An August CDD weather option is offered on the cumulative monthly CDD at an
Atlanta weather station. An investor has a long call with a strike price of 375 and a
short call with a strike price of 400. The payment is $10,000 per degree day. What is the
maximum payoff?
A. $500,000
B. $250,000
C. $100,000
D. $50,000
A company knows it will have to pay a certain amount of a foreign currency to one of
its suppliers in the future. Which of the following is true
A. A forward contract can be used to lock in the exchange rate
B. A forward contract will always give a better outcome than an option
C. An option will always give a better outcome than a forward contract
D. An option can be used to lock in the exchange rate
A stock is expected to return 10% when the risk-free rate is 4%. What is the correct
discount rate to use for the expected payoff on an option in the real world?
A. 4%
B. 10%
C. More than 10%
D. It could be more or less than 10%
What is the number of different option series used in creating a butterfly spread?
A. 1
B. 2
C. 3
D. 4
As the barrier is observed more frequently, which of the following is true of a knock out
option
A. It becomes more valuable
B. It becomes less valuable
C. There is no effect on value
D. It may become more valuable or less valuable
Which of the following describes a covered call?
A. A long call option on a stock plus a long position in the stock
B. A long call option on a stock plus a short put option on the stock
C. A short call option on a stock plus a short position in the stock
D. A short call option on a stock plus a long position in the stock
What should the continuous dividend yield be replaced by when options on an
exchange rate are valued using the formula for an option on a stock paying a continuous
dividend yield?
A. The domestic risk-free rate
B. The foreign risk-free rate
C. The foreign risk-free rate minus the domestic risk-free rate
D. None of the above
Which of the following must post margin?
A. The seller of an option
B. The buyer of an option
C. The seller and the buyer of an option
D. Neither the seller nor the buyer of an option
Which of the following are least likely to use weather derivatives?
A. Energy producers
B. Food and drink manufacturers
C. Companies in the leisure industry
D. Automobile manufacturers
An interest rate swap has three years of remaining life. Payments are exchanged
annually. Interest at 3% is paid and 12-month LIBOR is received. A exchange of
payments has just taken place. The one-year, two-year and three-year LIBOR/swap zero
rates are 2%, 3% and 4%. All rates an annually compounded. What is the value of the
swap as a percentage of the principal when LIBOR discounting is used.
A. 0.00
B. 2.66
C. 2.06
D. 1.06
Which of the following is true?
A. Hedging can always be done more easily by a company’s shareholders than by the
company itself
B. If all companies in an industry hedge, a company in the industry can sometimes
reduce its risk by choosing not to hedge
C. If all companies in an industry do not hedge, a company in the industry can reduce
its risk by hedging
D. If all companies in an industry do not hedge, a company is liable increase its risk by
hedging
When the stock price increases 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
A company can invest funds for five years at LIBOR minus 30 basis points. The
five-year swap rate is 3%. What fixed rate of interest can the company earn by using the
swap?
A. 2.4%
B. 2.7%
C. 3.0%
D. 3.3%
A futures price is currently 40 cents. It is expected to move up to 44 cents or down to 34
cents in the next six months. The risk-free interest rate is 6%. What is the value of a
six-month put option with a strike price of 37 cents?
A. 3.00 cents
B. 2.91 cents
C. 1.16 cents
D. 1.20 cents
The modified duration of a bond portfolio worth $1 million is 5 years. By
approximately how much does the value of the portfolio change if all yields increase by
5 basis points?
A. Increase of $2,500
B. Decrease of $2,500
C. Increase of $25,000
D. Decrease of $25,000
A call option on a stock has a delta of 0.3. A trader has sold 1,000 options. What
position should the trader take to hedge the position?
A. Sell 300 shares
B. Buy 300 shares
C. Sell 700 shares
D. Buy 700 shares
The two-year zero rate is 6% and the three year zero rate is 6.5%. What is the forward
rate for the third year? All rates are continuously compounded.
A. 6.75%
B. 7.0%
C. 7.25%
D. 7.5%
Which of the following is equivalent to a long position in a European call 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
A stock price is $100. Volatility is estimated to be 20% per year. What is an estimate of
the standard deviation of the change in the stock price in one week?
A. $0.38
B. $2.77
C. $3.02
D. $0.76
What is the value of a European call futures option where the futures price is 50, the
strike price is 50, the risk-free rate is 5%, the volatility is 20% and the time to maturity
is three months?
A. 49.38N(0.05)-49.38N(-0.05)
B. 50N(0.05)-50N(-0.05)
C. 49.38N(0.1)-49.38N(-0.1)
D. 50N(0.1)-49.38N(-0.1)
Which of the following describes European options?
A. Sold in Europe
B. Priced in Euros
C. Exercisable only at maturity
D. Calls (there are no European puts)