Under what circumstance will the buyer of a put option be asked to perform his or her obligation?
d. The put buyer has no obligation whatsoever.
In general, when deciding whether a market participant needs to buy or sell futures contracts in order to hedge, the rule could be:
b. sell futures if you have the underlying asset and buy futures if you need the underlying asset.
A producer that is worried about the future price that will be available when the product is to be sold can hedge this price risk
b. selling a futures contract.
Which of the following futures contract holders is speculating?
b. A cattle rancher who buys live cattle futures
Which of the following would not be regulated in a standardized futures contract?
c. The spot price
If you sold a call option, you
a. are required to deliver stock if asked
If you own a call option, you
c. have the right to ask for stock to be delivered to you
Which of the following is not a parameter used in the Black-Scholes option-pricing model?
d. time to expiration when the option was created originally
Apply the Black-Scholes Option pricing model to the following information: Stock price = $33, Strike price = $33, t is 6 months
(T=0.50., Std deviation is 0.30 and variance 0.09; d(1. = 0.34177, d(2. 0.12964, N(d(1..= 0.63369, N(d(2.. = 0.55155. What is the
value of the call option?
Which of the following is an example of a hedge (or hedging or hedging a bet)?
d. An individual investor, who owns IBM stock, sells an IBM call.
Which of the following is not considered a derivative instrument?
d. A share or shares of a company's Stock (or equity in the company..
Differences in currencies are attributed to which of the following:
e. all of the above
Wheat is grown in many places in the US. There are many varieties of grain grown. The Chicago Board of Trade has created a
'standardized wheat contract' representing a certain grain type which farmers and users of grain can compare their variety to the
contract variety. This is done to attract
d. all of the above
Exxon uses a natural hedge. Which of the following describes Exxon's strategy in using a natural hedge?
b. selling forward production from wells being drilled
Which of the following is not a difference between forward and future contracts?
e. none of these
A natural hedge is
c. one that may use consumers as the risk reducing entity
Ironically, one of the "architects" behind the Black-Scholes model joined a hedge fund with former Wall Street Executives. The fund
made over a billion dollars in profits over a 4 or 5 year period before almost destroying the US Capital Markets. The name of this
a. Long Term Capital Management (LTCM).
Calculate the profit per share for an investor that exercises a put option with a strike price of $60 when the stock is selling for
$46 and the premium for the put option was $4.
The interplay between interest rate differentials and exchange rates such that each adjusts until the foreign exchange market and
the money market reach equilibrium is called the
d. None of the above.
What are ADR's?
e. A security that US citizens can own which represent ownership in a foreign entity.
Mortgages are purchased and pooled into one large fund. The fund then sells securities for the fund backed by these mortgages. If I
purchase a specific security that pays me only the interest portion generated by the original mortgages in the fund, that is called
b. an "IO"
Your corporation borrows money for 10 years with an interest rate that floats according to some index. Your corporation enters into
another transaction whereby they agree to receive a floating rate return and agree to pay a fixed rate, essential converting their
floating rate loan to a fixed rate loan. What is the company anticipating?
c. Floating interest rates will rise significantly.
How much must the stock be worth at expiration in order for a call holder to break even if the exercise price is $50 and the call
premium was $4?
If prices double in New York while the prices in Frankfort remain the same, the purchasing power of the dollar relative to the mark
c. should decrease by 50%.
It is generally not possible for a normal consumer to borrow money in the US at a low rate, convert that money to Yen, invest in
risk-free Yen denominated interest bearing securities, and convert this amount using forward contracts at rates greater than a
normal CD rate in the US. This is an example of
b. Interest rate parity
Assume Purchasing Price parity holds. If a television set costs $500 in the US and that same set costs 725 Euro's. What is the spot
exchange rate between Dollars to Euros?
d. 1 Euro = $0.68
d. similar to the Feds Funds rates in the U.S.
Which of the following put strike prices would be considered in the money for a put where the underlying stock is trading at $55 per
share? (all of the following are the strike prices.
What form of hedging would you suggest for a producer that wishes to be protected from future price decreases but wants to benefit
from any future price increases?
a. Buy a call option on the asset.
How might a firm such as General Mills use options to control raw material prices for breakfast cereals?
a. Buy call options on commodities.
The primary purpose of financial futures is to:
b. protect against swings in interest rates or prices of financial assets.
A decrease in which of the following terms will cause an increase in the call value of an option?
c. Exercise price
If the owner of a call option with a strike price of $35 finds the stock to be trading for $42 at expiration, then the option:
c. is worth $7 per share.
Which of the following pair is incorrect?
d. Venezuela / peso
Which of the following option traders receive, rather than pay, a premium?
a. Option sellers
Which combination of positions will tend to protect the owner from downside risk?
c. Buy the stock and buy a put option.
Which of the following is true for the owner of a call option?
b. The profit potential is unlimited.
Edited by David on 9/24/2009 at 5:52 PM EST