• a) In hedging using futures contracts, basis risk may not arise in a hedging situation if the futures contract used for hedging relates to a commodity that is different from that being hedged.

• b) In reality, outofthemoney put options are more expensive than atthemoney put options.

• c) Time Corp. shares and a pair of 3month options with strike price of $30 are trading at the following prices. Assuming the 3month riskfree interest rate (with continuous compounding) is 10% p.a. There is an arbitrage opportunity in this set of prices.

• d) A long position in a put option can be delta hedged by shorting delta units of the underlying.

• e) A portfolio manager who fully removes the systematic risk of a stock portfolio by selling futures contracts on a stock index, could achieve the same outcome by selling the shares and replacing the share portfolio with a riskfree bond portfolio.

• f) You are long 5 Eurodollar futures contracts. If the Libor rate underlying the contract increases by 5 basis points, your position gains +$625.

• g) A stock index currently stands at 350. The riskfree interest rate is 10% per annum (with continuous compounding) and the dividend yield on the index is 4% per annum (with continuous compounding). The futures price for a threemonth contract should be 352.52.

• h) You enter into a short Eurodollar futures contract at a price of 99.75 and close it out a week later at a price of 99.40. You have gained $375 on the position.

• i) An option is said to be inthemoney if its value is positive.

• j) The seller of a European call option will be in a loss if the underlying asset price goes down in value.

• k) A stock is trading at $100. A call option on the stock with a maturity of three months is trading at $6.60 and has a delta of 0.7. If the stock price increases to 101, the new call price will be exactly $6.20.

• l) In Black-Scholes option pricing model, the stock prices follow a normal distribution while the stock returns follow a log-normal distribution.

• m) The six-month forward price of 1g gold is $2255.69. if the risk free rate is 5% per annum and no other holding cost is involved the current price of this gold should be $2000.

• n) The Black-Scholes-Merton formula cannot be used to price European index options.

• o) A three-month European call option on a non-dividend-paying stock is selling for $2.70. The stock price is $47, the strike price is $45, and the risk-free interest rate is 6 percent per annum. Assuming no transaction costs, the option and stock prices present an arbitrage opportunity.

• p) By shorting corn futures, corn farmers can hedge against the risk of adverse weather wiping out their crop.

• q) The Black-Scholes-Merton option pricing model assumes a risk-free rate as the expected rate of return on the asset. This assumption makes the model impractical.

• r) The seller of a European put option will benefit if the underlying asset price goes down in value.

• s) A stock is currently priced at $40. It is known that at the end of three months it will be either $45 or $35. The risk-free interest rate is 8 percent p.a. Using the binomial pricing model, the value of a three-month European put option on the stock with at the money strike price, should be $2.50

• t) A calendar spread can be created by buying a call and selling a call when the strike prices are the same and the times to maturity are different.