Question 1

The daily settlement brings the value of a futures contract back to zero.

Accepted Answer

A) True 
 B)False  True

Question 2

Find the price of a European call on a futures contract if the futures price is $106, the exercise price is $100, the continuously compounded risk-free rate is 7.2 percent, the volatility is 0.41 and the call expires in six months.

Accepted Answer

A)  $14.57 
B)  $17.04 
C)  $6.00 
D)  $19.78 
E)  none of the above 
A)  $14.57 
B)  $17.04 
C)  $6.00 
D)  $19.78 
E)  none of the above A

Question 3

Find the forward rate of foreign currency Y if the spot rate is $4.50, the domestic interest rate is 6 percent, the foreign interest rate is 7 percent, and the forward contract is for nine months. (The interest rates are continuously compounded.)

Accepted Answer

A)  $4.458 
B)  $5.104 
C)  $4.468 
D)  $4.532 
E)  none of the above 
A)  $4.458 
B)  $5.104 
C)  $4.468 
D)  $4.532 
E)  none of the above C

Question 4

Put-call-futures parity is the relationship between the prices of puts, calls, and futures on an asset. Assuming a constant risk-free rate and European options, which of the following correctly expresses the relationship of put-call-futures parity?

Accepted Answer

A)  Pe(S0,T) = Ce(S0,T) + (X - f0(T))(1 + r)-T 
B)  Pe(S0,T,X) = Ce(S0,T) - (X - f0(T))(1 + r)-T 
C)  Pe(S0,T,X) = Ce(S0,T,X) + (X - f0(T))(1 + r)-T 
D)  Pe(S0,T,X) = Ce(S0,T,X)(X - f0(T))(1 + r)-T 
E)  none of the above 
A)  Pe(S0,T) = Ce(S0,T) + (X - f0(T))(1 + r)-T 
B)  Pe(S0,T,X) = Ce(S0,T) - (X - f0(T))(1 + r)-T 
C)  Pe(S0,T,X) = Ce(S0,T,X) + (X - f0(T))(1 + r)-T 
D)  Pe(S0,T,X) = Ce(S0,T,X)(X - f0(T))(1 + r)-T 
E)  none of the above

Question 5

A convenience yield is an explanation for a negative cost of carry.

Accepted Answer

A) True 
 B)False

Question 6

Suppose you buy a one-year forward contract at $65. At expiration, the spot price is $73. The risk-free rate is 10 percent. What is the value of the contract at expiration?

Accepted Answer

A)  $8.00 
B)  -$8.00 
C)  $0.00 
D)  $7.27 
E)  none of the above 
A)  $8.00 
B)  -$8.00 
C)  $0.00 
D)  $7.27 
E)  none of the above

Question 7

Determine the value of a European foreign currency put if the call is at $0.05, the spot rate is $0.5702, the exercise price is $0.59, the domestic interest rate is 5.75 percent, the foreign interest rate is 4.95 percent and the options expire in 45 days. (The interest rates are continuously compounded.)

Accepted Answer

A)  $0.069 
B)  $0.031 
C)  $0.050 
D)  $0.517 
E)  none of the above 
A)  $0.069 
B)  $0.031 
C)  $0.050 
D)  $0.517 
E)  none of the above

Question 8

The Black formula prices an option on an instrument with a positive cost of carry.

Accepted Answer

A) True 
 B)False

Question 9

In financial futures markets, contango means that long-term interest rates are less than short-term interest rates.

Accepted Answer

A) True 
 B)False

Question 10

The Black-Scholes-Merton formula can be used in place of the Black formula if you use the futures price for the stock price and a risk-free rate of zero.

Accepted Answer

A) True 
 B)False

Question 11

The spot price plus the cost of carry equals

Accepted Answer

A)  the convenience yield 
B)  the expected future spot price 
C)  the risk premium 
D)  the futures price 
E)  none of the above 
A)  the convenience yield 
B)  the expected future spot price 
C)  the risk premium 
D)  the futures price 
E)  none of the above

Question 12

Suppose it is currently July. The September futures price is $60 and the December futures price is $68. What does the spread of $8 represent?

Accepted Answer

A)  the cost of carry from July to September 
B)  the expected risk premium from July to September 
C)  the cost of carry from September to December 
D)  the expected risk premium from September to December 
E)  none of the above 
A)  the cost of carry from July to September 
B)  the expected risk premium from July to September 
C)  the cost of carry from September to December 
D)  the expected risk premium from September to December 
E)  none of the above

Question 13

If the U.S. government announced that it would allow the dollar to drop in foreign currency markets, the price of a euro put would probably fall.

Accepted Answer

A) True 
 B)False

Question 14

Value is created in a futures contract with the passage of time.

Accepted Answer

A) True 
 B)False

Question 15

Suppose you sell a three-month forward contract at $35. One month later, new forward contracts with similar terms are trading for $30. The continuously compounded risk-free rate is 10 percent. What is the value of your forward contract?

Accepted Answer

A)  $4.96 
B)  $5.00 
C)  $4.92 
D)  $4.55 
E)  none of the above 
A)  $4.96 
B)  $5.00 
C)  $4.92 
D)  $4.55 
E)  none of the above

Question 16

Determine the appropriate price of a European put on a futures if the call is worth $6.55, the continuously compounded risk-free rate is 5.6 percent, the futures price is $80, the exercise price is $75, and the expiration is in three months.

Accepted Answer

A)  $12.56 
B)  $0.54 
C)  $11.48 
D)  $1.62 
E)  none of the above 
A)  $12.56 
B)  $0.54 
C)  $11.48 
D)  $1.62 
E)  none of the above

Question 17

If the U.S. risk-free rate is 4 percent and the Swiss risk-free rate is 5 percent, a U.S. investor can earn the Swiss rate by buying Swiss francs, selling a forward or futures contract and converting back to dollars at the contract's expiration.

Accepted Answer

A) True 
 B)False

Question 18

The cost of carry futures pricing model requires that investors be able to sell short the commodity.

Accepted Answer

A) True 
 B)False

Question 19

Interest-rate parity is a cost-of-carry model.

Accepted Answer

A) True 
 B)False

Question 20

The dividends that are subtracted from the cost of storage to determine the cost of carry are actually the present value of future dividends.

Accepted Answer

A) True 
 B)False

The daily settlement brings the value of a futures contract back to zero.

Find the price of a European call on a futures contract if the futures price is $106, the exercise price is $100, the continuously compounded risk-free rate is 7.2 percent, the volatility is 0.41 and the call expires in six months.

Find the forward rate of foreign currency Y if the spot rate is $4.50, the domestic interest rate is 6 percent, the foreign interest rate is 7 percent, and the forward contract is for nine months. (The interest rates are continuously compounded.)

Put-call-futures parity is the relationship between the prices of puts, calls, and futures on an asset. Assuming a constant risk-free rate and European options, which of the following correctly expresses the relationship of put-call-futures parity?

A convenience yield is an explanation for a negative cost of carry.

Suppose you buy a one-year forward contract at $65. At expiration, the spot price is $73. The risk-free rate is 10 percent. What is the value of the contract at expiration?

The Black formula prices an option on an instrument with a positive cost of carry.

In financial futures markets, contango means that long-term interest rates are less than short-term interest rates.

The Black-Scholes-Merton formula can be used in place of the Black formula if you use the futures price for the stock price and a risk-free rate of zero.

The spot price plus the cost of carry equals

Suppose it is currently July. The September futures price is $60 and the December futures price is $68. What does the spread of $8 represent?

If the U.S. government announced that it would allow the dollar to drop in foreign currency markets, the price of a euro put would probably fall.

Value is created in a futures contract with the passage of time.

Suppose you sell a three-month forward contract at $35. One month later, new forward contracts with similar terms are trading for $30. The continuously compounded risk-free rate is 10 percent. What is the value of your forward contract?

Determine the appropriate price of a European put on a futures if the call is worth $6.55, the continuously compounded risk-free rate is 5.6 percent, the futures price is $80, the exercise price is $75, and the expiration is in three months.

If the U.S. risk-free rate is 4 percent and the Swiss risk-free rate is 5 percent, a U.S. investor can earn the Swiss rate by buying Swiss francs, selling a forward or futures contract and converting back to dollars at the contract's expiration.

The cost of carry futures pricing model requires that investors be able to sell short the commodity.

Interest-rate parity is a cost-of-carry model.

The dividends that are subtracted from the cost of storage to determine the cost of carry are actually the present value of future dividends.

Introduction

Structure of Options Markets

Principles of Option Pricing

Option Pricing Models: The Binomial Model

Option Pricing Models: The Black-Scholes-Merton Model

Basic Option Strategies

Advanced Option Strategies

Structure of Forward and Futures Markets

Futures Arbitrage Strategies

Forward and Futures Hedging, Spread, and Target Strategies

Swaps

Interest Rate Forwards and Options

Advanced Derivatives and Strategies

Financial Risk Management Techniques and Appplications

Managing Risk in an Organization

Filters

Exam 9: Principles of Pricing Forwards, Futures and Options on Futures

The daily settlement brings the value of a futures contract back to zero.

Find the price of a European call on a futures contract if the futures price is $106, the exercise price is $100, the continuously compounded risk-free rate is 7.2 percent, the volatility is 0.41 and the call expires in six months.

Find the forward rate of foreign currency Y if the spot rate is $4.50, the domestic interest rate is 6 percent, the foreign interest rate is 7 percent, and the forward contract is for nine months. (The interest rates are continuously compounded.)

Put-call-futures parity is the relationship between the prices of puts, calls, and futures on an asset. Assuming a constant risk-free rate and European options, which of the following correctly expresses the relationship of put-call-futures parity?

A convenience yield is an explanation for a negative cost of carry.

Suppose you buy a one-year forward contract at $65. At expiration, the spot price is $73. The risk-free rate is 10 percent. What is the value of the contract at expiration?

The Black formula prices an option on an instrument with a positive cost of carry.

In financial futures markets, contango means that long-term interest rates are less than short-term interest rates.

The Black-Scholes-Merton formula can be used in place of the Black formula if you use the futures price for the stock price and a risk-free rate of zero.

The spot price plus the cost of carry equals

Suppose it is currently July. The September futures price is $60 and the December futures price is $68. What does the spread of $8 represent?

If the U.S. government announced that it would allow the dollar to drop in foreign currency markets, the price of a euro put would probably fall.

Value is created in a futures contract with the passage of time.

Suppose you sell a three-month forward contract at $35. One month later, new forward contracts with similar terms are trading for $30. The continuously compounded risk-free rate is 10 percent. What is the value of your forward contract?

Determine the appropriate price of a European put on a futures if the call is worth $6.55, the continuously compounded risk-free rate is 5.6 percent, the futures price is $80, the exercise price is $75, and the expiration is in three months.

If the U.S. risk-free rate is 4 percent and the Swiss risk-free rate is 5 percent, a U.S. investor can earn the Swiss rate by buying Swiss francs, selling a forward or futures contract and converting back to dollars at the contract's expiration.

The cost of carry futures pricing model requires that investors be able to sell short the commodity.

Interest-rate parity is a cost-of-carry model.

The dividends that are subtracted from the cost of storage to determine the cost of carry are actually the present value of future dividends.

Introduction

Structure of Options Markets

Principles of Option Pricing

Option Pricing Models: The Binomial Model

Option Pricing Models: The Black-Scholes-Merton Model

Basic Option Strategies

Advanced Option Strategies

Structure of Forward and Futures Markets

Futures Arbitrage Strategies

Forward and Futures Hedging, Spread, and Target Strategies

Swaps

Interest Rate Forwards and Options

Advanced Derivatives and Strategies

Financial Risk Management Techniques and Appplications

Managing Risk in an Organization

Filters