Derivatives - Pricing of Derivatives

Which of the following combinations replicates a long derivative position?

• A short derivative and a long asset

• A long asset and a short risk-free bond

• A short derivative and a short risk-free bond

Most derivatives are priced by:

• assuming that the market offers arbitrage opportunities.

• discounting the expected payoff of the derivative at the risk-free rate.

• applying a risk premium to the expected payoff of the derivative and its risk.

Stocks BWQ and ZER are each currently priced at $100 per share. Over the next year, stock BWQ is expected to generate significant benefits whereas stock ZER is not expected to generate any benefits. There are no carrying costs associated with holding either stock over the next year. Compared with ZER, the one-year

forward price of BWQ is most likely:

• lower.

• the same.

• higher

Which of the following factors most likely explains why the spot price of a commodity in short supply can be greater than its forward price?

• Opportunity cost

• Lack of dividends

• Convenience yield

The value of a swap is equal to the present value of the:

• fixed payments from the swap.

• net cash flow payments from the swap.

• underlying at the end of the contract.

A European call option and a European put option are written on the same

underlying, and both options have the same expiration date and exercise price.

At expiration, it is possible that both options will have:

• negative values.

• the same value.

• positive values.

When the price of the underlying is below the exercise price, a put option is:

• in-the-money.

• at-the-money.

• out-of-the-money.

The value of a European call option is inversely related to the:

• exercise price.

• time to expiration.

• volatility of the underlying.

A European put option on a dividend-paying stock is most likely to increase if

there is an increase in:

• carrying costs.

• the risk-free rate.

• dividend payments.

Which of the following transactions is the equivalent of a synthetic long call

position?

• Long asset, long put, short call

• Long asset, long put, short bond

• Short asset, long call, long bond