Professional Documents
Culture Documents
Introduction
1. List three types of traders in futures, forward, and options markets
i.
hedgers
ii.
speculators
iii.
aribitrageurs
7. A one-year call option on a stock with a strike price of $30 costs $3; a one-year
put option on the stock with a strike price of $30 costs $4. Suppose that a trader
buys two call options and one put option.
(i)
What is the breakeven stock price, above which the trader makes a profit?
$35
(ii)
What is the breakeven stock price below which the trader makes a profit?
$20
Test Bank: Chapter 2
Mechanics of Futures and Forward Markets
6. On the floor of a futures exchange one futures contract is traded where both the
long and short parties are closing out existing positions. What is the resultant
change in the open interest? Circle one.
(a) No change
(b) Decrease by one
(c) Decrease by two
(d) Increase by one
7. Who initiates delivery in a corn futures contract (circle one)
(a) The party with the long position
(b) The party with the short position
(c) Either party
(d) The exchange
8. You sell one December gold futures contracts when the futures price is $1,010 per
ounce. Each contract is on 100 ounces of gold and the initial margin per contract
that you provide is $2,000. The maintenance margin per contract is $1,500. During
the next day the futures price rises to $1,012 per ounce. What is the balance of
your margin account at the end of the day?
$1,800
9. A hedger takes a long position in an oil futures contract on November 1, 2009 to
hedge an exposure on March 1, 2010. The initial futures price is $60. On
December 31, 1999 the futures price is $61. On March 1, 2010 it is $64. The
contract is closed out on March 1, 2010. What gain is recognized in the accounting
year January 1 to December 31, 2010? Each contract is on 1000 barrels of oil.
$4,000
10.What is your answer to question 9 if the trader is a speculator rather than a hedger?
$3,000
3. On March 1 the price of gold is $1,000 and the December futures price is $1,015. On
November 1 the price of gold is $980 and the December futures price is $981. A gold
producer entered into a December futures contracts on March 1 to hedge the sale of
gold on November 1. It closed out its position on November 1. After taking account of
the cost of hedging, what is the effective price received by the company for the gold?
$1,014
4. Suppose that the standard deviation of monthly changes in the price of commodity A
is $2. The standard deviation of monthly changes in a futures price for a contract on
commodity B (which is similar to commodity A) is $3. The correlation between the
futures price and the commodity price is 0.9. What hedge ratio should be used when
hedging a one month exposure to the price of commodity A?
60%
5. A company has a $36 million portfolio with a beta of 1.2. The futures price for a
contract on the S&P index is 900. Futures contracts on $250 times the index can be
traded. What trade is necessary to achieve the following. (Indicate the number of
contracts that should be traded and whether the position is long or short.)
(i)
(ii)
(iii)
6. Futures contracts trade with every month as a delivery month. A company is hedging
the purchase of the underlying asset on June 15. Which futures contract should it use
(circle one)
(a) The June contract
(b) The July contract
(c) The May contract
(d) The August contract
7. Which of the following is true (circle one)
(a) The optimal hedge ratio is the slope of the best fit line when the spot price (on the
y -axis) is regressed against the futures price (on the x -axis).
(b) The optimal hedge ratio is the slope of the best fit line when the futures price (on
the y -axis) is regressed against the spot price (on the x -axis).
(c) The optimal hedge ratio is the slope of the best fit line when the change in the
spot price (on the y -axis) is regressed against the change in the futures price
(on the x -axis).
(d) The optimal hedge ratio is the slope of the best fit line when the change in the
futures price (on the y -axis) is regressed against the change in the spot price (on
the x -axis).
16. The one-year Canadian dollar forward exchange rate is quoted as 1.0500. What the
corresponding futures quote? Give four decimal places
0,9524
17. Which of the following is a consumption asset (circle one)
(a) The S&P 500 index
(b) The Canadian dollar
(c) Copper
(d) IBM shares
18. Which of the following is true (circle one)
(a) The convenience yield is always positive or zero.
(b) The convenience yield is always positive for an investment asset.
(c) The convenience yield is always negative for a consumption asset.
(d) The convenience yield measures the average return earned by holding futures
contracts.
Test Bank: Chapter 7
Swaps
1. Suppose that the yield curve is flat at 5% per annum with continuous compounding. A
swap with a notional principal of $100 million in which 6% is received and six-month
LIBOR is paid will last another 15 months. Payments are exchanged every six months.
The six-month LIBOR rate at the last reset date (three months ago) was 7%. Answer
in millions of dollars to two decimal places.
(i) What is the value of the fixed-rate bond underlying the swap? 102.61
(ii) What is the value of the floating-rate bond underlying the swap? 102.21
(iii) What is the value of the payment that will be exchanged in 3 months? -0.49
(iv) What is the value of the payment that will be exchanged in 9 months? 0.45
(v) What is the value of the payment that will be exchanged in 15 months? 0.44
(vi) What is the value of the swap? 0.40
2. A company can invest funds for five years at LIBOR minus 30 basis points. The fiveyear swap rate is 3%. What fixed rate of interest can the company earn? Ignore day
count issues
2.7%
100%
100%
40%
2. Which of the following would tend to lead to an increase in house prices (Circle two)
(a) A reduction in interest rates
(b) Regulators specifying a maximum level for the loan-to-value ratio on mortgages
(c) Banks reducing the minimum FICO that borrowers are required to have
(d) An increase in foreclosures
(ii)
(iii)
2. A trader writes two naked put option contracts. The option price is $3, the strike
price is $ 40 and the stock price is $42. What is the initial margin?
$1,880
3. Which of the following lead to IBM issuing more shares (circle three)
(a) Some executive stock options are exercised
(b) Some exchange-traded put options are exercised
(c) Some exchange-traded call options are exercised
(d) Some warrants on IBM are exercised
(e) Some of IBMs convertible debt is converted to equity.
What is the maximum gain when a bull spread is created from the calls?
$3
(ii)
What is the maximum loss when a bull spread is created from the calls?
$2
(iii)
What is the maximum gain when a bear spread is created from the calls?
$2
(iv)
What is the maximum loss when a bear spread is created from the calls?
$3
2. Three-month European put options with strike prices of $50, $55, and $60 cost $2,
$4, and $7, respectively.
(i)
What is the maximum gain when a butterfly spread is created from the put
options
$4
(ii)
What is the maximum loss when a butterfly spread is created from the put
options?
$1
(iii)
For what two values of the stock price in three months does the holder of the
butterfly spread breakeven with a profit of zero?
$51 and $59
3. A three-month call with a strike price of $25 costs $2. A three-month put with a
strike price of $20 and costs $3. A trader uses the options to create a strangle. For
what two values of the stock price in three months does the trader breakeven with
a profit of zero?
$15 and $30
What long position in the stock is necessary to hedge a short call option
when the strike price is $32? Give the number of shares purchased as a
percentage of the number of options that have been sold
40%
(ii)
(iii)
What long position in the stock is necessary to hedge a long put option
when the strike price is $32. Give the number of shares purchased as a
percentage of the number of options purchased option
60%
(iv)
(v)
2. In a Cox-Ross-Rubinstein binomial tree the formula for the proportional upmovement, u, is (circle one)
(a) u = e rt
(b) u = e r t
(c) u = e t
(d) u = e t (correct=D)
3. In a Cox-Ross-Rubinstein binomial tree the relationship between the proportional
down-movement, d, and the proportional up-movement, u, is (circle one)
(a) d = u 1
(b) d = 1/u
(c) d=2u
(d) None of the above
4. American options can be valued using a binomial tree by (circle one)
(a) Checking whether early exercise is optimal at all nodes where the option is
in-the-money
(b) Checking whether early exercise is optimal at the final nodes
(c) Checking whether early exercise is optimal at the penultimate nodes and the
final nodes
(d) Increasing the number of time steps on the tree