CIS March 2012 Exam Diet
Examination Paper 1.3:
Derivatives Valuation Analysis
Portfolio Management
Commodity Trading and Futures
Level 1
Derivative Valuation and Analysis (1 -30)
1.
Which of the following most accurately describes a derivative security? A derivative:
A. Always increases risk.
B. Has no expiration date.
C. Has a payoff based on another asset.
D. Increases transaction costs.
2.
Which of the following statements about exchange-traded derivatives is least accurate?
A. They are liquid.
B. They are standardized contracts.
C. They carry significant default risk.
D. They are traded on an exchange.
3.
A futures contract is least likely:
A. Exchange-traded.
B. A contingent claim.
C. Adjusted for profits and losses daily.
D. Liquid.
4.
Arbitrage prevents:
A. Market efficiency.
B. Profit higher than the risk-free rate of return.
C. Two assets with identical payoffs from selling at different prices.
D. Risk taking.
5.
Derivatives are least likely to provide or improve:
A. Liquidity.
B. Price information.
C. Inflation reduction.
D. Risk management.
6.
On
A.
B.
C.
D.
7.
Which of the following statements regarding early termination of a forward contract is
most accurate?
A. A party who enters into an offsetting contract to terminate has no risk.
B. A party who terminates a forward contract early must make cash payment.
C. Early termination through an offsetting transaction with the original counterparty
eliminates default risk.
D. None of the above.
8.
The fair price of a futures contract does not depend on:
A. Spot price of the underlying assets.
B. Time to expiration.
C. Time value of money.
D. Strike price.
9.
A Eurodollar time deposit:
A. Is priced on a discount basis.
B. May be issued by a Japanese bank.
C. Is a certificate of deposit denominated in Euros.
D. Is only recognized in Europe and the USA.
the settlement date of a forward contract:
The short may be required to sell the asset.
The long must sell the asset or make cash payment.
At least one party must make a cash payment to the other.
The contract may be cancelled.
10.
Party A has entered a currency forward contract to purchase €10 million at an exchange
rate of $0.98 per euro. At settlement, the exchange rate is $0.97 per euro. If the
contract is settled in cash, Party A. will:
A. Make a payment of $100,000
B. Receive a payment of $100.000
C. Receive a payment of $103.090
D. Make a payment of $103.090
11.
On 1st March, a six-month call option with a strike of 4,280 is available for trading. The
‘T’ that is used in the Black Scholes formula should be:
A. 0.25
B. 0.5
C. 6
D. 9
12.
The daily process of adjusting the margin in a futures account is called:
A. Variation margin.
B. Marking-to-market.
C. Maintenance margin.
D. Margin call.
13.
The existence of a delivery option with respect to Treasury bond futures means that
the:
A. Short can choose which bond to deliver.
B. Short has the option to settle in cash or by delivery.
C. Long chooses which of a number of bonds will be delivered.
D. Long chooses which bond to accept.
14.
In the futures market, the clearing house is least likely to:
A. Decide which contracts will trade.
B. Set initial and maintenance margins.
C. Act as the counterparty to every trade.
D. Guarantee that the traders will honour their obligations.
15.
Compared to forward contracts, futures contracts are least likely to be:
A. Standardized.
B. Larger in size.
C. Less subject to default risk.
D. More liquid.
16.
A decrease in the risk-free rate of interest will:
A. Increase put and call prices.
B. Decrease put prices and increase call prices.
C. Increase put prices and decrease call prices.
D. Not affect option prices.
17.
Which of the following is not a feature of the derivatives market and instruments?
A. It is a growing market globally.
B. It is an unregulated market.
C. The market exposes investors to risks.
D. Investment in derivatives could sometimes deliver spectacular return.
18.
If you are very bullish on a stock you could _________
A. Buy a put.
B. Buy a call.
C. Write a call.
D. Write a put.
19.
What right and/or obligation does a call holder (American style) have?
A. The obligation to sell the stock at the strike price any time until expiry.
B. The right to sell the stock at the strike price any time until expiry.
C. The obligation to buy the stock at the strike price any time until expiry.
D. The right to buy the stock at the strike price any time until expiry.
20.
Consider a one-period binomial model in which the underlying is currently valued at
N50, and can go up 25% or down 20%. The risk free rate is 7%. What is the price of a
European call option with exercise price of N50?
A. 0.80
B. 1.25
C. 5.25
D. 7.01
21.
What right and/or obligation does a put writer have?
A. The obligation to sell the stock at the strike price any time until expiry.
B. The right to sell the stock at the strike price any time until expiry.
C. The obligation to buy the stock at the strike price any time until expiry.
D. The right to buy the stock at the strike price any time until expiry.
22.
If you want to buy an insurance policy on a stock you own to protect against a possible
decline, what option strategy would you use?
A. Buy a put.
B. Buy a call.
C. Write a call.
D. Write a put.
23.
What right and/or obligation does a put holder have?
A. The obligation to sell the stock at the strike price any time until expiry.
B. The right to sell the stock at the strike price any time until expiry.
C. The obligation to buy the stock at the strike price any time until expiry.
D. The right to buy the stock at the strike price any time until expiry.
24.
A stock is trading at a price of N20. Which of the following statement about options
would be correct?
I. A put option with a strike of N17.50 would be in-the-money.
II. A put option with a strike price of N25 would be in-the-money.
III. A call option with a strike price of N20 would be at-the-money.
IV. A call option with a strike price of N17.50 would be out-of-the-money.
A.
B.
C.
D.
I, and II only.
II and III only.
I, II, and V only.
II, IV and V only.
25.
What is time value?
A. The value of the possibility that the option will increase in value during the time
before expiry.
B. The premium less the intrinsic value.
C. The current premium for the option.
D. Both (A) and (B) above.
26.
Tom bought a speculative put with a strike price of N65 for a premium of N3 at a time
the stock was trading at N66. On expiry the underlying stock is trading at a price of
N63. What is Tom's profit or loss?
A. N2 profit.
B. N3 profit.
C. N1 loss.
D. N5 loss.
27.
What is the maximum risk involved in buying a call option?
A. There is no risk involved in buying a call option.
B. The risk is limited to the premium paid.
C. The risk is limited to the strike price.
D. The risk is limited to the strike price plus the premium.
28.
Which statement best describes how time value erodes as an option approaches its
expiry date? (Assume that all other factors are unchanged).
A. Time value will decay at a constant rate as it approaches expiry.
B. The rate at which time value will decay will fluctuate therefore it cannot be
predicted.
C. Time value will decay at a slower rate as it approaches expiry.
D. Time value will decay at a faster rate as it approaches expiry.
29.
What is intrinsic value?
A. The value that could be realized by exercising an option then immediately
liquidating the position in the underlying.
B. The current premium for the option.
C. The amount of money you could sell the option for.
D. The amount of money you would get if you exercised the option.
30.
As
A.
B.
C.
D.
convergence occurs:
The basis between the cash price and future price becomes smaller.
The basis between the cash price and future price becomes wider.
The basis between the cash price and future price remains the same.
None of the above.
Portfolio Management (31 - 70)
31.
Which of the following comes closest to the annualized return on a fund that reports a
16-month return of 16%?
A. 9.66%
B. 11.77%
C. 13.88%
D. 16.00%
32.
Which of the following statements about risk is correct?
A. The capital market line plots expected return against market risk.
B. The efficient frontier plots expected return against unsystematic risk.
C. The security market line plots expected return against systematic risk.
D. None of the above.
33.
A portfolio manager is constructing a new equity portfolio consisting of a large number
of randomly chosen domestic stocks. As the number of stocks in the portfolio increases,
what happens to the expected levels of systematic and unsystematic risk?
A.
B.
C.
D.
34.
Sytematic risk
Increases
Decreases
Remains the same
Increases
Unsystematic risk
Remains the same
Increases
Decreases
Decreases
The risk-free rate is 5% and the expected market return is 15%. A portfolio manager is
estimating a return of 20% on a stock with a beta of 1.5. Based on the SML and the
analyst’s estimate, this stock is:
A. Properly valued.
B. Overvalued.
C. Undervalued.
D. A growth stock.
35.
Refusing to invest in companies that sell tobacco products, alcohol or products that are
harmful to the environment would constitute a set of investment restrictions that best
illustrates which of the following investment constraints?
A. Regulatory factors.
B. Unique needs and preferences.
C. Legal restrictions.
D. Liquidity constraints.
36.
You purchased a share of stock for N10. One year later you received a N2 dividend and
sold the share for N13. What is your holding period return?
A. 15.4%
B. 20.0%
C. 33.6%
D. 50.0%
37.
Which of the following is most likely to influence an investor’s risk tolerance?
A. Tax considerations.
B. Current net worth and income expectations.
C. Total returns.
D. Liquidity needs.
Portfolio
1
2
3
4
38.
Expected
Return
8%
10%
14%
14%
Standard
Deviation
6%
6%
12%
16%
An analyst gathers the following data about the returns for two stocks:
E(R)
σ2
Stock A
Stock B
0.04
0.09
0.0025
0.0064
Cov A,B = 0.001
The correlation between the returns of stock A and stock B (ΡA,B) is closest to:
A. 0.25
B. 0.50
C. 0.63
D. 0.75
39.
Which of the following would be most appropriate for a retired person in need of income
with modest resources?
A. Precious metals.
B. Long-term aggressive growth fund.
C. Put and call options.
D. Short term government bond funds.
40.
Which of the following portfolios cannot lie on the efficient frontier?
A.
B.
C.
D.
Portfolio 3 only.
Portfolios 1 and 4 only.
Portfolios 2 and 3 only.
Portfolio 2 only.
41.
The investment objective of earning a return on an investment that is at least equal to
the inflation rate is called:
A. Total return.
B. Current income.
C. Capital preservation.
D. Wealth accumulation.
42.
An investor plans to divide her funds evenly between two assets. Assets 1 and 2 have
standard deviations of 10% and 30%, respectively. If the two assets are perfectly
positively correlated, the standard deviations of returns of the two-asset portfolio is
closest to:
A. 10%
B. 15%
C. 20%
D. 35%
43.
Which of the following is example of risk-free investment?
A. Purchasing treasury bills.
B. Purchasing an AAA rated bond.
C. Safe keeping of currency in the bank
D. Making fixed deposit in the bank.
44.
The weak form of the efficient market hypothesis (EMH) implies that:
A. No one can achieve abnormal returns using market information.
B. Insiders, such as specialists and corporate board members, cannot achieve
abnormal returns on average.
C. Investors cannot achieve abnormal returns, on average, using technical analysis,
after adjusting for transaction costs and taxes.
D. None of the above.
45.
Which of the following is least likely a component of an investor’s required rate of
return on a stock?
A. A growth premium.
B. The real risk-free rate.
C. The expected inflation rate.
D. None of the above.
46.
Index futures are used for which of these purposes?
A. To hedge against rising share prices.
B. To hedge against falling prices.
C. For adjusting the beta of a stock portfolio.
D. All of the above.
Use the following data to answer Questions 47 to 49.
An investment has a 50% chance of a 20% return, a 25% chance of a 10% return, and
a 25% chance of a -10% return.
47.
What is the investment's expected return?
A. 5.0%
B. 10.0%
C. 12.5%
D. 15%
48.
What is the investment's variance of returns?
A. 0.005
B. 0.015
C. 0.150
D. 0.120
49.
What is the investment's standard deviation of returns?
A. 1.225%
B. 2.250%
C. 12.250%
D. 15%
50.
Which of the following would you use to measure the extent to which the returns of two
assets move together?
A. Covariance.
B. Range.
C. Standard deviation.
D. Expected value.
51.
The standard deviation of returns is 0.40 for Stock A and 0.0625 Stock B. The
covariance between the returns of A and B is 0.005. The correlation of returns between
A and B is:
A. 0.10
B. 0.20
C. 0.30
D. 0.40
52.
What is the risk measure associated with the capital market line (CML)?
A. Beta.
B. Market risk.
C. Standard deviation.
D. Peculiar risk.
53.
Total risk equals:
A. Unique plus diversifiable risk.
B. Market plus non-diversifiable.
C. Systematic plus unsystematic risk.
D. All of the above.
54.
A market is said to have external or informational efficiency if it features:
A. Market prices that reflect all available information about the value of the
securities traded.
B. Timely and accurate information about past transactions and current supply and
demand conditions.
C. Many buyers and sellers that are willing to trade at prices above and below the
prevailing market price.
D. None of the above.
55.
Which of the following forms of the EMH assumes that no group of investors has
monopolistic access to relevant information?
A. Weak form.
B. Strong form.
C. Semi-strong-form.
D. Semi-weak form.
56.
A stock's abnormal rate of return is defined as the:
A. The market rate of return less the actual rate of return.
B. Actual rate of return less the expected risk-adjusted rate of return.
C. Expected risk-adjusted rate of return minus the market rate of return.
D. Rate of return that is higher than other stocks.
57.
An investor has a portfolio with a combination of stock and bonds in the ratio of
80: 20. He is:
A. Risk averse.
B. Risk neutral.
C. A risk taker.
D. An active investor.
58.
A stock below the security market line is:
A. Underpriced.
B. Overpriced.
C. Appropriately priced.
D. Highly risky.
59.
The Sharpe index assigns higher values to funds that have:
A. Lower standard deviation.
B. Higher returns.
C. Higher risk-adjusted returns.
D. Higher risk premium.
60.
A statistical measure that indicates the percentage of the variance in the portfolio’s
returns that is explained by the market’s returns is:
A. The standard deviation.
B. The coefficient of determination.
C. The beta.
D. The alpha.
61.
Which statement best refers to the concept of unsystematic risk:
A. This risk is unique to each specific company.
B. This risk is common to the all companies trading in a specific market.
C. A stock's beta is a measure used to capture a security's unsystematic risk.
D. After adding a certain number of securities, a portfolio's unsystematic risk can no
longer be diversified.
62.
A liquid asset may:
A. Be converted into cash.
B. Be converted into cash with little chance of loss.
C. Not be converted into cash.
D. Not be converted without loss.
63.
Your research department has constructed the following table for Stock A:
Probability
0.10
0.25
0.40
0.25
Corresponding Return
12%
15%
8%
-9%
What is the expected return for this stock?
A. 5.90%
B. 6.50%
C. 6.72%
D. 8.40%
64.
A portfolio consisting of 150 highly correlated securities most likely:
A. Has a high degree of unsystematic risk.
B. Has a high beta.
C. Can have a large portion of its movement explained by movements in the market
index.
D. Has a high return expectation.
65.
Which of the following statements is least accurate with respect to the factors that
contribute to portfolio risk?
A. The weights of each of the securities in the portfolio must be computed.
B. The expected return of all securities in the portfolio must be examined.
C. The correlation of among all pair-wise combination of securities must be examined.
D. The standard deviation of all individual securities must be examined.
66.
Which of the following statements about performance attribution is true?
A.
B.
It does not require the identification of a benchmark of performance.
It seeks to distinguish the factors responsible for the portfolio’s overall
performance.
C. It is typically a bottom-up approach.
D. It analyses two basic factors: allocation effect and risk management effect.
67.
Money market funds are considered to be good choices for:
I.
II.
III.
IV.
Liquidity.
Safety of principal.
Long term investment.
Growth.
A.
B.
C.
D.
I and II only.
I and IV only.
II and IV only.
II and III only.
68.
A negative alpha for a portfolio indicates:
A. An abnormal loss.
B. Low returns.
C. The portfolio moves in the same direction as the market.
D. The portfolio moves in opposite direction to the market.
69.
Which of the following is not a step in the portfolio management process?
A. Forecast market conditions.
B. Eliminate sources of market risk.
C. Create investment policy statement.
D. Measure performance.
70.
If you were confident that the price of stock X would rise dramatically within two
months, which of the following investment transactions would yield the highest return
on your investment?
A. Purchase a call on stock X.
B. Purchase a put on stock X.
C. Purchase stock X.
D. Short sell stock X.
Commodity Trading and Futures (71 - 100)
71.
Which term denotes an inverse relationship between the price of a commodity and the
demand for that commodity?
A. Supply elasticity.
B. Supply inelasticity.
C. Demand elasticity.
D. Demand inelasticity.
72.
Which of the following contributes to reduced price volatility on the futures market?
A. A speculator who buys and offsets dozens of contracts weekly.
B. A farmer raising a crop who hedges yearly by selling short
C. A slaughterhouse owner who buys cattle futures monthly.
D. A cocoa grower who consistently hedges every growing season.
73.
Which type of futures trade includes investments in bonds?
A. Stock index futures.
B. Interest rate futures.
C. Foreign currency futures.
D. Exchange rate futures.
74.
Which type of yield curve indicates that short term debt has a higher yield than long
term debt?
A. Reversed yield curve.
B. Normal yield curve.
C. Inverted yield curve.
D. Flat yield curve.
75.
Which strategy protects investments against interest rate risk?
A. A short hedge.
B. A cross hedge.
C. A current investment hedge.
D. An anticipatory hedge.
76.
Which of these positions describes a long hedge?
A. Long on the commodity and short the futures contract.
B. Long on the commodity and long the futures contract.
C. Short on the commodity and long the futures contract.
D. Short on the commodity and short the futures contract.
77.
Which of the following is true of position traders?
A. They are a type of day trader.
B. They hold positions for longer terms.
C. They seek to profit from short-term fluctuations.
D. They will only hold long positions.
78.
A trader owns 4 wheat contracts and sells them for a profit of N0.15/bu. The total
commission is N90 and the contract size is 5,000 bushels. What is the trader's profit?
A. 660
B. 1,590
C. 2,910
D. 3,000
79.
Markets are inverted when:
A. The cash price is above the futures price.
B. The cash price is below the futures price.
C. Supplies of a commodity are high, driving down short-term prices.
D. None of the above.
80.
Which type of contracts is standardized and exchange-traded?
A. Futures contracts.
B. Forward contracts.
C. Both futures and forwards.
D. None of the above.
81.
A put with a strike price of N4.20 was purchased by your client at N0.50. The
underlying futures price is now N4.10. What is the intrinsic value of the put?
A. N0
B. N0.10
C. N0.50
D. N4.10
82.
Which of the following investors are bullish?
I.
II.
III.
IV.
Purchaser of a call option.
Purchaser of a put option.
Seller of a call option.
Seller of a put option.
A.
B.
C.
D.
I and III only.
I and IV only.
II and III only.
II and IV only.
83.
In terms of trading, gearing is best described as:
A. Variation margin.
B. Option premium in relation to the price of the underlying asset.
C. The credit line available to a speculator.
D. A prime brokerage account.
84.
A jeweler who wanted to protect against a steep rise in gold prices for minimal cost
would:
A. Buy a collar.
B. Sell a floor.
C. Sell a collar.
D. Sell a cap.
85.
Which of the following is a speculative trade?
A. An investor who anticipates a fall in the market buying a put option.
B. An investor who anticipates a rise in the market buying a call option.
C. An investor buying a call option and selling a put with the same strike and expiry
date.
D. An investor buying a call option and buying a put with the same strike and expiry
date.
86.
Which of the following is an example of a soft commodity?
A. Live hogs.
B. Milk.
C. Pork bellies.
D. Lumber.
87.
An investor believes that the price of copper will stay at N6,000 between now and the
expiry date. What strategy should he adopt?
A. Long put.
B. Short put.
C. Short straddle.
D. Long straddle.
88.
Which of the following is not one of the primary factors that define crude oil?
A. Density.
B. Field of origin.
C. Gas levels.
D. Sulphur content.
89.
Bio fuels have become an increasingly important part of the alternative energy
movement. Which of the following is an example of a bio fuel?
A. Petroleum.
B. Ethanol.
C. Natural gas.
D. Diesel.
90.
Which of the following is not one of the main purposes of an exchange’s rules and
regulations?
A. Assure a high level of market integrity and supervision of trading activity.
B. Enhance the attractiveness of products, markets and services.
C. Legislate for changes in trading laws.
D. Assure the financial condition of member intermediaries.
91.
Which two of the following options are out-of-the-money?
I.
April 150 call with a premium of 10 when the underlying is trading at 155.
II.
May 220 put with a premium of 5 when the underlying is trading at 220.
III. June 180 call with a premium of 12 when the underlying is trading at 170.
IV. May 550 put with a premium of 18 when the underlying is trading at 575.
A.
B.
C.
D.
III and IV only.
I and II only.
II and III only.
II and IV only.
92.
Which of the following would be the main reason why an investor may wish to trade an
exchange traded derivative?
A. They will pay lower margin.
B. They will pay lower fees.
C. The product will offer greater flexibility.
D. There will be lower credit default risk.
93.
Which of the following is a reason for buying a call option?
A. To enable you to have the right to sell an asset.
B. To earn extra income.
C. To profit from a bearish market.
D. To hedge a short underlying position.
94.
What should be included in the calculation of an index future’s fair value?
I.
II.
III.
IV.
Interest rates.
Margin payments.
Market sentiment.
Brokers fees.
A.
B.
C.
D.
I only.
I and II only.
I and III only.
I, II, III and IV only.
95.
Which of the following is not a reason why power exchanges have become such a useful
mechanism for energy companies to manage their energy supply?
A. Because energy can be stored should demand be low.
B. Because the supplier can sell excess capacity onto the exchange.
C. Because the supplier can purchase capacity from the exchange if he
is short.
D. Because it is a forum where prices can be accurately set.
96.
A short futures hedge is preferable to a hedge using puts because:
A. The short hedge retains upside potential.
B. The futures hedge is more flexible.
C. The futures hedge is cheaper.
D. The futures hedge has no basis risk.
97.
Which of the following is the least relevant to the process of price discovery in a
commodity market?
A. Supply and demand factors.
B. Country tax structures.
C. Brokerage fees.
D. International.
98.
The following information reflects current market prices and rates:
Palm oil price = N5,000
Palm oil future price = N5,350
Risk-free rate = 4.5%
Storage costs = 1.0%
Days to expiry = 365
Given the above information, what trade would be undertaken?
A. Buy futures and Palm oil and put money on deposit.
B. Borrow money and buy Palm oil and sell the future.
C. Do nothing, as professional arbitragers would remove any potential profit you would
make.
D. Sell the Palm oil future as it is overpriced.
99.
On
A.
B.
C.
D.
which of the following trades will margin not always be payable?
Buying options.
Selling options.
Buying futures.
Selling futures.
100. Which of the following best describes a contract for a difference?
A. A contract in which the final settlement is the final mark to market.
B. A contract in which different qualities of the commodity can be delivered.
C. A contract in which different quantities of a commodity can be delivered.
D. An index product.
FORMULAE
1)
Black and Scholes Options pricing model:
;
2)
2)
General cost of carry relationship:
3)
Continuous time cost of carry relationship:
4)
Determinants of Options Price:
5)
Correlation/Covariance:
6)
Static portfolio insurance using put option:
7)
Hedging with Stock Index Futures:
8)
Risk adjusted performance measures:
9)
Binomial Option Valuation Model:
;