Question 1

Normal backwardation and contango are mutually exclusive conditions for a market.

Accepted Answer

A) True 
 B)False

Question 2

What is the lower bound of a European call option on a futures contract where f0 is the futures price and X is the exercise price? Assume f0 is greater than X.

Accepted Answer

A) the difference between f0 and X 
B) zero 
C) the present value of the difference between f0 and X 
D) the ratio of f0 to X 
E) none of the above 
A) the difference between f0 and X 
B) zero 
C) the present value of the difference between f0 and X 
D) the ratio of f0 to X 
E) none of the above

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

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 5

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

Question 6

American foreign currency calls will never be exercised early.

Accepted Answer

A) True 
 B)False

Question 7

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 8

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 9

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 10

The price of a futures contract that expires immediately is the spot price.

Accepted Answer

A) True 
 B)False

Question 11

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 12

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

Accepted Answer

A) True 
 B)False

Question 13

A stock index futures price is the stock price compounded to expiration at the risk-free rate plus the future value of the dividends.

Accepted Answer

A) True 
 B)False

Question 14

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 15

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 16

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

Accepted Answer

A) True 
 B)False

Question 17

The price of a futures spread reflects the cost of carry until the time the spread is closed.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following best describes normal contango?

Accepted Answer

A) the spot price is less than the futures price 
B) the futures price is less than the spot price 
C) the expected spot price is less than the futures price 
D) the cost of carry is negative 
E) none of the above 
A) the spot price is less than the futures price 
B) the futures price is less than the spot price 
C) the expected spot price is less than the futures price 
D) the cost of carry is negative 
E) none of the above

Question 19

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

Question 20

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

Normal backwardation and contango are mutually exclusive conditions for a market.

What is the lower bound of a European call option on a futures contract where f₀ is the futures price and X is the exercise price? Assume f₀ is greater than X.

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

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

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.

American foreign currency calls will never be exercised early.

The spot price plus the cost of carry equals

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. )

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. )

The price of a futures contract that expires immediately is the spot price.

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

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

A stock index futures price is the stock price compounded to expiration at the risk-free rate plus the future value of the dividends.

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.

Which of the following can explain a contango?

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

The price of a futures spread reflects the cost of carry until the time the spread is closed.

Which of the following best describes normal contango?

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. )

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. )

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

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 8: Principles of Pricing Forwards,futures and Options on Futures

Normal backwardation and contango are mutually exclusive conditions for a market.

What is the lower bound of a European call option on a futures contract where f0 is the futures price and X is the exercise price? Assume f0 is greater than X.

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

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

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.

American foreign currency calls will never be exercised early.

The spot price plus the cost of carry equals

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. )

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. )

The price of a futures contract that expires immediately is the spot price.

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

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

A stock index futures price is the stock price compounded to expiration at the risk-free rate plus the future value of the dividends.

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.

Which of the following can explain a contango?

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

The price of a futures spread reflects the cost of carry until the time the spread is closed.

Which of the following best describes normal contango?

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. )

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. )

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

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

What is the lower bound of a European call option on a futures contract where f₀ is the futures price and X is the exercise price? Assume f₀ is greater than X.