FINC 6399- A contract places an obligation on a trader to sell a security at a fixed price to the other party on or

| February 14, 2018

FINC 63991. A contract places an
obligation on a trader to sell a security at a fixed price to the other party
on or before a specified date at the discretion of the latter. This is a(n)
A. forward contract
B. call option
C. put option

2. A futures contract on a
stock index can be settled on the expiration day by
A. physical delivery.
B. an offsetting contract.
C. cash settlement.

3. A forward rate agreement
is an agreement to buy or sell
A. an agricultural commodity.
B. an interest rate contract linked to, say, LIBOR.
C. an equity contract.

4. A trader has purchased a
put with an exercise price of 45 and has also bought the underlying stock when
its price was 50 a share. Which of the following statements is CORRECT?
A. If the stock price rises,
the stock will be called away. The trader will be deprived of the upside
potential.
B. If the stock price falls,
the trader will lose the premium paid on the option.
C. If the stock price falls,
the trader’s maximum loss will equal 5 per share plus the premium paid.

5. A put has an exercise
price of 65 with an expiration period of 75 days (360-day year basis) and the
risk free rate is 3.5%. Which of the following statements is INCORRECT?
A. The put has a minimum
value of 0 and a maximum value of 74.46 if it is an American put.
B. The put has a minimum
value of 0 and a maximum value of 74.46 if it is a European put.
C. The put has a maximum
payoff of 0 at expiration if it is an American put.

6. When comparing two
European puts, it can be said that
A. the put with the longer expiration period has
a higher value.
B. the put with the shorter expiration period
has a lower value.
C. a longer expiration period may not be beneficial
for such a put option.

7. A currency swap involving
an exchange of euros for US dollars has a 100 million dollar notional value.
The initial spot rate is $1.35/€. LIBOR is at 3.55% for dollars and the euro
rate is 2.95%, both semi-annual. Which of the following statements is CORRECT?
A. There is no exchange of notional principal at
the beginning.
B. Principal of $100 million
will be exchanged for €74.07 million and the first interest related payment of
$1.775 million will be exchanged for €1.093 million.
C. Principal of $100 million
will be exchanged for €74.07 million and the first interest related net payment
of $0.295 million will be exchanged between the swap parties.

8. A call writer with an
exercise price of 45 and a premium of 2.50 breaks even when the stock price
A. rises to 47.50.
B. falls to 42.50.
C. remains at 45.

9. The maximum profit under a
covered call position is
A. 0.
B. ?.
C. the premium received.

10. In an interest rate swap, a
notional principal of 50 million was used to exchange fixed for variable
payments. The swap fixed rate was set at 3.5% against LIBOR. If the LIBOR were
at 2.95% how much will be exchanged between the two parties?
A. the pay-fixed party will pay 1.75 million and
receive 1.475 million.
B. the receive fixed party will receive 0.275
million.
C. the receive-fixed party will receive 1.75
million and pay 1.475 million.

11. An investor has 10,000 in
cash and a stock is selling for 100 per share. Calls on that stock are selling
for a premium of 2.04. If the investor wishes to create a fiduciary call
position, she should
A. buy 10,000 worth of stock and sell 4,902
calls.
B. buy 5,000 worth of calls and use the rest to
buy stock at 50% margin.
C. buy 98 calls and invest the remainder in
Treasury bills.

12. A cap is a series of
options known as caplets. From the perspective of the borrower, for a floating
rate bond, the caplet on each reset date is a
A. short position on a put option written on the
reference rate.
B. long position on a call option written on the
cap rate.
C. short position on a call option written on
the reference rate.

13. A futures contract suffers
from all of the following risks to a certain extent, EXCEPT
A. market risk.
B. default risk.
C. rollover risk.

14. A put option is said to be deep out of the money if
A. the
exercise price is 45 and the stock is selling for 45.
B. the
exercise price is 25 and the stock is selling for 35.
C. the
stock is selling for 15 and the exercise price is 30.

15. What is the intrinsic value of a call option with an exercise price
of 33 and the stock price of 32?
A. ?
B. -1
C. 0

16. In a bond futures contract,
A. the
long has the choice of receiving the highest value bond.
B. the
short has the choice of delivering the cheapest to deliver bond.
C. the
contract specifies the exact bond to be delivered.

17. The minimum tick for a
A. eurodollar
futures contract is $12.50.
B. T-bill
futures contract is $25.
C. T-bond
futures contract is $31.25

18. Which of the following delivery options are not a prerogative of the
short?
A. The
quality of the underlying physical.
B. Price
of delivery.
C. Timing
of delivery.

19. A futures contract has an initial margin of 3,500 per contract with
a maintenance margin of 1,500 per contract. A single contract has a multiplier
of 300. A trader shorts 12 contracts at a price of 115. The settlement price is
determined to be 123.50. The short’s variation margin is
A. 30,600
B. 6,600
C. 24,000

20. An Australian manufacturer who has borrowed euros to finance its
plant, will need to enter into a
A. short
hedge to cover the risk of depreciating Australian dollar by buying euros.
B. long
hedge on the euro to counter the risk of an appreciating euro.
C. speculative
position by selling Australian dollars against euros.

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