FIN405 / derivatives

CHAPTER 1: INTRODUCTION
MULTIPLE CHOICE TEST QUESTIONS
1.
The market value of the derivatives contracts worldwide totals
a.
less than a trillion dollars
b.
in the hundreds of trillion dollars
c.
over a trillion dollars but less than a hundred trillion
d.
over quadrillion dollars
e.
none of the above
2.
Cash markets are also known as
a.
speculative markets
b.
spot markets
c.
derivative markets
d.
dollar markets
e.
none of the above
3.
A call option gives the holder
a.
the right to buy something
b.
the right to sell something
c.
the obligation to buy something
d.
the obligation to sell something
e.
none of the above
4.
Which of the following instruments are contracts but are not securities
a.
stocks
b.
options
c.
swaps
d.
a and b
e.
b and c
5.
The positive relationship between risk and return is called
a.
expected return
b.
market efficiency
c.
the law of one price
d.
arbitrage
e.
none of the above
6.
A transaction in which an investor holds a position in the spot market and sells a futures
contract or writes a call is
a.
a gamble
b.
a speculative position
c.
a hedge
d.
a risk-free transaction
e.
none of the above
7.
Which of the following are advantages of derivatives?
a.
lower transaction costs than securities and commodities
b.
reveal information about expected prices and volatility
c.
help control risk
d.
make spot prices stay closer to their true values
e.
all of the above
8.
A forward contract has which of the following characteristics?
a.
has a buyer and a seller
b.
trades on an organized exchange
c.
has a daily settlement
d.
gives the right but not the obligation to buy
e.
all of the above
9.
Options on futures are also known as
a.
spot options
b.
commodity options
c.
exchange options
d.
security options
e.
none of the above
10.
A market in which the price equals the true economic value
a.
is risk-free
b.
has high expected returns
c.
is organized
d.
is efficient
e.
all of the above
11.
Which of the following trade on organized exchanges?
a.
caps
b.
forwards
c.
options
d.
swaps
e.
none of the above
12.
Which of the following markets is/are said to provide price discovery?
a.
futures
b.
forwards
c.
options
d.
a and b
e.
b and c
13.
Investors who do not consider risk in their decisions are said to be
a.
speculating
b.
short selling
c.
d.
e.
14.
risk neutral
traders
none of the above
Which of the following statements is not true about the law of one price
a.
investors prefer more wealth to less
b.
investments that offer the same return in all states must pay the risk-free rate
c.
if two investment opportunities offer equivalent outcomes, they must have the same
price
d.
e.
investors are risk neutral
none of the above
15.
Which of the following contracts obligates a buyer to buy or sell something at a later date?
a.
call
b.
futures
c.
cap
d.
put
e.
swaption
16.
The process of creating new financial products is sometimes referred to as
a.
financial frontiering
b.
financial engineering
c.
financial modeling
d.
financial innovation
e.
none of the above
17.
The process of selling borrowed assets with the intention of buying them back at a later
date and lower price is referred to as
a.
longing an asset
b.
asset flipping
c.
shorting
d.
anticipated price fall arbitrage
e.
none of the above
18.
In which one of the following types of contract between a seller and a buyer does the seller
agree to sell a specified asset to the buyer today and then buy it back at a specified time in
the future at an agreed future price.
a.
repurchase agreement
b.
short selling
c.
swap
d.
call
e.
none of the above
19.
The expected return minus the risk-free rate is called
a.
the risk premium
b.
the percentage return
c.
the asset’s beta
d.
the return premium
e.
none of the above
20.
When the law of one price is violated in that the same good is selling for two different
prices, an opportunity for what type of transaction is created?
a.
return-to-equilibrium transaction
b.
risk-assuming transaction
c.
speculative transaction
d.
arbitrage transaction
e.
none of the above
CHAPTER 2: STRUCTURE OF OPTIONS MARKETS
MULTIPLE CHOICE TEST QUESTIONS
1.
Options are traded on which of the following exchanges?
a.
NYSE Amex
b.
NYSE Euronext (Arca)
c.
Chicago Board Options Exchange
d.
International Securities Exchange
e.
all of the above
2.
A call option priced at $2 with a stock price of $30 and an exercise price of $35 allows the
holder to buy the stock at
a.
$2
b.
$32
c.
$33
d.
$35
e.
none of the above
3.
A put option in which the stock price is $60 and the exercise price is $65 is said to be
a.
in-the-money
b.
out-of-the-money
c.
at-the-money
d.
exercisable
e.
none of the above
4.
Organized options markets are different from over-the-counter options markets for all of
the following reasons except
a.
exercise terms
b.
physical trading floor
c.
regulation
d.
standardized contracts
e.
credit risk
5.
The number of options acquired when one contract is purchased on an exchange is
a.
1
b.
5
c.
100
d.
500
e.
8,000
6.
The advantages of the over-the-counter options market include all of the following except
a.
customized contracts
b.
privately executed
c.
freedom from government regulation
d.
lower prices
e.
none of the above
7.
Which one of the following is not a type of transaction cost in options trading?
a.
the bid-ask spread
b.
the commission
c.
clearing fees
d.
the cost of obtaining a quote
e.
all of the above
8.
If the market maker will buy at 4 and sell at 4.50, the bid-ask spread is
a.
8.50
b.
4.25
c.
0.50
d.
4.00
e.
none of the above
9.
Which of the following is a legitimate type of option order on the exchange?
a.
purchase order
b.
limit order
c.
execution order
d.
floor order
e.
all of the above
10.
The exercise price can be set at any desired level on each of the following types of options
except
a.
FLEX options
b.
equity options
c.
over-the-counter options
d.
all of the above
e.
none of the above
11.
An investor who owns a call option can close out the position by any of the following types
of transactions except
a.
exercise
b.
offset
c.
expiring out-of-the-money
d.
buying a put
e.
none of the above
12.
Which type of trader legitimately practices dual trading?
a.
floor brokers
b.
off–floor option traders
c.
board brokers
d.
e.
designated primary market makers
none of the above
13.
The option price is also referred to as the
a.
strike
b.
spread
c.
premium
d.
fee
e.
none of the above
14.
Index options trading on organized exchanges expire according to which of the following
cycles?
a.
March, June, September, and December
b.
each of the next four consecutive months
c.
the current month, the next month, and the next two months in one of the other
cycles
d.
e.
15.
every other month for each of the next nine months
none of the above
An investor who exercises a call option on an index must
a.
accept the cash difference between the index and the exercise price
b.
purchase all of the stocks in the index in their appropriate proportions from the
writer
c.
d.
e.
immediately buy a put option to offset the call option
immediately write another call option to offset
none of the above
16.
Which of the following are long-term options?
a.
Bond options
b.
LEAPS
c.
currency options
d.
Nikkei put warrants
e.
none of the above
17.
The exchange with the largest share of the options market is the
a.
American Stock Exchange
b.
Boston Options Exchange
c.
Chicago Board Options Exchange
d.
Pacific Stock Exchange
e.
Philadelphia Stock Exchange
18.
A writer selected to exercise an option is said to be
a.
marginal
b.
assigned
c.
restricted
d.
e.
designated
none of the above
19.
All of the following are forms of options except
a.
convertible bonds
b.
callable bonds
c.
warrants
d.
mutual funds
e.
none of the above
20.
Which of the following index options is the most widely traded?
a.
S&P 500
b.
Nikkei 225
c.
Technology Index
d.
New York Stock Exchange Index
e.
none of the above
21.
In which city did organized option markets originate?
a.
New York
b.
Chicago
c.
Philadelphia
d.
San Francisco
e.
none of the above
22.
Who determines whether options on a company’s stock will be listed?
a.
the clearing house
b.
Securities Exchange Commission
c.
the company
d.
the exchange
e.
none of the above
23.
An order that specifies a maximum price to pay if buying is a
a.
stop order
b.
market order
c.
limit order
d.
all or none order
e.
none of the above
24.
What amount must a call writer pay if a cash–settled index call is exercised?
a.
difference between the index level and the exercise price
b.
exercise price
c.
difference between the exercise price and the index level
d.
index level
e.
none of the above
25.
Option traders incur which of the following types of costs?
a.
margin requirements
b.
taxes
c.
stock trading commissions
d.
a and b
e.
a, b and c
26.
The total number of long option contracts outstanding at any given time is called the
a. market cap
b. sum options outstanding (SOO)
c. option wealth outstanding (OWO)
d. open interest
e. none of the above
27.
“Wal-Mart calls” are an example of
a. an option series
b. an option class
c. an option grade
d. a and b
e. none of the above
28.
This individual maintains and attempts to fill public option orders but does not disclose
them to others.
a. liquidity provider
b. board broker
c. order book official
d. registered option trader
e. none of the above
29.
What intermediary guarantees an option writer’s performance?
a. credit worthiness rating company
b. brokerage
c. good-till-canceled order
d. clearinghouse
e. none of the above
30.
Suppose you hold a call option. The stock price has recently been increasing-making your
call option more valuable. Through what process might you take advantage of the liquid
nature of the options market?
a. offsetting order
b. contract reconciliation
c. mark to market order
d. settling up
e. none of the above
CHAPTER 3: PRINCIPLES OF OPTION PRICING
MULTIPLE CHOICE TEST QUESTIONS
1.
Consider a portfolio consisting of a long call with an exercise price of X, a short position
in a non-dividend paying stock at an initial price of S0, and the purchase of riskless bonds
with a face value of X and maturing when the call expires. What should such a portfolio
be worth?
a.
C + P – X(1 + r)-T
b.
C – S0
c.
P– X
d.
P + S0 – X(1 + r)-T
e.
none of the above
2.
What is the lowest possible value of a European put?
a.
Max(0, X – S0)
b.
X(1 + r)-T
c.
d.
e.
Max[0, S0 – X(1 + r)-T]
Max[0, X(1 + r)-T – S0)]
none of the above
3.
Another expression for intrinsic value is
a.
parity
b.
parity value
c.
exercise value
d.
all of the above
e.
none of the above
4.
On March 2, a Treasury bill expiring on April 20 had a bid discount of 5.80, and an ask
discount of 5.86. What is the best estimate of the risk-free rate as given in the text?
a.
5.86 %
b.
5.83 %
c.
6.11 %
d.
6.14 %
e.
none of the above
5.
Suppose you use put-call parity to compute a European call price from the European put
price, the stock price, and the risk-free rate. You find the market price of the call to be less
than the price given by put-call parity. Ignoring transaction costs, what trades should you
do?
a.
buy the call and the risk-free bonds and sell the put and the stock
b.
buy the stock and the risk-free bonds and sell the put and the call
c.
buy the put and the stock and sell the risk-free bonds and the call
d.
buy the put and the call and sell the risk-free bonds and the stock
e.
none of the above
6.
If there are no dividends on a stock, which of the following statements is correct?
a.
An American call will sell for more than a European call
b.
A European call will sell for more than an American call
c.
An American call will be immediately exercised
d.
An American call and an American put will sell for the same price
e.
none of the above
The following quotes were observed for options on a given stock on November 1 of a given
year. These are American calls except where indicated. Use the information to answer
questions 7 through 20.
Calls
Puts
Strike
Nov
Dec
Jan
Nov
Dec
Jan
105
8.40
10
11.50
5.30
1.30
2.00
110
4.40
7.10
8.30
0.90
2.50
3.80
115
1.50
3.90
5.30
2.80
4.80
4.80
The stock price was 113.25. The risk-free rates were 7.30 percent (November), 7.50
percent (December) and 7.62 percent (January). The times to expiration were 0.0384
(November), 0.1342 (December), and 0.211 (January). Assume no dividends unless
indicated.
7.
What is the intrinsic value of the December 115 put?
a.
1.75
b.
0.00
c.
3.90
d.
3.00
e.
none of the above
8.
What is the intrinsic value of the November 105 put?
a.
0.30
b.
8.25
c.
8.50
d.
0.00
e.
none of the above
9.
What is the intrinsic value of the January 110 call?
a.
0.00
b.
8.30
c.
3.75
d.
5.00
e.
none of the above
10.
What is the intrinsic value of the November 115 call?
a.
1.50
b.
0.00
c.
2.80
d.
1.75
e.
none of the above
11.
What is the time value of the December 105 put?
a.
1.30
b.
8.30
c.
d.
e.
0.00
7.00
none of the above
12.
What is the time value of the November 115 put?
a.
1.75
b.
2.80
c.
1.10
d.
0.00
e.
none of the above
13.
What is the time value of the November 110 call?
a.
0.00
b.
4.40
c.
1.15
d.
3.25
e.
none of the above
14.
What is the time value of the January 115 call?
a.
5.30
b.
0.00
c.
3.50
d.
1.70
e.
none of the above
15.
What is the European lower bound of the December 105 call?
a.
9.86
b.
0.00
c.
8.25
d.
9.26
e.
none of the above
16.
What is the European lower bound of the November 115 call?
a.
1.44
b.
0.00
c.
1.75
d.
2.06
e.
none of the above
17.
From American put-call parity, what are the minimum and maximum values that the sum
of the stock price and December 110 put price can be?
a.
101.81 and 102.87
b.
2.50 and 113.25
c.
116.038 and 117.10
d.
7.125 and 110
e.
none of the above
18.
The maximum difference between the January 105 and 110 calls is which of the following?
a.
11.50
b.
4.92
c.
5.00
d.
4.0
e.
none of the above
19.
Suppose you knew that the January 115 options were correctly priced but suspected that
the stock was mispriced. Using put-call parity, what would you expect the stock price to
be? For this problem, treat the options as if they were European.
a.
113.73
b.
123.23
c.
121.23
d.
112.77
e.
none of the above
20.
Suppose the stock is about to go ex-dividend in one day. The dividend will be $4.00.
Which of the following calls will you consider for exercise?
a.
November 115
b.
November 110
c.
December 115
d.
all of the above
e.
none of the above
21.
The time value of an option is also referred to as the
a.
synthetic value
b.
strike value
c.
speculative value
d.
parity value
e.
none of the above
22.
Which of the following is the lowest possible value of an American call on a stock with no
dividends?
a.
Max(0, S0 – X(1 + r)-T)
b.
S0
c.
Max(0, S0 – X)
d.
Max(0, S0 (1 + r)-T – X)
e.
none of the above
23.
Which of the following is the lowest possible value of an American put on a stock with no
dividends?
a.
X(1 + r)-T
b.
X
c.
Max(0, X(1 + r)-T – S0)
d.
e.
Max(0, X – S0)
none of the above
24.
The difference between a Treasury bill’s face value and its price is called the
a.
time value
b.
discount
c.
coupon rate
d.
bid
e.
none of the above
25.
Which of the following statements about an American call is not true?
a.
Its time value decreases as expiration approaches
b.
Its maximum value is the stock price
c.
It can be exercised prior to expiration
d.
It pays dividends
e.
none of the above
26.
Given a longer-lived American call and a shorter-lived American call with the same terms,
the longer-lived call must always be worth
a.
at most the value of the shorter-lived call
b.
at least as much as the shorter-lived call
c.
exactly the same as the shorter-lived call
d.
the shorter-lived call discounted to the length of the longer-lived call
e.
none of the above
27.
Which of the following inequalities correctly states the relationship between the difference
in the prices of two European calls that differ only by exercise price
a.
(X2 – X1)(1 + r)-T ≥ Ce(S0,T,X1) – Ce(S0,T,X2)
b.
(X2 – X1) ≥ Ce(S0,T,X2) – Ce(S0,T,X1)
c.
(X2 – X1)(1 + r)-T ≥ Ce(S0,T,X1) + Ce(S0,T,X2)
d.
(X2 – X1) ≥ Ce(S0,T,X1) – Ce(S0,T,X2)
e.
none of the above
28.
Suppose that you observe a European option on a currency with an exchange rate of S0 and
a foreign risk-free rate of . Which of the following inequalities correctly expresses the
lower bound of the call?
a.
Ce(S0,T,X) ≥ Max[0,S0(1 + )-T + X(1 + r)-T]
b.
Ce(S0,T,X) ≥ Max[0,S0 – X(1 + )-T]
c.
Ce(S0,T,X) ≥ Max[0,S0(1 + )-T – X]
d.
Ce(S0,T,X) ≥ Max[0,S0(1 + )-T – X(1 + r)-T]
e.
none of the above
29.
A situation in which early exercise of an American put can be justified is
a.
bankruptcy
b.
merger
c.
d.
e.
30.
if X exceeds S0 by greater than any transaction costs.
both a and b
both a and b and c
The effect of volatility on a call/put’s price is
a.
decreased price due to decreased possible losses
b.
nominal volatility will not noticeably effect a call/put’s price
c.
increased price due to increased possible gains
d.
decreased price due to increased possible losses
e.
none of the above
CHAPTER 4: OPTION PRICING MODELS: THE BINOMIAL MODEL
MULTIPLE CHOICE TEST QUESTIONS
1.
A portfolio that combines the underlying stock and a short position in an option is called
a.
a risk arbitrage portfolio
b.
a hedge portfolio
c.
a ratio portfolio
d.
a two-state portfolio
e.
none of the above
2.
In a binomial model, if the call price in the market is higher than the call price given by the
model, you should
a.
sell the call and sell short the stock
b.
buy the call and sell short the stock
c.
buy the stock and sell the call
d.
buy the call and buy the stock
e.
none of the above
3.
In a two-period binomial world, a mispriced call will lead to an arbitrage profit if
a.
the proper hedge ratio is maintained over the two periods
b.
the hedge portfolio is terminated after one period
c.
the option goes from over- to underpriced or vice versa
d.
the option remains mispriced over both periods
e.
none of the above
4.
The values of u and d are which of the following?
a.
b.
c.
d.
e.
the return on the stock if it goes up and down, respectively
the inverse of the ratio of the up and down probabilities, respectively, and the riskfree rate
the normal probabilities of up and down movements, respectively
one plus the return on the stock if it goes up and down, respectively
none of the above
5.
If the stock pays a specific dollar dividend and the stock price, to include the dividend,
follows the binomial up and down factors, which of the following will happen?
a.
the binomial tree will recombine
b.
the binomial tree will not recombine
c.
the option will be mispriced
d.
an arbitrage profit will not be possible
e.
none of the above
6.
When puts are priced with the binomial model, which of the following is true?
a.
the puts must be American
b.
the puts cannot be properly hedged
c.
the puts will violate put-call parity
d.
the hedge ratio is one throughout the tree
e.
none of the above
7.
If the binomial model is extended to multiple periods for a fixed option life, which of the
following adjustments must be made?
a.
the up and down factors must be increased
b.
the risk-free rate must be increased
c.
the up and down factors and the risk-free rate must be decreased
d.
the initial stock price must be proportionately reduced
e.
none of the above
8.
Which of the following are not path-dependent options when the stock pays a constant
dividend yield?
a.
European calls and European puts
b.
European calls and American puts
c.
American puts and European puts
d.
American puts and European calls
e.
none of the above
9.
In a non-recombining tree, the number of paths that will occur after three periods is
a.
three
b.
four
c.
ten
d.
eight
e.
six
10.
When the number of time periods in a binomial model is large, a European call option
value does what?
a.
fluctuates around its intrinsic value
b.
converges to a specific value
c.
increases without limit
d.
converges to the European lower bound
e.
none of the above
11.
When the number of time periods in a binomial model is large, what happens to the
binomial probability of an up move?
a.
it approaches 1.0
b.
it approaches zero
c.
it fluctuates without pattern
d.
it converges to 0.5
e.
none of the above
Consider a binomial world in which the current stock price of 80 can either go up by 10 percent or
down by 8 percent. The risk-free rate is 4 percent. Assume a one-period world. Answer questions
12 through 15 about a call with an exercise price of 80.
12.
What would be the call’s price if the stock goes up?
a.
3.60
b.
8.00
c.
5.71
d.
4.39
e.
none of the above
13.
What would be the call’s price if the stock goes down?
a.
8.00
b.
3.60
c.
0.00
d.
9.00
e.
none of the above
14.
What is the hedge ratio?
a.
0.429
b.
0.714
c.
0.571
d.
0.823
e.
none of the above
15.
What is the theoretical value of the call?
a.
8.00
b.
4.39
c.
5.15
d.
5.36
e.
none of the above
Now extend the one-period binomial model to a two-period world. Answer questions 16 through
18.
16.
What is the value of the call if the stock goes up, then down?
a.
0.96
b.
16.80
c.
8.00
d.
0.00
e.
none of the above
17.
What is the hedge ratio if the stock goes down one period?
a.
0.00
b.
0.0725
c.
1.00
d.
0.73
e.
none of the above
18.
What is the current value of the call?
a.
8.00
b.
7.30
c.
11.13
d.
0.619
e.
none of the above
19.
In the binomial model, if an option has no chance of expiring out-of-the-money, the hedge
ratio will be
a.
0.5
b.
infinite
c.
1
d.
0
e.
none of the above
20.
Suppose S = 70, X = 65, r = 0.05, p = 0.6, Cu = 7.17, Cd = 1.22 and there is one period left
in an American call’s life. What will the option be worth?
a.
6.83
b.
0.00
c.
4.56
d.
5.00
e.
none of the above
21.
In a one-period binomial model with Su = 49.5, Sd = 40.5, p = 0.8, r = 0.06, S = 45 and X
= 50, what is a European put worth?
a.
2.17
b.
0.50
c.
d.
e.
9.50
5.00
none of the above
22.
Which of the following statements about the binomial model is incorrect?
a.
it converges to the Black-Scholes-Merton model
b.
it can accommodate early exercise
c.
it allows only two stock prices at expiration
d.
it can be extended to a large number of time periods
e.
none of the above
23.
A stock priced at 50 can go up or down by 10 percent over two periods. The risk-free rate
is 4 percent. Which of the following is the correct price of an American put with an exercise
price of 55?
a.
7.88
b.
3.38
c.
4.00
d.
5.00
e.
1.65
24.
Determine the value of u for a three period binomial problem when the option’s life is onehalf a year and the volatility is 0.48. Use the model for u that does not require the risk-free
rate.
a.
1.22
b.
1.48
c.
1.40
d.
1.32
e.
none of the above
25.
Which of the following statements about the binomial option pricing model is not always
true?
a.
it can capture the effect of early exercise
b.
it can accommodate a large number of possible stock prices at expiration
c.
it reflects the effects of the stock price, exercise price, risk-free rate, volatility and
time to expiration
d.
it gives the price at which the option will trade in the market.
e.
none of the above
26.
All of the following are variables used to determine a call option’s price except
a.
the risk-free rate
b.
the probability of stock price movement
c.
the exercise price
d.
the possible future stock prices at expiration
e.
none of the above
27.
Pricing a put with the binomial model is the same procedure as pricing with a call, except
that the
a.
underlying stock must not pay dividends
b.
binomial model cannot account for expiration payoffs
c.
value of the underlying must be discounted back to the current time period
d.
expiration payoffs reflect the fact that the option is the right to sell the
underlying stock
e.
none of the above
28.
All of the following are practical applications of the binomial model except
a.
choices regarding real options
b.
options regarding executive incentive plans
c.
models in which the stock price can go up, down, or remain constant in the
next period
d.
embedded options within debt securities
e.
none of the above
29.
Determine the value of d for a four period binomial model when the option’s life is onefourth of a year and the volatility is 0.64. Use the model for u and d that does not require
the risk-free rate.
a.
0.85
b.
1.17
c.
2.56
d.
0.90
e.
none of the above
30.
The binomial option pricing model will converge to what value as the number of periods
increases?
a.
a random value
b.
the Black-Scholes-Merton value of the option
c.
the intrinsic volatility of the option
d.
the true value of the underlying
e.
none of the above
CHAPTER 5:
MODEL
OPTION PRICING MODELS:
THE BLACK-SCHOLES-MERTON
MULTIPLE CHOICE TEST QUESTIONS
The following information is given about options on the stock of a certain company.
S0 = 23
rc = 0.09
2 = 0.15
X = 20
T = 0.5
No dividends are expected.
Use this information to answer questions 1 through 8.
1.
What value does the Black-Scholes-Merton model predict for the call? (Due to differences
in rounding your calculations may be slightly different. “none of the above” should be
selected only if your answer is different by more than 10 cents.)
a.
5.35
b.
1.10
c.
4.73
d.
6.50
e.
none of the above
2.
Suppose you feel that the call is overpriced. What strategy should you use to exploit the
apparent misvaluation? (Due to differences in rounding your calculations may be slightly
different. “none of the above” should be selected only if your answer is different by more
than 10 shares.)
a.
buy 791 shares, sell 1,000 calls
b.
buy 705 shares, sell 1,000 calls
c.
sell short 791 shares, buy 1,000 calls
d.
sell short 705 shares, buy 1,000 calls
e.
none of the above
3.
The price of a put on the stock is: (Due to differences in rounding your calculations may
be slightly different. “none of the above” should be selected only if your answer is different
by more than 10 cents.)
a.
0.85
b.
8.64
c.
2.35
d.
4.88
e.
none of the above
4.
To construct a riskless hedge, the number of puts per 100 shares purchased is: (Due to
differences in rounding your calculations may be slightly different. “none of the above”
should be selected only if your answer is different by more than 0.01.)
a.
b.
c.
d.
e.
0.7580
0.2420
-0.2480
-0.6628
none of the above
5.
The call’s vega is: (Due to differences in rounding your calculations may be slightly
different. “none of the above” should be selected only if your answer is different by more
than 0.05.)
a.
-3.02
b.
0.046
c.
-0.792
d.
4.67
e.
none of the above
6.
If the actual call price is 3.79, the implied standard deviation is
a.
0.25
b.
greater than 0.25
c.
less than 0.25
d.
infinite
e.
none of the above
7.
If we now assume that the stock pays a dividend at a known constant rate of 3.5 percent,
what stock price should we use in the model? (Due to differences in rounding your
calculations may be slightly different. “none of the above” should be selected only if your
answer is different by more than 10 cents.)
a.
22.60
b.
19.65
c.
23.00
d.
21.99
e.
none of the above
8.
If we now assume that the stock pays a single dividend of 2.25 in three months, what stock
price should we use in the model? (Due to differences in rounding your calculations may
be slightly different. “none of the above” should be selected only if your answer is different
by more than 10 cents.)
a.
17.75
b.
20.75
c.
20.00
d.
20.80
e.
none of the above
9.
If the simple return on a Treasury bill is 8.5 percent, the risk-free rate in the Black-ScholesMerton model is
a.
8.77 percent
b.
8.93 percent
c.
d.
e.
8.55 percent
8.20 percent
none of the above
10.
Which of the following variables in the Black-Scholes-Merton option pricing model is the
most difficult to obtain?
a.
the volatility
b.
the risk-free rate
c.
the stock price
d.
the time to expiration
e.
the exercise price
11.
The binomial price will theoretically equal the Black-Scholes-Merton price under which of
the following conditions?
a.
when the number of time periods is large
b.
when the option is at-the-money
c.
when the option is in-the-money
d.
when the option is out-of-the-money
e.
none of the above
12.
If the stock price is 44, the exercise price is 40, the put price is 1.54, and the Black-ScholesMerton price using 0.28 as the volatility is 1.11, the implied volatility will be
a.
higher than 0.28
b.
lower than 0.28
c.
0.28
d.
lower than the risk-free rate
e.
none of the above
13.
Which of the following statements about the Black-Scholes-Merton model is not true?
a.
decreasing the volatility lowers the call price
b.
the expected stock price plays a role in the model
c.
the risk-free rate is continuously compounded
d.
the model is consistent with put-call parity
e.
none of the above
14.
Which of the following characteristics of the Black-Scholes-Merton model is not correct?
a.
it is a discrete time model
b.
it is the limit of the binomial model
c.
it is a continuous time model
d.
it gives the price of a European option
e.
none of the above
15. Which of the following assumptions of the Black-Scholes-Merton model is not correct?
a.
the stock volatility is constant
b.
the stock return follows a normal distribution
c.
there are no transaction costs
d.
e.
there are no taxes
none of the above
16. Which of the following statements about the delta is not true?
a.
it ranges from zero to one
b.
it converges to zero or one at expiration
c.
it is given by N(d1) in the Black-Scholes-Merton model
d.
it changes slowly near expiration if the option is at-the-money
e.
none of the above
17.
Which of the following “Greeks” is not a measure of the option’s sensitivity to a change in
one of its input values?
a.
delta
b.
gamma
c.
rho
d.
theta
e.
sigma
18.
Which of the following statements is true about the relationship between the option price
and the risk-free rate?
a.
a call price is nearly linear with respect to the risk-free rate
b.
a call price is highly sensitive to the risk-free rate
c.
the risk-free rate affects a call but not a put
d.
the risk-free rate does not affect a call price
e.
none of the above
19. The relationship between the volatility and the time to expiration is called the
a.
volatility smile
b.
volatility skew
c.
term structure of volatility
d.
theta
e.
none of the above
20. What is the reason for executing a gamma hedge?
a.
the volatility can change
b.
the stock price can make a large move
c.
the stock price moves are too small for a delta hedge to work
d.
there is no true risk-free rate
e.
none of the above
21. Which of the following statements about the volatility is not true?
a.
the implied volatility often differs across options with different exercise prices
b.
the implied volatility equals the historical volatility if the option is correctly
priced
c.
the implied volatility is determined by trial and error
d.
the implied volatility is nearly linearly related to the option price
e.
22.
none of the above
The relationship between the option price and the exercise price is called
a.
the gamma
b.
the vega
c.
the omega
d.
the zeta
e.
none of the above
23. What happens when the volatility is zero in the Black-Scholes-Merton model?
a.
the option price converges to either zero or the lower bound
b.
the option price converges to the intrinsic value
c.
the option automatically expires out of the money
d.
the gamma and delta converge
e.
none of the above
24. Which of the following is not correct about a call’s gamma?
a.
it is the same as a put’s gamma
b.
it is large when the call is at-the-money
c.
it can be viewed as a measure of the risk of the delta
d.
it is a source of risk that can be hedged only by using another option
e.
none of the above
25. Which of the following statements is incorrect about the historical volatility?
a.
if used in the Black-Scholes-Merton model, it gives the current market price
b.
it is based on the volatility of the log return on the stock
c.
it requires a sample of recent returns
d.
it should be converted to an annualized volatility
e.
none of the above
26.
A hedge portfolio is established and maintained by constantly adjusting the relative
proportions of stock and options, a process referred to as
a. actively managing
b. continuous reconciliation
c. marking to market
d. dynamic trading
e. none of the above
27.
The standard normal random variable used in the calculation of cumulative normal
probabilities within the Black-Scholes-Merton option pricing model is
a. the lognormal distribution
b. the d1 and d2 statistic
c. the z statistic
d. the f distribution
e. none of the above
28.
The pattern of volatility across exercise prices is often called
a. the price-fluctuation graph
b. the volatility smile
c. the term structure of implied volatility
d. the skew
e. none of the above
29.
The Black-Scholes-Merton model for European puts, obtained by applying put-call parity
to the Black-Scholes-Merton model for European calls, is customarily expressed by which
of the following:
a. P = Xe −rc T N(−d 2 ) −S0 N(−d1) T
b. P = X(1+ r) −T N(−d 2 ) −S0 N(−d1)
c. P = X(1+ r) −T N(−d1) −S0 N(−d 2 )
d. P = Xe −rc T N(−d1) −S0 N(−d 2 )
e. none of the above



30.
The implied volatility is obtained by finding the standard deviation that, when used in the
Black-Scholes-Merton model, makes the
a. model price expire at zero
b. model price equal the market price of the option
c. model price such that it exceeds currently traded market option values
d. model price equal the intrinsic value of the underlying stock
e. none of the above
CHAPTER 6: BASIC OPTION STRATEGIES
MULTIPLE CHOICE TEST QUESTIONS
Consider a stock priced at $30 with a standard deviation of 0.3. The risk-free rate is 0.05. There are
put and call options available at exercise prices of 30 and a time to expiration of six months. The
calls are priced at $2.89 and the puts cost $2.15. There are no dividends on the stock and the options
are European. Assume that all transactions consist of 100 shares or one contract (100 options). Use
this information to answer questions 1 through 10.
1.
What is your profit if you buy a call, hold it to expiration and the stock price at expiration is
$37?
a.
$700
b.
-$289
c.
$2,711
d.
$411
e.
none of the above
2.
What is the breakeven stock price at expiration on the transaction described in problem 1?
a.
$32.89
b.
$30.00
c.
$27.11
d.
$32.15
e.
there is no breakeven
3.
What is the maximum profit on the transaction described in problem 1?
a.
$2,711
b.
infinity
c.
zero
d.
$3,289
e.
$3,000
4.
What is the maximum profit that the writer of a call can make?
a.
$2,711
b.
$289
c.
$3,000
d.
$3,289
e.
none of the above
5.
Suppose the buyer of the call in problem 1 sold the call two months before expiration when
the stock price was $33. How much profit would the buyer make?
a.
$32.89
b.
$30.11
c.
$78.00
d.
$11.00
e.
none of the above
6.
Suppose the investor constructed a covered call. At expiration the stock price is $27. What
is the investor’s profit?
a.
$589
b.
$289
c.
$2,989
d.
$2,711
e.
none of the above
7.
What is the breakeven stock price at expiration for the transaction described in problem 6?
a.
$27.11
b.
$30.00
c.
$32.89
d
$29.89
e.
none of the above
8.
If the transaction described in problem 6 is closed out when the option has three months to
go and the stock price is at $36, what is the investor’s profit?
a.
$600
b.
$311
c.
$889
d.
$229
e.
none of the above
9.
What is the maximum profit from the transaction described in Question 6 if the position is
held to expiration?
a.
$3,289
b.
$289
c.
infinity
d.
$2,711
e.
none of the above
10.
What is the minimum profit from the transaction described in Question 6 if the position is
held to expiration?
a.
-$2,711
b.
-$3,289
c.
-$3,000
d.
negative infinity
e.
none of the above
11.
Consider two put options differing only by exercise price. The one with the higher exercise
price has
a.
the lower breakeven and lower profit potential
b.
the lower breakeven and greater profit potential
c.
the higher breakeven and greater profit potential
d.
the higher breakeven and lower profit potential
e.
the greater premium and lower profit potential
12.
Which of the following statements is true about closing a long call position prior to expiration
relative to holding it to expiration?
a.
the profit is greater at all stock prices
b.
the profit is greater only at low stock prices
c.
the profit is greater only at high stock prices
d.
the range of possible profits is greater
e.
none of the above are true
13.
Which of the following transactions does not profit in a strong bull market.
a.
a short put
b.
a covered call
c.
a protective put
d.
a synthetic call
e.
none of the above
14.
Which of the following is equivalent to a synthetic call?
a.
a long stock and a short put position
b.
a long put and a long stock position
c.
a long put and a short risk-free bond position
d.
a long stock and a short risk-free bond position
e.
none of the above
15.
Early exercise imposes a risk to all but one of the following transactions.
a.
a short call
b.
a short put
c.
a protective put
d.
an uncovered call
e.
none of the above
16.
Each of the following is a bullish strategy except
a.
a long call
b.
a short put
c.
a short stock
d.
a protective put
e.
none of the above
17.
Which of the following strategies has the greatest potential loss?
a.
an uncovered call
b.
a long put
c.
a covered call
d.
a long position in the stock
e.
it is impossible to tell
18.
Which of the following strategies has essentially the same profit diagram as a covered call?
a.
b.
c.
d.
e.
a long put
a short put
a protective put
a long call
none of the above
19.
Which of the following statements is true about the purchase of a protective put at a higher
exercise price relative to a lower exercise price?
a.
the breakeven is lower
b.
the maximum loss is greater
c.
the insurance is less costly
d.
the insurance is more costly
e.
none of the above
20.
What is the disadvantage of a strategy of rolling over a covered call to avoid exercise?
a.
the call premium is essentially thrown away
b.
transaction costs tend to be high
c.
the stock will incur losses
d.
the call is more expensive when rolled over
e.
none of the above
21.
Which of the following is the breakeven for a protective put?
a.
X + S0 – P
b.
P + S0
c.
X – ST
d.
X – S0 – P
e.
none of the above
22.
Which of the following statements about a covered call writing strategy is true?
a.
the losses are limited
b.
return and risk are greater than that of simply holding the stock
c.
it is a cheaper form of insurance than a protective put
d.
it generally makes a large number of small profits
e.
none of the above
23.
The difference in profit from an actual put and a synthetic put is
a.
X
b.
ST – X
c.
X – ST
d.
ST + X(1 + r)-T
e.
none of the above
24.
A covered call writer who prefers even less risk should
a.
get rid of the call
b.
switch to a call with a lower exercise price
c.
get rid of the stock
d.
e.
switch to a call with a higher exercise price
none of the above
25.
Which of the following investors may be obligated to buy stock?
a.
covered call writer
b.
call buyer
c.
put writer
d.
protective put buyer
e.
none of the above
26.
Identify the correct statement related to the choice of exercise price for buying a call.
a.
the higher the exercise price the higher the call premium
b.
the lower the exercise price the more likely the call option will expire out-of-the-
money
c.
A higher strike price results in smaller gains on the upside but smaller losses on
the downside
d.
the higher the exercise price the more dividends contribute to the overall profit
e.
none of the above are correct statements related to the choice of exercise price for
buying a call
27.
Consider the following statement related to writing a naked call option. For a given stock
price, the ____________ the position is held, the more time value it loses and the
___________ the profit. Identify the correct words for these two blanks.
a.
longer, lower
b.
longer, higher
c.
shorter, lower
d.
shorter, higher
e.
longer, flatter
28.
Consider the following statement related to buying a put option. For a given stock price, the
____________ the position is held, the more time value it loses and the ___________ the profit;
however, an exception can occur when the stock price is ___________. Identify the correct words
for these two blanks.
a.
longer, lower, low
b.
longer, higher, high
c.
shorter, lower, low
d.
shorter, higher, high
e.
longer, flatter, low
29.
A synthetic long call position can be created with which of the following sets of transactions.
a.
borrow the present value of the strike price, sell stock, sell put
b.
lend the present value of the strike price, sell stock, buy put
c.
sell put, buy stock, lend the present value of the strike price
d.
buy stock, buy put, borrow the present value of the strike price
e.
none of the above creates a synthetic long call position
30.
A synthetic short put position can be created with which of the following sets of transactions.
a.
borrow the present value of the strike price, sell stock, sell call
b.
lend the present value of the strike price, sell stock, buy call
c.
sell call, buy stock, lend the present value of the strike price
d.
buy stock, buy call, borrow the present value of the strike price
e.
none of the above creates a synthetic long call position
CHAPTER 7: ADVANCED OPTION STRATEGIES
MULTIPLE CHOICE TEST QUESTIONS
The following prices are available for call and put options on a stock priced at $50. The risk-free
rate is 6 percent and the volatility is 0.35. The March options have 90 days remaining and the June
options have 180 days remaining. The Black-Scholes model was used to obtain the prices.
Calls
Puts
Strike
March
June
March
June
45
6.84
8.41
1.18
2.09
50
3.82
5.58
3.08
4.13
55
1.89
3.54
6.08
6.93
Use this information to answer questions 1 through 20. Assume that each transaction consists of
one contract (for 100 shares) unless otherwise indicated.
For questions 1 through 6, consider a bull money spread using the March 45/50 calls.
1.
How much will the spread cost?
a.
$986
b.
$302
c.
$283
d.
$193
e.
none of the above
2.
What is the maximum profit on the spread?
a.
$500
b.
$802
c.
$198
d.
$302
e.
none of the above
3.
What is the maximum loss on the spread?
a.
$500
b.
$698
c.
$198
d.
$802
e.
none of the above
4.
What is the profit if the stock price at expiration is $47?
a.
-$102
b.
$398
c.
d.
e.
-$302
$500
none of the above
5.
What is the breakeven point?
a.
$48.02
b.
$41.98
c.
$55.66
d.
$50.00
e.
none of the above
6.
Suppose you closed the spread 60 days later. What will be the profit if the stock price is
still at $50?
a.
$41
b.
$198
c.
$302
d.
$102
e.
none of the above
For questions 7 and 8, suppose an investor expects the stock price to remain at about $50 and
decides to execute a butterfly spread using the June calls.
7.
What will be the cost of the butterfly spread?
a.
$1,195
b.
$637
c.
$79
d.
$1,045
e.
none of the above
8.
What will be the profit if the stock price at expiration is $52.50?
a.
$171
b.
$1,421
c.
$1.037
d.
$421
e.
none of the above
9.
Suppose you wish to construct a ratio spread using the March and June 50 calls. You want
to buy 100 June 50 call contracts. How many March 50 calls would you sell?
a.
105
b.
95
c.
100
d.
57
e.
none of the above
Answer questions 10 and 11 about a calendar spread based on the assumption that stock prices are
expected to remain fairly constant. Use the June/March 50 call spread. Assume one contract of
each.
10.
What will the spread cost?
a.
-$176
b.
$176
c.
$558
d.
$105
e.
none of the above
11.
What will be the profit if the spread is held 90 days and the stock price is $45?
a.
$36
b.
$20
c.
$558
d.
-$20
e.
none of the above
Answer questions 12 through 17 about a long straddle constructed using the June 50 options.
12.
What will the straddle cost?
a.
$145
b.
$690
c.
$971
d.
$413
e.
none of the above
13.
What are the two breakeven stock prices at expiration?
a.
$55.58 and $45.87
b.
$54.13 and $45.87
c.
$55.58 and $44.42
d.
$59.71 and $40.29
e.
none of the above
14.
What is the profit if the stock price at expiration is at $64.75?
a.
-$971
b.
$1,475
c.
-$3,525
d.
$500
e.
none of the above
15.
What is the profit if the position is held for 90 days and the stock price is $55?
a.
-$971
b.
-$58
c.
-$109
d.
-$471
e.
none of the above
16.
Suppose the investor adds a call to the long straddle, a transaction known as a strap. What
will this do to the breakeven stock prices?
a.
lower both the upside and downside breakevens
b.
raise both the upside and downside breakevens
c.
raise the upside and lower the downside breakevens
d.
lower the upside and raise the downside breakevens
e.
none of the above
17.
Suppose a put is added to a straddle. This overall transaction is called a strip. Determine
the profit at expiration on a strip if the stock price at expiration is $36.
a.
-$129
b.
$1,416
c.
$429
d.
$1,384
e.
none of the above
Answer questions 18 through 20 about a long box spread using the June 50 and 55 options.
18.
What is the cost of the box spread?
a.
$500
b.
$2,018
c.
$76
d.
$484
e.
none of the above
19.
What is the profit if the stock price at expiration is $52.50?
a.
$16
b.
$500
c.
-$234
d.
$250
e.
none of the above
20.
What is the net present value of the box spread?
a.
$9.84
b.
$5.00
c.
$16.00
d.
$1.84
e.
none of the above
21.
Which of the following strategies does not profit in a rising market?
a.
put bull spread
b.
long straddle
c.
collar
d.
call bull spread
e.
none of the above
22.
Which of the following transactions can have an unlimited loss?
a.
long straddle
b.
calendar spread
c.
butterfly spread
d.
reverse box spread
e.
none of the above
23.
Which of the following is the best strategy for an expected fall in the market?
a.
long strip (2 puts and 1 call)
b.
put bull spread
c.
calendar spread
d.
butterfly spread
e.
none of the above
24.
Early exercise is a disadvantage in which of the following transactions?
a.
short box spread
b.
put bear spread
c.
long strip (2 puts and 1 call)
d.
long strap (2 calls and 1 put)
e.
none of the above
25.
Which of the following have similar profit graphs?
a.
call bull spread and long box spread
b.
put bear spread and short box spread
c.
butterfly spread and ratio spread
d.
calendar spread and call bear spread
e.
none of the above
26.
The purchase of one option and the sale of another is known as
a.
box
b.
bear strategy
c.
bull strategy
d.
collar
e.
spread
27.
The option strategy where the holder of a long position in a stock buys a put with an
exercise price lower than the current stock price and sells a call with an exercise price
higher than the current stock price is known as
a.
box
b.
bear strategy
c.
bull strategy
d.
collar
e.
spread
28.
The profit from a put bear spread strategy when both options are out of the money is
a.
–X1 + ST + P1 + X2 – ST – P2
b.
–X1 + ST + P1 – P2
c.
X 1 – S T – P 1 – X 2 + ST + P 2
d.
P 1 + X2 – ST – P2
e.
P1 – P2
29.
“Like the butterfly spread, the calendar spread is one in which the underlying instrument’s
___________ is the major factor in its performance.” The best word for the blank is which
of the following?
a.
volatility
b.
expected rate of return
c.
beta
d.
correlation with the benchmark index
e.
skewness
30.
Which of the following statements best describes the nature of option time value decay?
a.
time value decays more rapidly as the stock price approaches being at-the-money
b.
time value decays more rapidly as expiration approaches
c.
time value decays more rapidly for put option than call options
d.
time value decay does not occur for collar option strategies
e.
time value decay is detrimental for a trader who is short call options
CHAPTER 8: STRUCTURE OF FORWARD AND FUTURES MARKETS
MULTIPLE CHOICE TEST QUESTIONS
1.
Which of the following is a false statement related to options on futures?
a.
options on futures are also known as futures options
b.
options on futures are also known as options on the underlying instrument
c.
options on futures is a derivative on a derivative
d.
options on futures are also known as commodity options
e.
all of the above statements are true related to options on futures
2.
Which of the following contract terms is not set by the futures exchange?
a.
the dates on which delivery can occur
b.
the expiration months
c.
the deliverable commodities
d.
the size of the contract
e.
the price
3.
Which of the following organizations has the ultimate regulatory authority in the futures
industry?
a.
National Futures Association
b.
Commodity Futures Trading Commission
c.
Commodity Exchange Authority
d.
Securities and Exchange Commission
e.
none of the above
4.
Margin in a futures transaction differs from margin in a stock transaction because
a.
stock transactions are much smaller
b.
delivery occurs immediately in a stock transaction
c.
no money is borrowed in a futures transaction
d.
futures are much more volatile
e.
none of the above
5.
If the initial margin is $5,000, the maintenance margin is $3,500 and your balance is
$4,000, how much must you deposit?
a.
$6,000
b.
$1,500
c.
$9,000
d.
nothing
e.
none of the above
6.
If the initial margin is $5,000, the maintenance margin is $3,500 and your balance is
$3,100, how much must you deposit?
a.
$1,500
b.
$400
c.
$1,900
d.
0
e.
none of the above
7.
The number of long or short futures positions outstanding is called the
a.
reportable position
b.
minimum volume
c.
open interest
d.
spread position
e.
none of the above
8.
Most futures contracts are closed by
a.
delivery
b.
offset
c.
exercise
d.
default
e. none of the above
9.
Most forward contracts are closed by
a.
delivery
b.
offset
c.
exercise
d.
default
e.
none of the above
10.
Which of the following is not a forward contract?
a.
a long-term employment contract at a fixed salary
b.
an automobile lease non-cancelable for three years
c.
a rain check
d.
a signed contract to buy a house in six months
e.
none of the above
11.
Where did the U.S. futures market originate?
a.
Chicago
b.
Kansas
c.
New York
d.
Minneapolis
e.
none of the above
12.
Which of the following is a trader on the floor of the futures exchange?
a.
introducing broker
b.
commission broker
c.
commodity trading advisor
d.
commodity pool operator
e.
none of the above
13.
Variation margin is which of the following?
a.
the difference in margin between hedger and speculator
b.
margin differences according to trading style
c.
d.
e.
margin deposited as a result of marking-to-market
margin set by the variability of a futures price
none of the above
14.
Which of the following is the most actively traded U.S. futures contract?
a.
S&P 500 Index
b.
crude oil
c.
Treasury bonds
d.
Wheat
e.
none of the above
15.
Which of the following duties is not performed by the clearinghouse?
a.
holding margin deposits
b.
guaranteeing performance of buyer and writer
c.
maintaining records of transactions
d.
lending money to meet margin requirements
e.
none of the above
16.
What are circuit breakers?
a.
rules that stop trading when futures are about to expire
b.
a system that shuts down the exchange computer during periods of abnormal
volume
c.
d.
e.
limits on the number of contracts that can be traded on high volume days
rules that limit the number of contracts a speculator can hold
none of the above
17.
One of the first automated trading systems that matched bids and offers implemented at the
CME is called
a.
COMEX
b.
GLOBEX
c.
LIFFE
d.
CFTC
e.
none of the above
18.
Which of the following is not a method of terminating a futures contract?
a.
offset
b.
delivery
c.
exchange for physicals
d.
scalping
e.
none of the above
19.
Trading as both a broker and a dealer is called
a.
dual trading
b.
spreading
c.
scalping
d.
arbitraging
e.
none of the above
20.
The trading procedure on the floor of the futures exchange is referred to as
a.
against actuals
b.
open interest
c.
open outcry
d.
index participation
e.
none of the above
21.
A futures contract covers 5000 pounds with a minimum price change of $0.01 is sold for
$31.60 per pound. If the initial margin is $2,525 and the maintenance margin is $1,000, at
what price would there be a margin call?
a.
31.91
b.
32.11
c.
31.29
d.
31.09
e.
31.80
22.
One of the advantages of forward markets is
a.
performance is guaranteed by the G-30
b.
trading is conducted in the evening over computers
c.
the contracts are private and customized
d.
trading is less costly and governed by more rules
e.
none of the above
23.
Which is the most active group of futures?
a.
energy
b.
agriculture
c.
currency
d.
financials
e.
none of the above
24.
Options on futures have been trading since
a.
1973
b.
1982
c.
1966
d.
1936
e.
none of the above
25.
Which of the following is not a type of futures trader?
a. scalpers
b.
arbitrageurs
c.
profit-takers
d.
hedgers
e.
day traders
26.
Individuals engaging in this type of trading strategy are characterized by their attempt to
profit from guessing the direction of the market
a.
hedgers
b.
spreaders
c.
speculators
d.
arbitraguers
e.
none of the above
27.
This financial instrument (sometimes referred to as a commodity option) permits the holder
to buy if a call, or to sell if a put, a specific underlying futures contract at a fixed price up
to a specific expiration day
a. forward
b. futures option
c. swap
d. commodity swap
e. futures swap
28.
Despite the fact that forward contracts carry more credit risk than futures contracts, forward
contracts offer what primary advantage over futures contracts?
a.
the over-the-counter forward market is a highly regulated market
b.
forward contracts prevent the writer from assuming the credit risk of the buyer
c.
terms and conditions are tailored to the specific needs of the two parties
involved
d.
transaction information between the two parties involved in the forward contract is
readily available to the public
e.
conditions of the forward contract, such as delivery date and location, cannot be
altered
29.
This individual takes a futures contract position that is opposite to the position in the spot
market in order to reduce risk
a.
speculator
b. hedger
c. spreader
d. arbitrageur
e. trading advisor
30.
Which of the following correctly orders the process of daily settlement?
a.
clearinghouse officials establish a settlement price; each account is marked to
market; accounts of those holding long/short positions are credited/debited
appropriately; differences between today’s settlement price and the previous days
settlement price are determined
b.
clearinghouse officials establish a settlement price; each account is marked to
market; differences between today’s settlement price and the previous day’s
settlement price are determined; accounts of those holding long/short positions are
credited/debited appropriately
c.
differences between today’s settlement price and the previous day’s settlement
d.
e.
31.
price are determined; accounts are marked to market; clearinghouse officials
establish a settlement price; accounts of those holding long/short positions are
credited/debited appropriately
clearinghouse officials establish a settlement price; differences between
today’s settlement price and the previous days settlement price are
determined; accounts of those holding long/short positions are
credited/debited appropriately; each account is marked to market
differences between today’s settlement price and the previous day’s settlement
price are determined; accounts are marked to market; clearinghouse officials
establish a settlement price; accounts of those holding long/short positions are
credited/debited appropriately
The following process is the only type of permissible futures transaction that occurs off the
floor of the exchange
a. determination of the position day
b.
determination of the delivery day
c.
determination of a daily settlement price
d.
offsetting
e.
exchange for physicals

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