Question 1

A short forward contract on an asset plus a long position in a European call option on the asset with a strike price equal to the forward price is equivalent to

Accepted Answer

A)  A short position in a call option 
B)  A short position in a put option 
C)  A long position in a put option 
D)  None of the above 
A)  A short position in a call option 
B)  A short position in a put option 
C)  A long position in a put option 
D)  None of the above C

Question 2

Which of the following is NOT true about call and put options?

Accepted Answer

A)  An American option can be exercised at any time during its life 
B)  A European option can only be exercised only on the maturity date 
C)  Investors must pay an upfront price (the option premium) for an option contract 
D)  The price of a call option increases as the strike price increases 
A)  An American option can be exercised at any time during its life 
B)  A European option can only be exercised only on the maturity date 
C)  Investors must pay an upfront price (the option premium) for an option contract 
D)  The price of a call option increases as the strike price increases D

Question 3

Which of the following is true about a long forward contract?

Accepted Answer

A)  The contract becomes more valuable as the price of the asset declines 
B)  The contract becomes more valuable as the price of the asset rises 
C)  The contract is worth zero if the price of the asset declines after the contract has been entered into 
D)  The contract is worth zero if the price of the asset rises after the contract has been entered into 
A)  The contract becomes more valuable as the price of the asset declines 
B)  The contract becomes more valuable as the price of the asset rises 
C)  The contract is worth zero if the price of the asset declines after the contract has been entered into 
D)  The contract is worth zero if the price of the asset rises after the contract has been entered into B

Question 4

Which of the following is NOT true?

Accepted Answer

A)  A call option gives the holder the right to buy an asset by a certain date for a certain price 
B)  A put option gives the holder the right to sell an asset by a certain date for a certain price 
C)  The holder of a call or put option must exercise the right to sell or buy an asset 
D)  The holder of a forward contract is obligated to buy or sell an asset 
A)  A call option gives the holder the right to buy an asset by a certain date for a certain price 
B)  A put option gives the holder the right to sell an asset by a certain date for a certain price 
C)  The holder of a call or put option must exercise the right to sell or buy an asset 
D)  The holder of a forward contract is obligated to buy or sell an asset

Question 5

Which of the following best describes the term "spot price"?

Accepted Answer

A)  The price for immediate delivery 
B)  The price for delivery at a future time 
C)  The price of an asset that has been damaged 
D)  The price of renting an asset 
A)  The price for immediate delivery 
B)  The price for delivery at a future time 
C)  The price of an asset that has been damaged 
D)  The price of renting an asset

Question 6

Which of the following describes European options?

Accepted Answer

A)  Sold in Europe 
B)  Priced in Euros 
C)  Exercisable only at maturity 
D)  Calls (there are no puts) 
A)  Sold in Europe 
B)  Priced in Euros 
C)  Exercisable only at maturity 
D)  Calls (there are no puts)

Question 7

An investor sells a futures contract an asset when the futures price is $1,500. Each contract is on 100 units of the asset. The contract is closed out when the futures price is $1,540. Which of the following is true?

Accepted Answer

A)  The investor has made a gain of $4,000 
B)  The investor has made a loss of $4,000 
C)  The investor has made a gain of $2,000 
D)  The investor has made a loss of $2,000 
A)  The investor has made a gain of $4,000 
B)  The investor has made a loss of $4,000 
C)  The investor has made a gain of $2,000 
D)  The investor has made a loss of $2,000

Question 8

Which of the following is NOT true?

Accepted Answer

A)  When a CBOE call option on IBM is exercised, IBM issues more stock 
B)  An American option can be exercised at any time during its life 
C)  An call option will always be exercised at maturity if the underlying asset price is greater than the strike price 
D)  A put option will always be exercised at maturity if the strike price is greater than the underlying asset price 
A)  When a CBOE call option on IBM is exercised, IBM issues more stock 
B)  An American option can be exercised at any time during its life 
C)  An call option will always be exercised at maturity if the underlying asset price is greater than the strike price 
D)  A put option will always be exercised at maturity if the strike price is greater than the underlying asset price

Question 9

Which of the following is approximately true when size is measured in terms of the underlying principal amounts or value of the underlying assets?

Accepted Answer

A)  The exchange-traded market is twice as big as the over-the-counter market 
B)  The over-the-counter market is twice as big as the exchange-traded market 
C)  The exchange-traded market is ten times as big as the over-the-counter market 
D)  The over-the-counter market is ten times as big as the exchange-traded market 
A)  The exchange-traded market is twice as big as the over-the-counter market 
B)  The over-the-counter market is twice as big as the exchange-traded market 
C)  The exchange-traded market is ten times as big as the over-the-counter market 
D)  The over-the-counter market is ten times as big as the exchange-traded market

Question 10

A company knows it will have to pay a certain amount of a foreign currency to one of its suppliers in the future. Which of the following is true?

Accepted Answer

A)  A forward contract can be used to lock in the exchange rate 
B)  A forward contract will always give a better outcome than an option 
C)  An option will always give a better outcome than a forward contract 
D)  An option can be used to lock in the exchange rate 
A)  A forward contract can be used to lock in the exchange rate 
B)  A forward contract will always give a better outcome than an option 
C)  An option will always give a better outcome than a forward contract 
D)  An option can be used to lock in the exchange rate

Question 11

A one-year call option on a stock with a strike price of $30 costs $3; a one-year put option on the stock with a strike price of $30 costs $4. Suppose that a trader buys two call options and one put option. The breakeven stock price above which the trader makes a profit is

Accepted Answer

A)  $35 
B)  $40 
C)  $30 
D)  $36 
A)  $35 
B)  $40 
C)  $30 
D)  $36

Question 12

A one-year forward contract is an agreement where

Accepted Answer

A)  One side has the right to buy an asset for a certain price in one year's time 
B)  One side has the obligation to buy an asset for a certain price in one year's time 
C)  One side has the obligation to buy an asset for a certain price at some time during the next year 
D)  One side has the obligation to buy an asset for the market price in one year's time 
A)  One side has the right to buy an asset for a certain price in one year's time 
B)  One side has the obligation to buy an asset for a certain price in one year's time 
C)  One side has the obligation to buy an asset for a certain price at some time during the next year 
D)  One side has the obligation to buy an asset for the market price in one year's time

Question 13

The price of a stock on February 1 is $84. A trader buys 200 put options on the stock with a strike price of $90 when the option price is $10. The options are exercised when the stock price is $85. The trader's net profit or loss is

Accepted Answer

A)  Loss of $1,000 
B)  Loss of $2,000 
C)  Gain of $200 
D)  Gain of $1000 
A)  Loss of $1,000 
B)  Loss of $2,000 
C)  Gain of $200 
D)  Gain of $1000

Question 14

The price of a stock on February 1 is $124. A trader sells 200 put options on the stock with a strike price of $120 when the option price is $5. The options are exercised when the stock price is $110. The trader's net profit or loss is

Accepted Answer

A)  Gain of $1,000 
B)  Loss of $2,000 
C)  Loss of $2,800 
D)  Loss of $1,000 
A)  Gain of $1,000 
B)  Loss of $2,000 
C)  Loss of $2,800 
D)  Loss of $1,000

Question 15

Which of the following best describes a central clearing party?

Accepted Answer

A)  It is a trader that works for an exchange 
B)  It stands between two parties in the over-the-counter market 
C)  It is a trader that works for a bank 
D)  It helps facilitate futures trades 
A)  It is a trader that works for an exchange 
B)  It stands between two parties in the over-the-counter market 
C)  It is a trader that works for a bank 
D)  It helps facilitate futures trades

Question 16

The price of a stock on July 1 is $57. A trader buys 100 call options on the stock with a strike price of $60 when the option price is $2. The options are exercised when the stock price is $65. The trader's net profit is

Accepted Answer

A)  $700 
B)  $500 
C)  $300 
D)  $600 
A)  $700 
B)  $500 
C)  $300 
D)  $600

Question 17

A trader has a portfolio worth $5 million that mirrors the performance of a stock index. The stock index is currently 1,250. Futures contract trade on the index with one contract being on 250 times the index. To remove market risk from the portfolio the trader should

Accepted Answer

A)  Buy 16 contracts 
B)  Sell 16 contracts 
C)  Buy 20 contracts 
D)  Sell 20 contracts 
A)  Buy 16 contracts 
B)  Sell 16 contracts 
C)  Buy 20 contracts 
D)  Sell 20 contracts

Question 18

A speculator can choose between buying 100 shares of a stock for $40 per share and buying 1000 European call options on the stock with a strike price of $45 for $4 per option. For second alternative to give a better outcome at the option maturity, the stock price must be above

Accepted Answer

A)  $45 
B)  $46 
C)  $55 
D)  $50 
A)  $45 
B)  $46 
C)  $55 
D)  $50

Question 19

A one-year call option on a stock with a strike price of $30 costs $3; a one-year put option on the stock with a strike price of $30 costs $4. Suppose that a trader buys two call options and one put option. The breakeven stock price below which the trader makes a profit is

Accepted Answer

A)  $25 
B)  $28 
C)  $26 
D)  $20 
A)  $25 
B)  $28 
C)  $26 
D)  $20

Question 20

The price of a stock on February 1 is $48. A trader sells 200 put options on the stock with a strike price of $40 when the option price is $2. The options are exercised when the stock price is $39. The trader's net profit or loss is

Accepted Answer

A)  Loss of $800 
B)  Loss of $200 
C)  Gain of $200 
D)  Loss of $900 
A)  Loss of $800 
B)  Loss of $200 
C)  Gain of $200 
D)  Loss of $900

Exam 1: Introduction

A short forward contract on an asset plus a long position in a European call option on the asset with a strike price equal to the forward price is equivalent to

Which of the following is NOT true about call and put options?

Which of the following is true about a long forward contract?

Which of the following is NOT true?

Which of the following best describes the term "spot price"?

Which of the following describes European options?

An investor sells a futures contract an asset when the futures price is $1,500. Each contract is on 100 units of the asset. The contract is closed out when the futures price is $1,540. Which of the following is true?

Which of the following is NOT true?

Which of the following is approximately true when size is measured in terms of the underlying principal amounts or value of the underlying assets?

A company knows it will have to pay a certain amount of a foreign currency to one of its suppliers in the future. Which of the following is true?

A one-year call option on a stock with a strike price of $30 costs $3; a one-year put option on the stock with a strike price of $30 costs $4. Suppose that a trader buys two call options and one put option. The breakeven stock price above which the trader makes a profit is

A one-year forward contract is an agreement where

The price of a stock on February 1 is $84. A trader buys 200 put options on the stock with a strike price of $90 when the option price is $10. The options are exercised when the stock price is $85. The trader's net profit or loss is

The price of a stock on February 1 is $124. A trader sells 200 put options on the stock with a strike price of $120 when the option price is $5. The options are exercised when the stock price is $110. The trader's net profit or loss is

Which of the following best describes a central clearing party?

The price of a stock on July 1 is $57. A trader buys 100 call options on the stock with a strike price of $60 when the option price is $2. The options are exercised when the stock price is $65. The trader's net profit is

A trader has a portfolio worth $5 million that mirrors the performance of a stock index. The stock index is currently 1,250. Futures contract trade on the index with one contract being on 250 times the index. To remove market risk from the portfolio the trader should

A speculator can choose between buying 100 shares of a stock for $40 per share and buying 1000 European call options on the stock with a strike price of $45 for $4 per option. For second alternative to give a better outcome at the option maturity, the stock price must be above

A one-year call option on a stock with a strike price of $30 costs $3; a one-year put option on the stock with a strike price of $30 costs $4. Suppose that a trader buys two call options and one put option. The breakeven stock price below which the trader makes a profit is

The price of a stock on February 1 is $48. A trader sells 200 put options on the stock with a strike price of $40 when the option price is $2. The options are exercised when the stock price is $39. The trader's net profit or loss is

Mechanics of Futures Markets

Hedging Strategies Using Futures

Interest Rates

Determination of Forward and Futures Prices

Interest Rate Futures

Swaps

Securitization and the Credit Crisis of 2007

Mechanics of Options Markets

Properties of Stock Options

Trading Strategies Involving Options

Introduction to Binomial Trees

Valuing Stock Options: the Bsm Model

Employee Stock Options

Options on Stock Indices and Currencies

Futures Options

The Greek Letters

Binomial Trees in Practice

Volatility Smiles

Value at Risk

Interest Rate Options

Exotic Options and Other Nonstandard Products

Credit Derivatives

Weather, Energy, and Insurance Derivatives

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