Question 1

Stock options expire on the Sunday following the third Saturday of the designated month.

Accepted Answer

A) True 
 B)False

Question 2

Exhibit 14-10
USE THE FOLLOWING INFORMATION FOR THE NEXT QUESTION(S)
The WallMal Company has entered into a 4-year interest rate swap, with semiannual settlement, to pay a fixed rate of 8% per year and receive 6-month LIBOR. The notional principal is $50,000,000.
-Refer to Exhibit 14-10. Indicate the market value of the swap to the WallMal Company.

Accepted Answer

A)  $5,786,345 
B)  -$3,575,987 
C)  $1,289,450 
D)  -$1,514,900 
E)  $1,250,075 
A)  $5,786,345 
B)  -$3,575,987 
C)  $1,289,450 
D)  -$1,514,900 
E)  $1,250,075

Question 3

Exhibit 14-7
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Black Gold Industries (BGI) is an independent oil producer with production capacity of 500,000 barrels per month. Due to the cost structure of the business, BGI needs to receive $56.50 per barrel in order to remain solvent. On the other side of this situation is Petrochemicals Unlimited (PU) which uses an average of 500,000 barrels of West Texas crude oil in its normal production operations. The nature of PU's business is such that they will financially suffer if they have to pay more than an average of $57.80 per barrel for oil over the next six years. To hedge against their exposure to volatile oil prices, BI and PU contact a swap dealer to arrange the six-year oil swap described below: - $ \quad $ Settlement is made monthly.
- The notional principal is for 500,000 barrels per month.
- The monthly WTI index value is determined as the average of the daily settlement prices for the crude oil futures contract traded on the New York Mercantile Exchange (NYMEX).
- The swap dealer pays BGI $ \$ 57.00 $ per barrel.
- BGI pays the swap dealer the average NYMEX Oil futures price per barrel.
- $ \quad $ PU pays the swap dealer $ \$ 57.50 $ per barrel.
- The swap dealer pays PU dealer the average NYMEX Oi futures price per barrel.
-Refer to Exhibit 14-7. Describe the transaction that occurs between BGI and the swap dealer if the monthly average oil futures settlement price is $58.45.

Accepted Answer

A)  BGI pays the swap dealer $725,000 
B)  The swap dealer pays BGI $725,000 
C)  BGI pays the swap dealer $675,000 
D)  The swap dealer pays BGI $675,000 
E)  None of the above. 
A)  BGI pays the swap dealer $725,000 
B)  The swap dealer pays BGI $725,000 
C)  BGI pays the swap dealer $675,000 
D)  The swap dealer pays BGI $675,000 
E)  None of the above.

Question 4

Exhibit 14-4
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
A company buys an interest rate cap that pays the difference between LIBOR and 8% if LIBOR exceeds 8%. Current LIBOR is 7%. The amount of the option is $2,500,000, and the settlement is every 6 months. Assume a 360 day year.
-Refer to Exhibit 14-4. Find the payoff if LIBOR closes at 7.8%.

Accepted Answer

A)  $0.00 
B)  $25,000.00 
C)  $50,000.00 
D)  -$25,000.00 
E)  -$50,000.00 
A)  $0.00 
B)  $25,000.00 
C)  $50,000.00 
D)  -$25,000.00 
E)  -$50,000.00

Question 5

Exhibit 14-11
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
An international investment firm buys an interest rate cap that pays the difference between LIBOR and 6% if LIBOR exceeds 6%. Current LIBOR is 5%. The amount of the option is $1,500,000, and the settlement is every 3 months. Assume a 360 day year.
-Refer to Exhibit 14-11. Find the payoff if LIBOR closes at 6.3%.

Accepted Answer

A)  -$45,000 
B)  -$11,250 
C)  $0 
D)  $11,250 
E)  $45,000 
A)  -$45,000 
B)  -$11,250 
C)  $0 
D)  $11,250 
E)  $45,000

Question 6

Exhibit 14-4
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
A company buys an interest rate cap that pays the difference between LIBOR and 8% if LIBOR exceeds 8%. Current LIBOR is 7%. The amount of the option is $2,500,000, and the settlement is every 6 months. Assume a 360 day year.
-Refer to Exhibit 14-4. Find the payoff if LIBOR closes at 8.2%.

Accepted Answer

A)  $0.00 
B)  $25,000.00 
C)  $50,000.00 
D)  -$25,000.00 
E)  -$50,000.00 
A)  $0.00 
B)  $25,000.00 
C)  $50,000.00 
D)  -$25,000.00 
E)  -$50,000.00

Question 7

The value of a call option is positively related to:

Accepted Answer

A)  Underlying stock price. 
B)  Time to expiration 
C)  Exercise price. 
D)  Choices a and b. 
E)  Choices b and c. 
A)  Underlying stock price. 
B)  Time to expiration 
C)  Exercise price. 
D)  Choices a and b. 
E)  Choices b and c.

Question 8

Exhibit 14-7
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Black Gold Industries (BGI) is an independent oil producer with production capacity of 500,000 barrels per month. Due to the cost structure of the business, BGI needs to receive $56.50 per barrel in order to remain solvent. On the other side of this situation is Petrochemicals Unlimited (PU) which uses an average of 500,000 barrels of West Texas crude oil in its normal production operations. The nature of PU's business is such that they will financially suffer if they have to pay more than an average of $57.80 per barrel for oil over the next six years. To hedge against their exposure to volatile oil prices, BI and PU contact a swap dealer to arrange the six-year oil swap described below: - $ \quad $ Settlement is made monthly.
- The notional principal is for 500,000 barrels per month.
- The monthly WTI index value is determined as the average of the daily settlement prices for the crude oil futures contract traded on the New York Mercantile Exchange (NYMEX).
- The swap dealer pays BGI $ \$ 57.00 $ per barrel.
- BGI pays the swap dealer the average NYMEX Oil futures price per barrel.
- $ \quad $ PU pays the swap dealer $ \$ 57.50 $ per barrel.
- The swap dealer pays PU dealer the average NYMEX Oi futures price per barrel.
-Refer to Exhibit 14-7. Barring default by PU or BGI, how much compensation does the swap dealer receive each month?

Accepted Answer

A)  $150,000 
B)  $210,000 
C)  $175,000 
D)  $250,000 
E)  None of the above 
A)  $150,000 
B)  $210,000 
C)  $175,000 
D)  $250,000 
E)  None of the above

Question 9

If the hedge ratio is 0.50, this indicates that the portfolio should hold

Accepted Answer

A)  Two shares of stock for every call option written. 
B)  One share of stock for every two call options written. 
C)  Two shares of stock for every call option purchased. 
D)  One share of stock for every two call options purchased. 
E)  Two call options for every put option written. 
A)  Two shares of stock for every call option written. 
B)  One share of stock for every two call options written. 
C)  Two shares of stock for every call option purchased. 
D)  One share of stock for every two call options purchased. 
E)  Two call options for every put option written.

Question 10

A real option is a reference to

Accepted Answer

A)  Options on physical assets. 
B)  Options on commodity futures. 
C)  The value of flexibility embedded in a real asset. 
D)  Choices a and b. 
E)  Choices b and c. 
A)  Options on physical assets. 
B)  Options on commodity futures. 
C)  The value of flexibility embedded in a real asset. 
D)  Choices a and b. 
E)  Choices b and c.

Question 11

In the Black-Scholes option pricing model, an increase in security price (S) will cause

Accepted Answer

A)  An increase in call value and an increase in put value 
B)  An increase in call value and a decrease in put value 
C)  An decrease in call value and an increase in put value 
D)  An decrease in call value and a decrease in put value 
E)  An increase in call value and an increase or decrease in put value 
A)  An increase in call value and an increase in put value 
B)  An increase in call value and a decrease in put value 
C)  An decrease in call value and an increase in put value 
D)  An decrease in call value and a decrease in put value 
E)  An increase in call value and an increase or decrease in put value

Question 12

In the Black-Scholes option pricing model, an increase in security volatility (s) will cause

Accepted Answer

A)  An increase in call value and an increase in put value 
B)  An increase in call value and a decrease in put value 
C)  An decrease in call value and an increase in put value 
D)  An decrease in call value and a decrease in put value 
E)  An increase in call value and an increase or decrease in put value 
A)  An increase in call value and an increase in put value 
B)  An increase in call value and a decrease in put value 
C)  An decrease in call value and an increase in put value 
D)  An decrease in call value and a decrease in put value 
E)  An increase in call value and an increase or decrease in put value

Question 13

Exhibit 14-6
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Chimichango Industries has decided to borrow $50,000,000.00 for six months in two three-month issues. As the Treasurer, you are concerned that interest rates will rise over the next three months and the rate upon which the second payment will be based will be undesirable. (The amount of Chimichango's first payment will be known at origination.) To reduce the company's interest rate exposure, you decide to purchase a 3 ´ 6 FRA whereby you pay the dealer's quoted fixed rate of 5.91% in exchange for receiving 3-month LIBOR at the settlement date. In order to hedge her exposure, the dealer buys LIBOR from Megabuks Industries at its bid rate of 5.85%. (Assume a notional principal of $50,000,000.00 and that there are 60 days between month 3 and month 6.)
-Refer to Exhibit 14-6. Assuming that 3-month LIBOR is 5.6% on the rate determination day, and the contract specified settlement in arrears at month 6, describe the transaction that occurs between the dealer and Megabuks.

Accepted Answer

A)  The dealer is obligated to pay Megabuks $38,750. 
B)  The dealer is obligated to pay Megabuks $31,250. 
C)  Megabuks is obligated to pay the dealer $38,750. 
D)  Megabuks is obligated to pay the dealer $31,250. 
E)  None of the above. 
A)  The dealer is obligated to pay Megabuks $38,750. 
B)  The dealer is obligated to pay Megabuks $31,250. 
C)  Megabuks is obligated to pay the dealer $38,750. 
D)  Megabuks is obligated to pay the dealer $31,250. 
E)  None of the above.

Question 14

Which of the following is not a characteristic of warrants?

Accepted Answer

A)  They are sweeteners added to other security issues. 
B)  After the initial sale, warrants are detachable. 
C)  They pay no dividends. 
D)  They provide no voting rights. 
E)  No dilution protection is offered in the event of stock dividends or stock splits. 
A)  They are sweeteners added to other security issues. 
B)  After the initial sale, warrants are detachable. 
C)  They pay no dividends. 
D)  They provide no voting rights. 
E)  No dilution protection is offered in the event of stock dividends or stock splits.

Question 15

Exhibit 14-12
USE THE FOLLOWING INFORMATION FOR THE NEXT QUESTION(S)
The Skalmory Corporation has entered into a 3-year interest rate swap, with semiannual settlement, to pay a fixed rate of 7.5% per year and receive 6-month LIBOR. The notional principal is $10,000,000.
-Refer to Exhibit 14-12. Assuming that one year after the swap was initiated the fixed rate on a new 2-year receive fixed pay floating LIBOR swap has fallen to 7% per year, calculate the market value of the 7.5% fixed rate bond based on $100 face value. Settlement is on a semiannual basis.

Accepted Answer

A)  $101.33 
B)  $100.92 
C)  $100.00 
D)  $98.67 
E)  $95.83 
A)  $101.33 
B)  $100.92 
C)  $100.00 
D)  $98.67 
E)  $95.83

Question 16

The Black-Scholes model assumes that stock price movements can be described by

Accepted Answer

A)  Geometric moving averages. 
B)  Arithmetic moving averages. 
C)  Regression towards the mean. 
D)  Geometric Brownian motion. 
E)  Stochastic time lags. 
A)  Geometric moving averages. 
B)  Arithmetic moving averages. 
C)  Regression towards the mean. 
D)  Geometric Brownian motion. 
E)  Stochastic time lags.

Question 17

Exhibit 14-10
USE THE FOLLOWING INFORMATION FOR THE NEXT QUESTION(S)
The WallMal Company has entered into a 4-year interest rate swap, with semiannual settlement, to pay a fixed rate of 8% per year and receive 6-month LIBOR. The notional principal is $50,000,000.
-Refer to Exhibit 14-10. Assuming that one year after the swap was initiated the fixed rate on a new 3-year receive fixed pay floating LIBOR swap has fallen to 7% per year, calculate the market value of the 8% fixed rate bond based on $100 face value. Settlement is on a semiannual basis.

Accepted Answer

A)  $102.66 
B)  $100.00 
C)  $95.56 
D)  $89.63 
E)  $70.77 
A)  $102.66 
B)  $100.00 
C)  $95.56 
D)  $89.63 
E)  $70.77

Question 18

Exhibit 14-12
USE THE FOLLOWING INFORMATION FOR THE NEXT QUESTION(S)
The Skalmory Corporation has entered into a 3-year interest rate swap, with semiannual settlement, to pay a fixed rate of 7.5% per year and receive 6-month LIBOR. The notional principal is $10,000,000.
-Refer to Exhibit 14-12. Assume that one year later the fixed rate on a new 2-year receive fixed pay floating LIBOR swap has fallen to 7% per year. Settlement is on a semiannual basis. Calculate the market value of the FRN based on $100 face value.

Accepted Answer

A)  $101.33 
B)  $100.58 
C)  $100.00 
D)  $98.67 
E)  $95.83 
A)  $101.33 
B)  $100.58 
C)  $100.00 
D)  $98.67 
E)  $95.83

Question 19

Exhibit 14-2
USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT QUESTION(S)
The information provided is relevant in the context of a one period (one year) binomial option pricing model. A stock currently trades at $50 per share, a call option on the stock has an exercise price of $45. The stock is equally likely to rise by 25% or fall by 25%. The one-year risk free rate is 2%.
-Refer to Exhibit 14-2. Calculate the price of the call option today (C₀).

Accepted Answer

A)  $7.56 
B)  $17.48 
C)  $9.26 
D)  $5.0 
E)  $17.15 
A)  $7.56 
B)  $17.48 
C)  $9.26 
D)  $5.0 
E)  $17.15

Question 20

If interest rates fall, an interest rate cap would expire unexercised.

Accepted Answer

A) True 
 B)False

Stock options expire on the Sunday following the third Saturday of the designated month.

The value of a call option is positively related to:

If the hedge ratio is 0.50, this indicates that the portfolio should hold

A real option is a reference to

In the Black-Scholes option pricing model, an increase in security price (S) will cause

In the Black-Scholes option pricing model, an increase in security volatility (s) will cause

Which of the following is not a characteristic of warrants?

The Black-Scholes model assumes that stock price movements can be described by

If interest rates fall, an interest rate cap would expire unexercised.

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Securities Markets and the Economy

Efficient Capital Markets

An Introduction to Portfolio Management

Asset Pricing Models: Capm and Apt

Economic and Industry Analysis

Company Analysis and Stock Valuation

Technical Analysis

Bond Fundamentals

The Analysis and Valuation of Bonds

An Introduction to Derivative Markets and Securities

Equity Portfolio Management Strategies

Bond Portfolio Management Strategies

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Analysis of Financial Statements

An Introduction to Security Valuation

Web Appendix: A Review of Statistics and the Security Market Line

Web Appendix: A Review of Statistics and the Security Market Line

Appendix: Objectives and Constraints of Institutional Investors

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Exam 14: Derivatives: Analysis and Valuation

Stock options expire on the Sunday following the third Saturday of the designated month.

The value of a call option is positively related to:

If the hedge ratio is 0.50, this indicates that the portfolio should hold

A real option is a reference to

In the Black-Scholes option pricing model, an increase in security price (S) will cause

In the Black-Scholes option pricing model, an increase in security volatility (s) will cause

Which of the following is not a characteristic of warrants?

The Black-Scholes model assumes that stock price movements can be described by

If interest rates fall, an interest rate cap would expire unexercised.

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Securities Markets and the Economy

Efficient Capital Markets

An Introduction to Portfolio Management

Asset Pricing Models: Capm and Apt

Economic and Industry Analysis

Company Analysis and Stock Valuation

Technical Analysis

Bond Fundamentals

The Analysis and Valuation of Bonds

An Introduction to Derivative Markets and Securities

Equity Portfolio Management Strategies

Bond Portfolio Management Strategies

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Analysis of Financial Statements

An Introduction to Security Valuation

Web Appendix: A Review of Statistics and the Security Market Line

Web Appendix: A Review of Statistics and the Security Market Line

Appendix: Objectives and Constraints of Institutional Investors

Filters