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Melissa purchased a put option on Netflix. The put premium was $10. The strike price is $345. When she purchased the option Netflix stock was

Melissa purchased a put option on Netflix. The put premium was $10. The strike price is $345. When she purchased the option Netflix stock was trading at $365. The option matured today and the stock price is $338. What is her profit/loss? Should she exercise her option?

Multiple Choice

  • $7 profit; yes she should exercise her put option
  • -$3 loss; yes she should exercise her put option
  • $8 gain; yes she should exercise her put option
  • -$10 loss; no she should not exercise her put option
  • $7 profit; no she should not exercise her put option

Inflation in the UK was 2% while inflation in Japan was 4%. According to relative purchasing power parity, which currency should strengthenversus the other currency, and by around how much?

Multiple Choice

  • Pound should strengthen; around 3%
  • Pound should strengthen; around 2%
  • Yen should strengthen; around 4%
  • Pound should strengthen; around 1%
  • Yen should weaken; around 1%

Francis currently lives in Paris. He is traveling to Las Vegas, USA next month (Cardi B has a residency there). He plans to take 50,000 with him. However, he is worried about a movement in the $/ exchange rate. He believes the dollar will strengthen against the euro. What should he do if he wants to protect himself against a move in the exchange rate?

Multiple Choice

  • Sell euros forward with a maturity next month
  • Sell dollars forwardwith a maturity next month
  • Buy a call option on euros with a maturity next month
  • Sell a put option on euros with a maturity next month

George Soros and Warren Buffet both believe the stock market is going down (i.e. stock prices will fall). Buffet decides to use an option strategy and Soros decides to use a forwards strategy. Currently, the stock market is priced at $200. A call option has a strike of $205 and costs $2. A put option has a strike of $195 and costs $3. The forward price is $201. Each investor uses the respective derivative strategy mentioned above. What is the profit/loss of each investor if the market finishes at $198?

Multiple Choice

  • Soros breaks even
  • Buffet profits $1
  • Soros profits $3

Buffet loses $2

  • Buffet loses $3
  • Soros profits $3
  • Soros loses $2
  • Buffet profits $1
  • Soros profits $2
  • Buffet profits $3

The annualized risk-free rate in the eurozone is 5% and the annualized UK risk-free rate is 3%. The spot quote is 1.18/ while the one year forward quote is 1.25/. You can borrow either 1,000,000 or 847,457.6.

According to interest rate parity, is the forward quote correct? If not, what should it be?

If the forward quote is not correct, how much money would you profit if you implemented the proper arbitrage?

Multiple Choice

  • Forward rate should be 1.2643/; arbitrage would net you110,513
  • Forward rate should be1.2643/; arbitrage would net you 93,786
  • Forward rate should be1.2029/; arbitrage would net you 41,102
  • Forward rate should be1.2029/; arbitrage would net you 45,721
  • Forward rate should be1.2029/; arbitrage would net you 51,354

There are two neighboring farmers - Shirley and Bob. Both make the same two products - wheat and corn. If Bob used all of his resources to harvest only corn then he would have 200,000 pounds of corn. If he only harvested wheat then he would have 300,000 pounds of wheat. If Shirley only harvested corn then she would have 400,000 pounds of corn. If she harvested just wheat then she would have 350,000 pounds of wheat.

Which farmer has the relative comparative advantage harvesting wheat? Who has relative comparative advantage harvesting corn?

Multiple Choice

  • Bob has relative comparative advantage with Wheat.
  • Bob has relative comparative advantage with Corn.
  • Shirley has relative comparative advantage with Corn.
  • Bob has relative comparative advantage with Wheat.
  • Shirley has relative comparative advantage with Wheat.
  • Bob has relative comparative advantage with Corn.
  • No one has relative comparative advantage with Wheat.
  • Shirley has relative comparative advantage with Corn.
  • Shirley has relative comparative advantage with Wheat.
  • Shirley has relative comparative advantage with Corn.

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