A floating-rate lender wants to use a collar as a hedge. Which of the following is
appropriate?
A. Buy a cap and sell a floor
B. Buy a cap and buy a floor
C. Sell a cap and sell a floor
D. Sell a cap and buy a floor
Which of the following might we expect to be the result of global warming?
A. An decrease in observed CDDs
B. An increase in observed CDDs
C. An increase in observed HDDs
D. None of the above
In a one-year forward contract on a CDS that will last five years, what usually happens
if there is a default during the first year?
A. There is a payoff to the forward protection buyer at the time of default
B. There is a payoff to the forward protection buyer at the end of one year
C. There is a payoff to the forward protection buyer at the end of six years
D. The contract ceases to exist
A short forward contract on an asset plus a long position in a European call option on
the asset with a strike price equal to the forward price is equivalent to
A. A short position in a call option
B. A short position in a put option
C. A long position in a put option
D. None of the above
Which of the following creates a bear spread?
A. Buy a low strike price put and sell a high strike price put
B. Buy a high strike price put and sell a low strike price put
C. Buy a high strike price call and sell a low strike price put
D. Buy a high strike price put and sell a low strike price call
Which of the following is true when a European currency option is valued using
forward exchange rates?
A. It is not necessary to know the domestic interest rate or the spot exchange rate
B. It is not necessary to know either the foreign or domestic interest rate
C. It is necessary to know the difference between the foreign and domestic interest rates
but not the rates themselves
D. It is not necessary to know the foreign interest rate or the spot exchange rate
The gain from a project is equally likely to have any value between -$0.15 million and
+$0.85 million. What is the 99% expected shortfall?
A. $0.145 million
B. $0.14 million
C. $0.13 million
D. $0.10 million
An interest rate is 5% per annum with continuous compounding. What is the equivalent
rate with semiannual compounding?
A. 5.06%
B. 5.03%
C. 4.97%
D. 4.94%
Which of the following is NOT true
A. A call option gives the holder the right to buy an asset by a certain date for a certain
price
B. A put option gives the holder the right to sell an asset by a certain date for a certain
price
C. The holder of a call or put option must exercise the right to sell or buy an asset
D. The holder of a forward contract is obligated to buy or sell an asset
A Eurodollar futures option contract has a strike price of 97 and the Eurodollar interest
rate is 2.50%. What is the intrinsic value of the contract if the option is a put?
A. $0
B. $1,250
C. $1,750
D. $2,500
How can a strangle trading strategy be created?
A. Buy one call and one put with the same strike price and same expiration date
B. Buy one call and one put with different strike prices and same expiration date
C. Buy one call and two puts with the same strike price and expiration date
D. Buy two calls and one put with the same strike price and expiration date
When dividends 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
As the convenience yield increases, which of the following is true?
A. The one-year futures price as a percentage of the spot price increases
B. The one-year futures price as a percentage of the spot price decreases
C. The one-year futures price as a percentage of the spot price stays the same
D. Any of the above can happen
The current price of a non-dividend-paying stock is $30. Over the next six months it is
expected to rise to $36 or fall to $26. Assume the risk-free rate is zero. An investor sells
call options with a strike price of $32. Which of the following hedges the position?
A. Buy 0.6 shares for each call option sold
B. Buy 0.4 shares for each call option sold
C. Short 0.6 shares for each call option sold
D. Short 0.6 shares for each call option sold
Which of the following describes contango?
A. The futures price is below the expected future spot price
B. The futures price is below today’s spot price
C. The futures price is a declining function of the time to maturity
D. The futures price is above the expected future spot price
Which of the following is approximately true when size is measured in terms of the
underlying principal amounts or value of the underlying assets
A. The exchange-traded market is twice as big as the over-the-counter market.
B. The over-the-counter market is twice as big as the exchange-traded market.
C. The exchange-traded market is ten times as big as the over-the-counter market.
D. The over-the-counter market is ten times as big as the exchange-traded market.
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 paid?
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 yield curve is flat at 6% per annum. What is the value of an FRA where the holder
receives interest at the rate of 8% per annum for a six-month period on a principal of
$1,000 starting in two years? All rates are compounded semiannually.
A. $9.12
B. $9.02
C. $8.88
D. $8.63
A European option on a stock with known a dollar dividend is valued by setting the
stock price variable equal to the stock price minus the present value of the dividend in
the Black-Scholes-Merton formula. A second price can be obtained using the tree
building procedure in the chapter. Which of the following is true when a very large
number of time steps are used in the tree?
A. The first price is higher than the second price
B. The first price is lower than the second price
C. The first price is sometimes higher and sometimes lower than the second price
D. The two prices are almost exactly the same
Consider a European one-year call futures option and a European one-year put futures
options when the futures price equals the strike price. Which of the following is true?
A. The call futures option is worth more than the put futures option
B. The put futures option is worth more than the call futures option
C. The call futures option is sometimes worth more and sometimes worth less than the
put futures option
D. The call futures option is worth the same as the put futures option
Which of the following is NOT a letter in the Greek alphabet?
A. delta
B. rho
C. vega
D. gamma
Which of the following is necessary for tailing a hedge?
A. Comparing the size in units of the position being hedged with the size in units of the
futures contract
B. Comparing the value of the position being hedged with the value of one futures
contract
C. Comparing the futures price of the asset being hedged to its forward price
D. None of the above