Question 1 -95528

An investor purchases a stock for $40 a share and simultaneously sells a call option on
the stock with an exercise price of $42 for a premium of $3/share. Ignoring dividends and
transactions cost, what is the maximum profit that the writer of this covered call can earn
if the position is held to expiration?

A) $3.
B) $5.
C) $2.

Question 2 -95750

Which of the following is least likely a characteristic of futures contracts? Futures

contracts:

A) require weekly settlement of gains and losses.

B) are traded in an active secondary market.
C) are backed by the clearinghouse.

Question 3 -95644

Which of the following is least likely one of the conditions that must be met for a trade to
be considered an arbitrage?

A) There is no risk.
B) There are no commissions.
C) There is no initial investment.

Question 4 -95640

A legally binding promise to buy 140 oz. of gold two months from now at a price agreed
upon today is a(n):

A) hedge.
B) take-or-pay contract.
C) forward commitment.
Question 5 -95371

Which of the following statements concerning an American-style option is least accurate?

A) It allows the holder the right to exercise before maturity of the option.
B) They are only traded in the U.S.
C) The predominant option type is American-style, rather than European-style.

Question 6 -95430

Which statement best reflects the risk exposure of an option buyer?

A) Unlimited risk.
B) No risk.
C) Limited risk.

Question 7 -95400

For a European call option X = 25 and a European call option X = 30 on the same stock
with the same time to expiration it is true that, when the 30 call is at-or in-the-money, the
strongest statement we can make is the:

A) 30 call is worth at least as much as the 25 call.

B) value of the 25 call is greater than or equal to the value of the 30 call.
C) value of the 25 call is greater than the value of the 30 call.

Question 8 -95431

Given the covered call option diagram below and the following information, what are the
dollar values for points X and Y? The market price of the stock is $70, the strike price of
the call is $80, and the call premium is $5.

Point X Point Y
A) $80 $5
B) $75 $15
C) $80 $15

Question 9 -95641

Typically, forward commitments are made with respect to all the following EXCEPT:

A) inflation.
B) equities.
C) bonds.

Question 10 -95784

Which of the following is least likely a characteristic of London Interbank Offered Rate
(LIBOR)?

A) Adjusted daily.
B) Set by the European Central Bank.
C) Paid on loans denominated in U.S. dollars.

Question 11 -95703
An out-of-the-money put and an in-the-money call are defined as:
Put Call
A) strike price > market price market price > strike price
B) market price > strike price strike price > market price
C) market price > strike price market price > strike price

Question 12 -95298

Given the payoff diagram shown below of an option combined with a long position in a
stock, which of the following statements most accurately describes the profit or loss
potential to the holder of the combined position?

A) The maximum profit on the long call is unlimited.

B) The maximum profit on the short put is $2.
C) The maximum loss on the long put is its cost.

Question 13 -95303

An option to buy Mexican pesos is:

A) an exchange rate option.

B) a currency option.
C) a foreign option.

Question 14 -95319

An investor bought a futures contract covering 100,000 Mexican Pesos at 0.08196 and
deposited margin of $320. The following day the contract settlement price was 0.08201.
The new margin balance in the account is:
A) $320.
B) $325.
C) $314.

Question 15 -95734

Which of the following relationships between arbitrage and market efficiency is least
accurate?

A) Market efficiency refers to the low cost of trading derivatives because of the lower
expense to traders. The concept of rationally priced financial instruments preventing
arbitrage opportunities is the basis

B) behind the no-arbitrage principle.

C) Investors acting on arbitrage opportunities help keep markets efficient.

Question 16 -95360

Most deliverable futures contracts are settled by:

A) delivery of the asset at contract expiration.

B) a cash payment at expiration.
C) an offsetting trade.

Question 17 -95567

Consider a currency swap in which Party A pays 180-day London Interbank Offered Rate
on $1,000,000 and Party B pays the Japanese yen riskless rate on 130,000,000 yen.
Which of the following statements regarding the terms required at the initiation of the
swap is TRUE?

A) An exchange of principal amounts is not required at the initiation of the swap.

B) Party A must pay 130,000,000 yen and receive $1,000,000.
C) Party A must pay $1,000,000 and receive 130,000,000 yen.

Question 18 -95460

Donner Foliette holds stock in Hamilton Properties, which is currently trading at $25.70
per share. On the advice of this investment advisor, he conducts a covered call transaction
at a strike price of $30 and at a premium of $3.50. The advisor drew the following graph
to help explain the transaction.
Which of the following statements about this transaction is least accurate?

A) Foliette believes the stock will appreciate significantly in the near future.
B) The call buyer paid $3.50 for the right to any gain above $30.
C) If the stock price falls to $23, Foliette will gain $0.80 per share.

Question 19 -95043

For a futures trade:

A) the buyer pays the bid price; the seller receives the ask price.
B) the seller receives the bid price; the buyer pays the ask price.
C) a single price is determined by supply and demand.

Question 20 -95415
Using put-call parity, it can be shown that a synthetic European put can be created by a
portfolio that is:

A) short the stock, long the call, and long a pure discount bond that pays the exercise
price at option expiration.
B) short the stock, long the call, and short a pure discount bond that pays the exercise
price at option expiration.
C) long the stock, short the call, and short a pure discount bond that pays the exercise
price at option expiration.

Question 21 -95305

Prior to contract expiration the short in a futures contract can avoid futures exposure by:
A) using an exchange-for-physicals.
B) entering into a reversing trade.
C) paying a cash settlement amount.

Question 22 -95796

All of the following are typically end users of forward contracts EXCEPT:

A) non-profit institutions.
B) governmental units.
C) a forwards dealer.

Question 23 -95495
A forward contract that must be settled by a sale of an asset by one party to the other
party is termed a:

A) deliverable forward contract.

B) take-and-pay contract.
C) physicals-only contract.

Question 24 -95048

It is April 15, and a trader is entered into a short position in two soybean meal futures
contracts. The contracts expire on August 15, and call for the delivery of 100 tons of
soybean meal each. Further, because this is a futures position, it requires the posting of a
$3,000 initial margin and a $1,500 maintenance margin per contract. For simplicity,
however, assume that the account is marked to market on a monthly basis. Assume the
following represent the contract delivery prices (in dollars per ton) that prevail on each
settlement date:

April 15 …173.00 …(initiation)

May 15 179.75
June 15 189.00
July 15 182.50
August 15 ….174.25 …..(delivery)

Part 1)
What is the equity value of the margin account on the May 15 settlement date, including
any additional equity that is required to meet a margin call?

A) $1,350.
B) $4,650.
C) $2,300.

Part 2)
Based on the May 15 settlement date, which of the following is most accurate?

Since the equity value of the margin account is above the initial margin, the trader can
withdraw
A) $1,350.
B) Since the equity value of the margin account is below the maintenance margin, a
variation margin is called to restore the equity value of the account to it's initial level.
C) No margin call or disbursement occurs.
Question 25 -95576

The term exchange of borrowings refers to:

A) swaptions.
B) currency swaps.
C) interest rate swaps.

Question 26 -95467

George Mote owns stock in IBM currently valued at $112 per share. Mote writes a call
option on IBM with an exercise price of $120. The call option is sold for $1.80. At
expiration, the price of IBM is $115. What is Mote’s profit (or loss) from his covered call
strategy? Mote:

A) gained $3.00.
B) lost $3.20.
C) gained $4.80.

Question 27 -95485

American options are worth no less than European options with the same maturity,
exercise price, and underlying stock because:

A) both of these choices are correct.

B) American options can be exercised before maturity, while European options can be
exercised only at maturity.
C) purchasers of American options receive stock dividends, while purchasers of
European options do not.

Question 28 -95526

The process that ensures that two securities positions with identical future payoffs,
regardless of future events, will have the same price is called:

A) exchange parity.
B) the law of one price.
C) arbitrage.

Question 29 -95374

Which of the following statements about uncovered call options is least accurate?
A) The loss potential to the writer is unlimited.
B) The profit potential to the holder is unlimited.
C) The most the writer can make is the premium plus the difference between the exercise
price (X) and the stock price (S).

Question 30 -95642
Which of the following statements about forward and future contracts is least accurate?
The primary difference between forwards and futures is that only futures are considered
financial

A) derivatives.
B) A predetermined price to be paid for a good is a necessary requirement in the terms of
a forward contract.
C) A future requires the contract purchaser to receive delivery of the good at a specified
time.

Question 31 -95412

Buying an interest-rate cap and selling an interest-rate floor is equivalent to:

A) buying a series of interest-rate puts and selling a series of interest rate calls.
B) buying a series of interest-rate puts and calls.
C) buying a series of interest-rate calls and selling a series of interest-rate puts.

Question 32 -95649

Which of the following is most accurate regarding derivatives?

A) Exchange-traded derivatives are created and traded by dealers in a market with no

central location.
B) Derivatives have no default risk.
C) Derivative values are based on the value of another security, index, or rate.

Question 33 -95631

Which of the following is NOT considered a reason for using the swaps market? To:

A) reduce transactions costs.

B) exploit market inefficiencies.
C) maintain privacy.

Question 34 -95364

A European option can be exercised by:

A) its owner, anytime during the term of the contract.
B) either party, at contract expiration.
C) its owner, only at the expiration of the contract.

Question 35 -95770

Eurodollar time deposits are:

A) priced at a discount.
B) denominated in U.S. dollars (USD).
C) actively traded in the secondary market.

Question 36 -95513

Consider a call option expiring in 110 days on a non-dividend-paying stock trading at 27

when the risk-free rate is 6%. The lower bound for a call option with an exercise price of
25 is:

A) $2.00.
B) $1.97.
C) $2.44.

Question 37 -94993

A similarity of margin accounts for both equities and futures is that for both:

A) interest is charged on the margin loan balance.

B) the value of the security is the collateral for the loan.
C) additional payment is required if margin falls below the maintenance margin.

Question 38 -95540

Consider a 1-year quarterly-pay $1,000,000 equity swap based on 90-day London

Interbank Offered Rate (LIBOR) and an index return. Current LIBOR is 3.0% and the
index is at 840. Below are the index level and LIBOR at each of the four settlement dates
on the swap.

Q1 Q2 Q3 Q4
LIBOR 3.2% 3.0% 3.4% 3.9%
Index 881 850 892.5 900
At the second settlement date, the equity-return payer in the swap will:

A) receive $42,687.
B) receive $43,187.
C) receive $21,187.

Question 39 -95765

Which of the following statements regarding Eurodollar time deposits is FALSE?

A) Rates are quoted as an add-on yield.

B) They are available in Switzerland.
C) Sometimes the best rates are available in New York City.

Question 40 -95753

A derivative security:

A) is one that is based on the value of another security.

B) is like a callable bond.
C) has a value dependent on the shape of the yield curve.

Question 41 -95728

One reason that criticism has been leveled at derivatives and derivatives markets is that:

A) derivatives have too much default risk.

B) derivatives expire.
C) they are complex instruments and sometimes hard to understand.

Question 42 -95637

Which of the following is the best interpretation of the no-arbitrage principle?

A) There is no way you can find an opportunity to make a profit.

B) There is no free money.
C) The information flow is quick in the financial market.

Question 43 -95447

Which of the following characteristics about swaps is least accurate? Swaps:

A) are highly regulated.
B) have no active secondary market.
C) are custom instruments.

Question 44 -95586

XYZ, Inc. has entered into a "plain-vanilla" interest rate swap on $5,000,000 notional
principal. XYZ company pays a fixed rate of 8.5% on payments that occur at 180-day
intervals. Platteville Investments, a swap broker, negotiates with another firm, SSP, to
take the receive-fixed side of the swap. The floating rate payment is based on LIBOR
(currently at 7.2%). At the time of the next payment (due in exactly 180 days), XYZ
company will:

A) pay the dealer net payments of $65,000.

B) receive net payments of $32,500.
C) pay the dealer net payments of $32,500.

Question 45 -95554

An option’s intrinsic value is equal to the amount the option is:

A) in the money, and the time value is the intrinsic value minus the market value.
B) in the money, and the time value is the market value minus the intrinsic value.
C) out of the money, and the time value is the market value minus the intrinsic value.

Question 46 -95405

A covered call position is equivalent to:

A) owning the stock and a long call.

B) owning the stock and a long put.
C) a short put.

Question 47 -95066

A currency forward contract:

A) requires a payment at settlement based on London Interbank Offered Rate.

B) is priced using the future interest rate on a foreign currency.
C) can be a deliverable contract.
Question 48 -95630

A put option has a strike price of $65, and the stock price is $39 at expiration. The
expiration day value of the put option is:

A) $65.
B) $26.
C) $0.

Question 49 -95621
Which of the following statements about the early exercise of an option is least accurate?
For an American:
A) put option on an asset with no cash flows, early exercise is sometimes optimal.
B) call option, on an asset with no cash flows, early exercise can be profitable if the
option is far in the money.
C) call option on an asset with positive cash flows, early exercise is sometimes profitable.

Question 50 -95392

For two European put options that differ only in their time to expiration, which of the
following is most accurate? The longer-term option:

A) can be worth less than the shorter-term option.

B) can be worth more than the shorter-term option.
C) can be worth at least as much as the shorter-term option.

Question 51 -95830

The forward contract price of a coupon-bearing bond is typically quoted as:

A) a discount to the face value.

B) the bond dollar-price plus accrued interest as of the settlement date.
C) a yield to maturity at the settlement date.

Question 52 -95293

Which of the following statements about closing a futures position is least accurate?

A) Closing a position through delivery refers exclusively to the physical delivery of

goods.
B) Few futures positions are settled by delivery of cash or assets.
C) Except for exchange for physicals (EFP) transactions, futures contracts must be closed
on the exchange floor.
Question 53 -95331

The payoff of a call option on a stock at expiration is equal to:

A) the maximum of zero and the stock price minus the exercise price.
B) the minimum of zero and the stock price minus the exercise price.
C) the maximum of zero and the exercise price minus the stock price.

Question 54 -95280

Which of the following statements regarding futures contracts is least accurate?

A) The exchange sets the times of trading for futures contracts.

B) The long will have gains when the futures price rises above the initial contract price.
C) Price fluctuations can be any amount.

Question 55 -95362

Bidco Corporation common stock has a market value of $30.00. Which statement about
put and call options available on Bidco common is most accurate?

A) A put with a strike price of $35.00 is in-the-money.

B) A call with a strike price of $25.00 is at-the-money.
C) A put with a strike price of $20.00 has intrinsic value.

Question 56 -95489

An increase in the riskless rate of interest, other things equal, will:

A) decrease call option values and increase put option values.

B) decrease call option values and decrease put option values.
C) increase call option values and decrease put option values.

Question 57 -95107

Investing in distressed securities and venture capital investing are similar in all of the
following ways EXCEPT:

A) a large investment requirement.

B) illiquid investments.
C) heavy involvement by investors.
Question 58 -95145

The securities of companies that are either close to bankruptcy or have already filed for
bankruptcy protection are called:

A) distressed securities.
B) inactively traded securities.
C) discount securities.

Question 59 -95175

The per-share value of an investment company’s assets minus its liabilities is called the:

A) discount.
B) net asset value.
C) current market value.