Test Bank For Options, Futures, And Other Derivatives, 8th Edition

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Test Bank: Chapter 1Introduction1.List three types of traders in futures, forward, and options marketsi._ _ _ _ _ _ _ _ii._ _ _ _ _ _ _ _iii._ _ _ _ _ _ _ _2.Which of the following isnottrue (circle one)a.When a CBOEcalloption on IBM is exercised, IBM issues more stockb.An American option can be exercised at any time during its lifec.An call option will always be exercised at maturity if the underlyingasset price is greater than the strike priced.A put option will always be exercised at maturity if the strike price isgreater than the underlying asset price.3.A trader enters into a one-year short forward contract to sell an asset for $60when the spot price is $58. The spot price in one year proves to be $63. What isthe trader’s gain or loss?Show a dollar amount and indicate whether it is a gain ora loss._ _ _ _ _ __ _ _ _4.A trader buys 100 European call options(i.e., one contract)with a strike price of$20 and a time to maturity of one year. The cost of each option is $2. The price ofthe underlying asset proves to be $25 in one year. Whatis the trader’s gain orloss?Show a dollar amount and indicate whether it is a gain or a loss._ _ _ _ _ __ _ _ _5.A trader sells 100 European put options(i.e., one contract)with a strike price of$50 and a time to maturity of six months. The price received for each option is $4.The price of the underlying asset is $41 in six months. Whatis the trader’s gain orloss?Show a dollar amount and indicate whether it is a gain or a loss._ _ _ _ _ __ _ _ _6.The price of a stock is $36 and the price of a three-month call option on the stockwith a strike price of $36 is $3.60. Suppose a trader has $3,600 to invest and istrying to choose between buying 1,000 options and 100 shares of stock. How highdoes the stock price have to rise for an investment in options to lead to the sameprofitas an investment in the stock?_ _ _ _ _ _

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7.A one-year call option on a stock with a strike price of $30 costs $3; a one-yearput option on the stock with a strike price of $30 costs $4. Suppose that a traderbuys two call options and one put option.(i)What is the breakeven stock price, above which the trader makes a profit?_ _ _ _ _ _(ii)What is the breakeven stock price below which the trader makes a profit?_ _ _ _ _ _

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Test Bank: Chapter 2Mechanics of Futures and Forward Markets1.Which of the following is true (circle one)(a)Both forward and futures contracts are traded on exchanges.(b)Forward contracts are traded on exchanges,but futures contracts are not.(c)Futures contracts are traded on exchanges, but forward contracts are not.(d)Neither futures contracts nor forward contracts are traded on exchanges.2.Which of the following isnottrue (circle one)(a)Futures contracts nearly always last longer than forward contracts(b)Futures contracts are standardized; forward contracts are not.(c)Delivery or final cash settlement usually takes place with forward contracts;the same is not true of futures contracts.(d)Forward contract usually have one specified delivery date; futures contractoften have a range of delivery dates.3.In the corn futures contract a number of different types of corn can be delivered(with price adjustments specified by the exchange) and there are a number ofdifferent delivery locations. Which of the following is true (circle one)(a)This flexibility tends increase the futures price.(b)This flexibility tends decrease the futures price.(c)This flexibility may increase and may decrease the futures price.(d)This has noeffect on the futures price4.A company enters into a short futures contractto sell 50,000 units of a commodityfor 70 cents per unit. The initial margin is $4,000 and the maintenance margin is$3,000. What is the futures priceper unitabove which there will be a margin call?_ _ _ _ _ _5.A company enters into a long futures contract tobuy 1,000 barrels of oil for $60per barrel. The initial margin is $6,000 and the maintenance margin is $4,000.What oil futures price will allow $2,000 to be withdrawn from the marginaccount?…6.On the floor of a futures exchange one futures contract is traded where both thelong and short parties are closing out existing positions. What is the resultantchange in the open interest?Circle one.(a)No change(b)Decrease by one(c)Decrease by two(d)Increase by one7.Who initiates deliveryin 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

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8.You sell oneDecember gold futures contracts when the futures price is $1,010 perounce. Each contract is on 100 ounces of gold and the initial margin per contractthat you provideis $2,000. The maintenance margin per contractis $1,500.During the next daythe futures price risesto $1,012 per ounce. What is thebalance of your margin account at the end of the day?_ _ _ _ _ _9.A hedger takes a long position in an oil futures contract on November 1, 2009 tohedge an exposure on March 1, 2010.The initial futures price is $60. OnDecember 31, 1999 the futures price is $61. On March 1, 2010 it is $64. Thecontract isclosed out on March 1, 2010. What gain is recognized in theaccounting year January 1 to December 31, 2010? Each contract is on 1000barrels of oil._ _ _ _ _ _10.What is your answer to question 9 if the trader is a speculator rather than a hedger?_ _ _ _ _ _

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Test Bank:Chapter3Hedging Strategies Using Futures1.The basisis defined as spot minus futures. For a short hedger basisstrengthensunexpectedly. Which of the following is true (circle one)(a)Thehedger’s position improves.(b)Thehedger’s position worsens.(c)Thehedger’s position sometimes worsens and sometimes improves.(d)Thehedger’s position stays the same.2.On March 1 the price of oil is $60and the July futures price is $59.On June 1 theprice of oil is $64and the July futures price is $63.50. A company entered into afutures contracts on March 1 to hedge the purchase of oil on June 1. It closed out itsposition on June 1.After taking account of the cost of hedging, what is the effectiveprice paid by the company for the oil?_ _ _ _ _ _3.On March 1 the price of gold is $1,000 andthe December futures price is $1,015. OnNovember 1 the price of gold is $980 andthe December futures price is $981. A goldproducer entered into a December futures contracts on March 1 to hedge the sale ofgold on November 1. It closed out its position on November 1.After taking accountof the cost of hedging, what is the effective price received by the company for thegold? _ _ _ _ _ _4.Suppose that the standard deviation of monthly changes in the price of commodity Ais $2. The standard deviation of monthly changes in a futures price for a contract oncommodity B (which is similar to commodity A) is $3. The correlation between thefutures price and the commodity price is 0.9. What hedge ratio should be used whenhedging a one month exposure to the price of commodity A?_ _ _ _ _ _5.A company has a $36 million portfolio with a beta of 1.2. The futures price for acontract on the S&P index is900. Futures contracts on $250 times the index can betraded. What trade is necessary to achieve the following. (Indicate the number ofcontracts that should be traded and whether the position is long or short.)(i)Eliminate all systematic risk in the portfolio_ _ _ _ _ _ _ _ _ _(ii)Reduce the beta to 0.9_ _ _ _ _ _ _ _ _ _(iii)Increase beta to 1.8_ _ _ _ _ _ _ _ __6.Futures contracts trade with every month as a delivery month. A company is hedgingthe 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

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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 (onthey-axis) is regressed against the futures price (on thex-axis).(b)The optimal hedge ratio is the slope of the best fit line when the futures price (onthey-axis) is regressed against the spot price (on thex-axis).(c)The optimal hedge ratio is the slope of the best fit line when the change in the spotprice (on they-axis) is regressed against the change in the futures price (on thex-axis).(d)The optimal hedge ratio is the slope of the best fit line when the change in thefutures price (on they-axis) is regressed against the change in the spot price (onthex-axis).8.Tailing the hedge is (circle one)(a)A strategy where the hedge position is increased at the end of the life of the hedge(b)A strategy where the hedge position is increased at the end of the life of thefutures contract(c)A more exact calculation of the hedge ratio when forward contracts are used forhedging(d)None of the above

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Test Bank:Chapter4Interest Rates1.An interest rate is 15% per annum when expressed with annual compounding. What isthe equivalent rate with continuous compounding?Answer as a percent with twodecimal place accuracy_ _ _ _ _ _2.An interest rate is 8% per annum when expressed with continuous compounding.What is the equivalent rate with semiannual compounding?Answer as a percent withtwo decimal place accuracy_ _ _ _ _ _3.An interest rate is 12% when expressed with quarterly compounding. What is theequivalent rate with semiannual compounding?Answer as a percent with two decimalplace accuracy_ _ _ _ _ _4.The three-year zero rate is 7% and the four-year zero rate is 7.5% (both continuouslycompounded. What is the forward rate for the fourth yearwith continuouscompounding?Answer as a percent with two decimal place accuracy_ _ _ _ _ _5.The six-month zero rate is 8% with semiannual compounding. The price of a one-yearbond that provides a coupon of 6% per annum semiannually is 97. What is the one-year continuously compounded zero rate?Answer as a percent with two decimal placeaccuracy_ _ _ _ _ _6.The yield curve is flat at 6% per annum with semiannual compounding. What(to thenearest cent)is the value of an FRA where the holder receives interest at the rate of8% per annum for a six-month period on a principal of $1,000 starting in two years?_ _ _ _ _ _7.Under liquidity preference theory, which of the following is always true (circle one)(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.8.When the zero curve is upward sloping, whichtwoof the following is true? (circletwo)(a)The one-year zero rate is always greater than the forward rate for the periodbetween 1 year and 1.5 years.(b)The one-year zero rate is always less than the forward rate for the period between1 year and 1.5 years.(c)The one-year par yield is always greater than the one-year zero rate.(d)The one-year par yield is always lessthan the one-year zero rate.9.The short term risk-free rate usually used by derivatives traders in the over-the-counter market is (circle one)(a)The Treasury rate(b)The LIBOR rate(c)The repo rate(d)Thecommercial paper rate

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Test Bank:Chapter5The Determinants of Forward and Futures Prices1.An investor shorts 100 shares when the share price is $50 and closes out the positionsix months later when the share price is $43. The shares pay a dividend of $3 pershare during the six months. How much does the investor gain?_ _ _ _ _ _2.The spot price of an investment asset that provides no income is $30 and the risk-freerate for all maturities (with continuous compounding) is 10%. What,to the nearestcent,is the three-year forward price?_ _ _ _ _ _3.Repeat question 2 on the assumption that the asset provides an income of $2 at theend of the first year and at the end of the second year._ _ _ _ _ _4.In question 2 what is the valueto the nearest centof a three-year forward contractwith a delivery price of $30?_ _ _ _ _ _5.An exchange rate is 0.7000 and the six-month domestic and foreign risk-free interestrates are 5% and 7% (both expressed with continuous compounding). What is the six-month forward rate?Give four decimal places_ _ _ _ _ _6.A short forward contract that was negotiated some time ago will expire in threemonths and has a delivery price of $40. The current forward price for three-monthforward contract is $42. The three month risk-free interest rate (with continuouscompounding) is 8%. Whatto the nearest centis the value of the short forwardcontract?_ _ _ _ _ _7.The spot price of an asset is positively correlated with the market. Which of thefollowing would you expect to be true (circle one)(a)The forward price equals the expected future spot price.(b)The forward price is greater than the expected future spot price.(c)The forward price is less than the expected future spot price.(d)The forward price is sometimes greater and sometimes less than the expectedfuture spot price.8.The one-year Canadian dollar forward exchange rate is quoted as 1.0500. Whatthecorresponding futures quote?Give four decimal places_ _ _ _ _ _9.Which of the following is a consumption asset (circle one)(a)The S&P 500 index(b)The Canadian dollar(c)Copper(d)IBM shares10.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 futurescontracts.

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Test Bank: Chapter 6Interest Rate Futures1.Which of following is applicable to corporate bonds in the United States (circleone)(a)Actual/360(b)Actual/Actual(c)30/360(d)Actual/3652.It is May 1. The quoted price of abondwith an Actual/365 day count and 12% perannum couponin the United States is 105. It has a face value of 100 and payscouponson April 1 and October 1. What, totwodecimal place accuracy,is thecash price?_ _ _ _ _ _3.What difference wouldit make to your answer to question 3 if the bond’s daycountwere 30/360?_ _ _ _ _ _4.The quoted futures price is 103.5. Which of the following four bonds is cheapestto deliver (circle one)(a)Quoted price = 110; conversion factor = 1.0400.(b)Quoted price = 160; conversion factor = 1.5200.(c)Quoted price =131; conversion factor = 1.2500.(d)Quoted price = 143;conversion factor = 1.3500.5.Which of the following isnotan option open to the party with a short position inthe Treasury bond futures contract (circle one)(a)The ability to deliver any of a number of different bonds(b)The wild card play(c)The fact that delivery can be made any time during the delivery month(d)The interest rate used in the calculation of the conversion factor6.A trader enters into a long position in one Eurodollar futures contract. How muchdoes the trader gainwhen the futures price quote increases by 6 basis points?_ _ _ _ _ _7.A company invests $1,000 in a five-year zero-coupon bond and $4,000 in a ten-year zero-coupon bond. What is the duration of the portfolio?_ _ _ _ _ _8.Themodifiedduration of abondportfolio worth $1 million is 5 years. Byapproximatelyhow much does the value of the portfolio change if all yieldsincrease by 5 basis points? Indicate whether the dollar amount you calculate is anincrease or a decrease _ _ _ _ _ __ _ _ _ _ _ _

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9.A portfolio is worth $24,000,000. The futures price for a Treasury note futurescontract is 110 and each contract is for the delivery of bonds with a face value of$100,000. On the delivery date the duration ofthe bond that is expected to becheapest to deliver is 6 yearsand the duration of the portfolio will be 5.5 years.How many contracts are necessary for hedging the portfolio?_ _ _ _ _ _ _10.Which of the following is true (circle one)(a)The futures rates calculated from a Eurodollar futures quote is always less thanthe corresponding forward rate(b)The futures rates calculated from a Eurodollar futures quote is always greaterthan the corresponding forward rate(c)The futures rates calculated from a Eurodollar futures quote should equal thecorresponding forward rate(d)The futures rates calculated from a Eurodollar futures quote is sometimesgreater than and sometimes less than the corresponding forward rate

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Test Bank: Chapter7Swaps1.Suppose that the yield curve is flat at 5% per annum with continuous compounding. Aswap with a notional principal of $100 million in which 6% is received and six-monthLIBOR 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 inmillions of dollars to two decimal places.(i)What is the value of the fixed-rate bond underlying the swap?_ _ _ _ _ _(ii)What is the value of the floating-rate bond underlying the swap?_ _ _ _ _ _(iii)What is the value of the payment that will be exchanged in 3 months?_ _ _ _ _ _(iv)What is the value of the payment that will be exchanged in 9 months?_ _ _ _ _ _(v)What is the value of the payment that will be exchanged in 15 months?_ _ _ _ _ _(vi)What is the value of the swap?_ _ _ _ _ _2.A company can invest funds for five years at LIBOR minus 30 basis points.The five-year swap rate is 3%. What fixedrate of interest can the company earn?Ignore day countissues _ _ _ _ _ _3.Which of the following is true (circle one)(a)Principals are not usually exchanged in a currency swap(b)The principal amounts usually flow in the opposite direction to interest payments atthe beginning of a currency swap and in the same direction as interest payments atthe end of the swap.(c)The principal amounts usually flow in the same direction as interest payments at thebeginning of a currency swap and in the opposite direction to interest payments at theend of the swap.(d)Principals are not usuallyspecified in a currency swap4.Suppose you enter into an interest rate swap where you are receiving floating and payingfixed.Whichtwoof the following is true?(circle two)(a)Your credit risk is greater when the term structure is upward sloping than when it isdownward sloping.(b)Your credit risk is greater when the term structure is downward sloping than when itis upward sloping.(c)Your credit risk exposure increases when interest rates decline unexpectedly.(d)Your credit risk exposure increases when interest rates increase unexpectedly.

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Test Bank: Chapter 8Securitization and the Credit Crisis of 20071.Suppose that ABSs are created from portfolios of subprime mortgages with the followingallocation of the principal to tranches:senior 75%, mezzanine 20%, and equity 5%. AnABS CDO is then created from the mezzanine tranches with the same allocation ofprincipal. Losses on the mortgage portfolio prove to be 16%. What,as a percent oftranche principal,arelosses on(i)The equity tranche of the ABS_ _ _ _ _ _(ii)The mezzanine tranche of the ABS_ _ _ _ _ _(iii)The senior tranche of the ABS_ _ _ _ _ _(iv)The equity tranche of the ABS CDO _ _ _ _ _ _(v)The mezzanine tranche of the ABS CDO_ _ _ _ _ _(vi)The senior tranche of the ABS CDO_ _ _ _ _ _2.Which of the following wouldtend tolead 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 foreclosures3.When a mortgage is non-recourse (Circle one)(a)The house buyer can lose all possessions ifhe or she is unable to make payments(b)The purchaser has a free American style put option on the house(c)The purchaser has a free European style put option on the house(d)The lender is less likely to lose money on the mortgage4.Which of the following isnottrue (Circle one)(a)The bonus structure at banks is liable to lead to short term horizons for decisionmaking(b)A portfolio of BBB tranches created from mortgages hasaloss probabilitydistribution similar to a portfolio of BBB bonds(c)The term “agency costs” describesthe situation wherethe incentives of two parties ina business relationship are not perfectly aligned(d)Correlations tend to increase in stressed market conditions

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Test Bank: Chapter9Mechanics of Options Markets1.Consider an exchange traded put option to sell 100 shares for $20. Give (a) thestrike price and (b) the number of shares that can be sold after(i)A 5 for 1 stock split(a)_ _ _ _ _ _(b)_ _ _ _ _ _(ii)A 25% stock dividend(a)_ _ _ _ _ _(b)_ _ _ _ _ _(iii)A $5 cash dividend(a)_ _ _ _ _ _(b)_ _ _ _ _ _2.A trader writes two naked put option contracts. The option price is $3, the strikeprice is $ 40 and the stock price is $42. What is the initial margin? _ _ _ _ _ _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 IBM’s convertible debt is converted to equity.

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