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WorksheetsFRM_FinalReview
Total questions: 209
Worksheet time: 2hrs 45mins
Name
Class
Date
1.
A one-year forward contract is an agreement where
a)
One side has the right to buy an asset for a certain price in one year’s time.
b)
One side has the obligation to buy an asset for a certain price in one year’s time.
c)
One side has the obligation to buy an asset for a certain price at some time during the
next year.
d)
One side has the obligation to buy an asset for the market price in one year’s time.
2.
Which of the following is NOT true
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 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. The breakeven stock price above which the trader makes a profit is
a)
35.0
b)
40.0
c)
30.0
d)
36.0
4.
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. The breakeven stock price below which the trader makes a profit is
a)
25.0
b)
28.0
c)
26.0
d)
20.0
5.
Which of the following is approximately true when size is measured in terms of the underlying
principal amounts or value of the underlying assets
a)
The exchange-traded market is twice as big as the over-the-counter market.
b)
The over-the-counter market is twice as big as the exchange-traded market.
c)
The exchange-traded market is ten times as big as the over-the-counter market.
d)
The over-the-counter market is ten times as big as the exchange-traded market.
6.
Which of the following best describes the term “spot price”
a)
The price for immediate delivery
b)
The price for delivery at a future time
c)
The price of an asset that has been damaged
d)
The price of renting an asset
7.
Which of the following is true about a long forward contract
a)
The contract becomes more valuable as the price of the asset declines
b)
The contract becomes more valuable as the price of the asset rises
c)
The contract is worth zero if the price of the asset declines after the contract has been
entered into
d)
The contract is worth zero if the price of the asset rises after the contract has been
entered into
8.
An investor sells a futures contract an asset when the futures price is $1,500. Each contract is on
100 units of the asset. The contract is closed out when the futures price is $1,540. Which of the
following is true
a)
The investor has made a gain of $4,000
b)
The investor has made a loss of $4,000
c)
The investor has made a gain of $2,000
d)
The investor has made a loss of $2,000
9.
Which of the following describes European options?
a)
Sold in Europe
b)
Priced in Euros
c)
Exercisable only at maturity
d)
Calls (there are no European puts)
10.
Which of the following is NOT true
a)
A call option gives the holder the right to buy an asset by a certain date for a certain
price
b)
A put option gives the holder the right to sell an asset by a certain date for a certain
price
c)
The holder of a call or put option must exercise the right to sell or buy an asset
d)
The holder of a forward contract is obligated to buy or sell an asset
11.
Which of the following is NOT true about call and put options:
a)
An American option can be exercised at any time during its life
b)
A European option can only be exercised only on the maturity date
c)
Investors must pay an upfront price (the option premium) for an option contract
d)
The price of a call option increases as the strike price increases
12.
The price of a stock on July 1 is $57. A trader buys 100 call options on the stock with a strike
price of $60 when the option price is $2. The options are exercised when the stock price is $65.
The trader’s net profit is
a)
700.0
b)
500.0
c)
300.0
d)
600.0
13.
The price of a stock on February 1 is $124. A trader sells 200 put options on the stock with a
strike price of $120 when the option price is $5. The options are exercised when the stock price
is $110. The trader’s net profit or loss is
a)
Gain 1000
b)
Loss 2000
c)
Loss 2800
d)
Loss 1000
14.
The price of a stock on February 1 is $84. A trader buys 200 put options on the stock with a
strike price of $90 when the option price is $10. The options are exercised when the stock price
is $85. The trader’s net profit or loss is
a)
Loss 1000
b)
Loss 2000
c)
Gain 200
d)
Gain 1000
15.
The price of a stock on February 1 is $48. A trader sells 200 put options on the stock with a strike
price of $40 when the option price is $2. The options are exercised when the stock price is $39.
The trader’s net profit or loss is
a)
Loss 800
b)
Loss 200
c)
Gain 200
d)
Loss 900
16.
A speculator can choose between buying 100 shares of a stock for $40 per share and buying
1000 European call options on the stock with a strike price of $45 for $4 per option. For second
alternative to give a better outcome at the option maturity, the stock price must be above
a)
45.0
b)
46.0
c)
55.0
d)
50.0
17.
A company knows it will have to pay a certain amount of a foreign currency to one of its
suppliers in the future. Which of the following is true
a)
A forward contract can be used to lock in the exchange rate
b)
A forward contract will always give a better outcome than an option
c)
An option will always give a better outcome than a forward contract
d)
An option can be used to lock in the exchange rate
18.
A short forward contract on an asset plus a long position in a European call option on the asset
with a strike price equal to the forward price is equivalent to
a)
A short position in a call option
b)
A short position in a put option
c)
A long position in a put option
d)
None
19.
A trader has a portfolio worth $5 million that mirrors the performance of a stock index. The
stock index is currently 1,250. Futures contracts trade on the index with one contract being on
250 times the index. To remove market risk from the portfolio the trader should
a)
Buy 16
b)
Sell 16
c)
Buy 20
d)
Sell 20
20.
Which of the following best describes a central clearing party
a)
It is a trader that works for an exchange
b)
It stands between two parties in the over-the-counter market
c)
It is a trader that works for a bank
d)
It helps facilitate futures trades
21.
Which of the following is true about a long forward contract
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.
22.
Which of the following is NOT true
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 contracts usually have one specified delivery date; futures contract often have
a range of delivery dates.
23.
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
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 flexibility has no effect on the futures price
24.
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?
a)
78 cent
b)
76.0
c)
74.0
d)
72.0
25.
A company enters into a long futures contract to buy 1,000 units of a commodity for $60 per
unit. The initial margin is $6,000 and the maintenance margin is $4,000. What futures price
will allow $2,000 to be withdrawn from the margin account?
a)
58.0
b)
62.0
c)
64.0
d)
66.0
26.
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?
a)
Decrease by one
b)
Decrease by two
c)
Increase by one
d)
None
27.
Who initiates delivery in a corn futures contract
a)
Long position
b)
Short position
c)
Either
d)
The exchange
28.
You sell one December futures contracts when the futures price is $1,010 per unit. Each
contract is on 100 units 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 unit. What is the balance of your margin account at the end of the day?
a)
1800.0
b)
3300.0
c)
2200.0
d)
3700.0
29.
A hedger takes a long position in a futures contract on a commodity on November 1, 2012
to hedge an exposure on March 1, 2013. The initial futures price is $60. On December 31,
2012 the futures price is $61. On March 1, 2013 it is $64. The contract is closed out on
March 1, 2013. What gain is recognized in the accounting year January 1 to December 31,
2013? Each contract is on 1000 units of the commodity.
a)
None
b)
1000.0
c)
3000.0
d)
4000.0
30.
A speculator takes a long position in a futures contract on a commodity on November 1,
2012 to hedge an exposure on March 1, 2013. The initial futures price is $60. On December
31, 2012 the futures price is $61. On March 1, 2013 it is $64. The contract is closed out on
March 1, 2013. What gain is recognized in the accounting year January 1 to December 31,
2013? Each contract is on 1000 units of the commodity.
a)
None
b)
1000.0
c)
3000.0
d)
4000.0
31.
The frequency with which futures margin accounts are adjusted for gains and losses is
a)
Daily
b)
Weekly
c)
Monthly
d)
Quarterly
32.
Margin accounts have the effect of
a)
Reducing the risk of one party regretting the deal and backing out
b)
Ensuring funds are available to pay traders when they make a profit
c)
Reducing systemic risk due to collapse of futures markets
d)
All of the above
33.
Which entity in the United States takes primary responsibility for regulating futures market?
a)
FED
b)
CFTC
c)
SEC
d)
US Treasury
34.
For a futures contract trading in April 2012, the open interest for a June 2012 contract,
when compared to the open interest for Sept 2012 contracts, is usually
a)
Higher
b)
Lower
c)
The same
d)
none
35.
Clearing houses are
a)
Never used in futures markets and sometimes used in OTC markets
b)
Used in OTC markets, but not in futures markets
c)
Always used in futures markets and sometimes used in OTC markets
d)
Always used in both futures markets and OTC markets
36.
A haircut of 20% means that
a)
A bond with a market value of $100 is considered to be worth $80 when used to satisfy a collateral request
b)
A bond with a face value of $100 is considered to be worth $80 when used to satisfy a collateral request
c)
A bond with a market value of $100 is considered to be worth $83.3 when used to
satisfy a collateral request
d)
A bond with a face value of $100 is considered to be worth $83.3 when used to
satisfy a collateral request
37.
With bilateral clearing, the number of agreements between four dealers, who trade with
each other, is
a)
12.0
b)
1.0
c)
6.0
d)
2.0
38.
Which of the following best describes central clearing parties
a)
Help market participants to value derivative transactions
b)
Must be used for all OTC derivative transactions
c)
Are used for futures transactions
d)
Perform a similar function to exchange clearing houses
39.
Which of the following are cash settled
a)
All futures contracts
b)
All option contracts
c)
Futures on commodities
d)
Futures on stock indices
40.
A limit order
a)
Is an order to trade up to a certain number of futures contracts at a certain price
b)
Is an order that can be executed at a specified price or one more favorable to the investor
c)
Is an order that must be executed within a specified period of time
d)
None
41.
The basis is defined as spot minus futures. A trader is hedging the sale of an asset with a short
futures position. The basis increases unexpectedly. Which of the following is true?
a)
The hedger’s position improves.
b)
The hedger’s position worsens.
c)
The hedger’s position sometimes worsens and sometimes improves.
d)
The hedger’s position stays the same.
42.
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?
a)
June contract
b)
July
c)
May
d)
Augst
43.
On March 1 a commodity’s spot price is $60 and its August futures price is $59. On July 1 the
spot price is $64 and the August futures price is $63.50. A company entered into futures
contracts on March 1 to hedge its purchase of the commodity on July 1. It closed out its position
on July 1. What is the effective price (after taking account of hedging) paid by the company?
a)
59.5
b)
60.5
c)
61.5
d)
63.5
44.
On March 1 the price of a commodity is $1,000 and the December futures price is $1,015. On
November 1 the price is $980 and the December futures price is $981. A producer of the
commodity entered into a December futures contracts on March 1 to hedge the sale of the
commodity on November 1. It closed out its position on November 1. What is the effective price
(after taking account of hedging) received by the company for the commodity?
a)
1016.0
b)
1001.0
c)
981.0
d)
1014.0
45.
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?
a)
0.6
b)
0.67
c)
1.45
d)
0.9
46.
A company has a $36 million portfolio with a beta of 1.2. The futures price for a contract on an
index is 900. Futures contracts on $250 times the index can be traded. What trade is necessary
to reduce beta to 0.9?
a)
Long 192
b)
Short 192
c)
Long 48
d)
Short 48 contracts (0.9-1.2)*(36,000,000/(900*250)) = -48
47.
A company has a $36 million portfolio with a beta of 1.2. The futures price for a contract on an
index is 900. Futures contracts on $250 times the index can be traded. What trade is necessary
to increase beta to 1.8?
a)
Long 192
b)
Short 192
c)
Long 96
d)
Short 96
48.
Which of the following is true?
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).
49.
Which of the following describes tailing the hedge?
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
50.
A company due to pay a certain amount of a foreign currency in the future decides to hedge
with futures contracts. Which of the following best describes the advantage of hedging?
a)
It leads to a better exchange rate being paid
b)
It leads to a more predictable exchange rate being paid
c)
It caps the exchange rate that will be paid
d)
It provides a floor for the exchange rate that will be paid
51.
Which of the following best describes the capital asset pricing model?
a)
Determines the amount of capital that is needed in particular situations
b)
Is used to determine the price of futures contracts
c)
Relates the return on an asset to the return on a stock index
d)
Is used to determine the volatility of a stock index
52.
Which of the following best describes “stack and roll”?
a)
Creates long-term hedges from short term futures contracts
b)
Can avoid losses on futures contracts by entering into further futures contracts
c)
Involves buying a futures contract with one maturity and selling a futures contract with a
different maturity
d)
Involves two different exposures simultaneously
53.
Which of the following increases basis risk?
a)
A large difference between the futures prices when the hedge is put in place and when it is closed out
b)
Dissimilarity between the underlying asset of the futures contract and the hedger’s exposure
c)
A reduction in the time between the date when the futures contract is closed and its
delivery month
d)
None of the above
54.
Which of the following is a reason for hedging a portfolio with an index futures?
a)
The investor believes the stocks in the portfolio will perform better than the market but is uncertain about the future performance of the market
b)
The investor believes the stocks in the portfolio will perform better than the market and the market is expected to do well
c)
The portfolio is not well diversified and so its return is uncertain
d)
All of the above
55.
Which of the following does NOT describe beta?
a)
A measure of the sensitivity of the return on an asset to the return on an index
b)
The slope of the best fit line when the return on an asset is regressed against the return on the market
c)
The hedge ratio necessary to remove market risk from a portfolio
d)
Measures correlation between futures prices and spot prices for a commodity
56.
Which of the following is true?
a)
Hedging can always be done more easily by a company’s shareholders than by the company itself
b)
If all companies in an industry hedge, a company in the industry can sometimes reduce its risk by choosing not to hedge
c)
If all companies in an industry do not hedge, a company in the industry can reduce its risk
by hedging
d)
If all companies in an industry do not hedge, a company is liable increase its risk by hedging
57.
Which of the following is necessary for tailing a hedge?
a)
Comparing the size in units of the position being hedged with the size in units of the futures contract
b)
Comparing the value of the position being hedged with the value of one futures contract
c)
Comparing the futures price of the asset being hedged to its forward price
d)
None of the above
58.
Which of the following is true?
a)
Gold producers should always hedge the price they will receive for their production of gold over the next three years
b)
Gold producers should always hedge the price they will receive for their production of gold over the next one year
c)
The hedging strategies of a gold producer should depend on whether it shareholders want exposure to the price of gold
d)
Gold producers can hedge by buying gold in the forward market
59.
A silver mining company has used futures markets to hedge the price it will receive for
everything it will produce over the next 5 years. Which of the following is true?
a)
It is liable to experience liquidity problems if the price of silver falls dramatically
b)
It is liable to experience liquidity problems if the price of silver rises dramatically
c)
It is liable to experience liquidity problems if the price of silver rises dramatically or falls
dramatically
d)
The operation of futures markets protects it from liquidity problems
60.
A company will buy 1000 units of a certain commodity in one year. It decides to hedge 80% of its
exposure using futures contracts. The spot price and the futures price are currently $100 and
$90, respectively. If the spot price and the futures price in one year turn out to be $112 and
$110, respectively. What is the average price paid for the commodity?
a)
92.0
b)
96.0
c)
102.0
d)
106.0
61.
Which of the following is a consumption asset?
a)
The S&P 500 index
b)
The Canadian dollar
c)
Copper
d)
IBM stock
62.
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 share during the six
months. How much does the investor gain?
a)
1000.0
b)
400.0
c)
700.0
d)
300.0
63.
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 is the three-year forward price?
a)
$40.50 = 30*e^(0.1*3)
b)
22.22
c)
33.0
d)
33.16
64.
The spot price of an investment asset is $30 and the risk-free rate for all maturities is 10% with
continuous compounding. The asset provides an income of $2 at the end of the first year and at
the end of the second year. What is the three-year forward price?
a)
19.67
b)
$35.84 = 30e^(0.1*3) - 2e^(0.1*2) - 2e^0.1
c)
45.15
d)
40.5
65.
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?
a)
0.707
b)
0.7177
c)
0.7249
d)
0.6930 = 0.7e^(0.05-0.07)x0.5
66.
Which of the following is true?
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.
67.
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 is the value of
the short forward contract?
a)
2.0
b)
-2.0
c)
1.96
d)
−$1.96 = (40-42)e^(-0.08x3/12)
68.
The spot price of an asset is positively correlated with the market. Which of the following would
you expect to be true?
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 expected future spot
price.
69.
Which of the following describes the way the futures price of a foreign currency is quoted by the
CME group?
a)
The number of U.S. dollars per unit of the foreign currency
b)
The number of the foreign currency per U.S. dollar
c)
none
d)
none
70.
Which of the following describes the way the forward price of a foreign currency is quoted?
a)
None
b)
None
c)
Some forward prices are quoted as the number of U.S. dollars per unit of the foreign
currency and some are quoted the other way round
d)
There are no quotation conventions for forward prices
71.
Which of the following is NOT a reason why a short position in a stock is closed out?
a)
The investor with the short position chooses to close out the position
b)
The lender of the shares issues instructions to close out the position
c)
None
d)
None
72.
Which of the following is NOT true?
a)
Gold and silver are investment assets
b)
Investment assets are held by significant numbers of investors for investment purposes
c)
Investment assets are never held for consumption
d)
None
73.
What should a trader do when the one-year forward price of an asset is too low? Assume that
the asset provides no income.
a)
The trader should short the asset, invest the proceeds of the short sale at the risk-free rate, enter into a short forward contract to sell the asset in one year
b)
The trader should short the asset, invest the proceeds of the short sale at the risk-free rate, enter into a long forward contract to buy the asset in one year
c)
None
d)
None
74.
Which of the following is NOT true about forward and futures contracts?
a)
Forward contracts are more liquid than futures contracts
b)
The futures contracts are traded on exchanges while forward contracts are traded in the
over-the-counter market
c)
None
d)
None
75.
As the convenience yield increases, which of the following is true?
a)
The one-year futures price as a percentage of the spot price increases
b)
The one-year futures price as a percentage of the spot price decreases
c)
None
d)
None
76.
As inventories of a commodity decline, which of the following is true?
a)
The one-year futures price as a percentage of the spot price increases
b)
The one-year futures price as a percentage of the spot price decreases
c)
None
d)
None
77.
Which of the following describes a known dividend yield on a stock?
a)
The size of the dividend payments each year is known
b)
Dividends per year as a percentage of the stock price at the time when dividends are paid are known
c)
None
d)
None
78.
Which of the following is an argument used by Keynes and Hicks?
a)
If hedgers hold long positions and speculators holds short positions, the futures price will tend to be higher than the expected future spot price
b)
If hedgers hold long positions and speculators holds short positions, the futures price
will tend to be lower than the expected future spot price
c)
None
d)
None
79.
Which of the following describes contango?
a)
None
b)
None
c)
The futures price is a declining function of the time to maturity
d)
The futures price is above the expected future spot price
80.
Which of the following is true for a consumption commodity?
a)
None
b)
None
c)
There is an upper limit to the futures price but no lower limit, except that the futures
price cannot be negative
d)
The futures price can be determined with reasonable accuracy from the spot price and
interest rates
81.
Which of following is applicable to corporate bonds in the United States?
a)
None
b)
None
c)
30/360
d)
Actual/365
82.
It is May 1. The quoted price of a bond with an Actual/Actual (in period) day count and 12%
per annum coupon (paid semiannually) in the United States is 105. It has a face value of 100
and pays coupons on April 1 and October 1. What is the cash price?
a)
None
b)
None
c)
105.98
d)
106.04
83.
It is May 1. The quoted price of a bond with a 30/360 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 is the cash price?
a)
106.0
b)
106.02
c)
None
d)
None
84.
The most recent settlement bond futures price is 103.5. Which of the following four bonds is
cheapest to deliver?
a)
None
b)
None
c)
Quoted bond price = 131; conversion factor = 1.2500.
d)
Quoted bond price = 143; conversion factor = 1.3500.
85.
Which of the following is NOT an option open to the party with a short position in the Treasury
bond futures contract?
a)
None
b)
None
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 factor
86.
A trader enters into a long position in one Eurodollar futures contract. How much does the
trader gain when the futures price quote increases by 6 basis points?
a)
6.0
b)
150.0
c)
None
d)
None
87.
The bonds that can be delivered in a Treasury bond futures contract are
a)
Assets that provide no income
b)
Assets that provide a known cash income
c)
None
d)
None
88.
An ultra T-bond futures contract is one where
a)
None
b)
None
c)
Bonds with maturities greater than 15 years can be delivered
d)
Bonds with maturities greater than 25 year can be delivered
89.
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?
a)
100.0
b)
200.0
c)
None
d)
None
90.
Which of the following is true?
a)
The futures rates calculated from a Eurodollar futures quote are always less than the corresponding forward rate
b)
The futures rates calculated from a Eurodollar futures quote are always greater than the corresponding forward rate
c)
None
d)
None
91.
How much is a basis point?
a)
None
b)
None
c)
0.0001
d)
1e-05
92.
Which of the following day count conventions applies to a US Treasury bond?
a)
Actual/360
b)
Actual/Actual (in period)
c)
None
d)
None
93.
What is the quoted discount rate on a money market instrument?
a)
The interest rate earned as a percentage of the final face value of a bond
b)
The interest rate earned as a percentage of the initial price of a bond
c)
The interest rate earned as a percentage of the average price of a bond
d)
The risk-free rate used to calculate the present value of future cash flows from a bond
94.
Which of the following is closest to the duration of a 2-year bond that pays a coupon of 8% per
annum semiannually? The yield on the bond is 10% per annum with continuous compounding.
a)
None
b)
None
c)
1.88
d)
1.92
95.
Which of the following is NOT true about duration?
a)
None
b)
None
c)
Equals the weighted average of individual bond durations for a portfolio, where weights
are proportional to the present value of bond prices
d)
The prices of two bonds with the same duration change by the same percentage
amount when interest rate moves up by 100 basis points
96.
The conversion factor for a bond is approximately
a)
The price it would have if all cash flows were discounted at 6% per annum
b)
The price it would have if it paid coupons at 6% per annum
c)
None
d)
None
97.
The time-to-maturity of a Eurodollars futures contract is 4 years and the time-to-maturity of
the rate underlying the futures contract is 4.25 years. The standard deviation of the change in
the short term interest rate, = 0.011. What does the model in the text give as the difference
between the futures and the forward interest rate.
a)
0.00105
b)
0.00103
c)
None
d)
None
98.
A trader uses 3-month Eurodollar futures to lock in a rate on $5 million for six months. How
many contracts are required?
a)
5.0
b)
10.0
c)
None
d)
None
99.
In the U.S. what is the longest maturity for 3-month Eurodollar futures contracts?
a)
None
b)
None
c)
10 years
d)
20 years
100.
Duration matching immunizes a portfolio against
a)
None
b)
None
c)
Changes in the steepness of the yield curve
d)
Small parallel shifts in the yield curve
101.
A company can invest funds 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 by using the swap?
a)
0.024
b)
2.7%; 30bp = 0.3%
c)
None
d)
None
102.
Which of the following is true?
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)
None
d)
None
103.
Company X and Company Y have been offered the following rates, Suppose that Company X borrows fixed and company Y borrows floating. If they enter into a
swap with each other where the apparent benefits are shared equally, what is company X’s
effective borrowing rate?
a)
3-month LIBOR−30bp => (1% + 0.2%)/2 = 0.4%
b)
0.031
c)
None
d)
None
104.
Which of the following describes the five-year swap rate?
a)
The fixed rate of interest which a swap market maker is prepared to pay in exchange for LIBOR on a 5-year swap
b)
The fixed rate of interest which a swap market maker is prepared to receive in exchange for LIBOR on a 5-year swap
c)
Average A&B
d)
Higher A&B
105.
Which of the following is a use of a currency swap?
a)
To exchange an investment in one currency for an investment in another currency
b)
To exchange borrowing in one currency for borrowings in another currency
c)
To take advantage situations where the tax rates in two countries are different
d)
All of above
106.
The reference entity in a credit default swap is
a)
None
b)
None
c)
The company or country whose default is being insured against
d)
None
107.
Which of the following describes an interest rate swap?
a)
The exchange of a fixed rate bond for a floating rate bond
b)
A portfolio of forward rate agreements
c)
An agreement to exchange interest at a fixed rate for interest at a floating rate
d)
All of above
108.
Which of the following is true for an interest rate swap?
a)
A swap is usually worth close to zero when it is first negotiated
b)
Each forward rate agreement underlying a swap is worth close to zero when the swap is
first entered into
c)
None
d)
None
109.
Which of the following is true for the party paying fixed in a newly negotiated interest rate swap
when the yield curve is upward sloping?
a)
The early forward contracts underlying the swap have a positive value and the later ones have a negative value
b)
The early forward contracts underlying the swap have a negative value and the later ones have a positive value
c)
None
d)
None
110.
A bank enters into a 3-year swap with company X where it pays LIBOR and receives 3.00%. It
enters into an offsetting swap with company Y where is receives LIBOR and pays 2.95%. Which of
the following is true:
a)
None
b)
None
c)
If company X defaults, the swap with company Y continues
d)
The bank’s bid-offer spread is 0.5 basis points
111.
When LIBOR is used as the discount rate:
a)
None
b)
None
c)
The value of the floating rate bond underlying a swap is worth par immediately after a payment date
d)
The value of the floating rate bond underlying a swap is worth par immediately before a
payment date
112.
A company enters into an interest rate swap where it is paying fixed and receiving LIBOR. When
interest rates increase, which of the following is true?
a)
The value of the swap to the company increases
b)
The value of the swap to the company decreases
c)
None
d)
None
113.
A floating for floating currency swap is equivalent to
a)
None
b)
None
c)
A fixed-for-fixed currency swap and two interest rate swaps, one in each currency
d)
None
114.
A floating-for-fixed currency swap is equivalent to
a)
Two interest rate swaps, one in each currency
b)
A fixed-for-fixed currency swap and one interest rate swap
c)
None
d)
None
115.
An interest rate swap has three years of remaining life. Payments are exchanged annually.
Interest at 3% is paid and 12-month LIBOR is received. A exchange of payments has just taken
place. The one-year, two-year and three-year LIBOR/swap zero rates are 2%, 3% and 4%. All rates
an annually compounded. What is the value of the swap as a percentage of the principal when
LIBOR discounting is used.
a)
None
b)
2.66
c)
None
d)
None
116.
A semi-annual pay interest rate swap where the fixed rate is 5.00% (with semi-annual
compounding) has a remaining life of nine months. The six-month LIBOR rate observed three
months ago was 4.85% with semi-annual compounding. Today’s three and nine month LIBOR
rates are 5.3% and 5.8% (continuously compounded) respectively. From this it can be calculated
that the forward LIBOR rate for the period between three- and nine-months is 6.14% with semi-
annual compounding. If the swap has a principal value of $15,000,000, what is the value of the
swap to the party receiving a fixed rate of interest?
a)
74250.0
b)
-70760.0
c)
None
d)
None
117.
Which of the following describes the way a LIBOR-in-arrears swap differs from a plain vanilla
interest rate swap?
a)
Interest is paid at the beginning of the accrual period in a LIBOR-in-arrears swap
b)
Interest is paid at the end of the accrual period in a LIBOR-in-arrears swap
c)
None
d)
None
118.
In a fixed-for-fixed currency swap, 3% on a US dollar principal of $150 million is received and 4%
on a British pound principal of 100 million pounds is paid. The current exchange rate is 1.55
dollar per pound. Interest rates in both countries for all maturities are currently 5% (continuously
compounded). Payments are exchanged every year. The swap has 2.5 years left in its life. What is
the value of the swap?
a)
None
b)
None
c)
-9.15
d)
-10.15
119.
Which of the following is a typical bid-offer spread on the swap rate for a plain vanilla interest
rate swap?
a)
3 basis points
b)
8 basis points
c)
None
d)
None1
120.
Which of the following describes the five-year swap rate?
a)
None
b)
None
c)
The rate that can be earned over five years from a series of short-term loans to AA-
rated companies
d)
The rate that can be earned over five years from a series of short-term loans to A-rated
companies
121.
Which of the following describes a call option?
a)
The right to buy an asset for a certain price
b)
The obligation to buy an asset for a certain price
c)
None
d)
None
122.
Which of the following is true?
a)
A long call is the same as a short put
b)
A short call is the same as a long put
c)
A call on a stock plus a stock the same as a put
d)
None of above
123.
An investor has exchange-traded put options to sell 100 shares for $20. There is a 2 for 1 stock
split. Which of the following is the position of the investor after the stock split?
a)
None
b)
None
c)
Put options to sell 200 shares for $10
d)
Put options to sell 200 shares for $20
124.
An investor has exchange-traded put options to sell 100 shares for $20. There is 25% stock
dividend. Which of the following is the position of the investor after the stock dividend?
a)
Put options to sell 125 shares for $15
b)
Put options to sell 125 shares for $16
c)
None
d)
None
125.
An investor has exchange-traded put options to sell 100 shares for $20. There is a $1 cash
dividend. Which of the following is then the position of the investor?
a)
The investor has put options to sell 100 shares for $20
b)
The investor has put options to sell 100 shares for $19
c)
None
d)
None
126.
Which of the following describes a short position in an option?
a)
None
b)
None
c)
A position in an option lasting less than six months
d)
A position where an option has been sold
127.
Which of the following describes a difference between a warrant and an exchange-traded stock
option?
a)
In a warrant issue, someone has guaranteed the performance of the option seller in the event that the option is exercised
b)
The number of warrants is fixed whereas the number of exchange-traded options in existence depends on trading
c)
None
d)
None
128.
Which of the following describes LEAPS?
a)
None
b)
None
c)
Exchange-traded stock options with longer lives than regular exchange-traded stock
options
d)
Options on the average stock price during a period of time
129.
Which of the following is an example of an option class?
a)
All calls on a certain stock
b)
All calls with a particular strike price on a certain stock
c)
None
d)
None
130.
Which of the following is an example of an option series?
a)
None
b)
None
c)
All calls with a particular time to maturity on a certain stock
d)
All calls with a particular time to maturity and strike price on a certain stock
131.
Which of the following must post margin?
a)
The seller of an option
b)
The buyer of an option
c)
None
d)
None
132.
Which of the following describes a long position in an option?
a)
None
b)
None
c)
A position where an option has been purchased
d)
A position that has been held for a long time
133.
Which of the following is NOT traded by the CBOE?
a)
Weeklys
b)
Monthlys
c)
None
d)
None
134.
When a six-month option is purchased
a)
The price must be paid in full
b)
Up to 25% of the option price can be borrowed using a margin account
c)
None
d)
None
135.
Which of the following are true for CBOE stock options?
a)
There are no margin requirements
b)
The initial margin and maintenance margin are determined by formulas and are equal
c)
None
d)
None
136.
The price of a stock is $67. A trader sells 5 put option contracts on the stock with a strike price of
$70 when the option price is $4. The options are exercised when the stock price is $69. What is
the trader’s net profit or loss?
a)
None
b)
None
c)
Gain 1,500
d)
Loss 1,000
137.
A trader buys a call and sells a put with the same strike price and maturity date. What is the
position equivalent to?
a)
A long forward
b)
A short forward
c)
None
d)
None
138.
The price of a stock is $64. A trader buys 1 put option contract on the stock with a strike price of
$60 when the option price is $10. When does the trader make a profit?
a)
None
b)
None
c)
When the stock price is below $54
d)
When the stock price is below $50
139.
Consider a put option and a call option with the same strike price and time to maturity. Which of
the following is true?
a)
None
b)
None
c)
One of the options must be in the money
d)
One of the options must be either in the money or at the money
140.
In which of the following cases is an asset NOT considered constructively sold?
a)
The owner shorts the asset
b)
The owner buys an in-the-money put option on the asset
c)
None
d)
None
141.
When the stock price increases with all else remaining the same, which of the following is true?
a)
None
b)
None
c)
Calls increase in value while puts decrease in value
d)
Puts increase in value while calls decrease in value
142.
When the strike price increases with all else remaining the same, which of the following is true?
a)
None
b)
None
c)
Calls increase in value while puts decrease in value
d)
Puts increase in value while calls decrease in value
143.
When volatility increases with all else remaining the same, which of the following is true?
a)
Both calls and puts increase in value
b)
Both calls and puts decrease in value
c)
None
d)
None
144.
When dividends increase with all else remaining the same, which of the following is true?
a)
None
b)
None
c)
Calls increase in value while puts decrease in value
d)
Puts increase in value while calls decrease in value
145.
When interest rates increase with all else remaining the same, which of the following is true?
a)
None
b)
None
c)
Calls increase in value while puts decrease in value
d)
Puts increase in value while calls decrease in value
146.
When the time to maturity increases with all else remaining the same, which of the following is
true?
a)
None
b)
None
c)
There is no effect on European option values
d)
European options are liable to increase or decrease in value
147.
The price of a stock, which pays no dividends, is $30 and the strike price of a one year European
call option on the stock is $25. The risk-free rate is 4% (continuously compounded). Which of the
following is a lower bound for the option such that there are arbitrage opportunities if the price
is below the lower bound and no arbitrage opportunities if it is above the lower bound?
a)
5.0
b)
5.98
c)
None
d)
None
148.
A stock price (which pays no dividends) is $50 and the strike price of a two year European put
option is $54. The risk-free rate is 3% (continuously compounded). Which of the following is a
lower bound for the option such that there are arbitrage opportunities if the price is below the
lower bound and no arbitrage opportunities if it is above the lower bound?
a)
None
b)
None
c)
2.86
d)
$0.86 = Ke^(-rT) −S0
149.
Which of the following is NOT true? (Present values are calculated from the end of the life of the
option to the beginning)
a)
An American put option is always worth less than the present value of the strike price
b)
A European put option is always worth less than the present value of the strike price
c)
None
d)
None
150.
Which of the following best describes the intrinsic value of an option?
a)
The value it would have if the owner had to exercise it immediately or not at all
b)
The Black-Scholes-Merton price of the option
c)
None
d)
None
151.
Which of the following describes a situation where an American put option on a stock becomes
more likely to be exercised early?
a)
None
b)
None
c)
The stock price volatility decreases
d)
Interest rates decrease
152.
Which of the following is true?
a)
An American call option on a stock should never be exercised early
b)
An American call option on a stock should never be exercised early when no dividends are expected
c)
None
d)
None
153.
Which of the following is the put-call parity result for a non-dividend-paying stock?
a)
None
b)
None
c)
The European put price plus the stock price must equal the European call price plus the
strike price
d)
The European put price plus the stock price must equal the European call price plus the
present value of the strike price
154.
Which of the following is true when dividends are expected?
a)
Put-call parity does not hold
b)
The basic put-call parity formula can be adjusted by subtracting the present value of expected dividends from the stock price
c)
None
d)
None
155.
The price of a European call option on a non-dividend-paying stock with a strike price of $50 is
$6. The stock price is $51, the continuously compounded risk-free rate (all maturities) is 6% and
the time to maturity is one year. What is the price of a one-year European put option on the
stock with a strike price of $50?
a)
None
b)
None
c)
6.0
d)
2.09
156.
The price of a European call option on a stock with a strike price of $50 is $6. The stock price is
$51, the continuously compounded risk-free rate (all maturities) is 6% and the time to maturity is
one year. A dividend of $1 is expected in six months. What is the price of a one-year European
put option on the stock with a strike price of $50?
a)
None
b)
None
c)
3.06
d)
1.12
157.
A European call and a European put on a stock have the same strike price and time to maturity.
At 10:00am on a certain day, the price of the call is $3 and the price of the put is $4. At 10:01am
news reaches the market that has no effect on the stock price or interest rates, but increases
volatilities. As a result the price of the call changes to $4.50. Which of the following is correct?
a)
None
b)
None
c)
The put price increases to $5.50
d)
It is possible that there is no effect on the put price
158.
Interest rates are zero. A European call with a strike price of $50 and a maturity of one year is
worth $6. A European put with a strike price of $50 and a maturity of one year is worth $7. The
current stock price is $49. Which of the following is true?
a)
The call price is high relative to the put price
b)
The put price is high relative to the call price
c)
Both the call and put must be mispriced
d)
None of the above
159.
Which of the following is true for American options?
a)
Put-call parity provides an upper and lower bound for the difference between call and put prices
b)
Put call parity provides an upper bound but no lower bound for the difference between call and put prices
c)
None
d)
None of the above
160.
Which of the following can be used to create a long position in a European put option on a stock?
a)
Buy a call option on the stock and buy the stock
b)
Buy a call on the stock and short the stock
c)
None
d)
None
161.
Which of the following creates a bull spread?
a)
Buy a low strike price call and sell a high strike price call
b)
Buy a high strike price call and sell a low strike price call
c)
None
d)
None
162.
Which of the following creates a bear spread?
a)
Buy a low strike price call and sell a high strike price call
b)
Buy a high strike price call and sell a low strike price call
c)
None
d)
None
163.
Which of the following creates a bull spread?
a)
Buy a low strike price put and sell a high strike price put
b)
Buy a high strike price put and sell a low strike price put
c)
None
d)
None
164.
Which of the following creates a bear spread?
a)
Buy a low strike price put and sell a high strike price put
b)
Buy a high strike price put and sell a low strike price put
c)
None
d)
None
165.
What is the number of different option series used in creating a butterfly spread?
a)
None
b)
None
c)
3.0
d)
4.0
166.
A stock price is currently $23. A reverse (i.e short) butterfly spread is created from options with
strike prices of $20, $25, and $30. Which of the following is true?
a)
None
b)
None
c)
The gain when the stock price is greater that $30 is the same as the gain when the stock
price is less than $20
d)
It is incorrect to assume that there is always a gain when the stock price is greater than
$30 or less than $20
167.
Which of the following is correct?
a)
None
b)
None
c)
A calendar spread can be created by buying a call and selling a call when the strike
prices are different and the times to maturity are different
d)
A calendar spread can be created by buying a call and selling a call when the strike
prices are the same and the times to maturity are different
168.
What is a description of the trading strategy where an investor sells a 3-month call option and
buys a one-year call option, where both options have a strike price of $100 and the underlying
stock price is $75?
a)
Bearish Calendar Spread
b)
Bullish Calendar Spread
c)
Noen
d)
Nonen
169.
Which of the following is correct?
a)
None
b)
None
c)
A diagonal spread can be created by buying a call and selling a call when the strike prices
are different and the times to maturity are different
d)
A diagonal spread can be created by buying a call and selling a call when the strike prices
are the same and the times to maturity are different
170.
Which of the following is true of a box spread?
a)
It is a package consisting of a bull spread and a bear spread
b)
It involves two call options and two put options
c)
It has a known value at maturity
d)
All of above
171.
How can a straddle be created?
a)
Buy one call and one put with the same strike price and same expiration date
b)
Buy one call and one put with different strike prices and same expiration date
c)
None
d)
Nonen
172.
How can a strip trading strategy be created?
a)
None
b)
None
c)
Buy one call and two puts with the same strike price and expiration date
d)
Buy two calls and one put with the same strike price and expiration date
173.
How can a strap trading strategy be created?
a)
None
b)
None
c)
Buy one call and two puts with the same strike price and expiration date
d)
Buy two calls and one put with the same strike price and expiration date
174.
How can a strangle trading strategy be created?
a)
Buy one call and one put with the same strike price and same expiration date
b)
Buy one call and one put with different strike prices and same expiration date
c)
None
d)
Nonen
175.
Which of the following describes a protective put?
a)
A long put option on a stock plus a long position in the stock
b)
A long put option on a stock plus a short position in the stock
c)
None
d)
None
176.
Which of the following describes a covered call?
a)
None
b)
None
c)
A short call option on a stock plus a short position in the stock
d)
A short call option on a stock plus a long position in the stock
177.
When the interest rate is 5% per annum with continuous compounding, which of the following
creates a principal protected note worth $1000?
a)
A one-year zero-coupon bond plus a one-year call option worth about $59
b)
A one-year zero-coupon bond plus a one-year call option worth about $49
c)
None
d)
None
178.
A trader creates a long butterfly spread from options with strike prices $60, $65, and $70 by
trading a total of 400 options. The options are worth $11, $14, and $18. What is the maximum
net gain (after the cost of the options is taken into account)?
a)
None
b)
None
c)
300.0
d)
400.0
179.
A trader creates a long butterfly spread from options with strike prices $60, $65, and $70 by
trading a total of 400 options. The options are worth $11, $14, and $18. What is the maximum
net loss (after the cost of the options is taken into account)?
a)
100.0
b)
200.0
c)
None
d)
None
180.
Six-month call options with strike prices of $35 and $40 cost $6 and $4, respectively. What is the
maximum gain when a bull spread is created by trading a total of 200 options?
a)
None
b)
None
c)
300.0
d)
400.0
181.
Which of the following is acquired (in addition to a cash payoff) when the holder of a put futures
exercises?
a)
A long position in a futures contract
b)
A short position in a futures contract
c)
None
d)
None
182.
Which of the following is acquired (in addition to a cash payoff) when the holder of a call futures
exercises?
a)
A long position in a futures contract
b)
A short position in a futures contract
c)
None
d)
None
183.
The risk-free rate is 5% and the dividend yield on the S&P 500 index is 2%. Which of the following
is correct when a futures option on the index is being valued?
a)
The futures price of the S&P 500 is treated like a stock paying a dividend yield of 5%.
b)
The futures price of the S&P 500 is treated like a stock paying a dividend yield of 2%.
184.
Which of the following is NOT true?
a)
Black’s model can be used to value an American-style option on futures
b)
Black’s model can be used to value a European-style option on futures
185.
Which of the following is true when the futures price exceeds the spot price?
a)
A call on futures is always worth at least as much as the corresponding call on spot
b)
A call on spot is always worth at least as much as the corresponding call on futures
186.
Which of the following describes a futures-style option?
a)
A futures on an option payoff
b)
An option on spot with daily settlement
187.
A futures price is currently 40 cents. It is expected to move up to 44 cents or down to 34 cents in
the next six months. The risk-free interest rate is 6%. What is the probability of an up movement
in a risk-neutral world?
a)
0.4
b)
0.5
c)
0.72
d)
0.6
188.
A futures price is currently 40 cents. It is expected to move up to 44 cents or down to 34 cents in
the next six months. The risk-free interest rate is 6%. What is the value of a six-month put option
with a strike price of 37 cents?
a)
1.16 cents
b)
1.2 cents
189.
A futures price is currently 40 cents. It is expected to move up to 44 cents or down to 34 cents in
the next six months. The risk-free interest rate is 6%. What is the value of a six month call option
with a strike price of 39 cents?
a)
5 cents
b)
2.91 cents
190.
Which of the following are true?
a)
Futures options are usually European
b)
Futures options are usually American
191.
Which of the following is true for a September futures option?
a)
The expiration month of option is September
b)
The option was first traded in September
c)
The delivery month of the underlying futures contract is September
192.
What is the cash settlement if a put futures option on 50 units of the underlying asset is
exercised?
a)
(Current Futures Price – Strike Price) times 50
b)
(Strike Price – Current Futures Price) times 50
c)
(Most Recent Futures Settlement Price – Strike Price) times 50
d)
(Strike Price – Most Recent Futures Settlement Price) times 50
193.
What is the cash component of the payoff if a call futures option on 50 units of the underlying
asset is exercised?
a)
(Most Recent Futures Settlement Price – Strike Price) times 50
b)
(Strike Price – Most Recent Futures Settlement Price) times 50
194.
Which of the following is true?
a)
A futures option is settled daily
b)
A futures-style option is settled daily
c)
Both a futures option and a futures-style option are settled daily
d)
Neither a futures option nor a futures-style option is settled daily
195.
Which of the following is true about a futures option and a spot option on the same underlying
asset when they have the same strike price? The expiration dates of the two options and the
futures are all the same.
a)
A European put spot option and European put futures option are equivalent
b)
An American put spot option and American put futures option are equivalent
196.
What is the value of a European call futures option where the futures price is 50, the strike price
is 50, the risk-free rate is 5%, the volatility is 20% and the time to maturity is three months?
a)
49.38N(0.05)-49.38N(-0.05)
b)
50N(0.05)-50N(-0.05)
197.
What is the expected growth rate of an index futures price in the risk-neutral world?
a)
The dividend yield on the index
b)
Zero
198.
When Black’s model used to value a European option on the spot price of an asset, which of the
following is NOT true?
a)
It is not necessary to know the risk-free rate
b)
The underlying asset can be an investment or a consumption asset
199.
One-year European call and put options on an asset are worth $3 and $4 respectively when the
strike price is $20 and the one-year risk-free rate is 5%. What is the one-year futures price of the
asset if there are no arbitrage opportunities? (Use put-call parity.)
a)
19.55
b)
18.95
200.
When the stock price is 20 and the present value of dividends is 2, which of the following is the
recommended way of constructing a tree?
a)
Draw a tree with an initial stock price of 18 and add the present value of future dividends at each node
b)
Draw a tree with an initial stock price of 18 and add 2 at each node
201.
What is the recommended way of making interest rates a function of time in a Cox, Ross,
Rubinstein tree?
a)
Make u a function of time
b)
Make p a function of time
202.
What is the recommended way of making volatility a function of time in a Cox, Ross, Rubinstein
tree?
a)
Make u and p a function of time
b)
Make the lengths of the time steps unequal
203.
A binomial tree prices an American option at $3.12 and the corresponding European option at
$3.04. The Black-Scholes price of the European option is $2.98. What is the control variate price
of the American option?
a)
3.06
b)
3.18
204.
The chapter discusses an alternative to the Cox, Ross, Rubinstein tree. In this alternative, which
of the following are true:
a)
The relationship between u and d is: u-1=1-d
b)
The probabilities on the tree are all 0.5
205.
Which of the following cannot be valued by Monte Carlo simulation
a)
European options
b)
American options
206.
Which of the following is true?
a)
The implicit finite difference method relates prices at one node to three prices at nodes at a later time
b)
The implicit finite difference method relates prices at one node to three prices at nodes at an earlier time
207.
Which of the following is true?
a)
The implicit finite difference method is equivalent to using a trinomial tree
b)
The explicit finite difference method is equivalent to using a trinomial tree
208.
The standard deviation of the values of an option calculated using 10,000 Monte Carlo trials is
4.5. The average of the values is 20. What is the standard error of this as an estimate of the
option price?
a)
4.5
b)
0.45
c)
0.045
209.
The values of a stock price at the end of the second time step are $80, $100, $125. The
corresponding values of an option are $0, $5, and $20 respectively. What is an estimate of
gamma?
a)
0.136
b)
0.146
c)
0.156
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