SECTION A (25 MARKS) irclii that You are required to choose the correct answer by circling ee corresponds with your chosen answer on the question paper appropriately on the scannable sheet as well. 1. An OTC forward contract is: a. a forward contract b. acustomised agreement that is not traded on an exchange a standardised agreement that is traded on an exchange -~ None of the above 2. A call option is in-the-money if the: ; a. strike price of the option is less than the current price of the underlying asset . @) site price of the option is greater than the current price of the underlying asset ¢. strike price of the option is equal to the price of the underlying asset 4. intrinsic value of the option is zero or positive 3. A-eall option is out-of-the-money if the: CN price of the option is less than the current price of the underlying asset b. strike price of the option is greater than the current price of the underlying asset c. strike price of the option is equal to the price of the underlying asset d. intrinsic value of the option is zero or positive Use the following case to answer questions 4 to 8 Assume that an investor holds GHS 2,000 in an equity fund indexed to the GSE Composite Index and plans to temporarily hedge her exposure to risk by taking a short futures position. Assume that the indexed portfolio pays dividends totaling GHSSO over the course of the year, and all dividends are paid at year-end. Finally, assume that the futures price for year- end delivery of the GSE Composite Index is GHS 2,300. Ifthe value of the share portfolio above is GHS 1,950 at the end of the year. 4. What will be the value of the portfolio of shares and futures held by the investor at the end of the year? b. GHS2000 5 ce. GHS2350 d. GHS2050 Daca? aan Scanned with CamScanner5. will be the return on this portfolio? ‘7% b. 17.5% c. 18% d. 18.5% 6. According to the spot-futures parity theory, the T-bill rate should be —~ ayi7% By 17.5% c. 18% d. 18.5% 7. Given your answer in Q6 above determine the futures price of a contract to sell the shares in this portfolio at the end of the year based on the spot-futures parity relationship. (3) GHis2300 B. GHS2000 c. GHS2350 * d. GHS2250 8. Ifthe T-bill rate were 15%, what would be the theoretically fair price of this sizes contract? - (CY cusx30 i = GHS2000 : \ei, ce. GHS2350) 4. GHS2250 9. A call option is at-the-money if the: ‘strike price of the option is less than the current price of the underlying asset b.. strike price of the option is greater than the current price of the underlying asset @zie price of the option is equal to the price of the underlying asset -” intrinsic value of the option is zero or positive 10, A put option is in-the-money if the: strike price of the option is less than the current price of the underlying A asset (Site price of the option is greater than the current price of the underlying asset «._ strike price of the option is equal to the price of the underlying asset 4. intrinsic value of the option is zero or positive Page 3 of 14 Scanned with CamScannerh. option is out-of-the-money if the: . ( é ) strike price of the option is less than the current price of the underlying asset b. strike price of the option is greater than the current price of the underlying asset c. strike price of the option is equal to the price of the underlying asset d. intrinsic value of the option is zero or positive 12. Which of the following is false? ‘va. Futures contracts are more liquid than forward contracts Futures contracts are marked to market. Futures contracts allow fewer delivery options than forward contracts Futures contracts trade on a financial exchange 13. Which one of the following actions will reverse a long position in a futures contract that expires in June? Buy a futures contract that expires in June. b. Sell any futures contract, regardless of its expiration date. c. Hold the futures contract until it expires. d. Sell a futures contract that expires in June, e. Buy any futures contract, regardless of its expiration date. 14. Which of the following does the most to reduce default risk for futures contracts? a. Flexible delivery arrangements. (5) Standardization of contracts Marking to market. d. High liquidity. 15. Using futures contracts to transfer price risk is called: Hedging. Diversifying. c., Arbitrage. d. Speculating. 16. A call option with a strike price of $55 can be bought for $4. What will be your net profit if you sell the call and the stock price is $52 when the call expires? Page 4 of 14 Scanned with CamScanner17. Which of the following has the right to sell an asset at a predetermined price? a. A put buyer b. A call writer EM put writer A call buyer ; 18. Which of the following is potentially obligated to sell an asset at a predetermined price? a. Acall buyer. b. Acall writer. c. A put buyer. A put writer. 19. American-style options can be exercised any time before expiration. True False c. Not necessarily . None of the above 20. The intrinsic value of an option decreases as the option approaches expiration. a. Not necessarily Si False he True DA d. None of the above a. % 21. The buyer of a forward contract is obligated to buy the underlying asset when the contract expires. | ay RRR: a. Not necessarily Bye True d. None of the above 22. The buyer of a call option is obligated to buy the underlying asset when the contract expires. : a. Not necessarily b. True c. Aand B are corrects CY None of the above 23. Parties to forward contracts are more exposed to default risk than parties to . futures contracts. a. Not necessarily _b. False True | ANone of the above Page 5 of 14 Scanned with CamScannerent on 24, With forward contracts, all gains and losses are accumulated jaded aa 7 the delivery date, whereas futures contracts recognize gains a. Not necessarily False c. True 4. None of the above . 25. Most futures contracts do not result in delivery of the underlying asset. Not necessarily False c. True d. None of the above - 26. The clearinghouse minimizes default risk in futures transactions. a. Not necessarily b. False True None of the above 27. Risk is a tradeable commodity a. Not necessarily b. False True None of the above 28. Derivatives contracts can be used to hedge against volatile weather conditions, a. Not necessarily ; b. False True d. None of the above 4g 36 29: Individuals who take a view on the future direction of the markets to make profit a. Hedgers Speculators 7 Arbitrageurs d. All the above ++. take positions in financial markets to earn tiskless profits. a. Hedgers b. Speculators Arbitrageurs All the above 30... Scanned with CamScanner31. Select the odd one \ a. Financial Derivatives Sb. Commodity Derivatives ® e. Index Derivative Options ' 32. A statistical technique that provides a numerical estimate of the maximum/worst loss that could be expected in a given time period with a given level of confidence or probability \.a. Standard deviation . Co-efficient of variation Value at risk ~All the above I options, the writer takes a —~ c. Maintenance margin 4. All the above are correct. 34, Select the odd one a. In-the-money b. Out-of-the-money c. At-the-money On-the-mone! fa 5! Sets he odd ous. N°) Septem cr” a. European option b. American option Put option 36. Se is the difference between the ~ expected futures price and the contract price futures price and the spot price ¢. option premium and strike price d. current futures price and expected futures price on maturity 37. On the maturity date of a contract, the basis must be zero. a. False Tre ©. Not necessarily d. none of the above Page 7 of 14 Scanned with CamScanner1a in two or more options of the 38. Which of the following involves taking a positio or the same underlying same type. For example, combining two calls or put options asset with different exercise prices. a. Credit spread b. Underwriting spread Bull spread @._ Interest rate spread 39. Calculate the lower bound of an European call a GHS20 and a strike price of GHSI8, ifthe interest on the market is | maturity period of one year. option which has a spot rate of 0% pa with a a. GHS3.00 as GHS3.71 — c. GHS3.50 d. GHS3.55 40. Calculate the lower bound of an European put option which has a spot rate of GHS37 and a strike price of GHS4Q, if the interest rate on the market is 5% pa with a maturity period of 6 months. a. GHS2.01 b. GHS2.10 c. GHS2.11 & Gus2.12 ® Use the following case to answer question 41 and 42. Maturity Date Futures Price January 20 GHS110 Tune 20 GHSI15 41. Suppose that the effective annual T-bill rate is expected to persist at 5% and that the dividend yield is 4% per year. The “correct “June futures price relative to the January price is: @ Gus110.00 b. GHS110.46 ©. GHSIIS 4. GHSI14 42. Does the June future price reflect the true value of the June futures contract? a. Yesitis at par b. Itis undervalued c. Itis overvalued @ Cannot be determined Page 8 of 14 Scanned with CamScanner43. According to the theory, the futures prices is equal to expected spot price of the underlying asset ‘a. contango b. expectations backwardation hormal backwardation 44. The proponents of the . -gument postulate that the futures price is greater than the expected spot price of the underlying asset contango expectations ©. backwardation d. normal backwardation 45. The futures price is said to be lesser than the expected spot price in the \eory a. contango b. expectations backwardation [normal backwardation Use the case below to answer questions 4 46 to 48. SIC Insurance Company bought, reinsurance product from a foreign reinsurarice company in UK.. The cost of the reinsurance product is £1,000,000 payable in 1 year time. Assume that the spot exchange rate is GHS5/E, and the 1 year forward rate is GHS5.5/£. 46. Indicate how SIC can use forward market hedge to manage this payable. a. Enter into an agreement with the UK reinsurer to pay the £1,000,000 at maturity. b. Enter into a forward contract with the UK reinsurer to pay the £1,000,000 at the spot rate at maturity. c. Enter into a forward contract with a bank in Ghana to buy the £1,000,000 at __the spot rate at maturity. (; inter into a forward contract with a bank in Ghana to buy the £1,000,000 at ‘GHSS.S/£ at maturity. 47. Calculate the amount of GHS that SIC will need to undertake the forward market hedge. a.GHS5,000,000 b.GHS181,818.18 oa -GHS1,000,000 Page 9 of 14 Scanned with CamScanner48. Calculate the gain or loss under the forward market hedge if the spot rate at maturity tums out to be GHS6/E. a.+GHS550,000 b.~GHS550,000 £.+GHS500,000 HS500,000 49. The gain of the call option writer is a. limited by the strike price b. limited by the spot price . limited by difference between strike price and spot price Q limited by the premium paid 50. The loss of a forward contract buyer is Limited by the premium paid Unlimited ©. Limited by the contract price d. Limited by the spot price Page 100f 14 Pewravs0s-19 Scanned with CamScannerSECTION B (20 MARKS) ‘You are expected to provide the word/phrase/term or statement that best fits the gaps in the questions below. Answer all questions in this section in the spaces provided in the question paper. 51. Participants in the derivative marks who desire to make profit witho own funds at risk are known as. .NS pee 52. The derivatives market helps to transfer... .. from those who do not like them to those who have an appetite for them. 54, When a derivative product has and agricultural commodity as an underlying asset, Orca eie Gate Gntoceiicaen Whorkin ee tern oy aie statement that Tan area we sum. Se ‘, BERET te Sanh seed 56. Derivatives typically contain a high degree of leverage. This statement means that Seed 58, In estimating risk using the Standard deviation, the weighted average of the possible returns is referred to as See Vos... 59, Assume two investments A and B promise a monthly return of 13% Tespectively. If the two investments have the same standard deviati them will you choose asa rational investor? Lowi dus & WY, 60. The Raton seis omeaty. when | 4 reo a Berens Wm. ”“ 61. The patina ae positon is limited by wy Me. Way, Page 11 of 14 Scanned with CamScannerMariah | 2 sa tne money thitt parties ei mone ag tou sesh 9 poner sang a fOhanes contract toy the © “ cg Pte eg eg oR Of Me™ S thes snes Yo err with Me clear Thee srciighout the term of the futures ct the minimum amount remem / . } os, asemting vite © OD Wear scamming contmet call {ow inmesie deivery. the fain price em fey oF manrity ten the spot ree 6B tomy heslys stemtogy bs apywepriame wher i ee Sree ea Ba Ke oa Jet Bvertce uses one asset to hades sgsion ck iederoet in pres 6 Oo te maturity date of & fhewes ee et Kk Oxpeehd whims Ban fey tN rea wien wwe aa ner An ete ton they A wo CBR ~ Safed Son ee wan ou v= pusions Whe futures Contract ow the Sete Qomeneat.ty, but with different maturities, 70, Tac spoictutumes party relationship msy also be retired to as P KATAVSIAY Sh bho Gory. rel - note er Babee & Roads cleat ips tne futures pice equals the exporied value ef the fms yput pris of ther dock. Poge 12 of 24 Puta aot Scanned with CamScannerSECTION C (15 MARKS) Attempt only one question from this section. Provide your answer in the answer booklet. 1. Identify any high profile corporate bankruptcy attributable to derivative trading. i, Describe the events that created the problem. 7marks ii, Outline the lessons that can be leamt from the occurrence of such events. Smarks 2. An investor adopts a Bull spread strategy by buying a call with a low strike price (Kt) and selling a call with a higher strike price (Ku). If he buys a call with strike price $35 at $6 per share and sells a call with strike price $45 at $4. If the stock price at contract maturity were as shown in the table below from I to VI. ‘Stock price @ expiration (S7) | Payoff on the | Payoff on the | Payoif on the Longcall | Short call | Bull spread / is 30 35 40 50 = 65 n Tae \ a. Determine the payoff on the long call, short call and the bull spread strategy from Ito VL. Present your solution in a table. Systematically show how you arrive at your answers. 7marks b. An investor buys a put option on 3000 GCB shares with a contract price of $5 per share at premium of $0.05 per share with a maturity period of six (6) months. The investor also sells a call option on the 3000 shares with the same strike price, maturity period and premium. I What is the difference between the two positions taken by this investor? 3marks Il. What difference will it make if the investor instead entered into a futures contract to sell the 3000 shares at the above contract price? 3marks Ill. Explain the difference between the intrinsic and time values of the option premium. 2marks Discuss what is meant by interest rate swaps and how it may be used to manage interest rate risk. > D. DOMEHER Page 13 of 14 Scanned with CamScanner