Question 1

Describe the concept of a bid-ask spread and how that impacts the cash flows of an investor.

Accepted Answer

In some markets,especially OTC,dealers complete transactions.Buyers of stock pay the higher of the spread and sellers receive the lower price in the spread.The difference is the dealer's profit.

Question 2

A mutual fund is engaged in the short term and temporary purchase of index futures,for purposes of minimizing its cash exposures.Which "use" most closely explains their actions?

Accepted Answer

A)  Risk management 
B)  Speculation 
C)  Reduced transaction costs 
D)  Regulatory arbitrage 
A)  Risk management 
B)  Speculation 
C)  Reduced transaction costs 
D)  Regulatory arbitrage C

Question 3

What would cause the spread between the market rate of interest and the repo rate to be small?

Accepted Answer

If there is a low demand to short sell a security or a large supply of the security repo rates will be higher due to lack of demand for short instruments.

Question 4

Which of the following is not a derivative instrument?

Accepted Answer

A)  Contract to sell corn 
B)  Option agreement to buy land 
C)  Installment sales agreement 
D)  Mortgage backed security 
A)  Contract to sell corn 
B)  Option agreement to buy land 
C)  Installment sales agreement 
D)  Mortgage backed security

Question 5

Assume that you open a 100-share short position in Jiffy,Inc.common stock at the bid-ask price of $32.00 - $32.50.When you close your position,the bid-ask prices are $32.50 - $33.00.If you pay a commission rate of 0.5%,what is your profit or loss on the short investment?

Accepted Answer

A)  $32.50 gain 
B)  $16.25 loss 
C)  $132.50 loss 
D)  $100.00 gain 
A)  $32.50 gain 
B)  $16.25 loss 
C)  $132.50 loss 
D)  $100.00 gain

Question 6

All of the following are financially engineered products,except:

Accepted Answer

A)  Mortgage 
B)  Mortgage backed security 
C)  Interest only 
D)  Principal only 
A)  Mortgage 
B)  Mortgage backed security 
C)  Interest only 
D)  Principal only

Question 7

Why might a variable rate mortgage be considered a "derivative" and a fixed rate mortgage not?

Accepted Answer

The pure definition of a derivative is o

Question 8

Assume that you purchase 100 shares of Jiffy,Inc.common stock at the bid-ask prices of $32.00 - $32.50.When you sell,the bid-ask prices are $32.50 - $33.00.If you pay a commission rate of 0.5%,what is your profit or loss?

Accepted Answer

A)  $0 
B)  $16.25 loss 
C)  $32.50 gain 
D)  $32.50 loss 
A)  $0 
B)  $16.25 loss 
C)  $32.50 gain 
D)  $32.50 loss

Question 9

A firm provides a service that benefits from decreasing employment.This firm has a risk exposure to macro event.All other variables being equal,which of the following derivative securities is the firm most likely use to hedge its exposure?

Accepted Answer

A)  Short position in an economic futures 
B)  Long position in an economic futures 
C)  Short position in an interest rate futures 
D)  Long position in an interest rate futures 
A)  Short position in an economic futures 
B)  Long position in an economic futures 
C)  Short position in an interest rate futures 
D)  Long position in an interest rate futures

Question 10

Select the family member who is offering the most diversification to the rest of the family.

Accepted Answer

A)  Dad works for General Motors 
B)  Mom works for Goodyear 
C)  Daughter works for Jiffy Lube 
D)  Son works for Eli Lilly & Company 
A)  Dad works for General Motors 
B)  Mom works for Goodyear 
C)  Daughter works for Jiffy Lube 
D)  Son works for Eli Lilly & Company

Question 11

What is the cost of 100 shares of Jiffy,Inc.stock given that the bid-ask prices are $31.25 - $32.00 and a $15.00 commission per transaction exists?

Accepted Answer

A)  $3215 
B)  $3140 
C)  $3125 
D)  $3200 
A)  $3215 
B)  $3140 
C)  $3125 
D)  $3200

Question 12

Assume that an investor lends 100 shares of Jiffy,Inc.common stock to a short seller.The bid-ask prices are $32.00 - $32.50.When the position is closed,the bid-ask prices are $32.50 - $33.00.The commission rate is 0.5%.The market interest rate is 5.0% and the short rebate rate is 3.0%.Calculate the gain or loss to the lender.Assume the lender is not subject to a bid-ask loss or commissions.

Accepted Answer

A)  $164.00 gain 
B)  $164.00 loss 
C)  $100.00 gain 
D)  $100.00 loss 
A)  $164.00 gain 
B)  $164.00 loss 
C)  $100.00 gain 
D)  $100.00 loss

Question 13

During the growing season,a corn farmer sells short corn futures contracts in an amount equal to her crop.If upon harvesting and selling her crop she maintains the contracts,she is then considered a(n):

Accepted Answer

A)  Hedger 
B)  Speculator 
C)  Arbitrager 
D)  None of the above 
A)  Hedger 
B)  Speculator 
C)  Arbitrager 
D)  None of the above

Question 14

According to trading volume data tabulated by the Wall Street Journal for April 15,2010,which index futures contact experienced the highest total open interest?

Accepted Answer

A)  DJ Industrial Average 
B)  S&P 500 Index 
C)  Mini S&P 500 
D)  Mini Nasdaq 100 
A)  DJ Industrial Average 
B)  S&P 500 Index 
C)  Mini S&P 500 
D)  Mini Nasdaq 100

Question 15

Assume that you open a 100-share short position in Jiffy,Inc.common stock at the bid-ask prices of $32.00 - $32.50.When you close your position,the bid-ask prices are $32.50 - $33.00.You pay a commission rate of 0.5%.The market interest rate is 5.0% and the short rebate rate is 3.0%.What is your additional gain or loss due to leasing the asset?

Accepted Answer

A)  $64.00 loss 
B)  $160.00 loss 
C)  $96.00 gain 
D)  $0 
A)  $64.00 loss 
B)  $160.00 loss 
C)  $96.00 gain 
D)  $0

Question 16

Discuss the origins of derivatives in terms of risk reduction using the concept of evolution to integrate the additional uses of derivatives into the discussion.Conclude by asking students to list methods by which third parties could make fees by interjecting themselves into the process.

Accepted Answer

The origins of derivatives can be traced

Question 17

For families employed and living in "company towns" (i.e.,where the major employer owns all homes,retail stores,etc.),explain the lack of diversification.

Accepted Answer

Since the large local employer owns all

Question 18

Why would a corn farmer,who maintains a short futures contract after harvesting and selling her crop,be considered a speculator?

Accepted Answer

The farmer was a hedger until

Question 19

Who from the following list would be considered a speculator by entering into a futures or options contract on commodities?

Accepted Answer

A)  Farmer 
B)  Corn delivery truck driver 
C)  Food manufacturer 
D)  None of the above 
A)  Farmer 
B)  Corn delivery truck driver 
C)  Food manufacturer 
D)  None of the above

Exam 1: Introduction to Derivatives

Describe the concept of a bid-ask spread and how that impacts the cash flows of an investor.

A mutual fund is engaged in the short term and temporary purchase of index futures,for purposes of minimizing its cash exposures.Which "use" most closely explains their actions?

What would cause the spread between the market rate of interest and the repo rate to be small?

Which of the following is not a derivative instrument?

Assume that you open a 100-share short position in Jiffy,Inc.common stock at the bid-ask price of $32.00 - $32.50.When you close your position,the bid-ask prices are $32.50 - $33.00.If you pay a commission rate of 0.5%,what is your profit or loss on the short investment?

All of the following are financially engineered products,except:

Why might a variable rate mortgage be considered a "derivative" and a fixed rate mortgage not?

Assume that you purchase 100 shares of Jiffy,Inc.common stock at the bid-ask prices of $32.00 - $32.50.When you sell,the bid-ask prices are $32.50 - $33.00.If you pay a commission rate of 0.5%,what is your profit or loss?

A firm provides a service that benefits from decreasing employment.This firm has a risk exposure to macro event.All other variables being equal,which of the following derivative securities is the firm most likely use to hedge its exposure?

Select the family member who is offering the most diversification to the rest of the family.

What is the cost of 100 shares of Jiffy,Inc.stock given that the bid-ask prices are $31.25 - $32.00 and a $15.00 commission per transaction exists?

During the growing season,a corn farmer sells short corn futures contracts in an amount equal to her crop.If upon harvesting and selling her crop she maintains the contracts,she is then considered a(n):

According to trading volume data tabulated by the Wall Street Journal for April 15,2010,which index futures contact experienced the highest total open interest?

Discuss the origins of derivatives in terms of risk reduction using the concept of evolution to integrate the additional uses of derivatives into the discussion.Conclude by asking students to list methods by which third parties could make fees by interjecting themselves into the process.

For families employed and living in "company towns" (i.e.,where the major employer owns all homes,retail stores,etc.),explain the lack of diversification.

Why would a corn farmer,who maintains a short futures contract after harvesting and selling her crop,be considered a speculator?

Who from the following list would be considered a speculator by entering into a futures or options contract on commodities?

An Introduction to Forwards and Options

Insurance, collars, and Other Strategies

Introduction to Risk Management

Financial Forwards and Futures

Commodity Forwards and Futures

Interest Rate Forwards and Futures

Swaps

Parity and Other Option Relationships

Binomial Option Pricing: Basic Concepts

Binomial Option Pricing: Selected Topics

The Black-Scholes Formula

Market-Making and Delta-Hedging

Exotic Options: I

Financial Engineering and Security Design

Corporate Applications

Real Options

The Lognormal Distribution

Monte Carlo Valuation

Brownian Motion and Itos Lemma

The Black-Scholes-Merton Equation

Risk-Neutral and Martingale Pricing

Exotic Options: 2

Volatility

Interest Rate and Bond Derivatives

Value at Risk

Credit Risk

Filters