An exchange rate is 0.8000 and the six-month domestic and foreign risk-free interest rates are 6% and 8% (both expressed with continuous compounding). What is the six-month forward rate?

    a.

    0.7920

    b.

    0.8080

    c.

    0.8162

    d.

    0.8326

2 points

QUESTION 23
  1. Which of following is applicable to treasury bill in the United States?

    a.

    Actual/360

    b.

    Actual/Actual

    c.

    30/360

    d.

    Actual/365

2 points

QUESTION 24
  1. A trader enters into a long position in one Eurodollar futures contract. How much does the trader gain when the futures price quote increases by 6 basis points?

    a.

    $6

    b.

    $60

    c.

    $150

    d.

    $600

2 points

QUESTION 25
  1. A company invests $2,000 in a seven-year zero-coupon bond and $3,000 in a fifteen-year zero-coupon bond. What is the duration of the portfolio?

    a.

    7.8 years

    b.

    11.0 years

    c.

    11.8 years

    d.

    15.8 years

2 points

QUESTION 26
  1. A portfolio is worth $30,000,000. The futures price for a Treasury note futures contract is 120 and each contract is for the delivery of bonds with a face value of $100,000. On the delivery date the duration of the bond that is expected to be cheapest to deliver is 6 years and the duration of the portfolio will be 6 years. How many contracts are necessary for hedging the portfolio?

    a.

    100

    b.

    200

    c.

    250

    d.

    300

2 points

QUESTION 27
  1. Since the 2008 credit crisis

    a.

    LIBOR has replaced OIS as the discount rate for non-collateralized swaps

    b.

    OIS has replaced LIBOR as the discount rate for collateralized swaps

    c.

    LIBOR has replaced OIS as the discount rate for collateralized swaps

    d.

    OIS has replaced LIBOR as the discount rate for non-collateralized swaps

2 points

QUESTION 28
  1. A company enters into an interest rate swap where it is paying fixed and receiving LIBOR. When interest rates increase, which of the following is true?

    a.

    The value of the swap to the company decreases

    b.

    The value of the swap to the company increases

    c.

    The value of the swap can either increase or decrease

    d.

    The value of the swap does not change providing the swap rate remains the same

2 points

QUESTION 29
  1. A company can invest funds for five years at LIBOR minus 20 basis points. The five-year swap rate is 3%. What fixed rate of interest can the company earn by using the swap?

    a.

    2.4%

    b.

    2.7%

    c.

    2.8%

    d.

    3.0%

2 points

QUESTION 30
  1. An interest rate swap has three years of remaining life. Payments are exchanged annually. Interest at 2% is paid and 12-month LIBOR is received. A exchange of payments has just taken place. The one-year, two-year and three-year LIBOR/swap zero rates are 2%, 3% and 4%. All rates an annually compounded. What is the value of the swap as a percentage of the principal when LIBOR discounting is used?

    a.

    2.00

    b.

    2.24

    c.

    4.50

    d.

    5.48

2 points

QUESTION 31
  1. Company X and Company Y have been offered the following rates

    Fixed Rate

    Floating Rate

    Company X

    3.5%

    3-month LIBOR plus 10bp

    Company Y

    4.5%

    3-month LIBOR plus 40 bp

    Difference in rates

    100 bp

    30 bp

    Suppose that Company X borrows fixed and company Y borrows floating. If they enter into a swap with each other where the apparent benefits are shared equally, what is company Xs effective borrowing rate?

    a.

    3-month LIBOR10bp

    b.

    3-month LIBOR-30bp

    c.

    3-month LIBOR25bp

    d.

    3-month LIBOR-40bp

2 points

QUESTION 32
  1. Which of the following is NOT true

    a.
    1. The bonus structure at banks do not lead to short-term horizons for decision making
    b.

    Securitization involves the transfer of risk

    c.

    The term agency costs describes the situation where the incentives of two parties in a business relationship are not perfectly aligned

    d.

    Correlations increase in stressed market conditions

2 points

QUESTION 33
  1. Suppose that ABSs are created from portfolios of subprime mortgages with the following allocation of the principal to tranches: senior 80%, mezzanine 10%, and equity 10%. (The portfolios of subprime mortgages have the same default rates.) An ABS CDO is then created from the mezzanine tranches with the same allocation of principal. Losses on the mortgage portfolio prove to be 10%. What, as a percent of tranche principal, are losses on the mezzanine tranche of the ABS CDO

    a.

    0%

    b.

    50%

    c.

    75%

    d.

    100%

2 points

QUESTION 34
  1. Which of the following describes the waterfall typically used for mortgages pre-crisis?

    A distribution of cash flows to tranches with priority given to tranche with the highest rating

    A distribution of cash flows to tranches in proportion to their outstanding principals

    A distribution of losses to tranches so that tranches bear losses in proportion to their outstanding principals

    None of the above

2 points

QUESTION 35
  1. Which of the following describes a subprime mortgage?

    a.

    The rate of interest is less than the prime rate of interest

    b.

    The loan-to-value ratio is below average

    c.

    The life of the mortgage is less than 25 years

    d.

    The credit risk is high

2 points

QUESTION 36
  1. Which of the following is true?

    A long call is the same as a short put

    A short call is the same as a long put

    A call on a stock plus a stock the same as a put

    None of the above

2 points

QUESTION 37
  1. The price of a stock is $64. A trader buys 1 put option contract on the stock with a strike price of $60 when the option price is $12. When does the trader make a profit?

    a.

    When the stock price is below $48

    b.

    When the stock price is below $60

    c.

    When the stock price is below $64

    d.

    When the stock price is below $76

2 points

QUESTION 38
  1. The price of a stock is $67. A trader sells 5 put option contracts on the stock with a strike price of $70 when the option price is $4. The options are exercised when the stock price is $68. What is the traders net profit or loss?

    a.

    Loss of $1,500

    b.

    Gain of $1,000

    c.

    Gain of $2,000

    d.

    Gain of $3,000

2 points

QUESTION 39
  1. Which of the following is an example of an option class?

    a.

    All calls on a certain stock

    b.

    All calls with a particular strike price on a certain stock

    c.

    All calls with a particular time to maturity on a certain stock

    d.

    All calls with a particular time to maturity and strike price on a certain stock

2 points

QUESTION 40
  1. When a six-month option is purchased

    The price must be paid in full

    Up to 25% of the option price can be borrowed using a margin account

    Up to 50% of the option price can be borrowed using a margin account

    Up to 75% of the option price can be borrowed using a margin account

2 points

QUESTION 41
  1. When the strike price increases with all else remaining the same, which of the following is true?

    a.

    Both calls and puts increase in value

    b.

    Both calls and puts decrease in value

    c.

    Calls increase in value while puts decrease in value

    d.

    Puts increase in value while calls decrease in value

2 points

QUESTION 42
  1. When dividends increase with all else remaining the same, which of the following is true?

    a.

    Both calls and puts increase in value

    b.

    Both calls and puts decrease in value

    c.

    Calls increase in value while puts decrease in value

    d.

    Puts increase in value while calls decrease in value

2 points

QUESTION 43
  1. When the time to maturity increases with all else remaining the same, which of the following is true?

    European options always increase in value

    The value of European options either stays the same or increases

    There is no effect on European option values

    European options are liable to increase or decrease in value

2 points

QUESTION 44
  1. A stock price (which pays no dividends) is $50 and the strike price of a two year European put option is $54. The risk-free rate is 3% (continuously compounded). Which of the following is a lower bound for the option such that there are arbitrage opportunities if the price is below the lower bound and no arbitrage opportunities if it is above the lower bound?

    $0.86

    $2.86

    $3.86

    $4.00

2 points

QUESTION 45
  1. The price of a European call option on a non-dividend-paying stock with a strike price of $50 is $6. The stock price is $51, the continuously compounded risk-free rate (all maturities) is 6% and the time to maturity is one year. What is the price of a one-year European put option on the stock with a strike price of $50? (Use put-call parity)

    $2.09

    $6.00

    $7.00

    $9.91

2 points

QUESTION 46
  1. Which of the following creates a bull spread?

    a.

    Buy a high strike price put and sell a low strike price put

    b.

    Buy a low strike price put and sell a high strike price put

    c.

    Buy a high strike price call and sell a low strike price put

    d.

    Buy a high strike price put and sell a low strike price call

2 points

QUESTION 47
  1. Which of the following is true of a box spread?

    a.

    It is a package consisting of a bull spread and a bear spread

    b.

    It involves two call options and two put options

    c.

    It has a known value at maturity

    d.

    All of the above

2 points

QUESTION 48
  1. Which of the following describes a protective put?

    a.

    A long put option on a stock plus a long position in the stock

    b.

    A long put option on a stock plus a short position in the stock

    c.

    A short put option on a stock plus a short call option on the stock

    d.

    A short put option on a stock plus a long position in the stock

2 points

QUESTION 49
  1. Six-month call options with strike prices of $35 and $40 cost $6 and $4, respectively. What is the maximum gain when a bull spread is created by trading a total of 200 options?

    a.

    $100

    b.

    $200

    c.

    $300

    d.

    $400

2 points

QUESTION 50
  1. When the interest rate is 5% per annum with continuous compounding, which of the following creates a principal protected note worth $1000?

    a.

    A one-year zero-coupon bond plus a one-year call option worth about $59

    b.

    A one-year zero-coupon bond plus a one-year call option worth about $49

    c.

    A one-year zero-coupon bond plus a one-year call option worth about $39

    d.

    A one-year zero-coupon bond plus a one-year call option worth about $29

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