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Assume S = $63, K = 60, div = 0, r = 0.04, σ = 0.35, and 90 days until expiration. What
is the premium on a knock-in call option with an up-and-in barrier of $65?
A) $1.96
B) $2.06
C) $2.16
D) $2.26
The spot price of the market index is $900. After 3 months the market index is priced at
$920. The annual rate of interest on treasuries is 2.4% (0.2% per month). The premium
on the long put, with an exercise price of $930, is $8.00. At what index price does a
long put investor have the same payoff as a short index investor? Assume the short
position has a breakeven price of $930.
A) $921.90
B) $930.00
C) $938.05
D) $940.00
Matt owns 5,000 share of Matrix at $52.50. To arbitrage this he shorts 5,000 calls and
longs 5,000 puts at a strike of $50.00. Assume = 0.16, σ = 0.30, rf = 0.06, and the
options expire in 170 days. What is the value at risk for 1 week at a 95% confidence
level?
A) $0
B) $16,433
C) $18,433
D) $20,433
A stock is valued at $28.00. The annual expected return is 9.0% and the standard
deviation of annualized returns is 19.0%. If the stock is lognormally distributed, what is
the expected price after 4 years?
A) $28.00
B) $32.33
C) $40.13
D) $54.60
You wish to create a synthetic forward rate agreement in which you would lock in a
return between 150 and 310 days. The price of a 150-day zero coupon bond is 0.9823
and the price of 310-day zero coupon bond is 0.9634. What are the transactions used to
create this instrument?
A) Borrow one 150-day bond and invest in 1.02 of the 310-day bonds
B) Borrow two 150-day bonds and invest in 0.98 of the 310-day bonds
C) Lend one of the 150-day bonds and borrow 1.02 of the 310-day bonds
D) Lend two of the 150-day bonds and borrow 0.98 of the 310-day bonds
Given a 3-year, 8.0% annual coupon bond with a par value of $1,000, what is the bond's
Macaulay duration if the yield to maturity is 9.5%?
A) 2.779
B) 2.634
C) 2.535
D) 2.442
KidCo Cereal Company sells "Sugar Corns" for $2.50 per box. The company will need
to buy 20,000 bushels of corn in 6 months to produce 40,000 boxes of cereal. Non-corn
costs total $60,000. What is the company's profit if they purchase call options at $0.12
per bushel with a strike price of $1.60? Assume the 6-month interest rate is 4.0% and
the spot price in 6 months is $1.65 per bushel.
A) $6,504 profit
B) $8,005 loss
C) $12,064 profit
D) $11,293 loss
Which of the following is not a derivative instrument?
A) Contract to sell corn
B) Option agreement to buy land
C) Installment sales agreement
D) Mortgage backed security
In the case of an acquisition, with which of the following offer structures does the
acquired firm bear the most risk between the time the offer is accepted and the time it is
consummated?
A) Fixed stock offer
B) Floating stock offer
C) Fixed collar offer
D) Floating collar offer
The sum of the squared, continuously compounded returns used to calculate a volatility
is referred to as:
A) ARCH
B) EWMA
C) GARCH
D) Realized quadratic variation
A strategy consists of buying a market index product at $830 and longing a put on the
index with a strike of $830. If the put premium is $18.00 and interest rates are 0.5% per
month, what is the profit or loss at expiration (in 6 months) if the market index is $810?
A) $20.00 gain
B) $18.65 gain
C) $36.29 loss
D) $43.76 loss
A firm has a single issue of a zero coupon debt that promises to pay $90 in 4 years, and
the A0 = $100, r = 4%, σ = 25%, and δ = 0. If the asset has a 2% chance of total default,
what is the yield on the bond?
A) 8.32%
B) 12.33%
C) 24.36%
D) 36.85%
A firm has a single issue of a zero coupon debt that promises to pay $90 in 4 years, and
the
A0 = $100, r = 5%, σ = 15%, and δ = 0. If the asset has no chance of total default, what
is the value of the debt?
A) $67.10
B) $75.19
C) $85.62
D) $90.00
Which of the following equations represents a call power option?
A) Min (Ka-Sa,0)
B) Max (Ka-Sa,0)
C) Min (Sa-Ka,0)
D) Max (Sa-Ka,0)
A stock is valued at $55.00. The annual expected return is 12.0% and the standard
deviation of annualized returns is 22.0%. If the stock is lognormally distributed, what is
the expected price after 3 years?
A) $78.83
B) $88.83
C) $98.83
D) $108.83
Call options with strikes of $30, $35, and $40 have option premiums of $1.50, $1.70,
and $2.00, respectively. Using strike price convexity, which option premium, if any, is
not possible?
A) C (30)
B) C (35)
C) C (40)
D) All are possible
Jillo, Inc. stock is selling for $54.70 per share. Calls and puts with a $55 strike and 40
days until expiration are selling for $1.65 and $1.23, respectively. What potential
arbitrage profit exists?
A) $0.12
B) $0.24
C) $0.36
D) $0.48
The forward prices on a barrel of crude oil are $112 and $118 in years one and two,
respectively. The interest rates on zero coupon government bonds are 3.0% and 3.5% in
years one and two, respectively. What is the likely 2-year swap price on a barrel of
crude oil?
A) $112.00
B) $116.60
C) $118.00
D) $120.50
Refer to the table 6.1. If wheat farmers expect a return of 8.0% on their investment in
wheat, what is the approximate implied increase in wheat commodity prices over the
next 6 months?
A) 3.75%
B) 4.59%
C) 5.26%
D) 6.37%
An investor purchases a call option with an exercise price of $55 for $2.60. The same
investor sells a call on the same security with an exercise price of $60 for $1.40. At
expiration, 3 months later, the stock price is $56.75. All other things being equal and
given an annual interest rate of 4.0%, what is the net profit or loss to the investor?
A) $1.21 loss
B) $1.50 loss
C) $0.54 gain
D) $1.65 gain
Given a 25% chance of a 600,000 bushel yield and a 75% chance of a 500,000 bushel
yield, what quantity should the farmer hedge in order to protect against an uncertain
harvest? Assume the farmer is willing to take reasonable risk.
A) 0
B) 500,000
C) 525,000
D) 600,000
A stock has a price of $50 and pays no dividend. The historical standard deviation of
the stock is 25% and the expected return on the stock is 12%. At the 95% confidence
level, what is the Tail VaR over the next 6 months?
A) $2.50
B) $13.63
C) $22.36
D) $47.50
The 3-year swap price on a new oat swap agreement is $5.94. Interest rates immediately
rise on 1, 2, and 3-year zero coupon bonds from 5.1%, 5.4%, and 5.7% to 5.2%, 5.6%,
and 6.0%, respectively. What is net swap payment per year if the reverse transaction
occurs? Assume year 1, 2, and 3 forward prices are $2.05, $2.15, and $2.30,
respectively and do not change.
A) $0.35
B) $0.49
C) $0.64
D) $0.75
Assume S = $45, σ = 0.25, r = 0.05, div = 0.0, on a 45 strike call and 55 days until
expiration. Given delta = 0.5502 and gamma = 0.0876, what is the delta-gamma
approximation for the call price on a $0.90 stock price decline?
A) $1.35
B) $1.45
C) $1.55
D) $1.65
A mutual fund is engaged in the short term and temporary purchase of index futures, for
purposes of minimizing its cash exposures. Which "use" most closely explains their
actions?
A) Risk management
B) Speculation
C) Reduced transaction costs
D) Regulatory arbitrage
The process of emphasizing more recent observations of data in calculating volatility is
commonly known as:
A) ARCH
B) EWMA
C) GARCH
D) Realized quadratic variation
Using a binomial tree, what is the price of a $40 strike 6-month put option, using
3-month intervals as the time period? Assume the following data: S = $37.90, r = 5.0%,
σ = 0.35
A) $3.52
B) $3.66
C) $3.84
D) $3.91
Forward prices for gold, in dollars per ounce, for the next five years are 1350, 1400,
1560, 1675, and 1756, respectively. A mine can be opened for 3 years at a cost of
$2,000. Annual mining costs are a constant $500 and interest rates are 5.0%. When
should the mine be opened to maximize NPV?
A) Year 1
B) Year 2
C) Year 3
D) Never
The annual coupon rate on a 1-year treasury bond is 5.5%. The coupon on a 2-year
treasury bond is 5.8%. What is the continuously compounded yield on a 2-year zero
coupon bond?
A) 5.55%
B) 5.65%
C) 5.75%
D) 5.85%
The premium on a long term call option on the market index with an exercise price of
950 is $12.00 when originally purchased. After 6 months the position is closed, and the
index spot price is 965. If interest rates are 0.5% per month, what is the Call Payoff?
A) $2.64
B) $12.00
C) $12.36
D) $15.00
What is the price of a $25 strike call? Assume S = $23.50, σ = 0.24, r = 0.055, the stock
pays a 2.5% continuous dividend and the option expires in 45 days?
A) $0.60
B) $0.50
C) $0.40
D) $0.30
Given X1 = N (0, 1) and X2 = N (0.5, 8), what is the mean of ex2?
A) 69.97
B) 79.97
C) 89.97
D) 99.97
According to trading volume data tabulated by the Wall Street Journal for April 15,
2010, which index futures contact experienced the highest total open interest?
A) DJ Industrial Average
B) S&P 500 Index
C) Mini S&P 500
D) Mini Nasdaq 100
Assume S = $33.00, σ = 0.32, r = 0.06, div = 0.01. You short 100 $35 strike puts at 68
days until expiration. Under a delta hedge position, what is your overnight profit/loss if
the stock rises to $34.50? Assume no cost to short stock.
A) $8.30 gain
B) $8.30 loss
C) $9.56 gain
D) $9.56 loss
Why can repos be used to simulate borrowing?
What is the primary difference between an equity-linked bond and a currency-linked
bond?
What concept helped Robert Engle win the Nobel Prize for economics in 2003 and
what was its basic tenant?
Describe the effectiveness of duration as a tool in hedging bonds.
What is the risk a U.S. investor faces when investing in foreign index securities, besides
index fluctuations?
