1.1 A closed-end fund has a portfolio currently worth R450 million. The fund owes R10 million to its investment advisors. The fund has 20 million shares outstanding. What is the net asset value per share of the fund?

a) R20.00

b) R22.00

c) R22.50

d) R23.00

1.2 Asset A and B are perfectly correlated. What should the value of their correlation coefficient be?

a) 1 b) 0

c) +1

d) Between 1 to +1

1.3 The standard deviation for Company As stock is 30% and the standard deviation for Company Bs stock is 20%. The correlation of returns between A and B is 0.1. Calculate the covariance of returns between A and B

. a) 0.006

b) 0.06

c) 0.60

d) 0.15

1.4 Calculate the expected rate of return of a stock with a beta coefficient of 0.95. The risk-free rate is 3.5% and the market risk premium is 4%.

a) 7.3%

b) 10.63%

c) 11.0%

d) 7.5%

1.5 Suppose you hold a long position in a stock index futures contract. If the futures contract reaches maturity, what should be the means of settlement?

a) A cash settlement

b) Buying the stocks in the index

c) Letting the contract expire unexercised

d) Selling the stocks in the index

1.6 You are working for a domestic refinery and want to buy crude oil worth $10 million on the international market. You can only take delivery on a specific date in the future, and therefore you want to choose the delivery date for the oil. You also want to hedge your exchange-rate risk up to the selected date. The prime interest rate is 6%. How many different types of contracts would you need to enter into?

a) One forward contract and two futures contracts

b) Two forward contracts and one futures contract

c) Two futures contracts

d) Two forward contracts

1.7 A financial intermediary wants to hedge interest-rate risk on a floatingrate loan that has a 15-year term. What can the intermediary use?

a) Swaps

b) Put options

c) Futures

d) Call option

1.8 A single futures contract, which is to be settled by means of physical delivery, has an agreed contract price of R48. The settlement price is R50 on the day before expiry and R52 on the day of expiry of the contract. A trader has a long position in the above contract and leaves the position open. Determine the payment to the short position on expiry

a) R52

b) R48

c) R50

d) R2

1.9 An investor has purchased a put option on a stock that she owns. What option strategy is this?

a) Short put

b) Long put

c) Naked put

d) Protective put

1.10 A portfolio manager is concerned about the short-term loss in capital value of his share portfolio. He would like a fixed income return for the next year and would prefer not to liquidate the existing share portfolio. What is the most appropriate instrument that he should use?

a) Jibar futures contract

b) Forward-rate agreement

c) Plain vanilla swap

d) Debt-for-equity swap

1.11 An investor would like to write option contracts on his portfolio of shares, but has heard that the short call position poses unlimited risk. Suggest the appropriate spread that will create a floor on possible losses from the short call.

a) Bear spread

b) Bull spread

c) Short strangle

d) Long strangle

1.12 An investor is considering either buying or selling a call or put option and is not aware of the risks involved. Which option contract is the most risky one for the investor and why?

a) The long call, because the payoff profile is upward sloping and unlimited

b) The short call, because the payoff profile is downward sloping and unlimited

c) The long put, because the payoff profile is downward sloping and unlimited

d) The short put, because the payoff profile is upward sloping and unlimited

1.13 Bank A wants to enter into a credit-default swap, in order to transfer the risk of default on Company Xs bonds to a third party. What should Bank A do?

a) Sell protection and receive premiums

b) Buy protection and receive a default

c) Buy protection and pay premiums

1.14 If an underlying asset is priced at R100 and a put option with a premium of R8 has an exercise price of R95, what is the breakeven of a protective put strategy?

a) R92

b) R95

c) R100

d) R108

d) Sell protection and pay premiums

1.15 If an underlying asset is priced at R100 and a put option with a premium of R8 has an exercise price of R95, what is the breakeven of a protective put strategy? a) R92 b) R95 c) R100 d) R108