CHAPTER 1: INTRODUCTION

MULTIPLE CHOICE TEST QUESTIONS
1. The market value of the derivatives o!trats "orld"ide totals a#out
a. $% trillio!
#. 1&.$ trillio!
. ' trillio!
d. (.) trillio!
e. !o!e of the a#ove
(. Cash markets are also k!o"! as
a. s*eulative markets
#. s*ot markets
. derivative markets
d. dollar markets
e. !o!e of the a#ove
+. , all o*tio! -ives the holder
a. the ri-ht to #u. somethi!-
#. the ri-ht to sell somethi!-
. the o#li-atio! to #u. somethi!-
d. the o#li-atio! to sell somethi!-
e. !o!e of the a#ove
/. 0hih of the follo"i!- i!strume!ts are o!trats #ut are !ot seurities
a. stoks
#. o*tio!s
. s"a*s
d. a a!d #
e. # a!d
&. The *ositive relatio!shi* #et"ee! risk a!d retur! is alled
a. e1*eted retur!
#. market effiie!.
. the la" of o!e *rie
d. ar#itra-e
e. !o!e of the a#ove
). , tra!satio! i! "hih a! i!vestor holds a *ositio! i! the s*ot market a!d sells a futures o!trat or "rites
a all is
a. a -am#le
#. a s*eulative *ositio!
. a hed-e
d. a risk2free tra!satio!
e. !o!e of the a#ove
3. 0hih of the follo"i!- are adva!ta-es of derivatives4
a. lo"er tra!satio! osts tha! seurities a!d ommodities
#. reveal i!formatio! a#out e1*eted *ries a!d volatilit.
. hel* o!trol risk
d. make s*ot *ries sta. loser to their true values
e. all of the a#ove
$. , for"ard o!trat has "hih of the follo"i!- harateristis4
a. has a #u.er a!d a seller
#. trades o! a! or-a!i5ed e1ha!-e
. has a dail. settleme!t
d. -ives the ri-ht #ut !ot the o#li-atio! to #u.
e. all of the a#ove
'. O*tio!s o! futures are also k!o"! as
a. s*ot o*tio!s
#. ommodit. o*tio!s
. e1ha!-e o*tio!s
d. seurit. o*tio!s
e. !o!e of the a#ove
1%. , market i! "hih the *rie e6uals the true eo!omi value
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Co*.ri-ht 7 (%%1 #. Harourt8 I!
a. is risk2free
#. has hi-h e1*eted retur!s
. is or-a!i5ed
d. is effiie!t
e. all of the a#ove
11. 0hih of the follo"i!- trade o! or-a!i5ed e1ha!-es4
a. a*s
#. for"ards
. o*tio!s
d. s"a*s
e. !o!e of the a#ove
1(. 0hih of the follo"i!- markets is9are said to *rovide *rie disover.4
a. futures
#. for"ards
. o*tio!s
d. a a!d #
e. # a!d
1+. I!vestors "ho do !ot o!sider risk i! their deisio!s are said to #e
a. s*eulati!-
#. short selli!-
. risk !eutral
d. traders
e. !o!e of the a#ove
1/. 0hih of the follo"i!- stateme!ts is !ot true a#out the la" of o!e *rie
a. i!vestors *refer more "ealth to less
#. i!vestme!ts that offer the same retur! i! all states must *a. the risk2free rate
. if t"o i!vestme!t o**ortu!ities offer e6uivale!t outomes8 the. must have the same *rie
d. i!vestors are risk !eutral
e. !o!e of the a#ove
1&. 0hih of the follo"i!- o!trats o#li-ates a #u.er to #u. or sell somethi!- at a later date4
a. all
#. futures
. a*
d. *ut
e. s"a*tio!
CHAPTER 2: THE STRUCTURE OF OPTIONS MARKETS
1. O*tio!s are traded o! "hih of the follo"i!- e1ha!-es4
a. ,meria! Stok E1ha!-e
#. Paifi Stok E1ha!-e
. Chia-o :oard O*tio!s E1ha!-e
d. Philadel*hia Stok E1ha!-e
e. all of the a#ove
(. , all o*tio! *ried at ;( "ith a stok *rie of ;+% a!d a! e1erise *rie of ;+& allo"s the holder to #u.
the stok at
a. ;(
#. ;+(
. ;++
d. ;+&
e. !o!e of the a#ove
+. , *ut o*tio! i! "hih the stok *rie is ;)% a!d the e1erise *rie is ;)& is said to #e
a. i!2the2mo!e.
#. out2of2the2mo!e.
. at2the2mo!e.
d. e1erisa#le
e. !o!e of the a#ove
/. Or-a!i5ed o*tio!s markets are differe!t from over2the2ou!ter o*tio!s markets for all of the follo"i!-
reaso!s e1e*t
a. e1erise terms
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Co*.ri-ht 7 (%%1 #. Harourt8 I!
#. *h.sial tradi!- floor
. re-ulatio!
d. sta!dardi5ed o!trats
e. redit risk
&. The !um#er of o*tio!s a6uired "he! o!e o!trat is *urhased o! a! e1ha!-e is
a. 1
#. &
. 1%%
d. &%%
e. $8%%%
). The adva!ta-es of the over2the2ou!ter o*tio!s market i!lude all of the follo"i!- e1e*t
a. ustomi5ed o!trats
#. *rivatel. e1euted
. freedom from -over!me!t re-ulatio!
d. lo"er *ries
e. !o!e of the a#ove
3. 0hih o!e of the follo"i!- is !ot a t.*e of tra!satio! ost i! o*tio!s tradi!-4
a. the #id2ask s*read
#. the ommissio!
. leari!- fees
d. the ost of o#tai!i!- a 6uote
e. all of the a#ove
$. If the market maker "ill #u. at / a!d sell at / 19(8 the #id2ask s*read is
a. $ 19(
#. / 19/
. 19(
d. /
e. !o!e of the a#ove
'. 0hih of the follo"i!- is a le-itimate t.*e of o*tio! order o! the e1ha!-e4
a. *urhase order
#. limit order
. e1eutio! order
d. floor order
e. all of the a#ove
1%. The e1erise *rie a! #e set at a!. desired level o! eah of the follo"i!- t.*es of o*tio!s except
a. <LE= o*tio!s
#. e6uit. o*tio!s
. over2the2ou!ter o*tio!s
d. all of the a#ove
e. !o!e of the a#ove
11. ,! i!vestor "ho o"!s a all o*tio! a! lose out the *ositio! #. a!. of the follo"i!- t.*es of tra!satio!s
except
a. e1erise
#. offset
. e1*iri!- out2of2the2mo!e.
d. #u.i!- a *ut
e. !o!e of the a#ove
1(. 0hih t.*e of trader le-itimatel. *raties dual tradi!-4
a. floor #rokers
#. off>floor o*tio! traders
. #oard #rokers
d. desi-!ated *rimar. market makers
e. !o!e of the a#ove
1+. The o*tio! *rie is also referred to as the
a. strike
#. s*read
. *remium
d. fee
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e. !o!e of the a#ove
1/. I!de1 o*tio!s tradi!- o! or-a!i5ed e1ha!-es e1*ire aordi!- to "hih of the follo"i!- .les4
a. Marh8 ?u!e8 Se*tem#er8 a!d @eem#er
#. eah of the !e1t four o!seutive mo!ths
. the urre!t mo!th8 the !e1t mo!th8 a!d the !e1t t"o mo!ths i! o!e of the other .les
d. ever. other mo!th for eah of the !e1t !i!e mo!ths
e. !o!e of the a#ove
1&. ,! i!vestor "ho e1erises a all o*tio! o! a! i!de1 must
a. ae*t the ash differe!e #et"ee! the i!de1 a!d the e1erise *rie
#. *urhase all of the stoks i! the i!de1 i! their a**ro*riate *ro*ortio!s from the "riter
. immediatel. #u. a *ut o*tio! to offset the all o*tio!
d. immediatel. "rite a!other all o*tio! to offset
e. !o!e of the a#ove
1). 0hih of the follo"i!- are lo!-2term o*tio!s4
a. :o!d o*tio!s
#. LE,PS
. urre!. o*tio!s
d. Nikkei *ut "arra!ts
e. !o!e of the a#ove
13. The e1ha!-e "ith the lar-est share of the o*tio!s market is the
a. ,meria! Stok E1ha!-e
#. Ne" Aork Stok E1ha!-e
. Chia-o :oard O*tio!s E1ha!-e
d. Paifi Stok E1ha!-e
e. Philadel*hia Stok E1ha!-e
1$. , "riter seleted to e1erise a! o*tio! is said to #e
a. mar-i!al
#. assi-!ed
. restrited
d. desi-!ated
e. !o!e of the a#ove
1'. ,ll of the follo"i!- are forms of o*tio!s except
a. o!verti#le #o!ds
#. alla#le #o!ds
. "arra!ts
d. mutual fu!ds
e. !o!e of the a#ove
(%. 0hih of the follo"i!- i!de1 o*tio!s is the most "idel. traded4
a. SBP &%%
#. Nikkei ((&
. Teh!olo-. I!de1
d. Ne" Aork Stok E1ha!-e I!de1
e. !o!e of the a#ove
(1. 0here did or-a!i5ed o*tio! markets ori-i!ate4
a. Ne" Aork
#. Chia-o
. Philadel*hia
d. Sa! <ra!iso
e. !o!e of the a#ove
((. 0ho determi!es "hether o*tio!s o! a om*a!.Cs stok "ill #e listed4
a. the leari!- house
#. Seurities E1ha!-e Commissio!
. the om*a!.
d. the e1ha!-e
e. !o!e of the a#ove
(+. ,! order that s*eifies a ma1imum *rie to *a. if #u.i!- is a
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Co*.ri-ht 7 (%%1 #. Harourt8 I!
a. sto* order
#. market order
. limit order
d. all or !o!e order
e. !o!e of the a#ove
(/. 0hat amou!t must a all "riter *a. if a ash>settled i!de1 all is e1erised4
a. differe!e #et"ee! the i!de1 level a!d the e1erise *rie
#. e1erise *rie
. differe!e #et"ee! the e1erise *rie a!d the i!de1 level
d. i!de1 level
e. !o!e of the a#ove
(&. O*tio! traders i!ur "hih of the follo"i!- t.*es of osts4
a. mar-i! re6uireme!ts
#. ta1es
. stok tradi!- ommissio!s
d. a a!d #
e. a8 # a!d
CHAPTER 4: OPTION PRICING MODELS: THE BINOMIAL MODEL
1. , *ortfolio that om#i!es the u!derl.i!- stok a!d a short *ositio! i! a! o*tio! is alled
a. a risk ar#itra-e *ortfolio
#. a hed-e *ortfolio
. a ratio *ortfolio
d. a t"o2state *ortfolio
e. !o!e of the a#ove
(. I! a #i!omial model8 if the all *rie i! the market is hi-her tha! the all *rie -ive! #. the model8 .ou
should
a. sell the all a!d sell short the stok
#. #u. the all a!d sell short the stok
. #u. the stok a!d sell the all
d. #u. the all a!d #u. the stok
e. !o!e of the a#ove
+. I! a t"o2*eriod #i!omial "orld8 a mis*ried all "ill lead to a! ar#itra-e *rofit if
a. the *ro*er hed-e ratio is mai!tai!ed over the t"o *eriods
#. the hed-e *ortfolio is termi!ated after o!e *eriod
. the o*tio! -oes from over2 to u!der*ried or vie versa
d. the o*tio! remai!s mis*ried over #oth *eriods
e. !o!e of the a#ove
/. The values of u a!d d are "hih of the follo"i!-4
a. the retur! o! the stok if it -oes u* a!d do"!8 res*etivel.
#. the i!verse of the ratio of the u* a!d do"! *ro#a#ilities8 res*etivel.8 a!d the risk2free rate
. the !ormal *ro#a#ilities of u* a!d do"! moveme!ts8 res*etivel.
d. o!e *lus the retur! o! the stok if it -oes u* a!d do"!8 res*etivel.
e. !o!e of the a#ove
&. If the stok *a.s a s*eifi dollar divide!d a!d the stok *rie8 to i!lude the divide!d8 follo"s the
#i!omial u* a!d do"! fators8 "hih of the follo"i!- "ill ha**e!4
a. the #i!omial tree "ill reom#i!e
#. the #i!omial tree "ill !ot reom#i!e
. the o*tio! "ill #e mis*ried
d. a! ar#itra-e *rofit "ill !ot #e *ossi#le
e. !o!e of the a#ove
). 0he! *uts are *ried "ith the #i!omial model8 "hih of the follo"i!- is true4
a. the *uts must #e ,meria!
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Co*.ri-ht 7 (%%1 #. Harourt8 I!
#. the *uts a!!ot #e *ro*erl. hed-ed
. the *uts "ill violate *ut2all *arit.
d. the hed-e ratio is o!e throu-hout the tree
e. !o!e of the a#ove
3. If the #i!omial model is e1te!ded to multi*le *eriods for a fi1ed o*tio! life8 "hih of the follo"i!-
adDustme!ts must #e made4
a. the u* a!d do"! fators must #e i!reased
#. the risk2free rate must #e i!reased
. the u* a!d do"! fators a!d the risk2free rate must #e dereased
d. the i!itial stok *rie must #e *ro*ortio!atel. redued
e. !o!e of the a#ove
$. 0hih of the follo"i!- are !ot *ath2de*e!de!t o*tio!s "he! the stok *a.s a o!sta!t divide!d .ield4
a. Euro*ea! alls a!d Euro*ea! *uts
#. Euro*ea! alls a!d ,meria! *uts
. ,meria! *uts a!d Euro*ea! *uts
d. ,meria! *uts a!d Euro*ea! alls
e. !o!e of the a#ove
'. I! a !o!2reom#i!i!- tree8 the !um#er of *aths that "ill our after three *eriods is
a. three
#. four
. te!
d. ei-ht
e. si1
1%. 0he! the !um#er of time *eriods i! a #i!omial model is lar-e8 a Euro*ea! all o*tio! value does "hat4
a. flutuates arou!d its i!tri!si value
#. o!ver-es to a s*eifi value
. i!reases "ithout limit
d. o!ver-es to the Euro*ea! lo"er #ou!d
e. !o!e of the a#ove
11. 0he! the !um#er of time *eriods i! a #i!omial model is lar-e8 "hat ha**e!s to the #i!omial *ro#a#ilit.
of a! u* move4
a. it a**roahes 1.%
#. it a**roahes 5ero
. it flutuates "ithout *atter!
d. it o!ver-es to .&
e. !o!e of the a#ove
Co!sider a #i!omial "orld i! "hih the urre!t stok *rie of $% a! either -o u* #. 1% *ere!t or do"! #. $
*ere!t. The risk2free rate is / *ere!t. ,ssume a o!e2*eriod "orld. ,!s"er 6uestio!s 1( throu-h 1& a#out a all
"ith a! e1erise *rie of $%.
1(. 0hat "ould #e the allEs *rie if the stok -oes u*4
a. +.)%
#. $.%%
. &.31
d. /.+'
f. !o!e of the a#ove
1+. 0hat "ould #e the allEs *rie if the stok -oes do"!4
a. $.%%
#. +.)%
. %.%%
d. '.%%
e. !o!e of the a#ove
1/. 0hat is the hed-e ratio4
a. ./('
#. .31/
. .&31
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Co*.ri-ht 7 (%%1 #. Harourt8 I!
d. .$(+
e. !o!e of the a#ove
1&. 0hat is the theoretial value of the all4
a. $.%%
#. /.+'
. &.1&
d. &.+)
e. !o!e of the a#ove
No" e1te!d the o!e2*eriod #i!omial model to a t"o2*eriod "orld. ,!s"er 6uestio!s 1) throu-h 1$.
1). 0hat is the value of the all if the stok -oes u*8 the! do"!4
a. %.')
#. 1).$%
. $.%%
d. %.%%
e. !o!e of the a#ove
13. 0hat is the hed-e ratio if the stok -oes do"! o!e *eriod4
a. %.%%
#. %.%3(&
. 1.%%
d. %.3+
e. !o!e of the a#ove
1$. 0hat is the urre!t value of the all4
a. $.%%
#. 3.+%
. 11.1+
d. %.)1'
e. !o!e of the a#ove
1'. I! the #i!omial model8 if a! o*tio! has !o ha!e of e1*iri!- out2of2the2mo!e.8 the hed-e ratio "ill #e
a. %.&
#. i!fi!ite
. 1
d. %
e. !o!e of the a#ove
(%. Su**ose S F 3%8 = F )&8 r F .%&8 * F .)8 Cu F 3.138 Cd F 1.(( a!d there is o!e *eriod left i! a! ,meria!
allEs life. 0hat "ill the o*tio! #e "orth4
a. ).$+
#. %.%%
. /.&)
d. &.%%
e. !o!e of the a#ove
(1. I! a o!e2*eriod #i!omial model "ith Su F /'.&8 Sd F /%.&8 * F .$8 r F .%)8 S F /& a!d = F &%8 "hat is a
Euro*ea! *ut "orth4
a. (.13
#. %.&%
. '.&%
d. &.%%
e. !o!e of the a#ove
((. 0hih of the follo"i!- stateme!ts a#out the #i!omial model is i!orret4
a. it o!ver-es to the :lak2Sholes model
#. it a! aommodate earl. e1erise
. it allo"s o!l. t"o stok *ries at e1*iratio!
d. it a! #e e1te!ded to a lar-e !um#er of time *eriods
e. !o!e of the a#ove
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Co*.ri-ht 7 (%%1 #. Harourt8 I!
(+. , stok *ried at &% a! -o u* or do"! #. 1% *ere!t over t"o *eriods. The risk2free rate is / *ere!t.
0hih of the follo"i!- is the orret *rie of a! ,meria! *ut "ith a! e1erise *rie of &&4
a. 3.$$
#. +.+$
. /.%%
d. &.%%
e. 1.)&G
(/. @etermi!e the value of u for a three *eriod #i!omial *ro#lem "he! the o*tio!Cs life is o!e2half a .ear a!d
the volatilit. is ./$. Use the model for u that does !ot re6uire the risk2free rate.
a. 1.((
#. 1./$
. 1./%
d. 1.+(
e. !o!e of the a#ove
(&. 0hih of the follo"i!- stateme!ts a#out the #i!omial o*tio! *rii!- model is !ot al"a.s true4
a. it a! a*ture the effet of earl. e1erise
#. it a! aommodate a lar-e !um#er of *ossi#le stok *ries at e1*iratio!
. it reflets the effets of the stok *rie8 e1erise *rie8 risk2free rate8 volatilit. a!d time to
e1*iratio!
d. it -ives the *rie at "hih the o*tio! "ill trade i! the market.
e. !o!e of the a#ove
CHAPTER 5: OPTION PRICING MODELS: THE BLACK-SCHOLES MODEL
The follo"i!- i!formatio! is -ive! a#out o*tio!s o! the stok of a ertai! om*a!..
S% F (+ = F (%
r F .%' T F .&
σ
(
F .1&
No divide!ds are e1*eted.
Use this i!formatio! to a!s"er 6uestio!s 1 throu-h $.
1. 0hat value does the :lak2Sholes model *redit for the all4
a. &.+&
#. 1.1%
. /.3+
d. ).&%
e. !o!e of the a#ove
(. Su**ose .ou feel that the all is over*ried. 0hat strate-. should .ou use to e1*loit the a**are!t
misvaluatio!4
a. #u. 3'1 shares8 sell 18%%% alls
#. #u. 3%& shares8 sell 18%%% alls
. sell short 3'1 shares8 #u. 18%%% alls
d. sell short 3%& shares8 #u. 18%%% alls
e. !o!e of the a#ove
+. The *rie of a *ut o! the stok is
a. %.$&
#. $.)/
. (.+&
d. /.$$
e. !o!e of the a#ove
/. To o!strut a riskless hed-e8 the !um#er of *uts *er 1%% shares *urhased is
a. .3&$%
#. .(/(%
. 2.(/$%
d. 2.))($
e. !o!e of the a#ove
&. The allEs ve-a is
a. 2+.%(
#. .%/)
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Co*.ri-ht 7 (%%1 #. Harourt8 I!
. 2.3'(
d. /.)3
e. !o!e of the a#ove
). If the atual all *rie is +.3'8 the im*lied sta!dard deviatio! is
a. .(&
#. -reater tha! .(&
. less tha! .(&
d. i!fi!ite
e. !o!e of the a#ove
3. If "e !o" assume that the stok *a.s a divide!d at a k!o"! o!sta!t rate of +.& *ere!t8 "hat stok *rie
should "e use i! the model4
a. ((.)%
#. 1'.)&
. (+
d. (1.''
e. !o!e of the a#ove
$. If "e !o" assume that the stok *a.s a si!-le divide!d of (.(& i! three mo!ths8 "hat stok *rie should
"e use i! the model4
a. 13.3&
#. (%.3&
. (%
d. (%.$%
e. !o!e of the a#ove
'. If the sim*le retur! o! a Treasur. #ill is $.& *ere!t8 the risk2free rate i! the :lak2Sholes model is
a. $.33 *ere!t
#. $.'+ *ere!t
. $.&& *ere!t
d. $.(% *ere!t
e. !o!e of the a#ove
1%. 0hih of the follo"i!- varia#les i! the :lak2Sholes o*tio! *rii!- model is the most diffiult to o#tai!4
a. the volatilit.
#. the risk2free rate
. the stok *rie
d. the time to e1*iratio!
e. the e1erise *rie
11. The #i!omial *rie "ill theoretiall. e6ual the :lak2Sholes *rie u!der "hih of the follo"i!-
o!ditio!s4
a. "he! the !um#er of time *eriods is lar-e
#. "he! the o*tio! is at2the2mo!e.
. "he! the o*tio! is i!2the2mo!e.
d. "he! the o*tio! is out2of2the2mo!e.
e. !o!e of the a#ove
1(. If the stok *rie is //8 the e1erise *rie is /%8 the *ut *rie is 1.&/8 a!d the :lak2Sholes *rie usi!- .($
as the volatilit. is 1.118 the im*lied volatilit. "ill #e
a. hi-her tha! .($
#. lo"er tha! .($
. .($
d. lo"er tha! the risk2free rate
e. !o!e of the a#ove
1+. 0hih of the follo"i!- stateme!ts a#out the :lak2Sholes model is !ot true4
a. dereasi!- the volatilit. lo"ers the all *rie
#. the e1*eted stok *rie *la.s a role i! the model
. the risk2free rate is o!ti!uousl. om*ou!ded
d. the model is o!siste!t "ith *ut2all *arit.
e. !o!e of the a#ove
1/. 0hih of the follo"i!- harateristis of the :lak2Sholes model is !ot orret4
a. it is a disrete time model
1-11
Co*.ri-ht 7 (%%1 #. Harourt8 I!
#. it is the limit of the #i!omial model
. it is a o!ti!uous time model
d. it -ives the *rie of a Euro*ea! o*tio!
e. !o!e of the a#ove
1&. 0hih of the follo"i!- assum*tio!s of the :lak2Sholes model is !ot orret4
a. the stok volatilit. is o!sta!t
#. the stok retur! follo"s a !ormal distri#utio!
. there are !o tra!satio! osts
d. there are !o ta1es
e. !o!e of the a#ove
1). 0hih of the follo"i!- stateme!ts a#out the delta is !ot true4
a. it ra!-es from 5ero to o!e
#. it o!ver-es to 5ero or o!e at e1*iratio!
. it is -ive! #. NHd1I i! the :lak2Sholes model
d. it ha!-es slo"l. !ear e1*iratio! if the o*tio! is at2the2mo!e.
e. !o!e of the a#ove
13. 0hih of the follo"i!- JKreeksL is !ot a measure of the o*tio!Cs se!sitivit. to a ha!-e i! o!e of its i!*ut
values4
a. delta
#. -amma
. rho
d. theta
e. si-ma
1$. 0hih of the follo"i!- stateme!ts is true a#out the relatio!shi* #et"ee! the o*tio! *rie a!d the risk2free
rate4
a. a all *rie is !earl. li!ear "ith res*et to the risk2free rate
#. a all *rie is hi-hl. se!sitive to the risk2free rate
. the risk2free rate affets a all #ut !ot a *ut
d. the risk2free rate does !ot affet a all *rie
e. !o!e of the a#ove
1'. The relatio!shi* #et"ee! the volatilit. a!d the time to e1*iratio! is alled the
a. volatilit. smile
#. volatilit. ske"
. term struture of volatilit.
d. theta
e. !o!e of the a#ove
(%. 0hat is the reaso! for e1euti!- a -amma hed-e4
a. the volatilit. a! ha!-e
#. the stok *rie a! make a lar-e move
. the stok *rie moves are too small for a delta hed-e to "ork
d. there is !o true risk2free rate
e. !o!e of the a#ove
(1. 0hih of the follo"i!- stateme!ts a#out the volatilit. is !ot true4
a. the im*lied volatilit. ofte! differs aross o*tio!s "ith differe!t e1erise *ries
#. the im*lied volatilit. e6uals the historial volatilit. if the o*tio! is orretl. *ried
. the im*lied volatilit. is determi!ed #. trial a!d error
d. the im*lied volatilit. is !earl. li!earl. related to the o*tio! *rie
e. !o!e of the a#ove
((. The relatio!shi* #et"ee! the o*tio! *rie a!d the e1erise *rie is alled
a. the -amma
#. the ve-a
. the ome-a
d. the 5eta
e. !o!e of the a#ove
(+. 0hat ha**e!s "he! the volatilit. is 5ero i! the :lak2Sholes model4
1-12
Co*.ri-ht 7 (%%1 #. Harourt8 I!
a. the o*tio! *rie o!ver-es to either 5ero or the lo"er #ou!d
#. the o*tio! *rie o!ver-es to the i!tri!si value
. the o*tio! automatiall. e1*ires out of the mo!e.
d. the -amma a!d delta o!ver-e
e. !o!e of the a#ove
(/. 0hih of the follo"i!- is !ot orret a#out a allCs -amma4
a. it is the same as a *utCs -amma
#. it is lar-e "he! the all is at2the2mo!e.
. it a! #e vie"ed as a measure of the risk of the delta
d. it is a soure of risk that a! #e hed-ed o!l. #. usi!- a!other o*tio!
e. !o!e of the a#ove
(&. 0hih of the follo"i!- stateme!ts is i!orret a#out the historial volatilit.4
a. if used i! the :lak2Sholes model8 it -ives the urre!t market *rie
#. it is #ased o! the volatilit. of the lo- retur! o! the stok
. it re6uires a sam*le of ree!t retur!s
d. it should #e o!verted to a! a!!uali5ed volatilit.
e. !o!e of the a#ove

CHAPTER 6: BASIC OPTION STRATEGIES
Co!sider a stok *ried at ;+% "ith a sta!dard deviatio! of .+. The risk2free rate is .%&. There are *ut a!d all
o*tio!s availa#le at e1erise *ries of +% a!d a time to e1*iratio! of si1 mo!ths. The alls are *ried at ;(.$' a!d the
*uts ost ;(.1&. There are !o divide!ds o! the stok a!d the o*tio!s are Euro*ea!. ,ssume that all tra!satio!s
o!sist of 1%% shares or o!e o!trat H1%% o*tio!sI. Use this i!formatio! to a!s"er 6uestio!s 1 throu-h 1%.
1. 0hat is .our *rofit if .ou #u. a all8 hold it to e1*iratio! a!d the stok *rie at e1*iratio! is ;+34
a. ;3%%
#. 2;($'
. ;(8311
d. ;/11
e. !o!e of the a#ove
(. 0hat is the #reakeve! stok *rie at e1*iratio! o! the tra!satio! desri#ed i! *ro#lem 14
a. ;+(.$'
#. ;+%.%%
. ;(3.11
d. ;+(.1&
e. there is !o #reakeve!
+. 0hat is the ma1imum *rofit o! the tra!satio! desri#ed i! *ro#lem 14
a. ;(8311
#. i!fi!it.
. 5ero
d. ;+8($'
e. ;+8%%%
/. 0hat is the ma1imum *rofit that the "riter of a all a! make4
a. ;(8311
#. ;($'
. ;+8%%%
d. ;+8($'
e. !o!e of the a#ove
&. Su**ose the #u.er of the all i! *ro#lem 1 sold the all t"o mo!ths #efore e1*iratio! "he! the stok *rie
"as ;++. Ho" muh *rofit "ould the #u.er make4
a. ;+(.$'
1-13
Co*.ri-ht 7 (%%1 #. Harourt8 I!
#. ;+%.11
. ;3$.%%
d. ;11.%%
f. !o!e of the a#ove
). Su**ose the i!vestor o!struted a overed all. ,t e1*iratio! the stok *rie is ;(3. 0hat is the i!vestorEs
*rofit4
a. ;&$'
#. ;($'
. ;(8'$'
d. ;(8311
e. !o!e of the a#ove
3. 0hat is the #reakeve! stok *rie at e1*iratio! for the tra!satio! desri#ed i! *ro#lem )4
a. ;(3.11
#. ;+%.%%
. ;+(.$'
d ;('.$'
e. !o!e of the a#ove
$. If the tra!satio! desri#ed i! *ro#lem ) is losed out "he! the o*tio! has three mo!ths to -o a!d the stok
*rie is at ;+)8 "hat is the i!vestorEs *rofit4
a. ;)%%
#. ;+11
. ;$$'
d. ;(('
e. !o!e of the a#ove
'. 0hat is the ma1imum *rofit from the tra!satio! desri#ed i! Questio! ) if the *ositio! is held to
e1*iratio!4
a. ;+8($'
#. ;($'
. i!fi!it.
d. ;(8311
e. !o!e of the a#ove
1%. 0hat is the mi!imum *rofit from the tra!satio! desri#ed i! Questio! ) if the *ositio! is held to
e1*iratio!4
a. 2;(8311
#. 2;+8($'
. 2;+8%%%
d. !e-ative i!fi!it.
e. !o!e of the a#ove
11. Co!sider t"o *ut o*tio!s differi!- o!l. #. e1erise *rie. The o!e "ith the hi-her e1erise *rie has
a. the lo"er #reakeve! a!d lo"er *rofit *ote!tial
#. the lo"er #reakeve! a!d -reater *rofit *ote!tial
. the hi-her #reakeve! a!d -reater *rofit *ote!tial
d. the hi-her #reakeve! a!d lo"er *rofit *ote!tial
e. the -reater *remium a!d lo"er *rofit *ote!tial
1(. 0hih of the follo"i!- stateme!ts is true a#out losi!- a lo!- all *ositio! *rior to e1*iratio! relative to
holdi!- it to e1*iratio!4
a. the *rofit is -reater at all stok *ries
#. the *rofit is -reater o!l. at lo" stok *ries
. the *rofit is -reater o!l. at hi-h stok *ries
d. the ra!-e of *ossi#le *rofits is -reater
e. !o!e of the a#ove are true
1+. 0hih of the follo"i!- tra!satio!s does !ot *rofit i! a stro!- #ull market.
1-14
Co*.ri-ht 7 (%%1 #. Harourt8 I!
a. a short *ut
#. a overed all
. a *rotetive *ut
d. a s.!theti all
e. !o!e of the a#ove
1/. 0hih of the follo"i!- is e6uivale!t to a s.!theti all4
a. a lo!- stok a!d a short *ut *ositio!
#. a lo!- *ut a!d a lo!- stok *ositio!
. a lo!- *ut a!d a short risk2free #o!d *ositio!
d. a lo!- stok a!d a short risk2free #o!d *ositio!
e. !o!e of the a#ove
1&. Earl. e1erise im*oses a risk to all #ut o!e of the follo"i!- tra!satio!s.
a. a short all
#. a short *ut
. a *rotetive *ut
d. a! u!overed all
e. !o!e of the a#ove
1). Eah of the follo"i!- is a #ullish strate-. except
a. a lo!- all
#. a short *ut
. a short stok
d. a *rotetive *ut
e. !o!e of the a#ove
13. 0hih of the follo"i!- strate-ies has the -reatest *ote!tial loss4
a. a! u!overed all
#. a lo!- *ut
. a overed all
d. a lo!- *ositio! i! the stok
e. it is im*ossi#le to tell
1$. 0hih of the follo"i!- strate-ies has esse!tiall. the same *rofit dia-ram as a overed all4
a. a lo!- *ut
#. a short *ut
. a *rotetive *ut
d. a lo!- all
e. !o!e of the a#ove
1'. 0hih of the follo"i!- stateme!ts is true a#out the *urhase of a *rotetive *ut at a hi-her e1erise *rie
relative to a lo"er e1erise *rie4
a. the #reakeve! is lo"er
#. the ma1imum loss is -reater
. the i!sura!e is less ostl.
d. the i!sura!e is more ostl.
e. !o!e of the a#ove
(%. 0hat is the disadva!ta-e of a strate-. of rolli!- over a overed all to avoid e1erise4
a. the all *remium is esse!tiall. thro"! a"a.
#. tra!satio! osts te!d to #e hi-h
. the stok "ill i!ur losses
d. the all is more e1*e!sive "he! rolled over
e. !o!e of the a#ove
(1. 0hih of the follo"i!- is the #reakeve! for a *rotetive *ut4
a. = M S% 2 P
#. P M S%
. = 2 ST
d. = > S% 2 P
1-15
Co*.ri-ht 7 (%%1 #. Harourt8 I!
e. !o!e of the a#ove
((. 0hih of the follo"i!- stateme!ts a#out a overed all "riti!- strate-. is true4
a. the losses are limited
#. retur! a!d risk are -reater tha! that of sim*l. holdi!- the stok
. it is a hea*er form of i!sura!e tha! a *rotetive *ut
d. it -e!erall. makes a lar-e !um#er of small *rofits
e. !o!e of the a#ove
(+. The differe!e i! *rofit from a! atual *ut a!d a s.!theti *ut is
a. =
#. ST 2 =
. = 2 ST
d. ST M =H1 M rI
2T
e. !o!e of the a#ove
(/. , overed all "riter "ho *refers eve! less risk should
a. -et rid of the all
#. s"ith to a all "ith a lo"er e1erise *rie
. -et rid of the stok
d. s"ith to a all "ith a hi-her e1erise *rie
e. !o!e of the a#ove
(&. 0hih of the follo"i!- i!vestors ma. #e o#li-ated to #u. stok4
a. overed all "riter
#. all #u.er
. *ut "riter
d. *rotetive *ut #u.er
e. !o!e of the a#ove
CHAPTER 7: ADVANCED OPTION STRATEGIES
The follo"i!- *ries are availa#le for all a!d *ut o*tio!s o! a stok *ried at ;&%. The risk2free rate is ) *ere!t
a!d the volatilit. is .+&. The Marh o*tio!s have '% da.s remai!i!- a!d the ?u!e o*tio!s have 1$% da.s
remai!i!-. The :lak2Sholes model "as used to o#tai! the *ries.
Calls Puts
Strike Marh ?u!e Marh ?u!e
/& ).$/ $./1 1.1$ (.%'
&% +.$( &.&$ +.%$ /.1+
&& 1.$' +.&/ ).%$ ).'+
Use this i!formatio! to a!s"er 6uestio!s 1 throu-h (%. ,ssume that eah tra!satio! o!sists of o!e o!trat H1%%
o*tio!sI u!less other"ise i!diated.
<or 6uestio!s 1 throu-h )8 o!sider a #ull mo!e. s*read usi!- the Marh /&9&% alls.
1. Ho" muh "ill the s*read ost4
a. ;'$)
1-16
Co*.ri-ht 7 (%%1 #. Harourt8 I!
#. ;+%(
. ;($+
d. ;1'+
e. !o!e of the a#ove
(. 0hat is the ma1imum *rofit o! the s*read4
a. ;&%%
#. ;$%(
. ;1'$
d. ;+%(
e. !o!e of the a#ove
+. 0hat is the ma1imum loss o! the s*read4
a. ;&%%
#. ;)'$
. ;1'$
d. ;$%(
e. !o!e of the a#ove
/. 0hat is the *rofit if the stok *rie at e1*iratio! is ;/34
a. 2;1%(
#. ;+'$
. 2;+%(
d. ;&%%
e. !o!e of the a#ove
&. 0hat is the #reakeve! *oi!t4
a. ;/$.%(
#. ;/1.'$
. ;&&.))
d. ;&%.%%
e. !o!e of the a#ove
). Su**ose .ou losed the s*read )% da.s later. 0hat "ill #e the *rofit if the stok *rie is still at ;&%4
a. ;/1
#. ;1'$
. ;+%(
d. ;1%(
e. !o!e of the a#ove
<or 6uestio!s 3 a!d $8 su**ose a! i!vestor e1*ets the stok *rie to remai! at a#out ;&% a!d deides to e1eute a
#utterfl. s*read usi!- the ?u!e alls.
3. 0hat "ill #e the ost of the #utterfl. s*read4
a. ;181'&
#. ;)+3
. ;3'
d. ;18%/&
e. !o!e of the a#ove
$. 0hat "ill #e the *rofit if the stok *rie at e1*iratio! is ;&(.&%4
a. ;131
#. ;18/(1
. ;1.%+3
d. ;/(1
e. !o!e of the a#ove
'. Su**ose .ou "ish to o!strut a ratio s*read usi!- the Marh a!d ?u!e &% alls. Aou "a!t to #u. 1%%
?u!e &% all o!trats. Ho" ma!. Marh &% alls "ould .ou sell4
a. 1%&
#. '&
. 1%%
d. &3
e. !o!e of the a#ove
1-17
Co*.ri-ht 7 (%%1 #. Harourt8 I!
,!s"er 6uestio!s 1% a!d 11 a#out a ale!dar s*read #ased o! the assum*tio! that stok *ries are e1*eted to
remai! fairl. o!sta!t. Use the ?u!e9Marh &% all s*read. ,ssume o!e o!trat of eah.
1%. 0hat "ill the s*read ost4
a. 2;13)
#. ;13)
. ;&&$
d. ;1%&
e. !o!e of the a#ove
11. 0hat "ill #e the *rofit if the s*read is held '% da.s a!d the stok *rie is ;/&4
a. ;+)
#. ;(%
. ;&&$
d. 2;(%
e. !o!e of the a#ove
,!s"er 6uestio!s 1( throu-h 13 a#out a lo!- straddle o!struted usi!- the ?u!e &% o*tio!s.
1(. 0hat "ill the straddle ost4
a. ;1/&
#. ;)'%
. ;'31
d. ;/1+
e. !o!e of the a#ove
1+. 0hat are the t"o #reakeve! stok *ries at e1*iratio!4
a. ;&&.&$ a!d ;/&.$3
#. ;&/.1+ a!d ;/&.$3
. ;&&.&$ a!d ;//./(
d. ;&'.31 a!d ;/%.('
e. !o!e of the a#ove
1/. 0hat is the *rofit if the stok *rie at e1*iratio! is at ;)/.3&4
a. 2;'31
#. ;18/3&
. 2;+8&(&
d. ;&%%
e. !o!e of the a#ove
1&. 0hat is the *rofit if the *ositio! is held for '% da.s a!d the stok *rie is ;&&4
a. 2;'31
#. 2;&$
. 2;1%'
d. 2;/31
e. !o!e of the a#ove
1). Su**ose the i!vestor adds a all to the lo!- straddle8 thus reati!- a stra*. 0hat "ill this do to the
#reakeve! stok *ries4
a. lo"er #oth the u*side a!d do"!side #reakeve!s
#. raise #oth the u*side a!d do"!side #reakeve!s
. raise the u*side a!d lo"er the do"!side #reakeve!s
d. lo"er the u*side a!d raise the do"!side #reakeve!s
e. !o!e of the a#ove
13. @etermi!e the *rofit at e1*iratio! o! a stri* if the stok *rie at e1*iratio! is ;+).
a. 2;1('
#. ;18/1)
. ;/('
d. ;18+$/
e. !o!e of the a#ove
,!s"er 6uestio!s 1$ throu-h (% a#out a lo!- #o1 s*read usi!- the ?u!e &% a!d && o*tio!s.
1$. 0hat is the ost of the #o1 s*read4
a. ;&%%
#. ;(8%1$
1-18
Co*.ri-ht 7 (%%1 #. Harourt8 I!
. ;3)
d. ;/$/
e. !o!e of the a#ove
1'. 0hat is the *rofit if the stok *rie at e1*iratio! is ;&(.&%4
a. ;1)
#. ;&%%
. 2;(+/
d. ;(&%
e. !o!e of the a#ove
(%. 0hat is the !et *rese!t value of the #o1 s*read4
a. ;'.$/
#. ;&.%%
. ;1).%%
d. ;1.$/
e. !o!e of the a#ove
(1. 0hih of the follo"i!- strate-ies does !ot *rofit i! a risi!- market4
a. *ut #ull s*read
#. lo!- straddle
. ollar
d. all #ull s*read
e. !o!e of the a#ove
((. 0hih of the follo"i!- tra!satio!s a! have a! u!limited loss4
a. lo!- straddle
#. ale!dar s*read
. #utterfl. s*read
d. reverse #o1 s*read
e. !o!e of the a#ove
(+. 0hih of the follo"i!- is the #est strate-. for a! e1*eted fall i! the market4
a. lo!- stri*
#. *ut #ull s*read
. ale!dar s*read
d. #utterfl. s*read
e. !o!e of the a#ove
(/. Earl. e1erise is a disadva!ta-e i! "hih of the follo"i!- tra!satio!s4
a. short #o1 s*read
#. *ut #ear s*read
. lo!- stri*
d. lo!- stra*
e. !o!e of the a#ove
(&. 0hih of the follo"i!- have similar *rofit -ra*hs4
a. all #ull s*read a!d lo!- #o1 s*read
#. *ut #ear s*read a!d short #o1 s*read
. #utterfl. s*read a!d ratio s*read
d. ale!dar s*read a!d all #ear s*read
e. !o!e of the a#ove
CHAPTER 8: THE STRUCTURE OF FORWARD AND FUTURES MARKETS
1. 0hih of the follo"i!- is !ot a futures e1ha!-e4
a. Mi!!ea*olis Krai! E1ha!-e
#. :osto! Commodit. E1ha!-e
. Coffee8 Su-ar a!d Cooa E1ha!-e
d. Na!sas Cit. :oard of Trade
e. Mid,meria Commodit. E1ha!-e
1-19
Co*.ri-ht 7 (%%1 #. Harourt8 I!
(. 0hih of the follo"i!- o!trat terms is !ot set #. the futures e1ha!-e4
a. the dates o! "hih deliver. a! our
#. the e1*iratio! mo!ths
. the delivera#le ommodities
d. the si5e of the o!trat
e. the *rie
+. 0hih of the follo"i!- or-a!i5atio!s has the ultimate re-ulator. authorit. i! the futures i!dustr.4
a. Natio!al <utures ,ssoiatio!
#. Commodit. <utures Tradi!- Commissio!
. Commodit. E1ha!-e ,uthorit.
d. Seurities a!d E1ha!-e Commissio!
e. !o!e of the a#ove
/. Mar-i! i! a futures tra!satio! differs from mar-i! i! a stok tra!satio! #eause
a. stok tra!satio!s are muh smaller
#. deliver. ours immediatel. i! a stok tra!satio!
. !o mo!e. is #orro"ed i! a futures tra!satio!
d. futures are muh more volatile
e. !o!e of the a#ove
&. If the i!itial mar-i! is ;&8%%%8 the mai!te!a!e mar-i! is ;+8&%% a!d .our #ala!e is ;/8%%%8 ho" muh
must .ou de*osit4
a. ;)8%%%
#. ;18&%%
. ;'8%%%
d. !othi!-
e. !o!e of the a#ove
). If the i!itial mar-i! is ;&8%%%8 the mai!te!a!e mar-i! is ;+8&%% a!d .our #ala!e is ;+81%%8 ho" muh
must .ou de*osit4
a. ;18&%%
#. ;/%%
. ;18'%%
d. %
e. !o!e of the a#ove
3. The !um#er of futures o!trats outsta!di!- is alled the
a. re*orta#le *ositio!
#. mi!imum volume
. o*e! i!terest
d. s*read *ositio!
e. !o!e of the a#ove
$. Most futures o!trats are losed #.
a. deliver.
#. offset
. e1erise
d. default
e. !o!e of the a#ove
'. Most for"ard o!trats are losed #.
a. deliver.
#. offset
. e1erise
d. default
e. !o!e of the a#ove
1%. 0hih of the follo"i!- is !ot a for"ard o!trat4
a. a lo!-2term em*lo.me!t o!trat at a fi1ed salar.
#. a! automo#ile lease !o!2a!ela#le for three .ears
. a rai! hek
d. a si-!ed o!trat to #u. a house i! si1 mo!ths
e. !o!e of the a#ove
1-20
Co*.ri-ht 7 (%%1 #. Harourt8 I!
11. 0here did the U.S. futures market ori-i!ate4
a. Chia-o
#. Na!sas
. Ne" Aork
d. Mi!!ea*olis
e. !o!e of the a#ove
1(. 0hih of the follo"i!- is a trader o! the floor of the futures e1ha!-e4
a. i!trodui!- #roker
#. ommissio! #roker
. ommodit. tradi!- advisor
d. ommodit. *ool o*erator
e. !o!e of the a#ove
1+. Oariatio! mar-i! is "hih of the follo"i!-4
a. the differe!e i! mar-i! #et"ee! hed-er a!d s*eulator
#. mar-i! differe!es aordi!- to tradi!- st.le
. mar-i! de*osited as a result of marki!-2to2market
d. mar-i! set #. the varia#ilit. of a futures *rie
e. !o!e of the a#ove
1/. 0hih of the follo"i!- is the most ativel. traded U.S. futures o!trat4
a. SBP &%% I!de1
#. rude oil
. Treasur. #o!ds
d. 0heat
f. !o!e of the a#ove
1&. 0hih of the follo"i!- duties is !ot *erformed #. the leari!-house4
a. holdi!- mar-i! de*osits
#. -uara!teei!- *erforma!e of #u.er a!d "riter
. mai!tai!i!- reords of tra!satio!s
d. le!di!- mo!e. to meet mar-i! re6uireme!ts
e. !o!e of the a#ove
1). 0hat are iruit #reakers4
a. rules that sto* tradi!- "he! futures are a#out to e1*ire
#. a s.stem that shuts do"! the e1ha!-e om*uter duri!- *eriods of a#!ormal volume
. limits o! the !um#er of o!trats that a! #e traded o! hi-h volume da.s
d. rules that limit the !um#er of o!trats a s*eulator a! hold
e. !o!e of the a#ove
13. ,! after2hours om*uteri5ed tradi!- s.stem at the CME is alled
a. COME=
#. KLO:E=(
. LI<<E
d. C<TC
e. !o!e of the a#ove
1$. 0hih of the follo"i!- is !ot a method of termi!ati!- a futures o!trat4
a. offset
#. deliver.
. e1ha!-e for *h.sials
d. sal*i!-
e. !o!e of the a#ove
1'. Tradi!- as #oth a #roker a!d a dealer is alled
a. dual tradi!-
#. s*readi!-
. sal*i!-
1-21
Co*.ri-ht 7 (%%1 #. Harourt8 I!
d. ar#itra-i!-
e. !o!e of the a#ove
(%. The tradi!- *roedure o! the floor of the futures e1ha!-e is referred to as
a. a-ai!st atuals
#. o*e! i!terest
. o*e! outr.
d. i!de1 *artii*atio!
e. !o!e of the a#ove
(1. , futures o!trat overs &%%% *ou!ds "ith a mi!imum *rie ha!-e of ;%.%1 is sold for ;+1.)% *er
*ou!d. If the i!itial mar-i! is ;(8&(& a!d the mai!te!a!e mar-i! is ;18%%%8 at "hat *rie "ould there #e
a mar-i! all4
a. +1.'1
#. +(.11
. +1.('
d. +1.%'
e. +1.$%
((. O!e of the adva!ta-es of for"ard markets is
a. *erforma!e is -uara!teed #. the K2+%
#. tradi!- is o!duted i! the eve!i!- over om*uters
. the o!trats are *rivate a!d ustomi5ed
d. tradi!- is less ostl. a!d -over!ed #. more rules
-. !o!e of the a#ove
(+. 0hih is the most ative -rou* of futures4
a. e!er-.
#. a-riulture
. urre!.
d. fi!a!ials
e. !o!e of the a#ove
(/. 0hih e1ha!-e is the lar-est futures e1ha!-e i! the "orld4
a. Chia-o :oard of Trade
#. EUPE=
. Chia-o Mera!tile E1ha!-e
d. Tok.o Commodit. E1ha!-e
e. !o!e of the a#ove
(&. 0hih of the follo"i!- is !ot a t.*e of futures trader4
a. sal*ers
#. ar#itra-eurs
. *rofit2takers
d. hed-ers
e. da. traders
CHAPTER : PRINCIPLES OF FORWARD AND FUTURES PRICING
1. , market "ith o!ta!-o a!d #ak"ardatio! is said to #e
a. at less tha! full arr.
#. i!effiie!t
. offeri!- a risk *remium
d. #iased
e. !o!e of the a#ove
(. 0hih of the follo"i!- #est desri#es !ormal o!ta!-o4
a. the s*ot *rie is less tha! the futures *rie
#. the futures *rie is less tha! the s*ot *rie
. the e1*eted s*ot *rie is less tha! the futures *rie
d. the ost of arr. is !e-ative
1-22
Co*.ri-ht 7 (%%1 #. Harourt8 I!
e. !o!e of the a#ove
+. 0hih of the follo"i!- a! e1*lai! a o!ta!-o4
a. the i!terest rate e1eeds the divide!d .ield
#. the ost of arr. is !e-ative
. futures *ries e1eed for"ard *ries
d. the market is at less tha! full arr.
e. !o!e of the a#ove
/. U!der "hih of the follo"i!- situatio!s "ill futures *ries !ot e6ual for"ard *ries
a. "he! futures *ries a!d i!terest rates are u!orrelated
#. "he! i!terest rates do !ot ha!-e
. o!e da. *rior to e1*iratio!
d. at e1*iratio!
e. !o!e of the a#ove
&. Su**ose .ou #u. a o!e2.ear for"ard o!trat at ;)&. ,t e1*iratio!8 the s*ot *rie is ;3+. The risk2free
rate is 1% *ere!t. 0hat is the value of the o!trat at e1*iratio!4
a. ;$.%%
#. 2;$.%%
. ;%.%%
d. ;3.(3
e. !o!e of the a#ove
). Su**ose .ou sell a three2mo!th for"ard o!trat at ;+&. O!e mo!th later8 !e" for"ard o!trats are
selli!- for ;+%. The risk2free rate is 1% *ere!t. 0hat is the value of .our o!trat4
a. ;/.')
#. ;&.%%
. ;/.'(
d. ;/.&&
e. !o!e of the a#ove
3. Su**ose .ou #u. a futures o!trat at ;1&%. If the futures *rie ha!-es to ;1/38 "hat is its value a!
i!sta!t #efore it is marked2to2market4
a. %
#. ;+
. 2;+
d. it is im*ossi#le to tell
e. !o!e of the a#ove
$. 0hih o!e of the follo"i!- o!ditio!s is suffiie!t for futures *ries to e1eed for"ard *ries4
a. it is o!e da. *rior to e1*iratio!
#. for"ard rates e6ual future s*ot rates
. i!terest rates are o!sta!t
d. futures *ries are *ositivel. orrelated "ith i!terest rates
e. !o!e of the a#ove
'. If futures *ries are #elo" s*ot *ries8 "e sa. that
a. s*ot *ries are e1*eted to fall
#. there is #ak"ardatio!
. there is a risk *remium *aid #. lo!- hed-ers
d. the market is at full arr.
e. !o!e of the a#ove
1%. , market i! "hih the futures *rie e1eeds the s*ot *rie is
a. a o!ta!-o
#. a #ak"ardatio!
. a! ar#itra-e o**ortu!it.
d. risk2free
e. !o!e of the a#ove
1-23
Co*.ri-ht 7 (%%1 #. Harourt8 I!
11. <utures *ries differ from s*ot *ries #. "hih o!e of the follo"i!- fators4
a. the s.stemati risk
#. the ost of arr.
. the s*read
d. the risk *remium
e. !o!e of the a#ove
1(. , o!ve!ie!e .ield is
a. a retur! ear!ed for deliveri!- a -ood o! time
#. the ost of arr. mi!us the risk2free rate
. a retur! ear!ed for holdi!- a -ood i! short su**l.
d. the .ield o! a! asset that is eas. to a6uire
e. !o!e of the a#ove
1+. , o!ta!-o market is o!siste!t "ith
a. a !e-ative #asis
#. futures *ries e1eedi!- s*ot *ries
. a *ositive ost of arr.
d. all of the a#ove
e. !o!e of the a#ove
1/. 0hih of the follo"i!- situatio!s "ould #e most o!siste!t "ith !o risk *remium4
a. there is !o hed-i!-
#. there is a !e-ative ost of arr.
. futures are mis*ried
d. all of the a#ove
e. !o!e of the a#ove
1&. Su**ose there is a risk *remium of ;%.&%. The s*ot *rie is ;(% a!d the futures *rie is ;((. 0hat is the
e1*eted s*ot *rie at e1*iratio!4
a. ;(1.&%
#. ;((.&%
. ;(%.&%
d. ;(/.&%
e. !o!e of the a#ove
1). If hed-ers are *redomi!a!tl. short the ommodit.8 "hat a! "e sa. a#out the risk *remium4
a. it "ould #e *ositive
#. it "ould e1eed the ost of arr.
. it "ould #e !e-ative
d. it "ould #e 5ero
e. !o!e of the a#ove
13. 0hat "ould #e the s*ot *rie if a stok i!de1 futures *rie "ere ;3&8 the risk2free rate "ere 1% *ere!t8
the divide!d .ield + *ere!t8 a!d the futures e1*ires i! three mo!ths4
a. ;3+.3%
#. ;33./$
. ;3(.)%
d. ;3).+(
e. !o!e of the a#ove
1$. If i!terest rates "ere o!sta!t a!d .ou #ou-ht o!e t"o2da. for"ard o!trat8 ho" ma!. futures o!trats
should .ou sell to e1eute a risk2free hed-e4 r is the o!e2da. i!terest rate.
a. %
#. 1 M r
. 1
d. 19H1 M rI
e. !o!e of the a#ove
1-24
Co*.ri-ht 7 (%%1 #. Harourt8 I!
1'. Su**ose it is urre!tl. ?ul.. The Se*tem#er futures *rie is ;)% a!d the @eem#er futures *rie is ;)$.
0hat does the s*read of ;$ re*rese!t4
a. the ost of arr. from ?ul. to Se*tem#er
#. the e1*eted risk *remium from ?ul. to Se*tem#er
. the ost of arr. from Se*tem#er to @eem#er
d. the e1*eted risk *remium from Se*tem#er to @eem#er
e. !o!e of the a#ove
(%. 0h. is the i!itial value of a futures o!trat 5ero4
a. the futures is immediatel. marked2to2market
#. .ou do !ot *a. a!.thi!- for it
. the #asis "ill o!ver-e to 5ero
d. the e1*eted *rofit is 5ero
e. !o!e of the a#ove
(1. The s*ot *rie *lus the ost of arr. e6uals
a. the o!ve!ie!e .ield
#. the e1*eted future s*ot *rie
. the risk *remium
d. the futures *rie
e. !o!e of the a#ove
((. Pisk *remiums are likel. to e1ist i! "hat ki!d of market4
a. o!e "ith !o hed-ers
#. o!e "ith o!l. s*eulators
. o!e "ith ma!. hed-ers
d. o!e "ith o!ta!-o
e. !o!e of the a#ove
(+. If the three>.ear s*ot rate is 1/ *ere!t a!d the o!e>.ear s*ot rate is 1( *ere!t8 "hat is the for"ard rate
for t"o>.ear loa!s i! o!e .ear4
a. +(.($ *ere!t
#. 1&.%1 *ere!t
. (.(' *ere!t
d. 1+ *ere!t
e. !o!e of the a#ove
(/. If the 1$%>da. s*ot of '.&Q a!d a '%>da. futures e1*iri!- i! 1$% da.s im*lies a .ield of 1%.$Q8 "hat is
the estimated rate o! a (3%>da. s*ot tra!satio!4
a. &.+( *ere!t
#. '.'+ *ere!t
. 1%.% *ere!t
d. 3.() *ere!t
e. !o!e of the a#ove
(&. The ost of arr. o!sists of all the follo"i!- e1e*t
a. the risk>free rate
#. the ost of stora-e
. i!sura!e o! the asset
d. the risk *remium
e. !o!e of the a#ove
CHAPTER 1!: FUTURES HEDGING STRATEGIES
1. , short hed-e is o!e i! "hih
a. the mar-i! re6uireme!t is "aived
#. the hed-er is short futures
. the hed-er is short i! the s*ot market
d. the futures *rie is lo"er tha! the s*ot *rie
e. !o!e of the a#ove
(. ,! a!tii*ator. hed-e is o!e i! "hih
a. the #asis is e1*eted to fall
#. the hed-er e1*ets to make a *rofit o! the futures
1-25
Co*.ri-ht 7 (%%1 #. Harourt8 I!
. the s*ot *ositio! "ill #e take! i! the future
d. all of the a#ove
e. !o!e of the a#ove
+. , stre!-the!i!- of the #asis mea!s
a. the s*ot *rie rises more tha! the futures *rie
#. the futures *rie falls more tha! the s*ot *rie
. a short hed-er #e!efits
d. all of the a#ove
e. !o!e of the a#ove
/. , hed-e i! "hih the asset u!derl.i!- the futures is !ot the asset #ei!- hed-ed is
a. a ross hed-e
#. a! o*timal hed-e
. a #asis hed-e
d. a mi!imum varia!e hed-e
e. !o!e of the a#ove
&. 0he! the futures e1*ires #efore the hed-e is termi!ated a!d the hed-er moves i!to the !e1t futures
e1*iratio!8 it is alled
a. s*readi!- the hed-e
#. rolli!- the hed-e for"ard
. o*timall. "ei-hti!- the hed-e
d. all of the a#ove
e. !o!e of the a#ove
). The duratio! of the futures o!trat used i! the *rie se!sitivit. hed-e ratio is
a. the duratio! of the s*ot #o!d #ei!- hed-ed usi!- the futures *rie i!stead of the s*ot *rie
#. the duratio! of the delivera#le #o!d usi!- the s*ot *rie
. the duratio! of the delivera#le #o!d usi!- the futures *rie
d. the duratio! of the overall #o!d *ortfolio
f. !o!e of the a#ove
3. 0hih teh!i6ue a! #e used to om*ute the mi!imum varia!e hed-e ratio4
a. duratio! a!al.sis
#. *rese!t value
. re-ressio!
d. all of the a#ove
e. !o!e of the a#ove
$. 0hih of the follo"i!- measures is used i! the *rie se!sitivit. hed-e ratio for #o!d futures4
a. #eta
#. duratio!
. orrelatio!
d. varia!e
e. !o!e of the a#ove
'. Su**ose .ou #u. a! asset at ;&% a!d sell a futures o!trat at ;&+. 0hat is .our *rofit at e1*iratio! if the
asset *rie -oes to ;/'4 HI-!ore arr.i!- ostsI
a. 2;1
#. 2;/
. ;+
d. ;/
e. !o!e of the a#ove
1%. Su**ose .ou #u. a! asset at ;3% a!d sell a futures o!trat at ;3(. 0hat is .our *rofit if8 *rior to
e1*iratio!8 .ou sell the asset at ;3& a!d the futures *rie is ;3$4
a. 2;1
#. ;(
. ;1
1-26
Co*.ri-ht 7 (%%1 #. Harourt8 I!
d. 2;)
e. !o!e of the a#ove
11. 0hih of the follo"i!- is !ot a reaso! for firms to hed-e4
a. <irms a! hed-e less e1*e!sivel. tha! a! their shareholders
#. Shareholders a!!ot tolerate mark2to2market losses
. Hed-i!- #. or*oratio!s a! have ta1 adva!ta-es
d. Shareholders are !ot al"a.s a"are of their firmsE risks
e. !o!e of the a#ove
1(. @etermi!e the effetive a!!ual #orro"i!- ost of ;18%%%8%%% '%2da. ommerial *a*er if the *a*er -oes
out at a disou!t of 1% *ere!t a!d the hed-e *rodues a loss of ;+8&%%.
a. 1% *ere!t
#. (.(% *ere!t
. '.(1 *ere!t
d. 1(.// *ere!t
e. !o!e of the a#ove
1-27
Co*.ri-ht 7 (%%1 #. Harourt8 I!
1+. @etermi!e the o*timal hed-e ratio for Treasur. #o!ds "orth ;18%%%8%%% "ith a duratio! of 1(./&8 .ieldi!-
11.' *ere!t if the futures has a *rie of ;'%8%%%8 a duratio! of $.& .ears a!d a! im*lied .ield of '.&
*ere!t.
a. 1&.'+
#. 1).)+
. 3./(
d. 11.11
e. !o!e of the a#ove
1/. 0hat is the *rofit o! a hed-e if #o!ds are *urhased at ;1&%8%%%8 t"o futures o!trats are sold at ;3(8&%%
eah8 the! the #o!ds are sold at ;1/38&%% a!d the futures are re*urhased at ;3/8%%% eah4
a. 2;(8&%%
#. 2;&8&%%
. 2;&%%
d. 2;+8%%%
e. !o!e of the a#ove
1&. <i!d the o*timal stok i!de1 futures hed-e ratio if the *ortfolio is "orth ;(8/%%8%%%8 the #eta is 1.1& a!d
the SBP &%% futures *rie is /&%.3% "ith a multi*lier of &%%.
a. 1%.)&
#. 1(.(&
. )1(+.$%
d. &+(&.%& e. !o!e of the a#ove
1). I! "hih of the follo"i!- situatio!s "ould .ou use a short hed-e4
a. the *la!!ed *urhase of a stok
#. the *la!!ed *urhase of ommerial *a*er
. the *la!!ed issua!e of #o!ds
d. the *la!!ed re*urhase of stok to over a short *ositio!
e. !o!e of the a#ove
13. O! the #asis of li6uidit.8 the #est futures o!trat for hed-i!- short2term i!terest rates is
a. Treasur. #ills
#. the *rime rate
. ommerial *a*er
d. Eurodollars
e. !o!e of the a#ove
1$. If a firm is *la!!i!- to #orro" mo!e. i! the s*ot market8 the rate it is tr.i!- to lok i! is
a. the urre!t for"ard rate
#. the urre!t s*ot rate
. the differe!e #et"ee! the s*ot rate a!d the for"ard rate
d. the for"ard rate at the termi!atio! of the hed-e
e. !o!e of the a#ove
1'. 0hat reaso! mi-ht #e -ive! for !ot "a!ti!- to hed-e the future issua!e of a lia#ilit. if i!terest rates are
u!usuall. hi-h4
a. the mar-i! ost "ill #e e1*e!sive
#. .ou are loki!- i! a hi-h rate
. tra!satio! osts are hi-her
d. futures *ries are lo"er
e. !o!e of the a#ove
(%. Thou-h a ross hed-e has some"hat hi-her risk tha! a! ordi!ar. hed-e8 it "ill redue risk if "hih of the
follo"i!- ours4
a. futures *ries are more volatile tha! s*ot *ries
#. the s*ot a!d futures o!trats are orretl. *ried at the o!set
. s*ot a!d futures *ries are *ositivel. orrelated
d. futures *ries are less volatile tha! s*ot *ries
e. !o!e of the a#ove
1-28
Co*.ri-ht 7 (%%1 #. Harourt8 I!
(1. 0hih of the follo"i!- orretl. e1*resses the *rofit o! a hed-e4
a. the #asis "he! the hed-e is losed
#. the ha!-e i! the #asis
. the s*ot *rofit mi!us the futures *rofit
d. the futures *rofit mi!us the s*ot *rofit
e. !o!e of the a#ove
((. 0hat ha**e!s to the #asis throu-h the o!tratEs life4
a. it i!itiall. dereases8 the! i!reases
#. it i!itiall. i!reases8 the! dereases
. it remai!s relativel. stead.
d. it moves to"ard 5ero
e. !o!e of the a#ove
(+. Pedui!- the hed-e ratio to reflet the effets of the dail. settleme!t is alled
a. mi!imum varia!e hed-i!-
#. ross hed-i!-
. s*read hed-i!-
d. taili!- the hed-e
e. !o!e of the a#ove
(/. Qua!tit. risk is
a. !ot k!o"i!- ho" ma!. futures o!trats to use
#. the u!ertai!t. a#out the si5e of the s*ot *ositio!
. the u!ertai!t. i! estimati!- the hed-e ratio
d. the diffiult. i! 6ua!tif.i!- hed-i!- risk
e. !o!e of the a#ove
(&. The relatio!shi* #et"ee! the s*ot .ield a!d the .ield im*lied #. the futures *rie is alled
a. the .ield #eta
#. the *rie se!sitivit.
. the tail
d. the hed-e ratio
e !o!e of the a#ove
CHAPTER 11: ADVANCED FUTURES STRATEGIES
1. The tra!satio! desi-!ed to e1*loit mis*rii!- i! the relatio!shi* #et"ee! futures a!d s*ot *ries is alled
a. a re*urhase a-reeme!t
#. a hed-e
. s*eulatio!
d. ash a!d arr.
e. !o!e of the a#ove
(. The im*lied re*o rate is similar to the
a. i!ter!al rate of retur!
#. ost of hed-i!-
. .ield o! the futures o!trat
d. all of the a#ove
e. !o!e of the a#ove
+. <i!d the a!!uali5ed im*lied re*o rate if .ou #u. a '12da. T2#ill at '$ a!d sell a futures o!trat o! it at
''.&. HNoteR these *ries alread. reflet the disou!t o! a +)%2da. #asis.I
a. ).%' *ere!t
#. 1.&+ *ere!t
. ).($ *ere!t
d. (.%+ *ere!t
e. +.%) *ere!t
/. 0hih o!e of the follo"i!- o*tio!s is !ot assoiated "ith the Treasur. #o!d futures o!trat4
a. e!d2of2the2mo!th
1-29
Co*.ri-ht 7 (%%1 #. Harourt8 I!
#. s*read o*tio!
. "ild ard o*tio!
d. 6ualit. o*tio!
e. !o!e of the a#ove
&. The tra!satio! i! "hih a Treasur. #o!d futures s*read is om#i!ed "ith a Treasur. #ill futures
tra!satio! is alled a
a. :o!d2#ill s*read
#. MO: s*read
. desi-!ated order tur!arou!d
d. turtle trade
e. !o!e of the a#ove
). The o**ortu!it. to lok i! the i!voie *rie a!d *urhase the delivera#le Treasur. #o!d later is alled
a. #o!d i!sura!e
#. *ro-ram tradi!-
. the "ild ard
d. deliver. ar#itra-e
e !o!e of the a#ove
3. If the futures *rie at +R%% *.m. is 1((8 the s*ot *rie is 1/(.& a!d the C< is 1.1&3&8 #. ho" muh must
the s*ot *rie fall #. &R%% *.m. to Dustif. deliver.4
a. 1.($&
#. 1.11%(
. (%.&%
d. 13.31
e. /(.'/
$. Ho" is the ost of a deliver. o*tio! *aid4
a. the lo!- *a.s the short "ith a ash settleme!t
#. the short *a.s the lo!- "ith a ash settleme!t
. a hi-her losi!- futures *rie
d. a lo"er losi!- futures *rie
e. !o!e of the a#ove
'. <i!d the a!!uali5ed im*lied re*o rate o! a T2#o!d ar#itra-e if the s*ot *rie is 11(.(&8 the arued i!terest
is 1.+&8 the futures *rie is 11/.3&8 the C< is 1.%1(&8 the arued i!terest at deliver. is %.'&8 a!d the
holdi!- *eriod is three mo!ths.
a. 1.$& *ere!t
#. %.33 *ere!t
. 1/.33 *ere!t
d. 1+.%/ *ere!t
e. (.(+ *ere!t
1%. <i!d the *rofit if the i!vestor #u.s a ?ul. futures at 3&8 sells a! Oto#er futures at 3$ a!d the! reverses the
?ul. futures at 3( a!d the Oto#er futures at 33.
a. 2+
#. 2(
. (
d. 1
e. !o!e of the a#ove
11. @etermi!e the a!!uali5ed im*lied re*o rate o! a Treasur. #o!d s*read i! "hih the Marh is #ou-ht at
'$.3 a!d the ?u!e is sold at ''.&. The Marh C< is 1.((& a!d the ?u!e C< is 1.(/. The arued i!terest as
of Marh 1 is %.3& a!d the arued i!terest as of ?u!e 1 is 1.((.
a. &.(1 *ere!t
#. 1%.%+ *ere!t
. 1.($ *ere!t
d. (./( *ere!t
e. %.$1 *ere!t
1(. @etermi!e the amou!t #. "hih a stok i!de1 futures is mis*ried if the stok i!de1 is at (%%8 the futures
is at (%(.&8 the risk2free rate is )./& *ere!t8 the divide!d .ield is (.3& *ere!t8 a!d the o!trat e1*ires i!
three mo!ths.
a. u!der*ried #. %.)/
1-30
Co*.ri-ht 7 (%%1 #. Harourt8 I!
#. over*ried #. (.&
. over*ried #. '.3)
d. over*ried #. %.)/
e. u!der*ried #. (.&
1+. 0hih of the follo"i!- is !ot a risk of *ro-ram tradi!-4
a. the stoks a!!ot #e simulta!eousl. sold at e1*iratio!
#. fratio!al o!trats a!!ot #e *urhased or sold
. the divide!ds are !ot ertai!
d. the stoks a!!ot #e *urhased simulta!eousl.
e. !o!e of the a#ove
1/. Aou hold a stok *ortfolio "orth ;+% millio! "ith a #eta of 1.%&. Aou "ould like to lo"er the #eta to .'%
usi!- SBP &%% futures8 "hih have a *rie of /)%.(% a!d a multi*lier of &%%. 0hat tra!satio! should
.ou do4 Pou!d off to the !earest "hole o!trat.
a. sell 1+% o!trats
#. sell '833$ o!trats
. sell (% o!trats
d. #u. &%8%%% o!trats
e. sell &%8%%% o!trats
1&. If the stok i!de1 is at 1/$8 the three2mo!th futures *rie is 1&18 the divide!d .ield is & *ere!t a!d the
i!terest rate is $ *ere!t8 determi!e the *rofit from a! i!de1 ar#itra-e if the stok e!ds u* at 1// at
e1*iratio!. HI-!ore tra!satio! osts.I
a. 1.$'
#. /.%%
. 3.%%
d. &.11
e. 23.%%
1). The tra!satio! i! "hih mo!e. is #orro"ed #. selli!- a seurit. a!d *romisi!- to #u. it #ak i! several
"eeks is alled a
a. term re*o
#. over!i-ht re*o
. term ar#itra-e
d. MO: s*read
e. !o!e of the a#ove
13. The e!d2of2the2mo!th o*tio! is
a. the ri-ht to e1erise a! o*tio! o! the last da. of the mo!th
#. a! o*tio! e1*iri!- o! the last da. of the mo!th
. the ri-ht to deliver duri!- the last seve! #usi!ess da.s of the mo!th
d. a! o*tio! that trades o!l. at the e!d of the mo!th
e. !o!e of the a#ove
1$. Aou hold a #o!d *ortfolio "orth ;1% millio! "ith a .ield of 1%.(& *ere!t a!d a duratio! of $.&. 0hat
futures tra!satio! "ould .ou do to raise the duratio! to 1% if the futures *rie is ;'+8%%%8 its duratio! is
'.(& a!d its im*lied .ield is 1%.%& *ere!t4 Pou!d u* to the !earest "hole o!trat.
a. #u. 1%' o!trats
#. #u. 1$ o!trats
. #u. ))' o!trats
d. sell 1%% o!trats
e sell ))' o!trats
1'. <i!d the orret s*ot *rie if a '12da. T2#ill futures sells at '$.(8 the im*lied re*o rate is ).) *ere!t
Ha!!uali5ed to a +)&2da. .earI a!d the T2#ill has 1+& da.s to -o.
a. '3./&
#. ').)&
. '&.'1
d. '(.1(
1-31
Co*.ri-ht 7 (%%1 #. Harourt8 I!
e. ''.&&
(%. If .ou #u. #oth a +%2da. Eurodollar C@ *a.i!- ).3 *ere!t a!d a '%2da. futures o! a '%2da. Eurodollar
C@ "ith a *rie im*l.i!- a .ield of 3.( *ere!t8 "hat is .our total a!!uali5ed retur!4 H:oth .ields are
#ased o! +)%2da. .ears.I
a. 3.(& *ere!t
#. 3.%3 *ere!t
. 1%.1& *ere!t
d. 3.3& *ere!t
e. ).'& *ere!t
(1. , delivera#le Treasur. #o!d has arued i!terest of +./( *er ;1%%8 a ou*o! of '.& *ere!t8 a *rie of 1+&
a!d a o!versio! fator of 1.1'&. The futures *rie is 11(.(&. 0hat is the i!voie amou!t4
a. 1+3.&)
#. 1/+.)/
. 1)1.++
d. 1+/.1/
e. !o!e of the a#ove
((. @etermi!e the o!versio! fator for deliver. of the 3 19/Cs off Ma. 1&8 (%1) o! the Marh (%%% T>#o!d
futures o!trat.
a. 1.((&
#. %.'+(
. 1.%$+
d. 1.1(3
e. 1.&%'
(+. 0hih of the follo"i!- is !ot !eeded "he! alulati!- the im*lied re*o rate for stok i!de1 futures4
a. futures *rie
#. o!versio! fator
. time>to>e1*iratio!
d. s*ot *rie
e. !o!e of the a#ove
(/. The urre!t *rie of a stok i!de1 is 11&8 a!d the three>mo!th futures *rie is 113. The Euro*ea! all o!
the i!de18 e1*iri!- i! three mo!ths8 has a strike *rie of 1(% a!d a value of +.+%. If the risk>free rate is
&Q8 "hat is the value of the three>mo!th 1(% Euro*ea! *ut4
a. (.')
#. /.'/
. ).()
d. $.(/
e. !o!e of the a#ove
(&. 0hih of the follo"i!- is a form of *ro-ram tradi!-4
a. i!de1 ar#itra-e
#. "ild ard ar#itra-e
. tria!-ular ar#itra-e
d. timi!- ar#itra-e
e. !o!e of the a#ove
CHAPTER 12: OPTIONS ON FUTURES
1. O*tio!s o! futures have #ee! tradi!- si!e
a. 1'3+
#. 1'$(
. 1'))
d. 1'+)
e. !o!e of the a#ove
1-32
Co*.ri-ht 7 (%%1 #. Harourt8 I!
(. 0hat is the lo"er #ou!d of a Euro*ea! all o! a futures "here f% is the futures *rie a!d = is the e1erise
*rie4
a. the differe!e #et"ee! f% a!d =
#. 5ero
. the *rese!t value of the differe!e #et"ee! f% a!d =
d. the ratio of f% to =
e. !o!e of the a#ove
+. 0hih of the follo"i!- o*tio!s o! futures "ill !ot #e e1erised earl.4
a. a Euro*ea! *ut o! a futures
#. a! ,meria! all o! a futures
. a! ,meria! *ut o! a futures
d. all of the a#ove
e. !o!e of the a#ove
/. @etermi!e the a**ro*riate *rie of a Euro*ea! *ut o! a futures if the all is "orth ;).&&8 the risk2free rate is
&.) *ere!t8 the futures *rie is ;$%8 the e1erise *rie is ;3&8 a!d the e1*iratio! is i! three mo!ths.
a. ;1(.&)
#. ;%.&/
. ;11./$
d. ;1.)(
e. !o!e of the a#ove
&. <i!d the *rie of a Euro*ea! all o! a futures if the futures *rie is ;1%)8 the e1erise *rie is ;1%%8 the
o!ti!uousl. om*ou!ded risk2free rate is 3.( *ere!t8 the volatilit. is ./1 a!d the all e1*ires i! si1 mo!ths.
a. ;1/.&3
#. ;13.%/
. ;).%%
d. ;1'.3$
e. !o!e of the a#ove
). <i!d the *rofit o! a overed all o*tio! o! futures if the futures is *urhased at ;1&&8 the all is sold at ;).3&8
the e1erise *rie is ;1&%8 a!d the futures *rie at e1*iratio! is ;1&(. ,ssume a multi*lier of &%% for eah
futures a!d all.
a. ;18%%%
#. 2;(8&%%
. ;$3&
d. !ot e!ou-h i!formatio! to determi!e
e. !o!e of the a#ove
3. 0hih of the follo"i!- is not a! adva!ta-e of o*tio!s o! futures over futures4
a. the o*tio! is easier to *rie tha! the futures
#. the o*tio! trades side2#.2side "ith the futures
. the futures are more li6uid tha! the s*ot
d. there is less likelihood of a shorta-e at deliver.
e. !o!e of the a#ove
$. 0hat does a! i!vestor a6uire "he! e1erisi!- a *ut o*tio! o! a futures4
a. the e1erise *rie mi!us the *ut *rie
#. ash from the sale of the futures o!trat
. a short futures o!trat
d. all of the a#ove
e. !o!e of the a#ove
'. The :lak o*tio! o! futures *rii!- model is e6uivale!t to the :lak2Sholes model u!der "hih of the
follo"i!- o!ditio!s4
a. the o*tio! a!d futures e1*ire simulta!eousl.
#. the futures is *ried #. the ost of arr.
. the o*tio! o! futures is Euro*ea!
d. all of the a#ove
e. !o!e of the a#ove
1%. , dee* i!2the2mo!e. all o*tio! o! futures is e1erised earl. #eause
a. the i!tri!si value is ma1imi5ed
1-33
Co*.ri-ht 7 (%%1 #. Harourt8 I!
#. it #ehaves like a futures #ut ties u* fu!ds
. the futures *rie is !ot likel. to rise a!. further
d. all of the a#ove
e. !o!e of the a#ove
11. <i!d the value of a Euro*ea! *ut o*tio! o! futures if the futures *rie is 3(8 the e1erise *rie is 3%8 the
o!ti!uousl. om*ou!ded risk2free rate is $.& *ere!t8 the volatilit. is .+$ a!d the time to e1*iratio! is three
mo!ths.
a. ).+%
#. 1(.'%
. /.+/
d. (.%%
e. !o!e of the a#ove
1(. 0hat is the lo"er #ou!d of a Euro*ea! *ut o*tio! o! futures "here f% is the futures *rie a!d = is the
e1erise *rie4
a. f% 2 =
#. the *rese!t value of the differe!e #et"ee! = a!d f%
. = 2 f%
d. 5ero
e. !o!e of the a#ove
1+. If a Euro*ea! *ut o*tio! o! futures is over*ried relative to the all8 a risk2free strate-. "ould #e to
a. sell the *ut8 #u. the all8 sell the futures
#. sell the *ut8 #u. the all8 #u. the futures
. sell the *ut8 #u. the all8 #u. risk2free #o!ds
d. sell the *ut8 #u. the all8 #u. the s*ot asset
e. !o!e of the a#ove
1/. <i!d the *rofit o! a *ut o*tio! o! futures if the futures is ori-i!all. at '&8 the e1erise *rie is 1%%8 the *ut
*rie is 3.& a!d the futures is at '$ at e1*iratio!.
a. 23.&
#. 2/.&
. /.&
d. 2(.&
e. !o!e of the a#ove
1&. The lar-est volume of o*tio!s o! futures is o! the
a. Chia-o :oard of Trade
#. Chia-o :oard O*tio!s E1ha!-e
. Ne" Aork <utures E1ha!-e
d. Chia-o Mera!tile E1ha!-e
e. !o!e of the a#ove
1). <i!d the *rie of a Euro*ea! all o*tio! o! a futures if the *ut o*tio! is *ried at /./&8 the futures is at
11&.)&8 the e1erise *rie is 11&8 the time to e1*iratio! is )& da.s a!d the disrete risk2free i!terest rate is
$.3& *ere!t.
a. 11%.&&
#. /./&
. +.$1
d. &.%'
e. !o!e of the a#ove
13. <i!d the *rie of a! ,meria! all o*tio! o! a futures if the urre!t s*ot *rie is +%8 the e1erise *rie is (&8
the futures *rie is ++.3%8 the risk2free i!terest rate is ) *ere!t8 the s*ot asset a! -o u* #. 1% *ere!t or
do"! #. $ *ere!t *er *eriod a!d the all e1*ires i! t"o *eriods8 "hih is also "he! the futures e1*ires.
a. '.'$
#. $.3%
. 3.3+
d. $.((
e. !o!e of the a#ove
1$. The delta of a all o*tio! o! a futures is e6ual to the delta of a all o*tio! o! the s*ot times
a. the *rese!t value fator for the risk2free rate a!d time to e1*iratio!
1-34
Co*.ri-ht 7 (%%1 #. Harourt8 I!
#. o!e
. the futures *rie
d. the e1erise *rie
e. !o!e of the a#ove
CHAPTER 14: INTEREST RATE DERIVATIVES
1. , firm #orro"s ;(% millio! from its #a!k a!d a-rees to make *a.me!ts ever. '% da.s at the #e-i!!i!- of
the *eriod at LI:OP8 "hih is urre!tl. 1%.& *ere!t. It arra!-es a! i!terest rate s"a*8 a-reei!- to make
fi1ed *a.me!ts ever. '% da.s at a rate of 1+ *ere!t a!d reeive floati!- *a.me!ts ever. '% da.s at a rate
of LI:OP mi!us 1%% #asis *oi!ts. @etermi!e the !et ash flo" o! its first *a.me!t from the s"a* o!l..
a. a! outflo" of ;&(&8%%%
#. a! i!flo" of ;/3&8%%%
. a! outflo" of ;13&8%%%
d. a! outflo" of ;)&%8%%%
e. !o!e of the a#ove
(. @etermi!e the value of a! i!terest rate all o*tio! at the maturit. of a loa! if the all has a strike of 1(
*ere!t8 a fae value of ;&% millio!8 the loa! matures '% da.s after the all is e1erised8 the all e1*ires i!
)% da.s8 the all *remium is ;(%%8%%%8 a!d LI:OP e!ds u* at 1+ *ere!t.
a. ;1(&8%%%
#. ;$+8+++
. ;(%$8%%%
d. 2;3&8%%%
e. !o!e of the a#ove
+. , #a!k makes a ;& millio! 1$%2da. *ure disou!t loa! at LI:OP of ' *ere!t. ,t the same time8
ho"ever8 it e1erises a! i!terest rate *ut that has a strike of 11 *ere!t. <i!d the a!!uali5ed rate of retur!
o! the loa!. I-!ore the ost of the *ut.
a. '.+/ *ere!t
#. 11./3 *ere!t
. ' *ere!t
d. 11 *ere!t
e. !o!e of the a#ove
/. 0hih of the follo"i!- #est desri#es a! i!terest rate a*4
a. a ash2a!d2arr. hed-e
#. a series of for"ard o!trats
. a series of i!terest rate alls
d. a all o*tio! s*read
e. !o!e of the a#ove
&. , #a!k #u.s a! i!terest rate floor i! o!Du!tio! "ith a loa! it holds that "ill make four semia!!ual
*a.me!ts starti!- si1 mo!ths from !o". The floor has a strike of ' *ere!t. LI:OP at the #e-i!!i!- of
the four *a.me!t *eriods is 1%8 118 $ a!d $.) *ere!t. O! "hih dates "ill the floor "riter make a
*a.me!t to the #a!k4
a. !o" a!d i! (/ mo!ths
#. i! 1$ a!d (/ mo!ths
. i! 1( a!d 1$ mo!ths
d. i! )8 1(8 1$ a!d (/ mo!ths
e. !o!e of the a#ove
). The adva!ta-e of a ollar over a a* is
a. it lo"ers the out2of2*oket ost
#. it offers the *ossi#ilit. of -reater retur!s
. it elimi!ates the risk
d. it has lo"er tra!satio! osts
e. !o!e of the a#ove
3. ,! <P, is most like "hih of the follo"i!- tra!satio!s
a. a! i!terest rate a*
#. a! i!terest rate floor
. a! i!terest rate ollar
d. a for"ard o!trat
e. !o!e of the a#ove
$. Prii!- the floati!- rate *ortio! of a s"a* duri!- its life re6uires
1-35
Co*.ri-ht 7 (%%1 #. Harourt8 I!
a. fi!di!- the !e" floati!- rate
#. assumi!- that the market value "ill -o to *ar o! the !e1t *a.me!t date
. fi!di!- its *rese!t value usi!- the fi1ed rate as the disou!t rate
d. fi!di!- its urre!t market value a!d om*ou!di!- it to the !e1t ou*o! date
e. !o!e of the a#ove
'. 0hih of the follo"i!- "a.s of termi!ati!- a! i!terest rate s"a* a! #e do!e o!l. if a**roved #. the
ou!ter*art.4
a. e1erisi!- a! o*tio! "ith the ou!ter*art.
#. sale or assi-!me!t to a!other ou!ter*art.
. reversal or offset
d. all of the a#ove
e. !o!e of the a#ove
1%. S"a*tio!s are like for"ard s"a*s i! "hih of the follo"i!- "a.s
a. :oth are free of redit risk
#. :oth re6uire the e1eutio! of a s"a* at e1*iratio!
. The. have the same *rie
d. :oth are traded o! s"a*tio! e1ha!-es
e. !o!e of the a#ove
11. <i!d the ost of a orretl. *ried i!terest rate all o! +%2da. LI:OP if the urre!t for"ard rate is 3
*ere!t8 the strike is 3 *ere!t8 the o!ti!uousl. om*ou!ded risk2free rate is ).( *ere!t8 the volatilit. is
1( *ere!t a!d the o*tio! e1*ires i! o!e .ear. The !otio!al *ri!i*al is ;+% millio!.
a. ;.%%+1
#. ;'+8%%%
. ;38$13
d. ;%.%%1(
e. ;+)8%%%
1(. 0hih of the follo"i!- is a limitatio! of usi!- the :lak model to *rie i!terest rate o*tio!s4
a. the risk2free rate is !ot o!sta!t
#. the volatilit. is !ot o!sta!t
. i!terest rates are !ot lo-!ormall. distri#uted
d. all of the a#ove
e. !o!e of the a#ove
1+. ,! <P, differs from a! i!terest rate s"a* i! "hih of the follo"i!- "a.s4
a. ,! <P, has more redit risk
#. <P,s are federall. re-ulated
. Traditio!all. the *a.me!t i! a! <P, is dela.ed
d. <P,s are used o!l. #. #a!ks a!d s"a*s are used o!l. #. or*oratio!s
e. !o!e of the a#ove
1/. 0hih of the follo"i!- i!formatio! is !ot re6uired to determi!e a s"a*tio! *a.off at e1*iratio!4
a. the e1erise rate
#. the term struture of 5ero ou*o! rates at the s"a*tio! e1*iratio!
. the maturit. of the u!derl.i!- s"a*
d. the .ield o! a #o!d of e6uivale!t maturit. as the s"a*
e. !o!e of the a#ove
1&. <i!d the *a.off of a! i!terest rate all o*tio! o! the o!e2*eriod rate "ith a! e1erise rate of 1% *ere!t if
the o!e2*eriod rate at e1*iratio! is 11 *ere!t.
a. .1(
#. 5ero
. .%1
d. .%%'%
e. !o!e of the a#ove
1). I!terest rate s"a* *a.me!ts are made
1-36
Co*.ri-ht 7 (%%1 #. Harourt8 I!
a. o! the last da. of the 6uarter
#. o! the first da. of eah mo!th
. at "hatever dates are a-reed u*o! #. the ou!ter*arties
d. o! the 1&th of the a-reed2u*o! mo!ths
e. !o!e of the a#ove
13. ,! i!terest rate s"a* is e6uivale!t to "hih of the follo"i!- tra!satio!s
a. a series of <P,s
#. the *urhase of a stok a!d sale of a #o!d
. #orro"i!- mo!e. at o!e floati!- rate a!d le!di!- it at a!other
d. all of the a#ove
e. !o!e of the a#ove
1$. 0hih of the follo"i!- strate-ies is a**ro*riate if .ou e1*et i!terest rates to i!rease4
a. a *a.2fi1ed8 reeive2floati!- s"a*
#. a short i!terest rate all
. a short for"ard rate a-reeme!t
d. all of the a#ove
e. !o!e of the a#ove
1'. Com*a!ies use i!terest rate s"a*s for all of the follo"i!- reaso!s e1e*t
a. to o!vert floati!- rate loa!s to fi1ed rate loa!s
#. to alter the *atter!s of asset ash flo"s
. to o!vert fi1ed rate loa!s to floati!- rate loa!s
d. to save le-al a!d *a*er"ork osts
e. !o!e of the a#ove
(%. 0hih of the follo"i!- is the fi1ed rate o! a t"o2.ear s"a* if o!e2.ear LI:OP is ) *ere!t a!d t"o2.ear
LI:OP is 3 *ere!t4 HUse +)% da.s i! disou!ti!-.I
a. ).3& *ere!t
#. ).%% *ere!t
. 3.%% *ere!t
d. 3.+& *ere!t
e. !o!e of the a#ove
(1. , firm e!tered i!to a! i!terest rate s"a* to *a. a fi1ed rate of & *ere!t a!!uall. for t"o .ears. It is !o"
!i!e mo!ths i!to the s"a*. The three2mo!th rate is $ *ere!t a!d the 1&2mo!th rate is $.& *ere!t. The
u*omi!- floati!- *a.me!t is at the rate &.( *ere!t. 0hih of the follo"i!- is the value of the s"a* *er
;1 !otio!al *ri!i*al. H,ll rates are LI:OP a!d use +)% da.s i! disou!ti!-.I
a. %.%++(
#. %.%+1/
. 2%.%%1$
d. 1.%%%%
e. !o!e of the a#ove
((. 0hih of the follo"i!- stateme!ts a#out i!terest rate o*tio!s a!d9or i!terest rate s"a*s is true4
a. i!terest rate s"a*s as "ell as a*s a!d floors *a. off o! the date o! "hih the rate is determi!ed
#. a om#i!atio! of i!terest rate a*s is e6uivale!t to s a s"a*
. i!terest rate a*s a!d floors adhere to *ut2all *arit. if there is o!l. a si!-le e1*iratio!
d. a lo!- all a!d short *ut "ith the same strike rate set at the s"a* rate re*liates a s"a*
e. !o!e of the a#ove
(+. , *a.er s"a*tio! is e1*iri!-. The u!derl.i!- s"a* has a t"o .ear maturit.. Th e *rese!t value fators
are .'(&' Ho!e .earI a!d .$)&1 Ht"o .earsI. The strike rate is 3 *ere!t. 0hat is the value of the s"a*tio!
*er ;1 !otio!al *ri!i*al.
a. %.%%%%8 si!e it is out2of2the2mo!e.
#. 1.%%%%
. %.%3&+
d. %.%%'&
e. !o!e of the a#ove
(/. To determi!e the fi1ed rate o! a s"a*8 .ou "ould
1-37
Co*.ri-ht 7 (%%1 #. Harourt8 I!
a. use *ut2all *arit.
#. *rie it as the issua!e of a fi1ed rate #o!d a!d *urhase of a floati!- rate #o!d or vie versa
. use the same fi1ed rate as that of a 5ero ou*o! #o!d of e6uivale!t maturit.
d. all of the a#ove methods are e6uivale!t
e. !o!e of the a#ove
(&. ,ll of the follo"i!- are uses of s"a*tio!s e1e*t
a. to s*eulate o! i!terest rates
#. to -ive a firm fle1i#ilit. i! future #orro"i!-s
. to #orro" mo!e.
d. to reate alla#le from !o!2alla#le #o!ds
e. !o!e of the a#ove
CHAPTER 15: ADVANCED DERIVATIVES AND STRATEGIES
,!s"er 6uestio!s 1 throu-h ) a#out i!suri!- a *ortfolio ide!tial to the SBP &%% "orth ;1(8&%%8%%% "ith a three2
mo!th hori5o!. The risk2free rate is 3 *ere!t. Three2mo!th T2#ills are availa#le at a *rie of ;'$.)/ *er ;1%%
fae value. The SBP &%% is at +$&. Puts "ith a! e1erise *rie of +'% are availa#le at a *rie of 1+. Calls "ith a!
e1erise *rie of +'% are availa#le at a *rie of 1+.1(&. Pou!d off .our a!s"ers to the !earest i!te-er.
1. 0hat is the mi!imum value of the i!sured *ortfolio4
a. ;1)8)3(8+//
#. ;1(8&%%8%%%
. ;1(8%'183%'
d. ;1(8(//8$'$
e. ;1+8+3&8%%%
(. Ho" ma!. *uts should #e used to i!sure this *ortfolio4
a. 1((8&$/
#. +18+'3
. )(8$1/
d. ')18&+$
e. +(8/)$
+. If the SBP &%% e!ds u* at /%18 determi!e the u*side a*ture.
a. ').3 *ere!t
#. ') *ere!t
. ''.+ *ere!t
d. '/ *ere!t
e. 1%% *ere!t
/. If the i!sured *ortfolio o!sisted e!tirel. of alls a!d T2#ills8 ho" ma!. "ould #e used4
a. 1'81/+ alls a!d 1(/813) T2#ills
#. +18+'3 alls a!d 1((8//' T2#ills
. '++8(+$ alls a!d (8&/3 T2#ills
d. +18/%3 alls a!d 11'8''3 T2#ills
e. +(8/)$ alls a!d +(8/)$ T2#ills
&. If the i!sured *ortfolio "ere d.!amiall. hed-ed "ith stok i!de1 futures8 ho" ma!. futures "ould #e
used4 The all delta is .&( a!d the o!ti!uous risk2free rate is &./$ *ere!t. Eah futures has a multi*lier
of &%% a!d a *rie of +$$.)&.
a. )%
#. )/
. +%
d. +(
e. !o!e of the a#ove
). If the i!sured *ortfolio "ere d.!amiall. hed-ed "ith T2#ills8 ho" ma!. T2#ills "ould #e used4
a. 1)8++(
#. )+8%%(
. 1()83(+
d. )18)3(
e. +(8/)$
1-38
Co*.ri-ht 7 (%%1 #. Harourt8 I!
3. Su**ose a firm offers a! e6uit.2li!ked seurit.. The fae value is ;1 millio! a!d its *a.off is #ased o! a!.
a**reiatio! i! a! e6uit. i!de1 urre!tl. at $&&.&%. It has determi!ed that of the ;1 millio! raised8 it a!
struture the o*tio! om*o!e!t so that its value is ;1+&8%%%. Curre!tl. a! at2the2mo!e. all o*tio! is
"orth ;1(&. 0hat *ere!ta-e of the -ai! i! the i!de1 a! it offer4
a. '( Q
#. 1%% Q
. &% Q
d. $.(+ Q
e. !o!e of the a#ove
$. Su**ose a! i!vestor a-rees to s"a* the SBP &%% retur! for the Pussell (%%% Hsmall2stokI retur!. The
SBP &%% i!reases from /&%.'1 to /&).)% "hile the Pussell (%%% i!reases from ()%.3+ to ()(.$(. 0hat
"ould #e the i!vestorEs ash flo" o! a !otio!al *ri!i*al of ;1& millio!.
a. ;)'8%/&
#. ;1&81(%8(+'
. 2;1&81$'8($/
d. 2;)'8%/&
e. !o!e of the a#ove
'. 0hih of the follo"i!- stateme!ts a#out mort-a-e2#aked seurit. stri*s is true4
a. #oth i!terest2o!l. a!d *ri!i*al2o!l. stri*s are su#Det to *re2*a.me!t risk
#. o!l. *ri!i*al2o!l. stri*s are su#Det to *re*a.me!t risk
. o!l. i!terest2o!l. stri*s are su#Det to *re*a.me!t risk
d. the *re*a.me!t risk of i!terest2o!l. a!d *ri!i*al2o!l. stri*s is *reisel. offsetti!-
e. !o!e of the a#ove
1%. , hooser o*tio! is similar to "hat other t.*e of o*tio! strate-.
a. *ut2all *arit.
#. a overed all
. a *rotetive *ut
d. a om#i!atio! #ull a!d #ear s*read
e. !o!e of the a#ove
11. The !um#er of *ossi#le fi!al avera-e *ries i! a! ,sia! o*tio! for a four *eriod #i!omial model is
a. $
#. /
. 1)
d. +(
e. !o!e of the a#ove
1(. , look#ak all o*tio! *rovides the ri-ht
a. to ha!-e the stok o! "hih the o*tio! is "ritte!
#. to #u. the stok at its lo"est *rie over the o*tio!Es life
. to i!sure a stok a-ai!st loss
d. to ha!-e .our mi!d a#out the e1erise *rie
e. !o!e of the a#ove
1+. If the stok *rie is urre!tl. +)8 the e1erise *rie is +& a!d the stok e!ds u* at //8 the value of a! asset2
or2!othi!- o*tio! at e1*iratio! is
a. +&
#. $
. '
d. //
e. !o!e of the a#ove
1/. 0hih of the follo"i!- is harateristi of a #asis s"a*4
a. o!e *art. *a.s a floati!- rate a!d the other *a.s a fi1ed rate
#. o!e *art. *a.s the #asis o! a futures tra!satio!
. eah *art. *a.s a floati!- rate
d. at least o!e *art.Cs *a.me!ts is #ased o! a! o*tio! retur!
e. !o!e of the a#ove
1&. ,! e6uit. for"ard o!trat is
a. a for"ard o!trat o! LI:OP seured #. a stok as ollateral
1-39
Co*.ri-ht 7 (%%1 #. Harourt8 I!
#. a futures o!trat o! a stok i!de1 that is !ot marked2to2market
. a all o*tio! o! a stok "ith -reater do"!side risk tha! a! ordi!ar. all
d. a for"ard o!trat "hose *a.off is determi!ed #. a stok or i!de1
e. !o!e of the a#ove
1). , seurit. that *a.s off the retur! from a om#i!atio! of mort-a-es is alled a
a. homeo"!ersC e6uit. laim
#. mort-a-e *ortfolio
. mort-a-e o*tio!
d. mort-a-e2#aked seurit.
e. !o!e of the a#ove
13. ,sia! o*tio!s are also alled
a. avera-e *rie o*tio!s
#. Paifi o*tio!s
. i!stallme!t o*tio!s
d. !o2re-rets o*tio!s
e. !o!e of the a#ove
1$. 0hih of the follo"i!- stateme!ts is orret a#out ash2or2!othi!- o*tio!s
a. the. are su#Det to !o redit risk
#. the. must #e *ried #. the #i!omial model
. the. have lo"er u*side -ai!s a!d lo"er do"!side losses tha! ordi!ar. o*tio!s
d. the. are e6uivale!t to short *ositio!s i! asset2or2!othi!- o*tio!s
e. !o!e of the a#ove
1'. , o!sta!t maturit. s"a* has "hih of the follo"i!- harateristis
a. the s"a* maturit. is held o!sta!t at a fi1ed !um#er of .ears
#. the floati!- *a.me!t is usuall. #ased o! the rate o! a Treasur. !ote
. the s"a* alls for all *a.me!ts to #e made at its maturit.
d. the floati!- *a.me!t a!d the maturit. are #oth o!sta!t
e. !o!e of the a#ove
(%. , ra!-e floater is a seurit. "ith "hih of the follo"i!- harateristis
a. the *a.me!ts ra!-e from a -ive! ma1imum to a -ive! mi!imum
#. the maturit. is limited to a fi1ed ra!-e
. its *a.me!ts are #ased o! "hether the rate sta.s "ithi! a ra!-e
d. all of the a#ove
e. !o!e of the a#ove
(1. , seurit. that is su#2divided i!to seurities alled tra!hes is alled a
a. *ri!i*al2o!l. stri*
#. asia! look#ak o*tio!
. ra!-e mort-a-e stri*
d. ollaterali5ed mort-a-e o#li-atio!
e. !o!e of the a#ove
((. 0hih of the follo"i!- is a *ath2i!de*e!de!t o*tio!
a. a fi1ed strike ,sia! all o*tio!
#. a sta!dard Euro*ea! all o*tio!
. a! u*2a!d2out all o*tio!
d. a! ,meria! *ut o*tio!
f. !o!e of the a#ove
(+. 0hih of the follo"i!- is a reaso! for usi!- e6uit. s"a*s
a. to realloate a stok *ortfolio amo!- asset lasses
#. to s*eulate o! the *erforma!e of a stok or i!de1
. to avoid the tra!satio! ost of tradi!- i! i!dividual stoks
d. all of the a#ove
e. !o!e of the a#ove
(/. 0hih of the follo"i!- #est desri#es the ost of *ortfolio i!sura!e4
a. the mar-i! *ut do"! o! the futures o!trat
1-40
Co*.ri-ht 7 (%%1 #. Harourt8 I!
#. the -ai! -ive! u* "he! the stok moves u*
. the differe!e #et"ee! the all a!d *ut *ries
d. all of the a#ove
e. !o!e of the a#ove
(&. 0hih of the follo"i!- is !ot a t.*e of strutured !ote4
a. ra!-e floater
#. i!verse floater
. diff floater
d. reverse floater
e. !o!e of the a#ove
CHAPTER 16: FINANCIAL RISK MANAGEMENT
1. Pisk ma!a-eme!t e!om*asses all of the follo"i!- e1e*t
a. determi!i!- a firmCs atual level of risk
#. determi!i!- a firmCs desired level of risk
. setti!- *oliies a!d *roedures
d. mo!itori!- .our *ositio! after2the2fat
e. !o!e of the a#ove
(. Market risk is "hih of the follo"i!-
a. the risk assoiated "ith faili!- to *ro*erl. reord market tra!satio!s
#. the risk that a dealer "ill lose market share to a om*eti!- dealer
. the risk assoiated "ith moveme!ts i! suh fators as i!terest rates a!d e1ha!-e rates
d. the risk of the -over!me!t delari!- a tra!satio! ille-al
e. !o!e of the a#ove
+. 0hat is the reaso! for u!dertaki!- a -amma hed-e4
a. -over!me!t re-ulatio!
#. the *ossi#ilit. of ou!ter*art. default
. ha!-es i! volatilit.
d. lar-e moveme!ts i! the u!derl.i!-
e. !o!e of the a#ove
/. 0hih of the follo"i!- is the i!ter*retatio! of a O,P of ;& millio! for o!e .ear at .%&.
a. the *ro#a#ilit. is .%& that the firm "ill lose at least ;& millio! i! o!e .ear
#. the *ro#a#ilit. is at least .%& that the firm "ill lose ;& millio! i! o!e .ear
. the *ro#a#ilit. is .%& that the firm "ill lose ;& millio! i! o!e .ear
d. the *ro#a#ilit. is less tha! .%& that the firm "ill lose ;& millio! i! o!e .ear
e. !o!e of the a#ove
&. 0hih of the follo"i!- are !ot methods of determi!i!- the O,P4
a. simulatio! method
#. historial method
. estimatio! method
d. a!al.tial method
e. !o!e of the a#ove
). 0hih of the follo"i!- methods are !ot used to redue redit risk4
a. delta2-amma2ve-a hed-i!-
#. ollateral
. marki!- to market
d. limiti!- the amou!t of #usi!ess .ou do "ith a *art.
e. !o!e of the a#ove
3. 0hih of the follo"i!- are t.*es of risks faed #. a derivatives dealer4
a. ta1 risk
#. o*eratio!al risk
. aou!ti!- risk
d. le-al risk
e. !o!e of the a#ove
1-41
Co*.ri-ht 7 (%%1 #. Harourt8 I!
$. 0hat does !etti!- *ermit a firm to do4
a. su#trat losses from *rie i!reases from losses from *rie dereases
#. !et its tra!satio!s "ith a -ive! ou!ter*art. a-ai!st eah other
. !et all of its -ai!s a-ai!st all of its losses
d. all of the a#ove
e. !o!e of the a#ove
'. S.stemi risk is
a. the risk of a failure of the e!tire fi!a!ial s.stem
#. the risk assoiated "ith #road market moveme!ts
. the risk of a failure of a firmCs fi!a!ial risk ma!a-eme!t s.stem
d. the risk of lar-e *rie moveme!ts throu-hout the fi!a!ial s.stem
e. !o!e of the a#ove
1%. JI!de*e!de!t risk ma!a-eme!tL mea!s "hih of the follo"i!-4
a. that risk ma!a-eme!t of a firm is i!de*e!de!t of its overall or*orate *oli. deisio!s
#. that the risk ma!a-eme!t fu!tio! is *rovided #. a! outside o!sulti!- firm
. that the risk ma!a-er a!!ot #e i!flue!ed #. the traders
d. that the risk ma!a-er is i!de*e!de!t of the firmCs se!ior ma!a-ers
e. !o!e of the a#ove
11. E!d users are all of the follo"i!- t.*es of or-a!i5atio!s except4
a. i!vestme!t fu!ds
#. !o!2fi!a!ial or*oratio!s
. -over!me!ts
d. fi!a!ial i!stitutio!s
e. !o!e of the a#ove
1(. 0hat is the *rimar. ativit. of a firmCs fro!t offie4
a. risk ma!a-eme!t
#. tradi!-
. *rii!- derivative *roduts
d. auditi!-
e. !o!e of the a#ove
1+. , total retur! s"a* is #est desri#ed as
a. , s"a* i! "hih the *a.me!ts i!lude o!l. a*ital -ai!s
#. a s"a* i! "hih the total retur! o! a stok i!de1 is s"a**ed for the total retur! o! a #o!d
. a s"a* i! "hih the retur! o! o!e #o!d is s"a**ed for some other *a.me!t
d. a s"a* desi-!ed to su#stitute for a #asis s"a*
e. !o!e of the a#ove
1/. 0hih of the follo"i!- #est desri#es a redit default s"a*4
a. it is *roteted a-ai!st default
#. it has a hi-her rate to om*e!sate for the *ossi#ilit. of o!e *art. defaulti!-
. it arries a hi-her redit rati!- tha! most other s"a*s
d. it off if a!other *art. e1ter!al to the s"a* defaults
e. !o!e of the a#ove
1&. 0hih of the follo"i!- stateme!ts is !ot true a#out a redit s*read o*tio!4
a. it is a! o*tio! o! the s*read of a #o!d over a refere!e #o!d
#. its value "ould ha!-e "ith ha!-es i! i!vestorsC *ere*tio!s of a *art.Cs redit 6ualit.
. it re6uires *a.me!t of a *remium u* fro!t
d. it re6uires that the u!derl.i!- #o!d #e relativel. li6uid
e. !o!e of the a#ove
1). 0hih of the follo"i!- forms of hed-i!- re6uires the use of o*tio!s4
a. delta hed-i!-
#. ve-a hed-i!-
. -amma hed-i!-
d. redit risk hed-i!-
1-42
Co*.ri-ht 7 (%%1 #. Harourt8 I!
e. !o!e of the a#ove
13. If a firm e!-a-es i! risk ma!a-eme!t to a*ture ar#itra-e *rofits8 "hat is it eas. to overlook4
a. the additio!al redit risk it assumes
#. the ost is -reater tha! the #e!efit
. the market risk is hi-h
d. all of the a#ove
e. !o!e of the a#ove
1$. @erivatives dealers *rimaril. o!dut derivatives tra!satio!s for "hih of the follo"i!- reaso!s4
a. to e!ha!e the retur!s o! their other i!vestme!t tra!satio!s
#. to *rofit off of their a#ilit. to e1eute trades at the ri-ht time
. to *rofit off of their market maki!- servies
d. to *rovide servies to e!ha!e the overall attrative!ess of their *rodut li!e
f. !o!e of the a#ove
1'. The risk that errors a! our i! i!*uts to a *rii!- model is alled
a. i!*ut risk
#. model risk
. *rii!- risk
d. valuatio! risk
e. !o!e of the a#ove
(%. Hed-e aou!ti!- is "hih of the follo"i!-4
a. desri#i!- all hed-es i! foot!otes to aou!ti!- stateme!ts
#. deferri!- all reordi!- of hed-e *rofits a!d losses u!til the hed-e is over
. assoiati!- the derivative *rofit or loss "ith the i!strume!t #ei!- hed-ed
d. all of the a#ove
e. !o!e of the a#ove
(1. 0hih of the follo"i!- stateme!ts is !ot true a#out fair value hed-es4
a. it re6uires a method of determi!i!- the fair value of the derivative
#. it defers reo-!itio! of all *rofits a!d losses u!til the hed-e is termi!ated
. it "ill ause ear!i!-s to flutuate if hed-es are !ot effetive
d. it re6uires *ro*er doume!tatio!
e. !o!e of the a#ove
((. 0hih of the follo"i!- stateme!ts is !ot true a#out fair value hed-es4
a. it re6uires ide!tifiatio! of the effetive a!d i!effetive *arts
#. derivatives *rofits a!d losses are tem*oraril. arried i! a! e6uit. aou!t
. it re6uires *ro*er doume!tatio!
d. o!l. dealer firms are eli-i#le to use it
e. !o!e of the a#ove
(+. 0hih of the follo"i!- methods is !ot *ermitted to satisf. the SECCs re6uireme!ts for dislosure of
derivatives ativit.4
a. a! e1*la!atio! i! the hairma!Cs letter
#. a Oalue2at2Pisk fi-ure
. a se!sitivit. a!al.sis
d. a ta#le of market values a!d related terms
e. !o!e of the a#ove
(/. 0hih of the follo"i!- i!strume!ts ould #e used to e1eute a delta8 -amma a!d ve-a hed-e4
a. a s"a*
#. a! o*tio!
. a futures
d. a! <P,
e. !o!e of the a#ove
1-43
Co*.ri-ht 7 (%%1 #. Harourt8 I!
(&. 0hih of the follo"i!- is a**ro1imatel. the O,P at & *ere!t of a *ortfolio of ;1% millio! of asset ,8 "hose
e1*eted retur! is 1&Q a!d volatilit. is +&Q8 a!d ;1& millio! of asset :8 "hose e1*eted retur! is (1Q a!d
volatilit. is +%Q8 "here the orrelatio! #et"ee! the t"o assets is .(.
a. ;&.) millio!
#. ;1% millio!
. ;1& millio!
d. ;1.(& millio!G
e. !o!e of the a#ove
1-44
Co*.ri-ht 7 (%%1 #. Harourt8 I!