When LIBOR is used as the discount rate:
A. The value of a swap is worth zero immediately after a payment date
B. The value of a swap is worth zero immediately before a payment date
C. The value of the floating rate bond underlying a swap is worth par immediately after
a payment date
D. The value of the floating rate bond underlying a swap is worth par immediately
before a payment date
A portfolio of derivatives on a stock has a delta of 2400 and a gamma of ‘“10. An option
on the stock with a delta of 0.5 and a gamma of 0.04 can be traded. What position in the
option is necessary to make the portfolio gamma neutral?
A. Long position in 250 options
B. Short position in 250 options
C. Long position in 20 options
D. Short position in 20 options
A stock price is 20, 22, 19, 21, 24, and 24 on six successive Fridays. Which of the
following is closest to the volatility per annum estimated from this data?
A. 50%
B. 60%
C. 70%
D. 80%
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
Which of the following increases basis risk?
A. A large difference between the futures prices when the hedge is put in place and
when it is closed out
B. Dissimilarity between the underlying asset of the futures contract and the hedger’s
exposure
C. A reduction in the time between the date when the futures contract is closed and its
delivery month
D. None of the above
A company will buy 1000 units of a certain commodity in one year. It decides to hedge
80% of its exposure using futures contracts. The spot price and the futures price are
currently $100 and $90, respectively. If the spot price and the futures price in one year
turn out to be $112 and $110, respectively. What is the average price paid for the
commodity?
A. $92
B. $96
C. $102
D. $106
When can Bermudan options be exercised?
A. Any time during the life of the options
B. Any time after a certain date up to the end of the life of the life
C. Any time before a certain date or at the end of the option’s life
D. On dates specified at the start of the option
Which of the following is a common use of weather derivatives?
A. Hedge the volume of electricity that will be demanded by customers in the summer
B. Hedge the price of oil that must be purchased in the winter
C. Hedge the price of electricity that must be purchased in the summer
D. Hedge the price and volume of gas that must be purchased for heating in the winter
An investor sells a futures contract an asset when the futures price is $1,500. Each
contract is on 100 units of the asset. The contract is closed out when the futures price is
$1,540. Which of the following is true
A. The investor has made a gain of $4,000
B. The investor has made a loss of $4,000
C. The investor has made a gain of $2,000
D. The investor has made a loss of $2,000
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 forward contracts; the
same is not true of futures contracts.
D. Forward contracts usually have one specified delivery date; futures contract often
have a range of delivery dates.
Which of the following describes a long position in an option?
A. A position where there is more than one year to maturity
B. A position where there is more than five years to maturity
C. A position where an option has been purchased
D. A position that has been held for a long time
When interest rates 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
Which of the following describes what a company should do to create a range forward
contract in order to hedge foreign currency that will be received?
A. Buy a put and sell a call on the currency with the strike price of the put higher than
that of the call
B. Buy a put and sell a call on the currency with the strike price of the put lower than
that of the call
C. Buy a call and sell a put on the currency with the strike price of the put higher than
that of the call
D. Buy a call and sell a put on the currency with the strike price of the put lower than
that of the call
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 $69. What is the trader’s net profit or loss?
A. Loss of $1,500
B. Loss of $500
C. Gain of $1,500
D. Loss of $1,000
Company X and Company Y have been offered the following rates
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 X’s effective borrowing rate?
A. 3-month LIBOR−30bp
B. 3.1%
C. 3-month LIBOR−10bp
D. 3.3%
Which of the following is NOT true?
A. Risk-neutral valuation provides prices that are only correct in a world where
investors are risk-neutral
B. Options can be valued based on the assumption that investors are risk neutral
C. In risk-neutral valuation the expected return on all investment assets is set equal to
the risk-free rate
D. In risk-neutral valuation the risk-free rate is used to discount expected cash flows
Which of the following is a typical bid-offer spread on the swap rate for a plain vanilla
interest rate swap?
A. 3 basis points
B. 8 basis points
C. 13 basis points
D. 18 basis points
The values of a stock price at the end of the second time step are $80, $100, $125. The
corresponding values of an option are $0, $5, and $20 respectively. What is an estimate
of gamma?
A. 0.136
B. 0.146
C. 0.156
D. 0.166
In the U.S. what is the longest maturity for 3-month Eurodollar futures contracts?
A: 2 years
B: 5 years
C: 10 years
D: 20 years