FE1 Fun Quiz (Chapter 2-6)

 Suppose the stock price is $40 and the effective annual interest rate is 8%.

Calculate the profit for the following 1-year option:

Long 35-strike call with a premium of $9.12 when the stock price after 1 year is $20.

• -8.55

• -9.85

• -10.01

• -10.15

 Suppose the stock price is $40 and the effective annual interest rate is 8%.

Calculate the profit for the following 1-year option:

Short 35-strike put with a premium of $9.12 when the stock price after 1 year is $20.

• -15

• -5

• -5.15

• 15

Choose the true statements for bull spread and bear spread.

(i) Bull spread: Long a  K₁ call and short a  K₂ call,

where K₂ > K₁.

(ii) Bear spread: Bet on the volatility of the stock prices.

(iii) Bull spread: Only can be created by call options.

(iv) Bear spread: It is a bet that the underlying asset's price will decrease.

• (i) and (ii) only

• (i) and (iii) only.

• (i) and (iv) only.

• (i), (iii) and (iv) only.

Strangle has _____ premium cost than the straddle.

• Higher

• Lower

• Same

From the producer perspective, what are the strategies for hedging?

• Selling forward

• Selling puts

• Selling collars

• Buy calls

The blue line is the unhedged profit and the green line is the hedged profit. From this graph, choose the true statements.

• Unhedged profit outperforms hedged profit before the intersection point.

• This is not a good hedging strategy

• It is good if not using any strategy to hedge

• The hedging strategy is a call option.

Select the true statement for margin call.

• Futures margin calls are triggered when the market price of the underlying asset decreases

• Futures margin calls are initiated to ensure that traders maintain sufficient funds to cover potential losses.

• Futures margin calls only occur when the trader's initial margin falls below a certain threshold.

• Margin calls in futures trading are always issued directly by the broker to the trader.

Select the false statement for futures and forwards.

• Forward contracts are typically traded over-the-counter (OTC), meaning they are customized agreements between two parties, while futures contracts are standardized and traded on exchanges.

• Both forward and futures contracts are used to hedge against price fluctuations in the underlying asset, such as commodities or financial instruments.

• Settlement in forward contracts occurs at the end of the contract's term, while settlement in futures contracts can occur daily through marking to market.

• Forward contracts are more liquid and easily traded compared to futures contracts.

Suppose that oil forward prices for 1 year, 2 years and 3 years are $20, $21, $22 respectively. The 1-year effective annual interest rate is 6%, the 2-year interest rate is 7% and the 3-year interest rate is 8%.

Determine the 1-year deferred 2-years swap payment.

• 21.89

• 20.94

• 21.48

• 20.48

1-year spot rate is 5%
2-year spot rate is 6%.
What is the 1 year deferred 1-year forward rate?

• 5%

• 6%

• 7%

• 8%