Question 1

A bear spread is a position which:

Select one:
a. one sells a call and buys an otherwise identical call with a higher strike price
b. one buys a call and sells an otherwise identical call with a higher strike price
c. one buys a put and sells a call with the same strike price
Question 2
There are several reasons that a firm might use derivative, choose the most correct
answer:
Select one:
a. Hedging, Speculating, Reducing transaction costs and effecting regulatory
arbitrage
b. Hedging and Reducing transaction costs
c. Reducing transaction costs and effecting regulatory arbitrage
d. Hedging and Speculating
Question 3
This spread , which is a combination between synthetic long forward at one price
and synthetic short forward at different contract prices, is a mean of borrowing or
lending money:
Select one:
a. bull spread
b. Box spread

c. bear spread
Question 4
Which of the following statements about call options is least accurate?
Select one:
a. The lower the strike price relative to the stock' s underlying price, the more
the call option is worth
b. The buyer of a call option has an obligation to perform
c. A call option is in the money when the strike price is below the stock price
Question 5
A Gold mining company wants to hedge against the risk that gold price will
decrease. Which of the following strategies is most likely used by this firm:
Select one:
a. goes long a 480-500 Collar
b. long a call option
c. goes shot a 480-500 Collar
Question 6
Blue Sky, a manufacturer that use steel as an input to produce machinery. Michael
Carr, CEO of Blue Sky, want to hedge against the fluctuation of steel. Which of the
following positions is likely to help him to do that:
Select one:
a. short collars
b. long puts

c. short forward
Question 7
The payoff diagram of portfolio insurance (owning a stock and long a put) has the
same shape as the payoff diagram for:
Select one:
a. Writing a call option
b. Writing a put option
c. Buying a call option
Question 8
Suppose the premium on a 6- month S&R call with a strike price of 950 is $112,
and the premium on a 6-month S&R put with the same strike is $62. Given the
risk-free rate of 5%. the 6-month forward price is closest to:
Select one:
a. $1049
b. $1100
c. $1080
d. $1003
Question 9
A firm goes long an option that expires in 90 days to sell a stock at the exercise
price of $50. The price of that stock after 2 months is $40. Given this option is an
American option, after 2 months it is likely that this option will be :
Select one:
a. At- the- money.

b. In- the- money.

c. Out- of- the- money.
Question 10
Which of the following strategies can be used to hedge profit from the producer' s
perspective?
Select one:
a.
Buying calls
b.
Buying forward
c. Buying Collars
Question 11
In comparison with future contracts, forward contracts are:
Select one:
a. More credit risk, Less regulated,traded on OTC market and more
standardized
b. Less regulated, less standardized, less credit risk and traded on OTC market
c. Less standardized, traded on OTC market, more credit risk and less regulated
Question 12
A Butterfly spread can be created by:
Select one:
a. short a straddle ; long a strangle

b. long a straddle; short a put and long a call ( the call has higher strike price
than the put)
c. short a strangle; long a straddle
Question 13
Janet Power writes covered on a stock she owns, Billing, Inc. The current price of
the stock is $45, and Powers writes a call at a strike price of $50. The call option
premium is $3.50. Which of the following statements regarding Powers' s covered
call strategy is most accurate?
Select one:
a. Powers is trading the stock' s upside potential in exchange for current income
b. Powers is eliminating downside risk at the same time she is increasing her
current income with the covered call strategy.
c. The price of the stock must rise to at least $50 before Powers will lose
money.
Question 14
An option that gives the owner the right to sell 100 shares of stock at any day
between issuing day and expiration day one year from now at a strike price of
$45,when the current stock price is $55, is an:
Select one:
a. Out-of- the- money European put option
b. Out-of- the- money American put option
c. In- the- money American put option
Question 15
A ratio spread is created by:

Select one:
a. sells a call and buys an otherwise identical call with a higher strike price
b. buying m calls at one strike and selling n calls at a different strike, with all
options having the same time to maturity and same underlying asset.
c. Short a call and long a put at higher strike price on the same underlying asset
Question 16
A 6-month call on s stock with a strike price of $50 is priced at $4 per share, while
a 6-month put with a strike price of $50 is priced at $2.Given interest rate of 5%,
what is maximum per share gain to the buyer of the 6-month put ?
Select one:
a. 47.9
b. 47
c. 46.2
Question 17
Which of the following positions is least likely used to hedge against the decrease
in asset' s price ?
Select one:
a. Long Collar
b. Short forward
c. Short put
Question 18
Given risk-free rate is 5%, 1000- strike S&R call has a premium of $95, 1000strike S&R put has a premium of $70. You earn the same payoff and profit by (a)
issuing a Bond for $1,100 and (b) selling a 1000- strike S&R call, buying a 1000-

strike S&R put, and shorting the S&R index. The cash flow that you will receive
when shorting the S&R index is closest to:
Select one:
a. $1000
b. $1075
c. $1025
Question 19
Which strategy that an investor is most likely to use when he thinks that the
volatility is low and the movement of asset' s price is undefined?
Select one:
a. Sell straddle
b. Buy straddle
c. Buy strangle
Question 20
On the settlement date of a forward contract:
Select one:
a. the long must sell the asset or make a cash payment
b. at least one party must make a cash payment to the other
c. the short may be required to sell the asset

An option that gives the owner the right to sell 100 shares of stock at any day
between issuing day and expiration day one year from now at a strike price of
$45,when the current stock price is $55, is an
Select one:
a. Out-of- the- money European put option
b. In- the- money American put option
c. Out-of- the- money American put option
A bear spread is a position which
Select one:
a. one buys a call and sells an otherwise identical call with a higher strike price
b. one sells a call and buys an otherwise identical call with a higher strike price
c. one buys a put and sells a call with the same strike price
Jim had $50,000 in his account. He invested a stock trading at $40. The at the
money call option was trading at $4 at that time. How many times profit would he
have earned if he would have invested in call option rather than stock? Assume that
at expiry, the stock was trading at $50.
Select one:
a. 10 times
b. 2 times
c. 6 times
d. 3 times

A call with a strike price of $40 is available on a stock currently trading for $35.
The call expires in one year and the risk free rate of return is 10%. The lower
bound on this calls value:

Select one:
a. Is $1.36 if the call is European style
b. Is $5 if the call is American style
c. Is zero
By volume, the most widely used group of derivatives is the one with contracts
written on which of the following types of underlying assets?
Select one:
a. Energy-related
b. Commodities
c. Financial
A ratio spread is created by:
Select one:
a. sells a call and buys an otherwise identical call with a higher strike price
b. buying m calls at one strike and selling n calls at a different strike, with all
options
c. Short a call and long a put at higher strike price on the same underlying asset
Which of the following statements about call options is least accurate?

Select one:
a. The buyer of a call option has an obligation to perform
b. The lower the strike price relative to the stock' s underlying price, the more
the call option is worth

c. A call option is in the money when the strike price is below the stock price
Given risk-free rate is 5%, 1000- strike S&R call has a premium of $95, 1000strike S&R put has a premium of $70. You earn the same payoff and profit by (a)
issuing a Bond for $1,100 and (b) selling a 1000- strike S&R call, buying a 1000strike S&R put, and shorting the S&R index. The cash flow that you will receive
when shorting the S&R index is closest to:
Select one:
a. $1075
b. $1000
c. $1025
The payoff diagram of portfolio insurance (owning a stock and long a put) has the
same shape as the payoff diagram for:
Select one:
a. Writing a put option
b. Buying a call option
c. Writing a call option
Eric sold a call option on a stock trading at $40 and having a strike of $35 for $7.
What is the profit of the Eric from the transaction if at expiry the stock is trading at
$38?
Select one:
a. $5
b. $4
c. $3
d. $7

There are several reasons that a firm might use derivative, choose the most correct
answer:
Select one:
a. Hedging and Reducing transaction costs
b. Hedging, Speculating, Reducing transaction costs and effecting regulatory
arbitrage
c. Hedging and Speculating
d. Reducing transaction costs and effecting regulatory arbitrage
An investor writes a call option priced at $3 with an exercise price of $100 on a
stock that he owns. The investor paid $85 for the stock. If at expiration of the call
option the stock price has risen to $110, the profit for the investors position would
be closet to:
Select one:
a. $3
b. $12
c. $18
A firm goes long an option that expires in 90 days to sell a stock at the exercise
price of $50. The price of that stock after 2 months is $40. Given this option is an
American option, after 2 months it is likely that this option will be
Select one:
a. Out- of- the- money
b. At- the- money
c. In- the- money
On the settlement date of a forward contract

Select one:
a. at least one party must make a cash payment to the other
b. the short may be required to sell the asset
c. the long must sell the asset or make a cash payment
If an investor paid $5 for a put option with an exercise price of $60 that is in the
money $2, the price of the underlying is closet to:
Select one:
a. $58
b. $62
c. $53
What is the cash price of a 270-day T-bill with a discount rate of 4% and face value
of $100?
Select one:
a. $96
b. $97
c. $97.09
d. $103.00
Which of the following strategies can be used to hedge profit from the producer' s
perspective?
Select one:
a. Buying calls
b. Buying Collars

c. Buying forward
Suppose the premium on a 6- month S&R call with a strike price of 950 is $112,
and the premium on a 6-month S&R put with the same strike is $62. Given the
risk-free rate of 5%. the 6-month forward price is closest to:
Select one:
a. $1080
b. $1049
c. $1100
d. $1003
1. Which of the following positions is least likely used to hedge against the
decrease in asset' s price ?
Select one:
a. Short forward
b. Long Collar
c. Short put