CIS September 2013 Exam Diet
Examination Paper 1.3:
Derivatives Valuation and Analysis
Portfolio Management
Commodity Trading and Futures
Level 1
MULTI CHOICE QUESTIONS
Derivative Valuation and Analysis (1 -30)
1.
Derivatives can be used either to hedge or to speculate. These actions
____________
A. Increase risk in both cases.
B. Decrease risk in both cases.
C. Spread or minimize in both cases.
D. Offset risk by hedging and increase risk by speculating.
2.
Future contracts contrast with forward contracts by _____________
A. Trading on an organized exchange.
B. Marking to market on a daily basis.
C. Allowing the seller to deliver any day over the delivery month.
D. All of the above.
3.
A forward contract carries an obligation to perform the terms of a contract. This
is not like ___________
A. A cash transaction because a service is carried out but like an option because
it is a deferred choice.
B. An option because a service is performed but like a cash transaction because
it is completed today.
C. An option because the buyer has the choice to exercise but similar to a cash
transaction in that a service is performed.
D. A hedging transaction because a commitment has been undertaken with the
forward.
4.
A chocolate company, which uses the futures market to lock in the price of
cocoa to protect a profit, is an example of:
A. A long hedge.
B. A short hedge.
C. Purchasing future to guard against a potential loss.
D. (A) and (C) above.
5.
When someone “write” a call option, he/she has ____________
A. Taken a “long” position in a future contract.
B. “Marked to market” a futures contract.
C. Sold a call option.
D. Bought a call option.
6.
A currency forward contract is described by ___________
A. Agreeing today to buy or sell specified amount of a currency
set in the future.
B. Agreeing today to buy or sell specified amount of a currency
price.
C. Agreeing today to buy or sell specified amount of a currency
at a price set today.
D. None of the above.
E.
World Export Limited is expecting to receive N10 million in three
take which of the following actions today?
A. Use the forward market to hedge the amount.
B. Use the options market to hedge the amount.
C. Use the money market to hedge the amount.
7.
at a later date
at a current
at a later date
months. It can
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D. All of the above are valid strategies.
8.
The intrinsic value of an out-of-the-money option is ____________
A. Equal to the time value of the option.
B. Negative.
C. Zero.
D. Equal to the exercise price of the option.
9.
The implied volatility of an option is the standard deviation of ____________
that is consistent with the option's current market value.
A. Returns for the call option.
B. Returns for the underlying stock.
C. T-bill returns.
D. Returns for the corresponding put option.
10.
A call option that expires in 10 days has a strike price of N20. The underlying
stock has a current price of N40 per share. What is the likely value of N(d 1) in
the Black-Scholes option pricing model?
A. Close to 1
B. Negative and close to 0
C. Positive and close to 0
D. Close to 0.5
11.
As
A.
B.
C.
D.
12.
Prior to expiration, the time value of a call option is equal to __________
A. Exercise price of the call - intrinsic value of the call.
B. Call price - stock price.
C. Call price - intrinsic value of the call.
D. Exercise price of the call - stock price.
13.
Which of the following is correct concerning put-call parity?
A. Call price must be less than put price.
B. Call price must be greater than put price.
C. C + P = S0 + Xe-rT
D. C - S0 = P - Xe-rT
14.
What advantage do over-the-counter derivatives have over exchange-traded
derivatives?
A. Over-the-counter contracts are more flexible.
B. Over-the-counter contracts are more readily tradable.
C. Over-the-counter contracts are always for longer periods.
D. There is less risk of default on over-the-counter contracts.
15.
Which of the following does the most to reduce default risk for futures
contracts?
A. Marking to market.
B. Flexible delivery arrangement.
C. Credit checks for both buyer and sellers.
D. High liquidity.
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.
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16.
Ben purchased a call option on an “index” of stocks, and he is only permitted to
exercise it on one specific date, six months from now, Ben has a/an
___________
A. Short European option.
B. Long American option.
C. Short forward contract.
D. Long European option.
17.
Delta of a call option is always _______ and put option is ________
A. Positive, negative.
B. Positive, positive.
C. Negative, positive.
D. Negative, negative.
18.
Last month, Mary bought a call option on ABC Company stock, having an
exercise price of N30. Mary paid N1 for this call. Today, ABC stock is trading at
N40 per share. Which of the following is true?
A. Mary has now realized a N10 profit.
B. Mary has now realized a N10 loss.
C. Mary’s option is out of the money.
D. Mary’s option is in the money.
19.
An
A.
B.
C.
D.
20.
If a stock index futures contract is overpriced, you would exploit this situation
by ___________
A. Selling both the stock index futures and the stocks in the index.
B. Buying the stock index futures and selling the stocks in the index.
C. Buying both the stock index futures and the stocks in the index.
D. Selling the stock index futures and simultaneously buying the stocks in the
index.
21.
Commodities future pricing ___________
A. Converges to spot prices at maturity.
B. Includes cost of carry.
C. Must be related to spot prices.
D. All of the above are true.
22.
Hedging one commodity by using a futures contract on another commodity is
valid ___________
A. Surrogate hedging.
B. Cross hedging.
C. Alternative hedging.
D. Proxy hedging.
23.
The price at which the buyer of a put option can sell the stock during the life of
the option is called __________
A. Strike price.
B. Bid price.
C. Call price.
D. All of the above.
option’s premium consists of intrinsic value and ___________
Exercise price.
Strike price.
Expiration value.
Time value.
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24.
The existence of a delivery option with respect to Treasury bond futures means
that the ___________
A. Short has the option to settle in cash or by delivery.
B. Long chooses which of a number of bonds will be delivered.
C. Long chooses which bond to accept.
D. Short can choose which bond to deliver.
25.
___________ contract is an agreement for immediate exchange of funds for
assets.
A. Futures.
B. Forward.
C. Call option.
D. Spot.
26.
The most likely reasons derivative markets have flourished is that __________
A. Derivatives are easy to understand and use.
B. Derivatives have relatively low transaction costs.
C. The pricing of derivatives is relatively straight forward.
D. Involves commodities trading.
27.
Which is the least likely to be a purpose served by derivative markets?
A. Arbitrage.
B. Price discovery.
C. Risk management.
D. All of the above.
28.
For
A.
B.
C.
29.
The current price of Fast Computers stock is N26 per share. The price of a
three-month call option call option with an exercise price of N25 is N3. Which
one of the following increases the value of the call?
A. An increase in interest rate.
B. Passage of time.
C. An increase in Fast Computers dividends.
D. A decrease in the volatility of Fast Computer stock.
30.
Based on the information on stocks X and Y below, which of the stocks most
likely has the lower price?
derivative contracts, the notional principal is best described as __________
The amount of the underlying asset covered by the contract.
A measure of the actual payments made and received in the contract.
Tending to underestimate the actual payments made and received in the
contract.
D. The earliest maturity dates.
A.
B.
C.
D.
Stock
Standard
Deviation
Exercise
Price
Time to
Expiration
X
Y
30%
40%
N40
N40
3 months
4 months
Put
Option
Price
N8
N6
Stock X and Stock Y have approximately the same price.
Stock X.
Stock Y.
Not enough information to determine which stock has the lower price.
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Portfolio Management (31 - 70)
31.
The variance or standard deviation is a measure of __________
A. Total risk.
B. Unique risk.
C. Market risk.
D. Absolute risk.
32.
Efficient portfolios are those which offer ___________
A. Highest expected return for a given level of risk.
B. Highest risk for a given level of expected return.
C. The maximum risk and expected return.
D. All of the above.
33.
Which of the following least accurately compares the Sharpe and Treynor ratios?
A. Both ratios contain excess return in the numerator.
B. Both ratios express a measure of return per unit of some measure of risk.
C. The Sharpe ratio is based on total risk while the Treynor ratio is based on
systematic risk.
D. The Sharpe ratio is the inverse of the Treynor ratio.
34.
Which of the following statements is/are true if the efficient market hypothesis
holds?
A. It implies perfect forecasting ability.
B. It implies market is irrational.
C. It implies that price follow a particular pattern.
D. It implies that price reflect all available information.
35.
Which of the following is not a major cause of systematic (undiversifiable) risk?
A. A worldwide recession.
B. A world energy supply.
C. Company management change.
D. (A) and (B) above.
36.
Which of the following is not a major component of the capital asset pricing
model?
A. An expected rate of return on a maturity.
B. The riskless rate of return.
C. The systematic risk.
D. The historical price of the stock.
37.
A correlation coefficient in portfolio management measures ___________
A. The degree of correlation between two or more assets.
B. The degree of variance.
C. The degree of past relationship.
D. The degree of certainty.
38.
In a well diversified portfolio, which type of risk is negligible?
A. Firm-specific risk.
B. Beta risk.
C. Market risk.
D. Systematic risk.
39.
Aggressive stocks are those stocks that have betas __________
A. Greater than 1
B. Smaller than 1
C. Equal to 1
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D. Greater than 1 but smaller than 2
40.
The efficient frontier is the set of possible investment portfolios that _______
A. Have the minimum variance of all possible combinations.
B. Have the maximum return of all possible combinations.
C. Have equal weights in every risky security.
D. Have the maximum return for any given level of risk.
41.
Diversification is most effective when security returns are _________
A. High.
B. Negatively correlated.
C. Positively correlated.
D. Uncorrelated.
42.
The expected rate of return on a market portfolio is 15 percent. The riskless rate
of interest is 7 percent. The beta of a company is 1.4. What is the required rate of
return on this company’s ordinary shares?
A. 18.2%
B. 22.0%
C. 25.6%
D. 31.9%
43.
At present, the riskless rate of return is 5 percent and the expected rate of
return on the market portfolio is 11 percent. The expected rate of return for an
ordinary share is 20 percent and the stock’s beta is 1.2. This particular ordinary
shares is __________
A. Undervalued.
B. Overvalued.
C. Fairly valued.
D. None of the above.
44.
____________ is a form of market efficiency where shareholders know all the
relevant historical data and available current information.
A. Weak.
B. Semi-weak.
C. Strong.
D. Semi-strong.
45.
The shares of ABC Limited has a 25% probability of having a 15% rate of return
and has a 75% probability of having a 5% return. What is the rate of return as a
percentage?
A. 9 percent.
B. 6.25 percent.
C. 8.4 percent.
D. 7.5 percent.
46.
What is the following best represents the coefficient of variation for a company
with a standard deviation of 0.09 and an expected rate of return of 0.03?
A. 0.33
B. 0.0033
C. 3.0
D. 3.3
47.
Which of the following statement(s) best describe Security Market Line (SML) as a
graphical?
A. Expected rate of return vs. Beta.
B. Expected rate of return vs. variance of return.
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C. Expected rate of return vs. standard deviation of return.
D. All of the above.
48.
Active portfolio management consists of ____________
A. Marketing timing.
B. Security analysis.
C. Indexing.
D. (A) and (B) above.
49.
Suppose you buy Compaq and Pfizer with the following rates of return:
Year
1
2
3
Rate of Return
of Compaq
20%
-10%
8%
Rate of Return
of Pfizer
10%
-4%
30%
The probability of each year is 1/3.
What are the expected returns of Compaq and Pfizer respectively?
A. 6%, 12%
B. 6%, 10%
C. 7.2%, 11.8%
D. 12%, 6%
50.
A purely passive strategy is defined as ___________
A. One that uses only index funds.
B. One that allocates assets in fixed proportions that do not vary with market
conditions.
C. One that is mean-variance efficient.
D. (A) and (B) above.
51.
With regard to asset allocation, choose the incorrect statement __________
A. The asset allocation decision involves deciding the percentage of investable
funds to be placed in stocks, bonds, and cash equivalents.
B. Differences in asset allocation will be the key factor over time causing
differences in portfolio performance.
C. It is the second most important decision made by investors in the portfolio
management process, security selection being the most important.
D. How asset allocation decisions are made by investors remains a subject that is
not fully understood.
52.
One of the most popular tools used by technical analysts is __________
A. P/E ratio.
B. Growth rate of dividends .
C. Moving average.
D. Book-to-market value ratio.
53.
The measure of risk for a security held in a diversified portfolio is _________
A. Specific risk.
B. Standard deviation of returns.
C. Reinvestment risk.
D. Covariance.
54.
The possibility that a country will take over a publicly held firm is referred to as
the _________
A. Market risk.
B. Foreign exchange risk.
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C. Systemic risk.
D. Political risk.
55.
A stock that is relatively unaffected by the general fluctuations in the economy
can be characterized as __________
A. A cyclical stock.
B. Having a low beta.
C. Having high unsystematic risk.
D. Having no unsystematic risk.
56.
The inability to sell an asset quickly at a fair price is associated with _________
A. Liquidity risk.
B. Trade failure risk.
C. Exchange rate risk.
D. Financial risk.
57.
Which of the following actions is most accurately associated with tactical asset
allocation?
A. Investment decisions with a long term perspective.
B. Investment decisions that do not emphasize current market conditions.
C. Investment decisions with a primary goal of maximizing return.
D. Investment decisions that do not depend on ability to diversity.
58.
Assume that you are bearish on a particular stock. Which of these options would
you buy?
A. Call option.
B. Put option.
C. The stock.
D. Covered call.
59.
Which of the following statements about warrants is false?
A. Warrants require a firm to issue a new share of stock to satisfy its
obligations.
B. Warrants result in a cash flow, when warrant holder pays the exercise price.
C. Exercise of a warrant requires writer of the call to deliver an already-issued
share of stock to discharge the obligation.
D. Warrants are issued in conjunction with another security.
60.
Which of the following is not a typical investor constraint in the investment policy
statement?
A. Tax concerns.
B. Expected cash flow patterns.
C. Risk tolerance.
D. Liquidity needs.
61.
An open-end fund has a net asset value of N13.40 per share. The fund is sold
with a front-end load of 4%. What is the offering price?
A. N12.96
B. N12.86
C. N13.94
D. N12.88
62.
Which of the following observations concerning a unit investment is true?
A. Characterized by active portfolio management.
B. Primarily invests in distressed assets.
C. Higher management fees.
D. Fixed portfolio composition.
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63.
Assume the dividend yield on the NSE ASI is 0.1% per month and the risk-free
interest rate is 0.4% per month. Suppose that the current level of the NSE ASI
index is 1,500. The futures price for the NSE ASI index futures contract that
expires six months from now is ___________
A. 1,500.00
B. 1,504.50
C. 1,527.20
D. 1,536.36
64.
Which of the following statements regarding risk-averse investors is true?
A. They accept investments that are fair games.
B. They only care about rate of return.
C. They are willing to accept lower returns at high risk.
D. They only accept risky investments that offer risk premiums over the riskfree rate.
65.
A closed-end fund has a portfolio currently worth N350 million. The fund has
liabilities of N5 million and 17 million shares outstanding. What is the net asset
value of the fund?
A. N20.88
B. N20.29
C. N20.59
D. N29.17
66.
The presence of risk means that ____________
A. Investors will lose money.
B. The standard deviation of the payoff is larger than its expected value.
C. More than one outcome is possible.
D. Final wealth will be greater than initial wealth.
67.
Stock prices follow a random walk because ______________.
A. Investors are irrational.
B. New information is unpredictable.
C. Information is not efficiently disseminated.
D. Information tends to rely on technical analysis.
68.
All
A.
B.
C.
D.
69.
Suppose the following equation best describes the evolution of β over time:
things equal, diversification is most effective when ___________
Securities’ returns are positively correlated.
Securities’ returns are uncorrelated.
Securities’ returns are high.
Securities’ returns are negatively correlated.
βt = 0.25 + 0.75 βt-1
If a stock had a β of 0.6 last year, you would forecast the β to be __________
in the coming year.
A. 0.45
B. 0.60
C. 0.70
D. 0.75
70.
Given the capital allocation line, an investor’s optimal portfolio is the portfolio that
_____________
A. Maximizes her risk.
B. Maximizes her expected utility.
C. Minimizes both her risk and return.
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D. Maximizes her expected profit.
Commodity Trading and Futures (71 - 100)
71.
A futures contract will have its price adjusted each day of the contract’s life –
either up or down, depending on current market conditions. This is the essence of
___________
A. SEC requirements for futures contracts.
B. Marking to market.
C. The cheapest to deliver option on a futures contract.
D. Initial margin requirements changing on a daily basis.
72.
With futures market contracts, ___________ guarantee(s) all trades, so that
default risk is minimized.
A. Position traders.
B. An organized exchange.
C. Day traders.
D. The Commodity & Exchange Commission.
73.
Which of the following is a benefit provided by the futures market?
A. It encourages speculation and profitable enterprise.
B. It allows for a more efficient distribution of commodities.
C. It reduces the liquidity of futures contracts.
D. All of the above.
74.
A ____________ is one who tries to profit from in the futures market by taking
positions for very short periods of time – perhaps just minutes.
A. Scalper.
B. Long trader.
C. Short trader.
D. Forward trader.
75.
In order for Seun to enter into a futures contract, he was required to deposit
some up-front funds. This is the __________ requirement.
A. Marking to market.
B. Cheapest to deliver.
C. Initial margin.
D. Open interest.
76.
Which of the following statement is most accurate?
A. Forward contracts are marked to market daily.
B. Future contracts have more default risks than forward contracts.
C. Forward contracts require that both parties to the transaction have a high
degree of credit worthiness.
D. Forward contracts does not include individual commitment to buy or sell
commodities.
77.
The basis for a futures contract at maturity ____________
A. Must be zero.
B. Must be positive.
C. Must be negative.
D. Can be positive or negative.
78.
Which of the following factors affects the price of coffee the most?
A. Subsidies.
B. Weather.
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C. Taxes.
D. Import duties.
79.
The current level of NSE banking index is 250. The prospective dividend yield is
3.2% and the interest rate is 7%. What is the value of a one-year future on the
index?
A. 230.7
B. 250.0
C. 259.5
D. 267.5
80.
The spot price for delivery of home heating oil is N0.550 per gallon. The futures
price for one year from now is N0.560. If the risk-free rate is 6% per year, what
is the PV (net convenience yield)?
A. N0.041
B. N0.010
C. N0.022
D. N0.044
81.
A forward contract is described as ____________
A. Agreeing today to buy a product at a later date at a price to be set in future.
B. Agreeing today to buy a product today at its current price.
C. Agreeing today to buy a product at a later date at a price set today.
D. Agreeing today to buy a product if and only if its price rises above the
exercise price today at its current price.
82.
Who regulates the commodities trading exchange in Nigeria?
A. SEC.
B. NSE.
C. CBN.
D. Nigerian Investment Promotion Council.
83.
If you were to buy a N100 put for a premium of N13, what would be your
maximum profit?
A. N100
B. N87
C. N13
D. Unlimited.
84.
Which one of the following features is considered the key influence on pricing in
the electricity market?
A. Production costs.
B. Quality.
C. Storage and transportation.
D. Supply and demand.
85.
Where there is an unexpected shutdown in production from a key provider of a
particular commodity. What is the most likely impact on the price of this
commodity?
A. Short term rise then a levelling off.
B. Short term rise then a steep fall.
C. Short term fall then a levelling off.
D. Short term fall then a steep rise.
86.
Storage and transport costs are unlikely to be a major influence on the future
prices of which one of the following commodities?
A. Coffee.
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B. Crude oil.
C. Electricity.
D. Zinc.
87.
What is the characteristic of a yield curve for investors preferring more liquidity?
A. Concave.
B. Flat.
C. Inverted.
D. Normal.
88.
What does hedging with stock futures means?
A. Shorting stocks.
B. Shorting index futures.
C. Shorting stock futures.
D. Going long on index futures.
89.
Which trading price rule requires an order to be traded immediately at the best
price prevailing?
A. Contingent.
B. Limit.
C. Market.
D. Spread.
90.
Which one of the following is used to measure how much an option's value
changes with the time to maturity?
A. Delta.
B. Gamma.
C. Theta.
D. Vega.
91.
The advantages an option buyer might obtain include all of the following except
___________
A. Limiting his risk.
B. Positioning against the option.
C. Leverage.
D. Premium income.
92.
Which type of options is likely to be exercised automatically?
A. Assigned.
B. At-the-money.
C. In-the-money.
D. Out-of-the-money.
93.
Why would a future hedge be set up?
A. To reduce risk.
B. To set up future position.
C. To speculate.
D. To take advantage of arbitrage opportunities.
94.
In the futures market, which of the following does not include the function of the
clearing house?
A. Receive margin deposits from brokers.
B. Decide which contract will trade.
C. Set initial and maintenance margin.
D. Act as the counter party to every trade.
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95.
What type of risk is most associated with public dispute with clients that may lead
to litigation?
A. Credit risk.
B. Market risk.
C. Operational risk.
D. Reputational risk.
96.
If a call option on a Life corn future has a premium of N0.10 and gives the buyer
the right to buy a futures contracts for N1.70 (its current market price). What
would be the gain (or loss) if at expiry the future was price at N2?
A. Gain of N0.30
B. Loss of N0.20
C. Gain of N0.20
D. Loss of N0.30
97.
Method of settlement where the underlying asset is not exchanged is called
__________
A. Cash settlement.
B. Spot price.
C. Delivery of underlying.
D. (A) and (C) above.
98.
The closing price of the underlying commodity on the last trading day of the
futures contract is referred to as ___________
A. Market price.
B. Final settlement price.
C. Auction price.
D. Daily settlement price.
99.
The gain or loss to the long side for a futures contract held between 0 and t is
____________
A. Ft – F0
B. Ft – PT
C. PT – F0
D. F0 – PT
100.
The futures exchange clearing house guarantees _____________
A. Spot-futures parity.
B. Performance on both sides of a futures contract.
C. That investors will not lose money on their futures transactions.
D. That prices in futures contracts are fair prices.
Total = 100 marks
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