Refer to the table 6.1. The lease rate on the 6-month soybean contract is 0.35%. What is
the implied annual storage cost if the cost is continuously paid and proportional?
A) 0.84%
B) 1.62%
C) 2.30%
D) 4.0%
Using a binomial pricing model, what is the impact on the price of a call option if the
company increases the dividend paid to shareholders? The call option price:
A) Will drop
B) Will increase
C) Will remain constant
D) Impact cannot be determined
Eugene holds a collect-on-delivery call with S = $36.50, K = $35, σ = 0.22, r = 0.04,
div = 0 and 270 days until expiration. What is the value of the European COD call?
A) $5.90
B) $6.90
C) $7.90
D) $8.90
A put option is purchased and held for 1 year. The Exercise price on the underlying
asset is $40. If the current price of the asset is $36.45 and the future value of the
original option premium is (-$1.62), what is the put profit, if any, at the end of the year?
A) $1.62
B) $1.93
C) $3.55
D) $5.17
The owner of a house worth $180,000 purchases an insurance policy at the beginning of
the year for a price of $1,000. The deductible on the policy is $5,000. If after 6 months
the homeowner experiences a casualty loss valued at $45,000, what is the homeowner’s
net gain/loss? Assume an opportunity cost of capital of 4.0% annually.
A) $0
B) $1,000
C) $5,000
D) $6,020
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 median stock price after 3 years?
A) $57.67
B) $67.67
C) $77.67
D) $87.67
Consider a one-period binomial model of 12 months. Assume the stock price is $54.00,
σ = 0.25, r = 0.04 and the exercise price of a call option is $55. What is the forecasted
price of the stock given a downward movement during the year?
A) $43.77
B) $ 45.28
C) $48.98
D) $51.84
Assume the following: LN(S) and LN(Q) have a correlation coefficient of -0.20, S(0) =
45, S(Q) = 55, r = 0.03, σs = 0.18 σQ = 0.28, and no dividends. Using formula 20.39,
what is the price of a claim that pays 1/ ?
A) $3.02
B) $2.02
C) $1.02
D) $0.02
What is the breakeven point that an investor can obtain from a 6-month strategy
employing a long 830 call and a short 850 call? Interest rates are 0.5% per month.
A) $832.82
B) $842.32
C) $852.22
D) $862.92
A company issues an option grant with an outperformance feature, against the S&P 500.
Assume S&P 500 = 950, S = 22, k = 25, σ = 0.25, r = 0.06, and 5 years until expiration.
The S&P 500 has a dividend yield of 2%, standard deviation of 18.0% and a 0.30
correlation coefficient with the stock. What is the value of the outperformance feature?
A) $0.99
B) $1.31
C) $1.59
D) $1.72
What is the price of a $60 strike put? Assume S = $63.75, σ = 0.20, r = 0.055, the stock
pays no dividend and the option expires in 50 days?
A) $0.66
B) $0.55
C) $0.44
D) $0.33
Why is an American call option rarely exercised early, and thus priced similar to
European options?
A) Early exercise requires purchasing the stock
B) Most option sellers cannot deliver the stock
C) Option prices usually exceed intrinsic values
D) Short sellers disrupt delivery
Euro dollar futures prices with maturities of 3, 6, and 9 months are 89.04, 88.75, and
88.55, respectively. What is the annualized swap rate on 9-month securities?
A) 8.55%
B) 9.68%
C) 11.34%
D) 13.24%
Assume S = $36, K = 35, div = 0.0, r = 0.08, σ = 0.40, and 270 days until expiration.
What is the premium on an Asian average strike call where N = 2?
A) $1.91
B) $2.01
C) $2.11
D) $2.21
A portfolio manager enters into a total return swap. She swaps 50% of her $50 million
index based portfolio for 4.5% yield bonds. If the annualized total return on the index is
2.5%, what net cash flow will the manager experience under the swap agreement?
A) + $250,000
B) -$250,000
C) + $500,000
D) -$500,000
Suppose that B = $500 and A0 = $470, α = 9%, r = 4%, σ = 17%, and δ = 0. If T = 8,
what is the true default probability?
A) 13.0%
B) 20.5%
C) 38.3%
D) 44.4%
Which of the following financially engineered products is NOT used to defer the
payment of capital gains taxes on securities that have appreciated?
A) Commodity Linked Options
B) DECS
C) Equity Linked Notes
D) PEPS
Refer to the table 6.1. What is the approximate annualized lease rate on the 18-month
soybean forward contract?
A) 0.69%
B) 1.52%
C) 2.69%
D) 3.31%
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 price of the stock given a one standard deviation move up after 3 years?
A) $64.41
B) $74.41
C) $84.41
D) $94.41
Interest rates on the U.S. dollar are 6.5% and euro rates are 5.5%. The dollar per euro
spot rate is 0.950. What is the arbitrage profit on a required 1 million euro payment if
the forward rate is 0.980 dollars per euro and the exchange occurs in one year?
A) $10,000
B) $21,000
C) $28,000
D) $34,000
Using base 100 pricing, the price of bonds that mature in years 1, 2, 3, and 4 is 93.46,
92.22, 91 98 and 90.23, respectively. Given this data, what is the 2-year forward price
for a 2-year bond?
A) 97.84
B) 98.92
C) 99.74
D) 160.45
As the date of expiration approaches, what change in theta might counteract or slow
down the drop in the option price?
A) Decrease
B) Increase
C) Stay constant
D) Indifferent
A strategy consists of longing a put on the market index with a strike of 830 and
shorting a call option on the market index with a strike price of 830. The put premium is
$18.00 and the call premium is $44.00. Interest rates are 0.5% per month. Determine
the net profit or loss if the index price at expiration is $830 (in 6 months).
A) $0
B) $23.67 loss
C) $26.79 gain
D) $28.50 gain
What is the probability that a number drawn from the standard normal distribution will
NOT be between -1 and 1?
A) 0.22
B) 0.32
C) 0.42
D) 0.52
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, compute the profit or loss from the long index position by itself expiration (in 6
months) if the market index is $810.
A) $45.21 loss
B) $21.22 loss
C) $18.00 gain
D) $24.25 gain
What is the total dollar cost to create a delta hedge position against a 200 short call
position? Assume calls are priced at $4.16, the delta is 0.7644, and stock price is
$73.00.
A) $9,880
B) $10,328
C) $11,168
D) $12,660
Using option strategy concepts, what is the value of an insured home, if the value of the
uninsured home is $220,000, the house was purchased for $180,000 and the house has a
casualty policy costing $500 with a $2,000 deductible? Ignore interest costs.
A) $180,000
B) $217,500
C) $220,000
D) $222,500
In the case of a 1-year option, the current stock price is $52 per share. If the stock price
has an equal chance of ending the year at either $58 or $45, what is the given an △
interest rate of 6.0% and an exercise price of $50?
A) 0.2145
B) 0.3254
C) 0.5411
D) 0.6154
A 6-month forward contract for corn exists with a price of $1.70 per bushel. If Farmer
Jayne decides to hedge her 20,000 bushels of corn with the forward contract, what is
her profit or loss if spot prices are $1.65 or $1.80 when she sells her crop in 6 months?
Her total costs are $33,000.
A) $1,000 gain or $1,000 loss
B) $0 gain or $3,000 gain
C) $0 loss or $3,000 loss
D) $1,000 gain or $1,000 gain
The chance that a counter party may fail to meet a contractual obligation on a debt
instrument is referred to as:
A) Credit risk
B) Credit spread
C) Loss given default
D) Recovery rate
What is the cost of 100 shares of Jiffy, Inc. stock given that the bid-ask prices are
$31.25 – $32.00 and a $15.00 commission per transaction exists?
A) $3215
B) $3140
C) $3125
D) $3200
The spot price of the market index is $900. The annual rate of interest on treasuries is
2.4% (0.2% per month). After 3 months the market index is priced at $920. An investor
has a long call option on the index at a strike price of $930. What profit or loss will the
writer of the call option earn if the option premium is $2.00?
A) $2.00 gain
B) $2.00 loss
C) $2.01 gain
D) $2.01 loss