Week 7 : Week 7 - Exam #1
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1. What phrase is often used interchangeably with the phrase market
capitalization? (Points : 1)
Market value
Open Interest
Trading volume
Notional value
2. Assume that an investor lends 100 shares of Jiffy, Inc. common stock to a short seller.
The bid-ask prices are $32.00 - $32.50. When the position is closed the bid-ask prices
are $32.50 - $33.00. The commission rate is 0.5%. The market interest rate is 5.0% and
the short rebate rate is 3.0%. Calculate the gain or loss to the lender. Assume the lender
is not subject to a bid-ask loss or commissions. (Points : 1)
$164.00 loss
$100.00 gain
$100.00 loss
$164.00 gain
3. During the growing season a corn farmer sells short corn futures contracts in an
amount equal to her crop. If upon harvesting and selling her crop she maintains the
contracts, she is then considered a: (Points : 1)
Speculator
Arbitrager
Hedger
None of the above
4. What kind of risk does not disappear when spread across many investors? (Points : 1)
Diversifiable
Catastrophic
Predictive
Nondiversifiable
5. Who from the following list would be considered a speculator by entering into a
futures or options contract on commodities?(Points : 1)
Corn delivery truck driver
Food manufacturer
Farmer
None of the above
6. Assume that you purchase 100 shares of Jiffy, Inc. common stock at the bid-ask prices
of $32.00 - $32.50. When you sell the bid-ask prices are $32.50 - $33.00. If you pay a
commission rate of 0.5%, what is your profit or loss? (Points : 1)
$32.50 loss
$16.25 loss
$0
$32.50 gain
7. Which of the following is not a derivative instrument? (Points : 1)
Installment sales agreement
Option agreement to buy land
Contract to sell corn
Mortgage backed security
8. According to trading volume data tabulated for 2002, which international futures
exchange market experienced the highest total trading volume in the world? (Points : 1)
Chicago Board of Trade
Chicago Mercantile Exchange
New York Mercantile Exchange
Eurex
9. All of the following are financially engineered products, except: (Points : 1)
Mortgage backed security
Principal only
Mortgage
Interest only
10. What phrase might be used to describe the initial transaction a short seller initiates
when shorting an equity security? (Points : 1)
Covering
Buy
Sell
Borrow
11. The total number of contracts which exist and are delivery or payment is referred to
as the ___________________. (Points : 1)
Market value
Notional value
Trading volume
Open Interest
12. This measures the number of financial claims that change hands either daily or
annually. (Points : 1)
Open Interest
Notional value
Market value
Trading volume
13. A mutual fund is engaged in the short term and temporary purchase of index futures,
for purposes of minimizing its cash exposures. Which "use" most closely explains their
actions? (Points : 1)
Speculation
Reduced transaction costs
Regulatory arbitrage
Risk management
14. Which of the following phrases is used to describe an option where immediate
exercise results in a negative payoff? (Points : 1)
At-the-money
Near-the-money
In-the-money
Out-of-the-money
15. The premium on a long term call option on the market index with an exercise price
of 950 is $12.00 when originally purchased. After 6 months the position is closed and
the index spot price is 965. If interest rates are 0.5% per month, what is the Call
Payoff?(Points : 1)
$12.00
$15.00
$12.36
$2.64
16. The spot price of the market index is $900. The annual rate of interest on treasuries
is 4.8% (0.4% per month). After 3 months the market index is priced at $920. An
investor has a long call option on the index at a strike price of $930. What profit or loss
will the writer of the call option earn if the option premium is $2.00? (Points : 1)
$2.00 loss
$2.00 gain
$2.02 gain
$2.02 loss
17. The spot price of the market index is $900. After 3 months the market index is
priced at $920. The annual rate of interest on treasuries is 4.8% (0.4% per month). The
premium on the long put, with an exercise price of $930, is $8.00. What is the profit or
loss at expiration for the long put? (Points : 1)
$1.90 gain
$1.90 loss
$2.00 gain
$2.00 loss
18. Which type of option is least likely to be exercised? (Points : 1)
In-the-money
Near-the-money
Out-of-the-money
At-the-money
19. The spot price of the market index is $900. A 3-month forward contract on this index
is priced at $930. The market index rises to $920 by the expiration date. The annual rate
of interest on treasuries is 4.8% (0.4% per month). What is the difference in the payoffs
between a long index investment and a long forward contract investment? (Assume
monthly compounding) (Points : 1)
$19.16
$26.40
$43.20
$10.84
20. The spot price of the market index is $900. After 3 months the market index is
priced at $920. The annual rate of interest on treasuries is 4.8% (0.4% per month). The
premium on the long put, with an exercise price of $930, is $8.00. At what index price
does a long put investor have the same payoff as a short index investor? Assume the
short position has a breakeven price of $930. (Points : 1)
$940.00
$938.10
$930.00
$921.90
21. What term may be used to describe a long put position in which the exercise price is
below the asset price? (Points : 1)
At-the-money
Out-of-the-money
In-the-money
Near-the-money
22. The spot price of the market index is $900. A 3-month forward contract on this index
is priced at $930. The annual rate of interest on treasuries is 4.8% (0.4% per month).
What annualized rate of interest makes the net payoff zero? (Assume monthly
compounding) (Points : 1)
11.2%
13.2%
8.5%
4.8%
23. A put option if purchased and held for 1 year. The exercise price on the underlying
asset is $40. If the current price of the asset is $36.45 and the future value of the original
option premium is (- $1.62 ), what is the put profit, if any at the end of the
year? (Points : 1)
$1.62
$5.17
$1.93
$3.55
24. The premium on a call option on the market index with an exercise price of 1050 is
$9.30 when originally purchased. After 2 months the position is closed and the index
spot price is 1072. If interest rates are 0.5% per month, what is the Call Profit? (Points :
1)
$12.61
$9.30
$9.39
$22.00
25. The spot price of the market index is $900. A 3-month forward contract on this index
is priced at $930. What is the profit or loss to a short position if the spot price of the
market index rises to $920 by the expiration date? (Points : 1)
$20 loss
$10 gain
$20 gain
$10 loss
26. Which strike price is reflective of an out-of- the-money long call with an asset price
of $34? (Points : 1)
$36
$32
$34
$38
27. Which of the following phrases is used to describe an option where immediate
exercise results in a positive payoff? (Points : 1)
Near-the-money
Out-of-the-money
At-the-money
In-the-money
28. The spot price of the market index is $900. After 3 months the market index is
priced at $920. The annual rate of interest on treasuries is 4.8% (0.4% per month). The
premium on the long put, with an exercise price of $930, is $8.00. Calculate the profit or
loss to the short put position if the final index price is $915. (Points : 1)
$15.00 loss
$6.90 gain
$6.90 loss
$15.00 gain
29. What strategy is an investor most likely to employ to insure against the losses
associated with a straddle write? (Points : 1)
Ratio call write
Butterfly spread
Bull spread
Strangle
30. Which strategy is a bet that the actual volatility of an asset is low relative to the
market's assessment? (Points : 1)
Written straddle
Purchased straddle
Long Call
Long Put
31. What strategy is an investor most likely to employ to reduce the high premium cost
associated with a strangle strategy?(Points : 1)
Bull spread
Butterfly spread
Strangle
Ratio call write
32. A strategy consists of buying a market index product at $830 and longing a put on
the index with a strike of $830. If the put premium is $18.00 and interest rates are 0.5%
per month, compute the profit or loss from the long put position by itself (in 6 months) if
the market index is $810. (Points : 1)
$1.36 loss
$3.45 gain
$1.45 gain
$2.80 loss
33. A strategy consists of buying a market index product at $830 and longing a put on
the index with a strike of $830. If the put premium is $18.00 and interest rates are 0.5%
per month, compute the profit or loss from the long index position by itself expiration
(in 6 months) if the market index is $810. (Points : 1)
$18.00 gain
$45.21 loss
$21.22 loss
$24.25 gain
34. What is the maximum profit that an investor can obtain from a strategy employing a
long 830 call and a short 850 call over 6 months? Interest rates are 0.5% per
month. (Points : 1)
$12.32
$6.80
$9.24
$7.68
35. What is the maximum loss that an investor can obtain over 6 months from a strategy
employing a long 830 call and a short 850 call? Interest rates are 0.5% per
month. (Points : 1)
$12.32
$7.68
$9.24
$6.80
36. Which of the following strategies represents a purchased put and a written call for
which the premiums are equal? (Points : 1)
Ratio call write
Butterfly spread
Bull spread
Strangle
37. A strategy consists of buying a market index product at $830 and longing a put on
the index with a strike of $830. If the put premium is $18.00 and interest rates are 0.5%
per month, what is the profit or loss at expiration (in 6 months) if the market index is
$810? (Points : 1)
$18.65 gain
$20.00 gain
$36.29 loss
$43.76 loss
38. A strategy consists of buying a market index product at $830 and longing a put on
the index with a strike of $830. If the put premium is $18.00 and interest rates are 0.5%
per month, what is the estimated price of a call option with an exercise price of
$830? (Points : 1)
$49.55
$47.67
$42.47
$45.26
39. At the 6-month point, what is the breakeven index price for a strategy of longing the
market index at a price of 830? Interest rates are 0.5% per month. (Points : 1)
$855.21
$830.00
$866.32
$802.12
40. A strategy consists of longing a put on the market index with a strike of 830 and
shorting a call option on the market index with a strike price of 830. The put premium is
$18.00 and the call premium is $44.00. Interest rates are 0.5% per month. What is the
breakeven price of the market index for this strategy at expiration (in 6
months)? (Points : 1)
$830.00
$866.32
$855.21
$802.12
41. A position in which you buy a call and sell an otherwise identical call with a higher
strike price is called a ________. (Points : 1)
Butterfly spread
Ratio call write
Bull spread
Strangle
42. The $850 strike put premium is $25.45 and the $850 strike call is selling for $30.51.
Calculate the breakeven index price for a strategy employing a short call and long put
that expires in 6 months. Interest rates are 0.5% per month. (Points : 1)
$822.67
$824.79
$875.82
$830.76
43. What is the break even point that an investor can obtain from a 6-month strategy
employing a long 830 call and a short 850 call? Interest rates are 0.5% per
month. (Points : 1)
$832.82
$852.22
$862.92
$842.32
44. Which of the following strategies is the appropriate one if you have no view on the
stock-price direction and you think volatility will fall? (Points : 1)
Buying puts
Selling the underlying
Buying calls
Writing a straddle
45. An investor purchases a call option with an exercise price of $55 for $2.60. The
same investor sells a call on the same security with an exercise price of $60 for $1.40.
At expiration, 3 months later, the stock price is $56.75. All other things being equal and
given an annual interest rate of 4.0%, what is the net profit or loss to the
investor? (Points : 1)
$0.54 gain
$1.21 loss
$1.50 loss
$1.65 gain
46. Which of the following strategies is the appropriate one if you are bullish about the
stock-price direction and you think volatility will increase? (Points : 1)
Buying puts
Selling the underlying
Buying calls
Buying straddle
47. As a writer of a straddle position, how would you insure against large
losses? (Points : 1)
Buying an out-of-the-money put and buying an out-of-the-money call
Buying an in-the-money put and selling an out-of-the-money call
Selling an out-of-the-money put and buying an in-the-money call
Selling an out-of-the-money put and selling an out-of-the-money call
48. An insured asset position is equivalent to: (Points : 1)
-Zero-coupon bond - call
-Zero-coupon bond + put
Zero-coupon bond - put
Zero-coupon bond + call
49. Which of the following strategies is not a volatility play? (Points : 1)
Straddle
Strangle
Bull spread
Butterfly spread
50. Assume that you open a 100 share short position in Jiffy, Inc. common stock at the
bid-ask prices of $32.00 - $32.50. When you close your position the bid-ask prices are
$32.50 - $33.00. You pay a commission rate of 0.5%. The market interest rate is 5.0%
and the short rebate rate is 3.0%. What is your additional gain or loss due to leasing the
asset? (Points : 1)
$96 gain
$160 loss
$64 loss
$64 gain
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