Question 1

How is the cost of a delivery option paid?

Accepted Answer

A) the long pays the short with a cash settlement 
B) the short pays the long with a cash settlement 
C) a higher closing futures price 
D) a lower closing futures price 
E) none of the above 
A) the long pays the short with a cash settlement 
B) the short pays the long with a cash settlement 
C) a higher closing futures price 
D) a lower closing futures price 
E) none of the above

Question 2

If the stock index is at 148,the three-month futures price is 151,the dividend yield is 5 percent and the interest rate is 8 percent,determine the profit from an index arbitrage if the stock ends up at 144 at expiration.(Ignore transaction costs. )

Accepted Answer

A) 1.89 
B) 4.00 
C) 7.00 
D) 5.11 
E) -7.00 
A) 1.89 
B) 4.00 
C) 7.00 
D) 5.11 
E) -7.00

Question 3

A cash-and-carry arbitrage is not risk free unless a repo is available with a maturity equal to the entire life of the transaction.

Accepted Answer

A) True 
 B)False

Question 4

Determine the annualized implied repo rate on a Treasury bond spread in which the March is bought at 98.7 and the June is sold at 99.5.The March CF is 1.225 and the June CF is 1.24.The accrued interest as of March 1 is 0.75 and the accrued interest as of June 1 is 1.22.

Accepted Answer

A) 5.21 percent 
B) 10.03 percent 
C) 1.28 percent 
D) 2.42 percent 
E) 0.81 percent 
A) 5.21 percent 
B) 10.03 percent 
C) 1.28 percent 
D) 2.42 percent 
E) 0.81 percent

Question 5

Which of the following is a form of program trading?

Accepted Answer

A) index arbitrage 
B) wild card arbitrage 
C) triangular arbitrage 
D) timing arbitrage 
E) none of the above 
A) index arbitrage 
B) wild card arbitrage 
C) triangular arbitrage 
D) timing arbitrage 
E) none of the above

Question 6

Determine the amount by which a stock index futures is mispriced if the stock index is at 200,the futures is at 202.5,the risk-free rate is 6.45 percent,the dividend yield is 2.75 percent,and the contract expires in three months.

Accepted Answer

A) underpriced by 0.64 
B) overpriced by 2.5 
C) overpriced by 9.76 
D) overpriced by 0.64 
E) underpriced by 2.5 
A) underpriced by 0.64 
B) overpriced by 2.5 
C) overpriced by 9.76 
D) overpriced by 0.64 
E) underpriced by 2.5

Question 7

Selling an index futures and holding an undiversified portfolio would eliminate unsystematic risk.

Accepted Answer

A) True 
 B)False

Question 8

The settlement price,conversion factor and accrued interest are necessary to calculate the invoice price.

Accepted Answer

A) True 
 B)False

Question 9

Stock index arbitrage will earn,at no risk,the difference between the futures price and the theoretical futures price.

Accepted Answer

A) True 
 B)False

Question 10

What reason might be given for not wanting to hedge the future issuance of a liability if interest rates are unusually high?

Accepted Answer

A) the margin cost will be expensive 
B) you are locking in a high rate 
C) transaction costs are higher 
D) futures prices are lower 
E) none of the above 
A) the margin cost will be expensive 
B) you are locking in a high rate 
C) transaction costs are higher 
D) futures prices are lower 
E) none of the above

Question 11

Find the annualized implied repo rate on a T-bond arbitrage if the spot price is 112.25,the accrued interest is 1.35,the futures price is 114.75,the CF is 1.0125,the accrued interest at delivery is 0.95,and the holding period is three months.

Accepted Answer

A) 1.85 percent 
B) 0.77 percent 
C) 14.77 percent 
D) 13.04 percent 
E) 2.23 percent 
A) 1.85 percent 
B) 0.77 percent 
C) 14.77 percent 
D) 13.04 percent 
E) 2.23 percent

Question 12

Which one of the following options is not associated with the Treasury bond futures contract?

Accepted Answer

A) end-of-the-month 
B) spread option 
C) wild card option 
D) quality option 
E) none of the above 
A) end-of-the-month 
B) spread option 
C) wild card option 
D) quality option 
E) none of the above

Question 13

The unusual volatility that sometimes occurs at stock index futures expirations is because of the greater uncertainty.

Accepted Answer

A) True 
 B)False

Question 14

Much of the volume of stock transactions in program trading occurs through the New York Stock Exchange's DOT system.

Accepted Answer

A) True 
 B)False

Question 15

The opportunity to lock in the invoice price and purchase the deliverable Treasury bond later is called

Accepted Answer

A) bond insurance 
B) program trading 
C) the wild card 
D) delivery arbitrage 
E) none of the above 
A) bond insurance 
B) program trading 
C) the wild card 
D) delivery arbitrage 
E) none of the above

Question 16

The quality option is sometimes referred to as the switching option.

Accepted Answer

A) True 
 B)False

Question 17

Transaction costs in program trading are so small that they are not much of a factor.

Accepted Answer

A) True 
 B)False

Question 18

Use the following information to answer questions .On October 1,the one-month LIBOR rate is 4.50 percent and the two month LIBOR rate is 5.00 percent.The November Fed funds futures is quoted at 94.50.The contract size is $5,000,000.
-Compute the dollar profit or loss from borrowing the present value of $5,000,000 at one month LIBOR and lending the same amount at two month LIBOR while simultaneously selling one November Fed funds futures contract.Assume that rates on November 1 were 7 percent,there is no basis risk,and the position is unwound on November 1.Select the closest answer.

Accepted Answer

A) -$3,150 
B) $0 
C) $3,150 
D) $940 
E) -$940 
A) -$3,150 
B) $0 
C) $3,150 
D) $940 
E) -$940

Question 19

The conversion factor is the price of a bond with a face value of $1,coupon and maturity equal to that of the deliverable bond,and yield of 6 percent.

Accepted Answer

A) True 
 B)False

Question 20

A deliverable Treasury bond has accrued interest of 3.42 per $100,a coupon of 9.5 percent,a price of 135 and a conversion factor of 1.195.The futures price is 112.25.What is the invoice amount?

Accepted Answer

A) 137.56 
B) 143.64 
C) 161.33 
D) 134.14 
E) none of the above 
A) 137.56 
B) 143.64 
C) 161.33 
D) 134.14 
E) none of the above

How is the cost of a delivery option paid?

If the stock index is at 148,the three-month futures price is 151,the dividend yield is 5 percent and the interest rate is 8 percent,determine the profit from an index arbitrage if the stock ends up at 144 at expiration.(Ignore transaction costs. )

A cash-and-carry arbitrage is not risk free unless a repo is available with a maturity equal to the entire life of the transaction.

Determine the annualized implied repo rate on a Treasury bond spread in which the March is bought at 98.7 and the June is sold at 99.5.The March CF is 1.225 and the June CF is 1.24.The accrued interest as of March 1 is 0.75 and the accrued interest as of June 1 is 1.22.

Which of the following is a form of program trading?

Determine the amount by which a stock index futures is mispriced if the stock index is at 200,the futures is at 202.5,the risk-free rate is 6.45 percent,the dividend yield is 2.75 percent,and the contract expires in three months.

Selling an index futures and holding an undiversified portfolio would eliminate unsystematic risk.

The settlement price,conversion factor and accrued interest are necessary to calculate the invoice price.

Stock index arbitrage will earn,at no risk,the difference between the futures price and the theoretical futures price.

What reason might be given for not wanting to hedge the future issuance of a liability if interest rates are unusually high?

Find the annualized implied repo rate on a T-bond arbitrage if the spot price is 112.25,the accrued interest is 1.35,the futures price is 114.75,the CF is 1.0125,the accrued interest at delivery is 0.95,and the holding period is three months.

Which one of the following options is not associated with the Treasury bond futures contract?

The unusual volatility that sometimes occurs at stock index futures expirations is because of the greater uncertainty.

Much of the volume of stock transactions in program trading occurs through the New York Stock Exchange's DOT system.

The opportunity to lock in the invoice price and purchase the deliverable Treasury bond later is called

The quality option is sometimes referred to as the switching option.

Transaction costs in program trading are so small that they are not much of a factor.

The conversion factor is the price of a bond with a face value of $1,coupon and maturity equal to that of the deliverable bond,and yield of 6 percent.

A deliverable Treasury bond has accrued interest of 3.42 per $100,a coupon of 9.5 percent,a price of 135 and a conversion factor of 1.195.The futures price is 112.25.What is the invoice amount?

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

The Structure of Forward and Futures Markets

Principles of Pricing Forwards, Futures, and Options on Futures

Forward and Futures Hedging, Spread, and Target Strategies

Swaps

Interest Rate Forwards and Options

Advanced Derivatives and Strategies

Financial Risk Management Techniques and Applications

Managing Risk in an Organization

Filters

Exam 10: Futures Arbitrage Strategies

How is the cost of a delivery option paid?

If the stock index is at 148,the three-month futures price is 151,the dividend yield is 5 percent and the interest rate is 8 percent,determine the profit from an index arbitrage if the stock ends up at 144 at expiration.(Ignore transaction costs. )

A cash-and-carry arbitrage is not risk free unless a repo is available with a maturity equal to the entire life of the transaction.

Determine the annualized implied repo rate on a Treasury bond spread in which the March is bought at 98.7 and the June is sold at 99.5.The March CF is 1.225 and the June CF is 1.24.The accrued interest as of March 1 is 0.75 and the accrued interest as of June 1 is 1.22.

Which of the following is a form of program trading?

Determine the amount by which a stock index futures is mispriced if the stock index is at 200,the futures is at 202.5,the risk-free rate is 6.45 percent,the dividend yield is 2.75 percent,and the contract expires in three months.

Selling an index futures and holding an undiversified portfolio would eliminate unsystematic risk.

The settlement price,conversion factor and accrued interest are necessary to calculate the invoice price.

Stock index arbitrage will earn,at no risk,the difference between the futures price and the theoretical futures price.

What reason might be given for not wanting to hedge the future issuance of a liability if interest rates are unusually high?

Find the annualized implied repo rate on a T-bond arbitrage if the spot price is 112.25,the accrued interest is 1.35,the futures price is 114.75,the CF is 1.0125,the accrued interest at delivery is 0.95,and the holding period is three months.

Which one of the following options is not associated with the Treasury bond futures contract?

The unusual volatility that sometimes occurs at stock index futures expirations is because of the greater uncertainty.

Much of the volume of stock transactions in program trading occurs through the New York Stock Exchange's DOT system.

The opportunity to lock in the invoice price and purchase the deliverable Treasury bond later is called

The quality option is sometimes referred to as the switching option.

Transaction costs in program trading are so small that they are not much of a factor.

The conversion factor is the price of a bond with a face value of $1,coupon and maturity equal to that of the deliverable bond,and yield of 6 percent.

A deliverable Treasury bond has accrued interest of 3.42 per $100,a coupon of 9.5 percent,a price of 135 and a conversion factor of 1.195.The futures price is 112.25.What is the invoice amount?

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

The Structure of Forward and Futures Markets

Principles of Pricing Forwards, Futures, and Options on Futures

Forward and Futures Hedging, Spread, and Target Strategies

Swaps

Interest Rate Forwards and Options

Advanced Derivatives and Strategies

Financial Risk Management Techniques and Applications

Managing Risk in an Organization

Filters