Question 1

The price of an option can be separated into two parts, its extrinsic value and its risk premium.

Accepted Answer

A) True 
 B)False

Question 2

Which of the below statements is FALSE?

Accepted Answer

A)  A cash and carry trade strategy includes selling a futures contract and borrowing cash to purchase a security that is "carried" to the futures settlement date. 
B)  A reverse cash and carry trade strategy includes buying a futures contract, short selling a security and lending the proceeds. 
C)  There exists a futures price that would prevent the opportunity for the riskless arbitrage profit. 
D)  An equilibrium futures price is a futures price where any higher or lower futures price would disallow riskless arbitrage profits. 
A)  A cash and carry trade strategy includes selling a futures contract and borrowing cash to purchase a security that is "carried" to the futures settlement date. 
B)  A reverse cash and carry trade strategy includes buying a futures contract, short selling a security and lending the proceeds. 
C)  There exists a futures price that would prevent the opportunity for the riskless arbitrage profit. 
D)  An equilibrium futures price is a futures price where any higher or lower futures price would disallow riskless arbitrage profits.

Question 3

To determine the value of the ________, H, we must know Cᵤ and Cd. These two values are equal to the difference between the price of the asset and the strike price in the two possible states.

Accepted Answer

A)  put option 
B)  call option 
C)  hedge ratio 
D)  payoff ratio 
A)  put option 
B)  call option 
C)  hedge ratio 
D)  payoff ratio

Question 4

What is the time premium of an option?

Accepted Answer

The time premium of an option is the amo

Question 5

Solving for the theoretical futures price, we get ________.

Accepted Answer

A)  F = P + P(y - r). 
B)  F = P + P(r - y). 
C)  F = P - P(r + y). 
D)  P = F + F(r - y). 
A)  F = P + P(y - r). 
B)  F = P + P(r - y). 
C)  F = P - P(r + y). 
D)  P = F + F(r - y).

Question 6

You borrow $200 at 10% per year and proceed to buy Asset XYZ for $200 in the cash market. This asset pays $5 quarterly. You then immediately sell a futures contract at $214 requiring delivery of asset XYZ in three months. Which of the below statements is TRUE?

Accepted Answer

A)  At the end of three month, the settlement of the futures contract generates a total proceeds of $220. 
B)  At the end of three month, the cost of the loan generates a total outlay of $206 
C)  Your strategy of selling the futures contract after borrowing money to buy the asset produces a net profit of $15. 
D)  None of these 
A)  At the end of three month, the settlement of the futures contract generates a total proceeds of $220. 
B)  At the end of three month, the cost of the loan generates a total outlay of $206 
C)  Your strategy of selling the futures contract after borrowing money to buy the asset produces a net profit of $15. 
D)  None of these

Question 7

Which of the below statements is FALSE?

Accepted Answer

A)  It is important to note that, in the absence of initial and variation margins, the theoretical price for the contract is technically the theoretical price for a forward contract, not the theoretical price for a futures contract. 
B)  For cash and carry trade, the futures price that would produce no arbitrage profit is: F = P + P(rB - y) where P is the repayment of principal of loan, rB is the borrowing rate, and y is the cash yield. 
C)  For reverse cash and carry trade, the futures price that would prevent a riskless profit is: F = P + P(rL - y) where P is the repayment of principal of loan, rL is the lending rate, and y is the cash yield. 
D)  In deriving the theoretical futures price, we consider transaction costs of the elements in the arbitrage strategies. 
A)  It is important to note that, in the absence of initial and variation margins, the theoretical price for the contract is technically the theoretical price for a forward contract, not the theoretical price for a futures contract. 
B)  For cash and carry trade, the futures price that would produce no arbitrage profit is: F = P + P(rB - y) where P is the repayment of principal of loan, rB is the borrowing rate, and y is the cash yield. 
C)  For reverse cash and carry trade, the futures price that would prevent a riskless profit is: F = P + P(rL - y) where P is the repayment of principal of loan, rL is the lending rate, and y is the cash yield. 
D)  In deriving the theoretical futures price, we consider transaction costs of the elements in the arbitrage strategies.

Question 8

Consider the "cash and carry trade" where you sell (or take a short position in) the futures contract, purchase Asset XYZ, and borrow until the settlement date. In computing the "profit," which of the below statements is TRUE?

Accepted Answer

A)  Profit = Total proceeds - Total outlay 
B)  Profit = F + yP + (P - rP) 
C)  Profit = Total outlay - Total proceeds 
D)  Profit = P + yP - (P + rF) 
A)  Profit = Total proceeds - Total outlay 
B)  Profit = F + yP + (P - rP) 
C)  Profit = Total outlay - Total proceeds 
D)  Profit = P + yP - (P + rF)

Question 9

The ________ of an option, at any time, is its economic value if it is exercised immediately. If no positive economic value would result from exercising immediately, ________.

Accepted Answer

A)  extrinsic value; extrinsic value is zero. 
B)  intrinsic value; intrinsic value is zero. 
C)  extrinsic value; intrinsic value is negative. 
D)  intrinsic value; intrinsic value is positive. 
A)  extrinsic value; extrinsic value is zero. 
B)  intrinsic value; intrinsic value is zero. 
C)  extrinsic value; intrinsic value is negative. 
D)  intrinsic value; intrinsic value is positive.

Question 10

An option buyer can realize the value of a position taken in the option by ________.

Accepted Answer

A)  exercising the option. 
B)  selling the option for its exercise price. 
C)  buying a put option. 
D)  selling a put option. 
A)  exercising the option. 
B)  selling the option for its exercise price. 
C)  buying a put option. 
D)  selling a put option.

Question 11

The theoretical futures price depends on the price of the underlying asset in the futures market, the cost of financing a position in the underlying asset, and the cash yield on the underlying asset.

Accepted Answer

A) True 
 B)False

Question 12

________ on the underlying asset tend to decrease the price of a call option because the cash payments make it more attractive to hold the underlying asset than to hold the option. For put options, ________ on the underlying asset tend to increase the price.

Accepted Answer

A)  Noncash payments; cash payments 
B)  Cash payments; noncash payments 
C)  Cash payments; cash payments 
D)  Noncash payments; noncash payments 
A)  Noncash payments; cash payments 
B)  Cash payments; noncash payments 
C)  Cash payments; cash payments 
D)  Noncash payments; noncash payments

Question 13

The ________ is the sum of the option's intrinsic value and a premium over intrinsic value that is often referred to as the ________.

Accepted Answer

A)  option price time value or time premium. 
B)  forward value time value or time discount. 
C)  futures value time value or time premium. 
D)  option price time value or time discount. 
A)  option price time value or time premium. 
B)  forward value time value or time discount. 
C)  futures value time value or time premium. 
D)  option price time value or time discount.

Question 14

The ________ is fixed for the life of the option. All other factors equal, the lower the strike price, the ________ the price for a call option. For put options, the ________ the exercise price, the higher the option price.

Accepted Answer

A)  strike price; lower; higher 
B)  exercise price; higher; lower 
C)  strike price; higher; higher 
D)  market price; lower; lower 
A)  strike price; lower; higher 
B)  exercise price; higher; lower 
C)  strike price; higher; higher 
D)  market price; lower; lower

Question 15

According to the arbitrage arguments, what information determines the equilibrium or theoretical futures price?

Accepted Answer

According to the arbitrage arguments, th

Question 16

Consider the "reverse cash and carry trade" where you buy the futures contract, short sell Asset XYZ, and invest or lend until the settlement date. In computing the value "from the loan," which of the below statements is TRUE?

Accepted Answer

A)  rP= principal from maturing of investment 
B)  P = interest earned on loan 
C)  P + rP = total proceeds 
D)  P - rP = payment received from investing in Asset XYZ 
A)  rP= principal from maturing of investment 
B)  P = interest earned on loan 
C)  P + rP = total proceeds 
D)  P - rP = payment received from investing in Asset XYZ

Question 17

To show how to calculate the hedge ratio, we use notation that includes the following: ________.

Accepted Answer

A)  S = current asset price and C = current price of a call option. 
B)  Cd = intrinsic value of the call option if the asset price goes up and E = strike price of the call option. 
C)  d = current price of a call option and r = a risk-free one-period interest rate . 
D)  E = strike price of the call option and u = current asset price. 
A)  S = current asset price and C = current price of a call option. 
B)  Cd = intrinsic value of the call option if the asset price goes up and E = strike price of the call option. 
C)  d = current price of a call option and r = a risk-free one-period interest rate . 
D)  E = strike price of the call option and u = current asset price.

Question 18

Factors influence the price of an option include the ________.

Accepted Answer

A)  future price of the underlying asset and the strike price. 
B)  time to expiration of the option and the expected price volatility of the underlying asset over the past year. 
C)  long-term and the risk-free interest rate over the life of the option. 
D)  the strike price and the anticipated cash payments on the underlying asset over the life of the option. 
A)  future price of the underlying asset and the strike price. 
B)  time to expiration of the option and the expected price volatility of the underlying asset over the past year. 
C)  long-term and the risk-free interest rate over the life of the option. 
D)  the strike price and the anticipated cash payments on the underlying asset over the life of the option.

Exam 28: Pricing of Futures and Options Contracts

The price of an option can be separated into two parts, its extrinsic value and its risk premium.

Which of the below statements is FALSE?

To determine the value of the ________, H, we must know Cᵤ and Cd. These two values are equal to the difference between the price of the asset and the strike price in the two possible states.

What is the time premium of an option?

Solving for the theoretical futures price, we get ________.

You borrow $200 at 10% per year and proceed to buy Asset XYZ for $200 in the cash market. This asset pays $5 quarterly. You then immediately sell a futures contract at $214 requiring delivery of asset XYZ in three months. Which of the below statements is TRUE?

Which of the below statements is FALSE?

Consider the "cash and carry trade" where you sell (or take a short position in) the futures contract, purchase Asset XYZ, and borrow until the settlement date. In computing the "profit," which of the below statements is TRUE?

The ________ of an option, at any time, is its economic value if it is exercised immediately. If no positive economic value would result from exercising immediately, ________.

An option buyer can realize the value of a position taken in the option by ________.

The theoretical futures price depends on the price of the underlying asset in the futures market, the cost of financing a position in the underlying asset, and the cash yield on the underlying asset.

________ on the underlying asset tend to decrease the price of a call option because the cash payments make it more attractive to hold the underlying asset than to hold the option. For put options, ________ on the underlying asset tend to increase the price.

The ________ is the sum of the option's intrinsic value and a premium over intrinsic value that is often referred to as the ________.

The ________ is fixed for the life of the option. All other factors equal, the lower the strike price, the ________ the price for a call option. For put options, the ________ the exercise price, the higher the option price.

According to the arbitrage arguments, what information determines the equilibrium or theoretical futures price?

Consider the "reverse cash and carry trade" where you buy the futures contract, short sell Asset XYZ, and invest or lend until the settlement date. In computing the value "from the loan," which of the below statements is TRUE?

To show how to calculate the hedge ratio, we use notation that includes the following: ________.

Factors influence the price of an option include the ________.

Introduction

Financial Institutions, Financial Intermediaries, and Asset Management Firms

Depository Institutions: Activities and Characteristics

The U.S. Federal Reserve and the Creation of Money

Monetary Policy in the United States

Insurance Companies

Investment Companies and Exchange Traded Funds

Pension Funds

Properties and Pricing of Financial Assets

The Level and Structure of Interest Rates

The Term Structure of Interest Rates

Risk/Return and Asset Pricing Models

Primary Markets and the Underwriting of Securities

Secondary Markets

Treasury and Agency Securities Markets

Municipal Securities Markets

Markets for Common Stock: The Basic Characteristics

Markets for Common Stock: Structure and Organization

Markets for Corporate Senior Instruments: I

Markets for Corporate Senior Instruments: II

The Markets for Bank Obligations

The Residential Mortgage Market

Mortgage-Backed Securities Market

Market for Commercial Mortgage Loans and Commercial Mortgage-Backed Securities

Market for Asset-Backed Securities

Financial Futures Markets

Options Markets

The Applications of Futures and Options Contracts

OTC Interest Rate Derivatives: Forward Rate Agreements, Swaps, Caps, and Floors

Market for Credit Risk Transfer Vehicles: Credit Derivatives and Collateralized Debt Obligations

The Market for Foreign Exchange and Risk Control Instruments

Filters

The of an option, at any time, is its economic value if it is exercised immediately. If no positive economic value would result from exercising immediately, .

on the underlying asset tend to decrease the price of a call option because the cash payments make it more attractive to hold the underlying asset than to hold the option. For put options, on the underlying asset tend to increase the price.

The is the sum of the option's intrinsic value and a premium over intrinsic value that is often referred to as the .

The is fixed for the life of the option. All other factors equal, the lower the strike price, the the price for a call option. For put options, the the exercise price, the higher the option price.