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

Test Bank For Options, Futures, And Other Derivatives, 8th Edition simplifies your exam prep with detailed solutions and a wide range of test questions.

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    Test Bank: Chapter 1 Introduction 1. List three types of traders in futures, forward, and options markets i. _ _ _ _ _ _ _ _ ii. _ _ _ _ _ _ _ _ iii. _ _ _ _ _ _ _ _ 2. Which of the following is not true (circle one) a. When a CBOE call option on IBM is exercised, IBM issues more stock b. An American option can be exercised at any time during its life c. An call option will always be exercised at maturity if the underlying asset price is greater than the strike price d. A put option will always be exercised at maturity if the strike price is greater than the underlying asset price. 3. A trader enters into a one - year short forward contract to sell an asset for $60 when the spot price is $58. The spot price in one year prov es to be $63. What is the trader’s gain or loss ? Show a dollar amount and indicate whether it is a gain or a 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 of the underlying asset proves to be $25 in one year. What is the trader’s gain or loss? 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. What is the trader’s gain or loss? 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 stock with a strike price of $36 is $3.60. Suppose a trader has $3,600 to invest and is trying to choose between buying 1,000 options and 100 shares of stock. How high does the stock price have to rise for a n investment in options to lead to the same profit as 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 - 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? _ _ _ _ _ _ (ii) What is the breakeven stock price below which the trader makes a profit? _ _ _ _ _ _

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    Test Bank: C hapter 2 Mechanics of Futures and Forward Markets 1. 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 contra cts are traded on exchanges. 2. Which of the following is not true (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 contract often hav e 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 of different 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 no effect on the futures price 4. A company enters into a short futures contract to sell 50,000 units of a commodity for 70 cents per unit . The initial margin is $4,000 and the maintenance margin is $3,000. What is the futures price per unit above which there will be a margin call? _ _ _ _ _ _ 5. A company enters into a long futures contract to buy 1,000 barrels of oil for $6 0 per 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 margin account? … 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 p arty (d) The exchange

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    8. You sel l one December gold futures contra cts when the futures price is $1,0 10 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 pr ice rises to $1,0 12 per ounce. What is the balance of your margin acco unt at the end of the day ? _ _ _ _ _ _ 9. A hedger takes a long position in an oil fut ures contract on November 1, 200 9 to hedge an exposure on March 1, 20 10 . The initial futures price is $6 0. On December 31, 1999 the futur es price is $6 1. On March 1, 2010 it is $6 4. The contr act is closed out on March 1, 201 0. What gain is recognized in the accounting ye ar January 1 to December 31, 201 0? Each contract is on 1000 barrels 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: Chapter 3 Hedging Strategies Using Futures 1. The basis is defined as spot minus futures. For a short hedger basis strengthens unexpectedly. Which of the following is true (circle one) (a) The hedger’s position improves. (b) The hedger’s position worsens. (c) The hedger’s position sometimes worsens and sometimes improves. (d) The hedge r’s position stays the same. 2. O n March 1 the price of oil is $6 0 and the July futures price is $5 9. On June 1 the price of oil is $6 4 and the July futures price is $6 3.50. A company entered into a futures contracts on March 1 to hedge the purchase of oil on June 1. It closed out its position on June 1. After taking account of the cost of hedging, w hat is the effective price paid by the company for the oil? _ _ _ _ _ _ 3. On March 1 the price of gold i s $1,0 00 and the December futures price is $1,0 15. On No vember 1 the price of gold is $9 80 and the December futures price is $9 81. 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? _ _ _ _ _ _ 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? _ _ _ _ _ _ 5. A company has a $36 million portf olio 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) Eliminate all systematic risk in the portfolio _ _ _ _ _ _ _ _ _ _ (ii) Reduce the beta to 0.9 _ _ _ _ _ _ _ _ _ _ (iii) Increase beta to 1.8 _ _ _ _ _ _ _ _ _ _ 6. F utures co ntracts 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

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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 (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). 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 the futures contract (c) A more exact calculation of the hedge ratio when forward contracts are used for hedging (d) None of the above

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    Test Bank: Chapter 4 Interest Rates 1. An interest rate is 15% per annum when expressed with annual compounding. What is the equivalent rate with continuous compounding? Answer as a percent with two decimal 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 with two decimal place accuracy _ _ _ _ _ _ 3. An interest rate is 12% when expressed with quarterly compounding. What is the equivalent rate with semiannual compounding? Answer as a percent with two decimal place accuracy _ _ _ _ _ _ 4. The three - year zero rate is 7% and the four - year zero rate is 7.5% (both continuously compounded. What is the forward rate for the fourth year with continuous compounding ? 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 - year bond 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 place accuracy _ _ _ _ _ _ 6. The yield curve is flat at 6% per annum with semiannual compounding. What (to the nearest cent) 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? _ _ _ _ _ _ 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 tha n expected future spot rates. 8. When the zero curve is upward sloping, which two of the following is true? (circle two) (a) The one - year zero rate is always greater than the forward rate for the period between 1 year and 1.5 years. (b) The one - year zero rate is always less than the forward rate for the period between 1 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 less than 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) The commercial paper rate

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    Test Bank: Chapter 5 The Determinants of Forward and Futures Prices 1. An investor shorts 100 shares when the share price is $50 and closes out the position six months later when the share price is $43. The shares pay a dividend of $3 per sh are 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 - free rate for all maturities (with continuous compounding) is 10%. What , to the nearest cent, is the three - year forward price? _ _ _ _ _ _ 3. Repeat question 2 on the assumption that the asset provides an income of $2 at the end of the first year and at the end of the second year. _ _ _ _ _ _ 4. In question 2 what is the value to the nearest cent of a three - year forward contract with a delivery price of $30? _ _ _ _ _ _ 5. An exchange rate is 0.7000 and the six - month domestic and foreign risk - free interest rates 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 three months and has a delivery price of $40. The current forward price for three - month forward contract is $42. The three month risk - free interest rate (with continuous compounding) is 8%. What to the nearest cent is the value of the short forward contract? _ _ _ _ _ _ 7. The spot price of an asset is positively correlated with the market. Which of the following 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 th e expected future spot price. 8. The one - year Canadian dollar forwar d exchange rate is quoted as 1.05 0 0 . What the corresponding 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 shares 10. 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.

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    Test Bank: Chapter 6 Interest Rate Futures 1. Which of following is applicable to corporate bonds in the United States (circle one) (a) Actual/360 (b) Actual/Actual (c) 30/360 (d) Actual/365 2. It is May 1. Th e quoted price of a bond with an Actual/365 day count and 12% per annum coupon in the United States is 105. It has a face value of 100 and pays coupons on April 1 and October 1 . What , to two decimal place accuracy, is the cash price? _ _ _ _ _ _ 3. What difference would it make to your answe r to ques tion 3 if the bond’s day count were 30/360 ? _ _ _ _ _ _ 4. The quoted futures price is 103.5. Which of the following four bonds is cheapest to 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 is not an option open to the party with a short position in the 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 calculat ion of the conversion factor 6. A trader enters into a long position in one Eurodollar futures contract. How mu ch does the trader gain when 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. 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? Indicate whether the dollar amount you calculate is an increase or a decrease _ _ _ _ _ _ _ _ _ _ _ _ _

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    9. A portfolio is worth $24,000,000. The futures price for a Treasury note futures contract is 110 and each contract is for the delivery of bonds with a face value of $100,000. On the delivery date the duration of the bond that is expected to be cheapest to deliver is 6 years and 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 than the corresponding forward rate (b) The futures rates calculated from a Eurodollar futures quote is always greater than the corresponding forward rate (c) The futures rates calculated from a Eurodollar futures quote should equal the corresponding forward rate (d) The futures rates calculated from a Eurodollar futures quote is sometimes greater than and sometimes less than the corresponding forward rate

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    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 da te (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? _ _ _ _ _ _ (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 fund s 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? Ignore day count issues _ _ _ _ _ _ 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 at the beginning of a currency swap and in the same direction as interest payments at the end of the swap. (c) The principal amounts usually flow in the same direction as interest payments at the beginning of a currency swap and in the opposite direction to interest payments at the end of the swap. (d) Principals are not usually specified in a currency swap 4. Suppose you enter into an interest rate swap where you are receiving floating and paying fixed. Which two of the following is true ? (circle two) (a) Your credit risk is greater when the term structure is upward sloping than when it is downward sloping. (b) Your credit risk is greater when the term structure is downward sloping than when it is 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 8 Securitization and the Credit Crisis of 2007 1. Suppose that ABSs are created from portfolios of subprime mortgages with the following allocation of the principal to tranches: senior 75%, mezzanine 20%, and equity 5%. An ABS CDO is then created from the mezzanine tranches with the same allocation of principal. Losses on the m ortgage portfolio prove to be 16 %. What, as a percent of tranche principal , are losses on (i) The equ ity tranche of the ABS _ _ _ _ _ _ (ii) The mezzanine tran che of the ABS _ _ _ _ _ _ (iii) The s enior tranche of the ABS _ _ _ _ _ _ (iv) The equi ty tranche of the ABS CDO _ _ _ _ _ _ (v) The mezzani ne tranche of the ABS CDO _ _ _ _ _ _ (vi) The senio r tranche of the ABS CDO _ _ _ _ _ _ 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 3. When a mortgage is non - recourse (Circle one) (a) The ho use buyer can lose all possessions if he 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 mortgage 4. Which of the following is not true (Circle one) (a) The bonus structure at banks is liable to lead to short term horizons for decision making (b) A portfolio of BBB tranches created from mortgages has a loss probability distribution similar to a portfolio of BBB bonds (c) The term “agency costs” describes the situation where the incentives of two parties in a business relationship are not perfectly aligned (d) Correlations tend to increase in stressed market conditions

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    Test Bank: Chapter 9 Mechanics of Options Markets 1. Consider an exchange traded put option to sell 100 shares for $20. Give (a) the strike 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 strike price 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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