Question 1

The timing option will lead to early delivery if the coupon rate is higher than the repo rate.

Accepted Answer

A) True 
 B)False

Question 2

Foreign exchange carry arbitrage is based on a trader's expectations regarding purchasing power parity.

Accepted Answer

A) True 
 B)False

Question 3

Covered interest arbitrage relates to program trading and the need to cover the interest on funds borrowed.

Accepted Answer

A) True 
 B)False

Question 4

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 5

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 6

It is important to identify the cheapest bond to deliver because it is the one the futures contract is priced off of.

Accepted Answer

A) True 
 B)False

Question 7

The invoice price of a Treasury bond futures contract is based on the settlement price on position day and the conversion factor.

Accepted Answer

A) True 
 B)False

Question 8

Use the following information to answer questions 22 through 24.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 9

The cheapest bond to deliver is the one that has the lowest spot price.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following is not a risk of program trading?

Accepted Answer

A) the stocks cannot be simultaneously sold at expiration 
B) fractional contracts cannot be purchased or sold 
C) the dividends are not certain 
D) the stocks cannot be purchased simultaneously 
E) none of the above 
A) the stocks cannot be simultaneously sold at expiration 
B) fractional contracts cannot be purchased or sold 
C) the dividends are not certain 
D) the stocks cannot be purchased simultaneously 
E) none of the above

Question 11

The end-of-the-month option is

Accepted Answer

A) the right to exercise an option on the last day of the month 
B) an option expiring on the last day of the month 
C) the right to deliver during the last seven business days of the month 
D) an option that trades only at the end of the month 
E) none of the above 
A) the right to exercise an option on the last day of the month 
B) an option expiring on the last day of the month 
C) the right to deliver during the last seven business days of the month 
D) an option that trades only at the end of the month 
E) none of the above

Question 12

Fed fund futures arbitrage is based on the assumption that LIBOR and Fed funds are perfect substitutes.

Accepted Answer

A) True 
 B)False

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

The implied interest rate based on Treasury bond carry arbitrage will decrease when the cheapest-to-deliver bond price increases,everything else held constant.

Accepted Answer

A) True 
 B)False

Question 15

In theory,the foreign exchange futures price is based on four parameters only,the spot foreign exchange rate,the risk-free rate in the domestic currency,the risk-free rate in the foreign currency,and time to maturity.

Accepted Answer

A) True 
 B)False

Question 16

Covered interest arbitrage from a U.S.dollar perspective when the euro futures price (expressed in $/€)is too high involves

Accepted Answer

A) buying foreign exchange futures contracts 
B) selling interest rate futures contracts 
C) lending funds in risk-free euro investment 
D) selling euros 
E) buying euro stock index ETFs 
A) buying foreign exchange futures contracts 
B) selling interest rate futures contracts 
C) lending funds in risk-free euro investment 
D) selling euros 
E) buying euro stock index ETFs

Question 17

If the futures price at 3:00 p.m.is 122,the spot price is 142.5 and the CF is 1.1575,by how much must the spot price fall by 5:00 p.m.to justify delivery?

Accepted Answer

A) 1.285 
B) 1.1102 
C) 20.50 
D) 17.71 
E) 42.94 
A) 1.285 
B) 1.1102 
C) 20.50 
D) 17.71 
E) 42.94

Question 18

The implied repo rate on a spread is the implicit return on a risk-free spread transaction.

Accepted Answer

A) True 
 B)False

Question 19

The coupon assumption for the conversion factor is 8 percent.

Accepted Answer

A) True 
 B)False

The timing option will lead to early delivery if the coupon rate is higher than the repo rate.

Foreign exchange carry arbitrage is based on a trader's expectations regarding purchasing power parity.

Covered interest arbitrage relates to program trading and the need to cover the interest on funds borrowed.

How is the cost of a delivery option paid?

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

It is important to identify the cheapest bond to deliver because it is the one the futures contract is priced off of.

The invoice price of a Treasury bond futures contract is based on the settlement price on position day and the conversion factor.

The cheapest bond to deliver is the one that has the lowest spot price.

Which of the following is not a risk of program trading?

The end-of-the-month option is

Fed fund futures arbitrage is based on the assumption that LIBOR and Fed funds are perfect substitutes.

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

The implied interest rate based on Treasury bond carry arbitrage will decrease when the cheapest-to-deliver bond price increases,everything else held constant.

In theory,the foreign exchange futures price is based on four parameters only,the spot foreign exchange rate,the risk-free rate in the domestic currency,the risk-free rate in the foreign currency,and time to maturity.

Covered interest arbitrage from a U.S.dollar perspective when the euro futures price (expressed in $/€)is too high involves

If the futures price at 3:00 p.m.is 122,the spot price is 142.5 and the CF is 1.1575,by how much must the spot price fall by 5:00 p.m.to justify delivery?

The implied repo rate on a spread is the implicit return on a risk-free spread transaction.

The coupon assumption for the conversion factor is 8 percent.

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

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 Appplications

Managing Risk in an Organization

Filters

Exam 9: Futures Arbitrage Strategies

The timing option will lead to early delivery if the coupon rate is higher than the repo rate.

Foreign exchange carry arbitrage is based on a trader's expectations regarding purchasing power parity.

Covered interest arbitrage relates to program trading and the need to cover the interest on funds borrowed.

How is the cost of a delivery option paid?

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

It is important to identify the cheapest bond to deliver because it is the one the futures contract is priced off of.

The invoice price of a Treasury bond futures contract is based on the settlement price on position day and the conversion factor.

The cheapest bond to deliver is the one that has the lowest spot price.

Which of the following is not a risk of program trading?

The end-of-the-month option is

Fed fund futures arbitrage is based on the assumption that LIBOR and Fed funds are perfect substitutes.

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

The implied interest rate based on Treasury bond carry arbitrage will decrease when the cheapest-to-deliver bond price increases,everything else held constant.

In theory,the foreign exchange futures price is based on four parameters only,the spot foreign exchange rate,the risk-free rate in the domestic currency,the risk-free rate in the foreign currency,and time to maturity.

Covered interest arbitrage from a U.S.dollar perspective when the euro futures price (expressed in $/€)is too high involves

If the futures price at 3:00 p.m.is 122,the spot price is 142.5 and the CF is 1.1575,by how much must the spot price fall by 5:00 p.m.to justify delivery?

The implied repo rate on a spread is the implicit return on a risk-free spread transaction.

The coupon assumption for the conversion factor is 8 percent.

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

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 Appplications

Managing Risk in an Organization

Filters