Question 1: (4 points)



Question 1: [pic] (4 points)

The price of gold is currently $700 per ounce. Forward contracts are available to buy or sell gold at $900 for delivery in one year. An arbitrageur can borrow money at 10% per annum. What is the arbitrage profit?

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|Question 2: [pic] (4 points) |

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|[pic][pic][pic][pic][pic]A trader enters into a one-year short forward contract to sell an asset for $60 when the spot price is $58. The spot price in |

|one year turns out to be $63. What is the trader's gain or loss? |

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|Question 3: [pic] (4 points) |

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|[pic][pic][pic][pic][pic]Which of the following is NOT true? |

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|a. |

|When a CBOE option on IBM is exercised, IBM issues more stock.   |

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|b. |

|An American option can be exercised at any time during its life.   |

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|c. |

|A call option will always be exercised at maturity if the underlying asset price is greater than the strike price.   |

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|d. |

|A put option will always be exercised at maturity if the strike price is greater than the underlying asset price.   |

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|e. |

|All of the above are true.   |

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|Question 4: [pic] (4 points)Bottom of Form |

|[pic][pic][pic][pic]Which of the following is NOT true? |

|[pic]Question 3: [pic] (4 points) |

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|[pic][pic][pic][pic][pic]Which of the following is NOT true? |

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|a. |

|When a CBOE option on IBM is exercised, IBM issues more stock.   |

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|b. |

|An American option can be exercised at any time during its life.   |

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|c. |

|A call option will always be exercised at maturity if the underlying asset price is greater than the strike price.   |

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|d. |

|A put option will always be exercised at maturity if the strike price is greater than the underlying asset price.   |

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|e. |

|All of the above are true.   |

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|Question 5: [pic] (4 points)Bottom of Form |

|[pic][pic][pic][pic]A trader buys 100 European call options (one contract) with a strike price of $20 and a time to maturity of one year. The cost of |

|each option is $2. The price of the underlying asset turns out to be $25 in one year. What is the trader's gain or loss? |

|[pic]Question 4: [pic] (4 points) |

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|[pic][pic][pic][pic][pic]A trader buys 100 European call options (one contract) with a strike price of $20 and a time to maturity of one year. The cost |

|of each option is $2. The price of the underlying asset turns out to be $25 in one year. What is the trader's gain or loss? |

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|Question 5: [pic] (4 points) |

|Question 6: [pic] (4 points) |

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|[pic][pic][pic][pic][pic]It is May and a trader writes a September European call option with a strike price of $20. The stock price is currently $18 and |

|the option price is $2. In September, the stock price becomes $25. What is this trader’s cash flow from the option in September? |

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|Question 7: [pic] (4 points) |

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|[pic][pic][pic][pic][pic]All of the following are types of traders in futures, forward, and options markets EXCEPT: |

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|a. |

|hedgers   |

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|b. |

|speculators   |

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|c. |

|hackers   |

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|d. |

|arbitrageurs   |

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|e. |

|All of the above are trader types   |

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|Question 8: [pic] (4 points) |

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|[pic][pic][pic][pic][pic]Which of the following is true? |

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|a. |

|Both forward and futures contracts are traded on exchanges.   |

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|b. |

|Forward contracts are traded on exchanges, but futures contracts are not.   |

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|c. |

|Futures contracts are traded on exchanges, but forward contracts are not.   |

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|d. |

|Neither forward contracts nor futures contracts are traded on exchanges.   |

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|Question 9: [pic] (4 points) |

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|[pic][pic][pic][pic][pic]Which of the following is NOT true? |

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|a. |

|Forward contracts always have zero values.   |

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|b. |

|Futures contracts are standardized, forward contracts are not.   |

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|c. |

|Delivery or final cash settlement usually takes place with forward contracts; the same is not true for futures contracts.   |

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|d. |

|Forward contracts usually have one specified delivery date; futures contracts often have a range of delivery dates.   |

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|e. |

|All of the above are true.   |

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|Question 10: [pic] (4 points) |

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|[pic][pic][pic][pic][pic]A company enters into a short futures contract to sell 50,000 pounds of cotton for 70 cents per pound. The initial margin is |

|$4,000 and the maintenance margin is $3,000. What is the futures price above which there will be a margin call? |

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|Question 11: [pic] (4 points) |

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|[pic][pic][pic][pic][pic]Suppose that the standard deviation of monthly changes in the price of commodity A is $2. The standard deviation of monthly |

|changes in a futures price for a contract on commodity B (which is similar to commodity A) is $3. The correlation between changes in the futures price |

|and the commodity price is 0.9. What hedge ratio should be used when hedging a one month exposure to the price of commodity A? |

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|Question 12: [pic] (4 points) |

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|[pic][pic][pic][pic][pic]A fund manager has a portfolio worth $100 million with a beta of 1.20. The manager is concerned about the performance of the |

|market over the next two months and plans to use three-month futures contracts on the S&P 500 to hedge the risk. The current index level is 850 and one |

|futures contract is on 250 times the index (i.e., the index multiplier is 250). The risk-free rate is 6.0% per annum and the dividend yield on the index |

|is 3.0% per annum. The current three-month futures price is 852.34. What position should the fund manager take to hedge exposure to the market over the |

|next two months? |

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|Question 13: [pic] (4 points) |

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|[pic][pic][pic][pic][pic]An interest rate is 15% per annum when expressed with quarterly compounding. What is the equivalent rate with continuous |

|compounding? |

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|Question 14: [pic] (4 points) |

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|[pic][pic][pic][pic][pic]An interest rate is 8% per annum expressed with continuous compounding. What is the equivalent rate with semiannual compounding?|

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|Question 15: [pic] (4 points) |

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|[pic][pic][pic][pic][pic]The 6-month, 12-month, 18-month, and 24-month zero rates are 3%, 3.5%, 3.75%, and 4% with semi-annual compounding. What is the |

|continuous compounding forward rate for the six-month period beginning in 12 months (i.e., F12,18)? |

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|Question 16: [pic] (4 points) |

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|[pic][pic][pic][pic][pic]The spot price of an investment asset that provides no income is $30 and the risk-free rate for all maturities (with continuous |

|compounding) is 10%. What is the three year forward price? |

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|Question 17: [pic] (4 points) |

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|[pic][pic][pic][pic][pic]The spot price of an investment asset is $30 and the risk-free rate for all maturities (with continuous compounding) is 10%. The|

|asset provides $2 income at the end of the first year. What is the three year forward price? |

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|Question 18: [pic] (4 points) |

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|[pic][pic][pic][pic][pic]The spot price of an investment asset is $30 and the risk-free rate for all maturities (with continuous compounding) is 10%. The|

|asset provides a 4% continuous yield. What is the three year forward price? |

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|Question 19: [pic] (4 points) |

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|[pic][pic][pic][pic][pic]An exchange rate is 0.800 and the 2-month domestic risk free interest rate is 5%. The 2-month foreign interest rate is 2% (both |

|rates are continuously compounded). What is the two month forward rate? |

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|Question 20: [pic] (4 points) |

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|[pic][pic][pic][pic][pic]Which of the following is a consumption asset? |

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|a. |

|The S&P 500 Index   |

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|b. |

|The Canadian Dollar   |

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|c. |

|Copper   |

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|d. |

|IBM Shares   |

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|e. |

|None of the above   |

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|Question 21: [pic] (4 points) |

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|[pic][pic][pic][pic][pic]A five-year bond with a yield of 9% (continuously compounded) pays an 8% coupon at the end of each year. What is the duration of|

|the bond? |

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|Question 22: [pic] (4 points) |

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|[pic][pic][pic][pic][pic]Suppose you enter into an interest rate swap where you are receiving floating and paying fixed. Which of the following is true? |

|a) Your credit risk is greater when the term structure is upward sloping than when it is downward sloping. |

|b) Your credit risk is greater when the term structure is downward sloping than when it is upward sloping. |

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|c) Your credit risk exposure increases when interest rates decline unexpectedly. |

|d) Your credit risk exposure increases when interest rates increase unexpectedly. |

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|Question 23: [pic] (4 points) |

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|[pic][pic][pic][pic][pic]A trader writes two naked put option contracts. The option price is $3, the strike price is is $40 and the stock price is $42. |

|What is the original margin? |

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|Question 24: [pic] (4 points) |

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|[pic][pic][pic][pic][pic]It is January 15, 2009. The quoted price of a T-bond with a 12% coupon that matures on October 15, 2020, is 102-07. What is the |

|cash price? |

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|Question 25: [pic] (4 points) |

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|[pic][pic][pic][pic][pic]Suppose Microsoft is paying LIBOR + 1% per annum to its lenders. If Microsoft enters into a interest rate swap with Intel to |

|receive LIBOR and pay fixed 3.9%, what will be the net effect to Microsoft's payment? |

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|[pic][pic][pic][pic][pic]The current price of a stock is $94, and three-month European call options with a strike price of $95 currently sell for $4.70. |

|An investor who feels that the price of the stock will increase is trying to decide between buying 100 shares and buying 2,000 call options (20 |

|contracts). Both strategies involve an investment of $9,400. How high does the stock price have to rise for the option strategy to be more profitable? |

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