Question 1

The cost of carry includes the interest lost on the funds tied up in the asset stored.

Accepted Answer

A) True 
 B)False

Question 2

A market in which the futures price is said to be unbiased is also a market in which there is a risk premium.

Accepted Answer

A) True 
 B)False

Question 3

Suppose there is a risk premium of $0.50. The spot price is $20 and the futures price is $22. What is the expected spot price at expiration?

Accepted Answer

A)  $21.50 
B)  $22.50 
C)  $20.50 
D)  $24.50 
E)  none of the above 
A)  $21.50 
B)  $22.50 
C)  $20.50 
D)  $24.50 
E)  none of the above

Question 4

Find the value of a European foreign currency call if the spot rate is $5.25, the exercise price is $5.40, the domestic interest rate is 6.1 percent, the foreign interest rate is 5.5 percent, the call expires in one month, and the volatility is 0.32. (The interest rates are continuously compounded.)

Accepted Answer

A)  $0.167 
B)  $0.15 
C)  $0.140 
D)  $0.131 
E)  none of the above 
A)  $0.167 
B)  $0.15 
C)  $0.140 
D)  $0.131 
E)  none of the above

Question 5

As soon as a futures contract is marked to market, its value is zero.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following can explain a contango?

Accepted Answer

A)  the interest rate exceeds the dividend yield 
B)  the cost of carry is negative 
C)  futures prices exceed forward prices 
D)  the market is at less than full carry 
E)  none of the above 
A)  the interest rate exceeds the dividend yield 
B)  the cost of carry is negative 
C)  futures prices exceed forward prices 
D)  the market is at less than full carry 
E)  none of the above

Question 7

The value of a long position in a forward contract at expiration is

Accepted Answer

A)  the spot price plus the original forward price 
B)  the spot price minus the original forward price 
C)  the original forward price discounted to expiration 
D)  the spot price minus the original forward price discounted to expiration 
E)  none of the above 
A)  the spot price plus the original forward price 
B)  the spot price minus the original forward price 
C)  the original forward price discounted to expiration 
D)  the spot price minus the original forward price discounted to expiration 
E)  none of the above

Question 8

A contango market is consistent with

Accepted Answer

A)  a negative basis 
B)  futures prices exceeding spot prices 
C)  a positive cost of carry 
D)  all of the above 
E)  none of the above 
A)  a negative basis 
B)  futures prices exceeding spot prices 
C)  a positive cost of carry 
D)  all of the above 
E)  none of the above

Question 9

The dividend yield on a stock option is similar to the foreign interest rate on a foreign currency option.

Accepted Answer

A) True 
 B)False

Question 10

The cost of carry consists of all the following except

Accepted Answer

A)  the risk-free rate 
B)  the cost of storage 
C)  insurance on the asset 
D)  the risk premium 
E)  none of the above 
A)  the risk-free rate 
B)  the cost of storage 
C)  insurance on the asset 
D)  the risk premium 
E)  none of the above

Question 11

What is the lower bound of a European foreign currency call if the spot rate is $2.25, the domestic interest rate is 5.5 percent, the foreign interest rate is 6.2 percent, the option expires in three months, and the exercise price is $2.20? (The interest rates are continuously compounded.)

Accepted Answer

A)  $0.0457 
B)  $0.05 
C)  $0.0793 
D)  $0.0529 
E)  none of the above 
A)  $0.0457 
B)  $0.05 
C)  $0.0793 
D)  $0.0529 
E)  none of the above

Question 12

Find the lower bound of a European foreign currency put if the spot rate is $3.50, the domestic interest rate is 8 percent, the foreign interest rate is 7 percent, the option expires in six months, and the exercise price is $3.75. (The interest rates are continuously compounded.)

Accepted Answer

A)  zero 
B)  $0.250 
C)  $0.366 
D)  $0.108 
E)  none of the above 
A)  zero 
B)  $0.250 
C)  $0.366 
D)  $0.108 
E)  none of the above

Question 13

If the exercise price equals the futures price, a put on the futures will have the same price as a call on the futures.

Accepted Answer

A) True 
 B)False

Question 14

Holding everything else constant, dividends or interest on the underlying commodity would make a futures price be higher.

Accepted Answer

A) True 
 B)False

Question 15

A transaction that exploits differences in the theoretical and actual values of a foreign currency forward or futures contract is called

Accepted Answer

A)  covered interest arbitrage 
B)  triangular arbitrage 
C)  a conversion 
D)  interest-rate parity 
E)  none of the above 
A)  covered interest arbitrage 
B)  triangular arbitrage 
C)  a conversion 
D)  interest-rate parity 
E)  none of the above

Question 16

The value of a futures contract immediately after being marked to market is

Accepted Answer

A)  numerically equal to the daily settlement amount 
B)  the spot price plus the original forward price 
C)  equal to the amount by which the price changed since the contract was opened 
D)  simply zero 
E)  none of the above 
A)  numerically equal to the daily settlement amount 
B)  the spot price plus the original forward price 
C)  equal to the amount by which the price changed since the contract was opened 
D)  simply zero 
E)  none of the above

Question 17

A normal market in which the futures price exceeds the spot price is described as a contango.

Accepted Answer

A) True 
 B)False

Question 18

The risk-free rate is missing from d1 in the Black model because it is effectively zero.

Accepted Answer

A) True 
 B)False

Question 19

The futures price of a non-storable asset is determined by the cost of carry.

Accepted Answer

A) True 
 B)False

Question 20

Find the value of a European put option on futures if the futures price is 72, the exercise price is 70, the continuously compounded risk-free rate is 8.5 percent, the volatility is 0.38 and the time to expiration is three months.

Accepted Answer

A)  6.30 
B)  12.90 
C)  4.34 
D)  2.00 
E)  none of the above 
A)  6.30 
B)  12.90 
C)  4.34 
D)  2.00 
E)  none of the above

The cost of carry includes the interest lost on the funds tied up in the asset stored.

A market in which the futures price is said to be unbiased is also a market in which there is a risk premium.

Suppose there is a risk premium of $0.50. The spot price is $20 and the futures price is $22. What is the expected spot price at expiration?

Find the value of a European foreign currency call if the spot rate is $5.25, the exercise price is $5.40, the domestic interest rate is 6.1 percent, the foreign interest rate is 5.5 percent, the call expires in one month, and the volatility is 0.32. (The interest rates are continuously compounded.)

As soon as a futures contract is marked to market, its value is zero.

Which of the following can explain a contango?

The value of a long position in a forward contract at expiration is

A contango market is consistent with

The dividend yield on a stock option is similar to the foreign interest rate on a foreign currency option.

The cost of carry consists of all the following except

What is the lower bound of a European foreign currency call if the spot rate is $2.25, the domestic interest rate is 5.5 percent, the foreign interest rate is 6.2 percent, the option expires in three months, and the exercise price is $2.20? (The interest rates are continuously compounded.)

Find the lower bound of a European foreign currency put if the spot rate is $3.50, the domestic interest rate is 8 percent, the foreign interest rate is 7 percent, the option expires in six months, and the exercise price is $3.75. (The interest rates are continuously compounded.)

If the exercise price equals the futures price, a put on the futures will have the same price as a call on the futures.

Holding everything else constant, dividends or interest on the underlying commodity would make a futures price be higher.

A transaction that exploits differences in the theoretical and actual values of a foreign currency forward or futures contract is called

The value of a futures contract immediately after being marked to market is

A normal market in which the futures price exceeds the spot price is described as a contango.

The risk-free rate is missing from d₁ in the Black model because it is effectively zero.

The futures price of a non-storable asset is determined by the cost of carry.

Find the value of a European put option on futures if the futures price is 72, the exercise price is 70, the continuously compounded risk-free rate is 8.5 percent, the volatility is 0.38 and the time to expiration is three months.

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 cost of carry includes the interest lost on the funds tied up in the asset stored.

A market in which the futures price is said to be unbiased is also a market in which there is a risk premium.

Suppose there is a risk premium of $0.50. The spot price is $20 and the futures price is $22. What is the expected spot price at expiration?

As soon as a futures contract is marked to market, its value is zero.

Which of the following can explain a contango?

The value of a long position in a forward contract at expiration is

A contango market is consistent with

The dividend yield on a stock option is similar to the foreign interest rate on a foreign currency option.

The cost of carry consists of all the following except

What is the lower bound of a European foreign currency call if the spot rate is $2.25, the domestic interest rate is 5.5 percent, the foreign interest rate is 6.2 percent, the option expires in three months, and the exercise price is $2.20? (The interest rates are continuously compounded.)

Find the lower bound of a European foreign currency put if the spot rate is $3.50, the domestic interest rate is 8 percent, the foreign interest rate is 7 percent, the option expires in six months, and the exercise price is $3.75. (The interest rates are continuously compounded.)

If the exercise price equals the futures price, a put on the futures will have the same price as a call on the futures.

Holding everything else constant, dividends or interest on the underlying commodity would make a futures price be higher.

A transaction that exploits differences in the theoretical and actual values of a foreign currency forward or futures contract is called

The value of a futures contract immediately after being marked to market is

A normal market in which the futures price exceeds the spot price is described as a contango.

The risk-free rate is missing from d1 in the Black model because it is effectively zero.

The futures price of a non-storable asset is determined by the cost of carry.

Find the value of a European put option on futures if the futures price is 72, the exercise price is 70, the continuously compounded risk-free rate is 8.5 percent, the volatility is 0.38 and the time to expiration is three months.

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

The risk-free rate is missing from d₁ in the Black model because it is effectively zero.