Which of the following is NOT true?
A. Gold and silver are investment assets
B. Investment assets are held by significant numbers of investors for investment
purposes
C. Investment assets are never held for consumption
D. The forward price of an investment asset can be obtained from the spot price,
interest rates, and the income paid on the asset
Which of the following is equivalent to a short position in a European put option?
A. A short position in a cash-or-nothing put option plus a long position in an
asset-or-nothing put option
B. A long position in an asset-or-nothing put option plus a long position in a
cash-or-nothing put option
C. A long position in an asset-or-nothing call option plus a long position in a
cash-or-nothing call option
D. A long position in an asset-or-nothing call option plus a short position in a
cash-or-nothing call option
Which of the following is the basis for calculating HDD and CDD?
A. The average temperature during the day
B. The average of the highest and lowest temperature during the day
C. The temperature at 12 noon during the day
D. None of the above
The volatility of a stock is 18% per year. Which of the following is closest to the
volatility per month?
A. 1.5%
B. 3.0%
C. 5.2%
D. 6.3%
Which of the following causes a volatility smile that is a “frown“?
A. There is a small probability of a large stock price decrease in one week
B. There is a small probability of a large stock price increase in one week
C. The outcome of a lawsuit (roughly equal chance of being favorable or unfavorable)
will create a large movement up or down in one week
D. None of the above
A haircut of 20% means that
A. A bond with a market value of $100 is considered to be worth $80 when used to
satisfy a collateral request
B. A bond with a face value of $100 is considered to be worth $80 when used to satisfy
a collateral request
C. A bond with a market value of $100 is considered to be worth $83.3 when used to
satisfy a collateral request
D. A bond with a face value of $100 is considered to be worth $83.3 when used to
satisfy a collateral request
Which of the following is acquired (in addition to a cash payoff) when the holder of a
call futures exercises?
A. A long position in a futures contract
B. A short position in a futures contract
C. A long position in the underlying asset
D. A short position in the underlying asset
When a reinsurer covers the layer of hurricane losses for an insurance company
between $20 million and $30 million, which of the following describes the reinsurance
company’s losses?
A. A bull spread on total hurricane losses
B. A bear spread on total hurricane losses
C. A long call option on total hurricane losses
D. A short put option on total hurricane losses
Which of the following describes a situation where an American put option on a stock
becomes more likely to be exercised early?
A. Expected dividends increase
B. Interest rates decrease
C. The stock price volatility decreases
D. All of the above
For a European put option on an index, the index level is 1,000, the strike price is 1050,
the time to maturity is six months, the risk-free rate is 4% per annum, and the dividend
yield on the index is 2% per annum. How low can the option price be without there
being an arbitrage opportunity?
A. $50.00
B. $43.11
C. $29.21
D. $39.16
The price of a stock on July 1 is $57. A trader buys 100 call options on the stock with a
strike price of $60 when the option price is $2. The options are exercised when the
stock price is $65. The trader’s net profit is
A. $700
B. $500
C. $300
D. $600
Which of the following is true?
A. Cash flow mapping is a way of calculating the present value of cash flows
B. Cash flow mapping is used to handle interest rate exposures in the model building
approach
C. Cash flow mapping is used to handle interest rate exposures in the historical
simulation approach
D. None of the above
A portfolio is worth $24,000,000. The futures price for a Treasury note futures contract
is 110 and each contract is for the delivery of bonds with a face value of $100,000. On
the delivery date the duration of the bond that is expected to be cheapest to deliver is 6
years and the duration of the portfolio will be 5.5 years. How many contracts are
necessary for hedging the portfolio?
A. 100
B. 200
C. 300
D. 400
Which of the following is true about a futures option and a spot option on the same
underlying asset when they have the same strike price? The expiration dates of the two
options and the futures are all the same.
A. A European call spot option and an American call futures option are equivalent
B. An American call spot option and a European call futures option are equivalent
C. A European put spot option and European put futures option are equivalent
D. An American put spot option and American put futures option are equivalent
A binomial tree with one-month time steps is used to value an index option. The interest
rate is 3% per annum and the dividend yield is 1% per annum. The volatility of the
index is 16%. What is the probability of an up movement?
A. 0.4704
B. 0.5065
C. 0.5592
D. 0.5833
Which of the following is NOT true? (Assume that present values are calculated from
the end of the life of the option to today.)
A. An American put option is always worth less than the present value of the strike
price
B. A European put option is always worth less than the present value of the strike price
C. A European call option is always worth less than the stock price
D. An American call option is always worth less than the stock price
When a CEO has employee stock options, he or she is in theory motivated to do which
of the following?
A. Take more risk
B. Take less risk
C. Buy some of the company’s stock
D. None of the above
Which of the following is correct?
A. A diagonal spread can be created by buying a call and selling a put when the strike
prices are the same and the times to maturity are different
B. A diagonal spread can be created by buying a put and selling a call when the strike
prices are the same and the times to maturity are different
C. A diagonal spread can be created by buying a call and selling a call when the strike
prices are different and the times to maturity are different
D. A diagonal 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
What term is used to describe losses shareholders experience because the interests of
managers are not aligned with their own?
A. Agency costs
B. Backdating scandals
C. Dilution
D. Income statement expense
Which of the following best describes the term ‘spot price’
A. The price for immediate delivery
B. The price for delivery at a future time
C. The price of an asset that has been damaged
D. The price of renting an asset
Under liquidity preference theory, which of the following is always true?
A. The forward rate is higher than the spot rate when both have the same maturity.
B. Forward rates are unbiased predictors of expected future spot rates.
C. The spot rate for a certain maturity is higher than the par yield for that maturity.
D. Forward rates are higher than expected future spot rates.
Which of the following hypotheses is supported by empirical research covering the
1995-2000 period?
A. The grant date for executive stock options tended to be when the stock price is high
B. The grant date for executive stock options tended to be when the stock price is low
C. The grant date for executive stock options tended to be after a growth spurt in the
stock price
D. There was no relationship between the timing of grants and the stock price
The price of a stock on February 1 is $84. A trader buys 200 put options on the stock
with a strike price of $90 when the option price is $10. The options are exercised when
the stock price is $85. The trader’s net profit or loss is
A. Loss of $1,000
B. Loss of $2,000
C. Gain of $200
D. Gain of $1000
Which of the following is true about employee stock options after they have been
issued?
A. They have to be revalued every year
B. They have to be revalued every quarter
C. They have to be revalued every day like other derivatives
D. They never have to be revalued