DERIVATIVES QUESTIONS Question 1: Which of the following in not a usual feature of a derivative contract?

A) Settlement Date B) Face Value C) Underlying D) All the above are usual features Question 2: There is credit risk for derivatives that are: Exchange Traded Over the Counter A) Yes Yes B) Yes No C) No Yes D) No No Question 3: I) Marking to Market is done for OTC traded derivatives and decreases the possibility of default. II) Marking to Market is done for exchange traded derivatives and increases the possibility of default. I&II are: A) TT B) TF C) FT D) FF Question 4: For a Forward contract we have: Price Decided Delivery or Settlement A) Today Today B) Today Future C) Future Today D) Future Future Question 5: Suppose on Jan 1, 20X0 you enter into a contract to deliver 1,000 IBM shares with settlement date April 1, 20XO with price $30 per share. On settlement date the price of IBM is $30.75. Your net cash flow due to the contract is: A) -$30,750 B) -$750 C) +$750 D) +$30,750 Information for questions 6 & 7: Suppose on July 1, 20X2 you enter into a forward contract to deliver 1,000 IBM shares with settlement date July 1, 20X3 with price $30.00 per share. There is no cash flows today. The riskless rate on July 1, 20X2 is 4.5% (six-month rate annualized). Question 6: What is the forward price on July 1, 20X2? A) $28.71 B) $29.34 C) $30.00 D) $31.37 Question 7: Suppose on Jan 1, 20X3 the price of IBM in the market is $32.80. The riskless rate on Jan 1, 20X3 is 6% (six-month rate annualized). What is the value of your forward contract on Jan 1, 20X3? A) -2.42 B) -$2.35

C) +$2.35 D) +$2.42 Question 8: A call option on a stock has a strike price of $50. The premium paid for the call was $5. Currently the price of the stock is $54. The intrinsic value of the call is: A) 4 B) 1 C) -1 D) 54 Question 9: I) A forward contract does not involve cash flows at inception. II) Cash settlement is common for forward contracts on financial assets. I&II are: A) TT B) TF C) FT D) FF Question 10: I) In Contango the prices for future delivery are higher than spot prices. II) In Backwardation the prices for near future delivery are lower than prices for delivery farther in the future. I&II are: A) TT B) TF C) FT D) FF Question 11: I) Higher storage costs can lead to prices being in contango. II) Convenience yield can be a reason for oil prices being in contango during the summer driving season (when demand for oil is higher than average). I&II are: A) TT B) TF C) FT D) FF Question 12: Forward of 100 GOOG shares with Settlement Date of January 1, 20X4 while today is January 1, 20X2. Price of GOOG today is $500. Each July 1 GOOG will pay a dividend of $20 per share. Discount rate is 2.5% per six months (not annualized). The forward price F(0,T) is: A) 518.55 B) 520.76 C) 511.73 D) 609.20 Information for questions 13 and 14: Today is January 1, 20X1. A Treasury bond with 6 years to maturity and six-monthly coupons of $20 (payable on January 1 and July 1) has a yield of 3.7%. The six-month spot rate is 3.2%, the 12 month spot rate is 3.4%, and the 18 month spot rate is 3.57%. Question 13: What is F(0,18 mo) for delivery of an ex-coupon 4.5 year maturity bond with semi-annual coupons of $20 (payable on January 1 and July 1) on July 1, 20X2? A) $1010.25 B) $1073.45 C) $1016.01 D) $1012.18 Question 14: Suppose you have entered into the long side of the forward contract in the above question. On July 1, 20X1 the yield on the bond rises to 3.9%, the sixmonth spot rate is 3.4%, and the 12 month spot rate is 3.6%. Calculate the value on July 1 of the forward contract that you had entered into six months earlier. A) -8.89

B) -9.22 C) -9.55 D) 0 Question 15: I) Euribor is the reference rate for euro-denominated forward rate agreements, short term interest rate futures contracts and interest rate swaps. II) Libor is the daily rate based on the interest rates at which banks offer to lend unsecured funds to other banks in the London money market. I&II are: A) TT B) TF C) FT D) FF Question 16: I) In a Forward Rate Agreement the buyer (Long) pays floating rate on the notional amount to the Seller (Short), and Seller pays fixed rate to Buyer. II) A 2x6 (2 by 6) FRA settles in 60 days (2*30), and underlying rate is 180 days (6*30) LIBOR. I&II are: A) TT B) TF C) FT D) FF Question 17: The notional amount for a 6x9 FRA is $5 M. The fixed rate is 4%. On settlement date (180 days from when contract was entered into) the 90 day Libor rate is 5.5%. What are the cash flows for the long is closest to? A) 18,750 B) 27,5000 C) 18,500 D) 200,000 Question 18: A US firm has a subsidiary in Germany from which Euro 50 M receivables are due in 6 months. It enters into a currency forward contract with settlement in 6 months to fully hedge these receivables at Euro 0.60 for $1. On settlement date the spot rate is Euro 0.66 per $1. The cash flow to the firm on settlement date from receivables and currency forward combined is: A) 3250000 B) 8333333 C) 3000000 D) 7692308 Question 19: I) Futures are standardized and traded in Futures Exchanges and their price is determined by the market. II) Futures have no counter party credit risk as the exchange guarantees performance. I&II are: A) TT B) TF C) FT D) FF Question 20: I) The practice of marking to market runs the risk of losses accumulating on a position.. II) If during the day a position makes money, then the margin account is credited, and if the position loses money then a margin call is made. I&II are: A) TT B) TF C) FT D) FF Question 21: I) Futures Market (clearinghouse) sets the Settlement Price equal to the price for the last trade during the day. II) The Settlement Price is used to determine how much money a Futures position has gained or lost during the day. I&II are: A) TT B) TF C) FT D) FF

Information for questions 22 to 26: A trader enters into the long side of 500 Futures contracts each of which requires a margin of $6. The initial Futures price is $50. The maintenance margin is $4. Question 22: What is the initial dollar margin? A) 0 (as futures have zero initial price) B) 300 C) 3000 D) 25000 Question 23: At the end of the first day the settlement price changes to $50.63. What is the margin call? A) 0 B) 0.63 C) 315 D) -315 Question 24: What is the dollar margin at the beginning of the second day? A) 2685 B) 3000 C) 3315 D) 25315 Question 25: At the end of the second day the settlement price falls to $44.95. What is the margin call? A) 0 B) 525 C) 2525 D) 2840 Question 26: What is the dollar margin at the beginning of the third day? A) 0 B) 2685 C) 3000 D) 25000 Question 27: I) On Settlement Date the Futures Price converges to the Spot Price. II) The change in the Futures Price during a day has to exceed the Price Limits set by the exchange. I&II are: A) TT B) TF C) FT D) FF Question 28: I) For futures, if the price limit is $4, the settlement price the previous day is $95.85, then a move in futures prices to $99.85 is a limit move. II) For futures, if the price limit is $4, the settlement price the previous day is $95.85, then a move in futures prices to $99.85 is a limit up. I&II are: A) TT B) TF C) FT D) FF Question 29: I) The shareholders of a Futures Exchange hold Seats. II) Scalpers, day traders, and position traders are different kinds of brokers. I&II are: A) TT B) TF C) FT D) FF

Question 30: I) Position Traders attempt to profit by selling at Ask and buying at Bid. II) Scalpers keep longer positions, but close at the end of the trading day. I&II are: A) TT B) TF C) FT D) FF Question 31: I) Futures contracts are always be settled for cash, not by delivery of physicals. II) The futures price for an financial asset (costless storage) will be lower than the expected value for the asset if the expected rate of return on the asset is higher than the riskless rate. I&II are: A) TT B) TF C) FT D) FF Question 32: A T-bill with 60 days to maturity and par value $1,000 has a discount rate of 3.6%. What is its price? A) 994.00 B) 994.04 C) 994.08 D) 994.12 Question 33: T-bill Futures price quoted at 96.40 means that: A) price to be paid on delivery of 90 day T-bill of face value $1,000,000 is 991000 B) price to be paid on delivery of 90 day T-bill of face value $1,000,000 is 964000 C) price to be paid on delivery of 30 day T-bill of face value $1,000,000 is 991000 D) price to be paid on delivery of 30 day T-bill of face value $1,000,000 is 964000 Question 34: For every basis point change in the IMM index, the futures price changes by: A) Euro 1 B) $ 1 C) Euro 25 D) $ 25 Question 35: I) A medium or long term futures contract has a Treasury note or a bond as the underlying. II) A Medium or long term futures contract specifies a set of bonds that may be delivered to satisfy the contract. I&II are: A) TT B) TF C) FT D) FF Question 36: I) If the bond delivered to settle a medium or long term futures contract has a coupon greater than the designated benchmark bond, the price paid by the long is adjusted downwards. II) Futures contracts specify a set of bonds that may be delivered to satisfy the contract and on settlement the short chooses which particular bond is to be delivered. I&II are: A) TT B) TF C) FT D) FF Question 37: If the quoted price for a 3 month S&P futures contract is 1400, then futures price is: A) 0 B) 1400 C) 70000 D) 350000

Question 38: I) An call option is necessarily a better trade than a forward, as on settlement date the option can have only a positive value, whereas the forward can have a negative value (require payment). II) A call option on a stock provides protection against fall in value of the stock. I&II are: A) TT B) TF C) FT D) FF Question 39: For an Interest Rate Call, if the fixed rate is 5%, the notional amount in $10 M and the interest rate on maturity date is 6.25%, then the holder of the option will receive: A) 0 B) 125000 C) 500000 D) 625000 Question 40: I) Interest Calls can be combined to set an Interest Rate Cap on a floating rate loan. II) Borrowers can purchase interest rate puts to set an Interest Rate Floor on the rate on a floating rate debt I&II are: A) TT B) TF C) FT D) FF Information for questions 41 and 42: Suppose on March 31, 20X0, on the Chicago Mercantile Exchange we have a currency option gives the owner the right to purchase Euros for dollars on September 31, 20XO. (The expiration months for currency options are usually March, June, September and December.) This currency option is EUR156, that is the option to buy Euro 1 for $1.56. (Note: Except for the Japanese Yen, currency option exercise prices are state in dollars. Japanese Yen options are stated in hundredths of cents). Suppose a trader purchases 10 contracts. The contract size on Chicago Mercantile Exchange is EUR 125,000 (which is double the size of Philadelphia currency option contracts). Question 41: The option premium is quoted as 0.40. What is the dollar premium that the trader pays? A) $4 B) $5,000 C) $500,000 D) $5,195,0000 Question 42: On maturity date if the exchange rate EURUSD is 1.65 (that is $1.65 for 1 Euro), then the dollar payoff to the trader is: A) 16.5 B) 11,250 C) 112,500 D) 2,062,500 Question 43: I) An increase in volatility of the underlying will cause a fall in the price of a call option due to increased risk. II) Due to time value of money, an increase in time to maturity will cause the price of a call option to be lower. I&II are: A) TT B) TF C) FT D) FF

Question 44: I) For speculators, trading in derivatives instead of the underlying offers: Returns Risk A) Higher Higher B) Higher Lower C) Lower Higher D) Lower Lower Question 45: I) A farmer seeking to hedge his corn harvest during the time of sowing will enter into a long position in corn futures. II) An investor who holds stocks of MSFT can buy puts to hedge her position. I&II are: A) TT B) TF C) FT D) FF Question 46: I) An utility company that uses oil as an input will enter into a long position in oil contracts to hedge costs. II) A commodity firm that produces copper will enter into a short position in copper contracts to hedge revenues. I&II are: A) TT B) TF C) FT D) FF Question 47: A share of MSFT is priced at $30, a put on it with strike price $31 and 3 months to expiration is priced at $4, and the riskless rate of lending for 3 months is 1.2% (not annualized). By the put-call parity the price of the call with strike price $31 and 3 months to expiration is: A) 3 B) 3.37 C) 4.63 D) 0.63 Information for question 48 to 50 : Stock A is priced at $50, a call on stock A with strike price $54 and maturity in 6 months is priced at $3, and a put on stock A with strike price $54 and maturity in 6 months is priced at $10. The riskless rate for 6 months is 2.1% (not annualized). Assume that you can purchase any fractions of riskless bonds that you like, and there are no transactions costs. Question 48: Refer to the stock and derivatives above. In setting up the arbitrage you will have: Stock A Call A) Long Long B) Long Short C) Short Long D) Short Short Question 49: Refer to the bonds and derivatives above. In setting up the arbitrage you will have: Bonds Put A) Long Long B) Long Short C) Short Long D) Short Short Question 50: Suppose you trade one unit of stock and appropriate quantities of bonds, calls and puts to create an arbitrage profit where you have a net positive cash flow today and zero cash flow on settlement date. Then the net positive cash flow

you have today equals: A) 4 B) 4.11 C) 7 D) 7.11 Question 51: I) A Fiduciary Call is the combination of a call option and bonds with value on maturity date equal to strike price. II) A Protective Put is the combination of a stock and a put. I&II are: A) TT B) TF C) FT D) FF Question 52: I) A Synthetic Stock can be formed by a portfolio with 1 short Call, 1 long Put and Bonds with maturity value equal to the strike price II) A Synthetic Call can be formed by creating a portfolio with 1 Stock, 1 Put, and short Bonds with maturity value (on settlement date) equal to strike price. I&II are: A) TT B) TF C) FT D) FF Question 53: I) Other things kept constant, an increase in the riskless interest rates will increase call option prices. II) Other things kept constant, an increase in the riskless interest rates will increase put option prices. I&II are: A) TT B) TF C) FT D) FF Question 54: A trader owns an American call option has a strike price of $200. The current stock price is $220. The option has 3 months to expiry. The riskless rate for 3 months is 2% (not annualized). The trader is allowed to go both long and short of stocks, options, and bonds (both borrow and lend at the riskless rate). Transactions costs are zero. What is the maximum cash flow the trader can generate today (arising from ownership of the American call option) while keeping all future cash flows non-negative? A) 0 B) 20 C) 23.92 D) 28.32 Question 55: On Jan 1, 20X4 A and B enter an Interest Rate Swap. The notional amount of $20 M, and A is to receive fixed while B is to receive floating. The fixed rate is 5.75%, and payments are to be made every year, termination date is Jan 1, 20X8. On settlement dates Jan 1, 20X5 and Jan 1, 20X6 the interest rate are 5.72% and 5.83%. The cash flow to A on Jan 1, 20X6 is: A) 16000 B) -16000 C) 6000 D) -6000 Question 56: On Jan 1, 20X4 A and B enter an Interest Rate Swap. The notional amount of $20 M, and A is to receive fixed while B is to receive floating. The fixed rate is 5.75%, and payments are to be made every year, termination date is Jan 1, 20X8. Payments are in arrears. On settlement dates Jan 1, 20X5 and Jan 1, 20X6 the interest rate are 5.72% and 5.83%. The cash flow to A on Jan 1, 20X6 is:

A) 16000 B) -16000 C) 6000 D) -6000 Question 57: Two parties A and B enter into a Currency Swap on July 1, 20X2. A agrees to make payments to B for a 4 year $50 M face value bond with a coupon rate of 4.75% and semi-annual coupons. In exchange B agrees to make payments to A for a 4 year GBP 25 M face value bond with coupon rate 4.9%. On July 1, 20X6, the spot exchange rate is $1.88 per GBP1. What is the next cash flow to B on July 1, 20X6 from the currency swap? A) 3036000 B) 25612500 C) 25575000 D) 51187500 Question 58: I) The principal amounts of a currency swap are typically exchanged by the parties at the beginning of the swap. II) The principal amounts of a currency swap are typically exchanged by the parties at the end of the swap. I&II are: A) TT B) TF C) FT D) FF Question 59: I) An example of an Equity Swap has A giving B the return of investing the notional amount on an equity or an index, while B giving A the return of investing the notional amount at a fixed rate. II) An example of a Contingent Contract is A agreeing to pay B $1 M if the Dow Jones Industrial Average rises by 10% in the next 6 months. I&II are: A) TT B) TF C) FT D) FF Question 60: I) A Covered Calls is the combination of one short underlying and one long call. II) A Protective Put is the combination of one long underlying and one short put. I&II are: A) TT B) TF C) FT D) FF Question 61: A share of MSFT, currently priced at $30. The premium is $4 for a 6month call option on the MSFT with strike price $28. At what price will a trader who takes a covered call position break even? A) 26 B) 28 C) 2 D) 30 Question 62: I) A Bull Spread is one long call with strike price X0, and one short call with strike price X1, with X0 > X1. II) A Butterfly Spread is the combination of one Bull Spread and one Bear Spread. I&II are: A) TT B) TF C) FT D) FF Question 63: I) A Bear Spread is one long call with strike price X0, and one short call with strike price X1, with X0 > X1. II) A trader would use a butterfly spread when he expects prices to remain stable (not change much). I&II are: A) TT B) TF C) FT D) FF

Question 64: I) A collar is formed by one long underlying, one short call and one short put. II) A straddle is a combination of a long call and a short put. I&II are: A) TT B) TF C) FT D) FF ANSWERS: 1) B 2) C 3) D 4) B 5) C 6) D. Annual rate by convention reported as twice six-month rate. Therefore, six month rate is 4.5%/2 = 2.25%. Also financial assets like shares do not incur storage costs. 7) C 8) B. Intrinsic value is the amount by which the call is in the money. 9) A 10) B 11) C 12) B 13) A 29) B 14) A 30) D 15) A 31) C 16) D 32) A 17) C 33) A 18) B 34) D 19) A 35) A 20) C 36) D 21) C 37) D 22) C 38) D 23) A 39) B 24) C 40) B 25) C 41) B 26) C 42) C* 27) B 43) D 28) A 44) A Answer 41: Option premium is quoted in US cents per unit of underlying currency with the exception of the Japanese yen. 45) C 57) A 46) A 58) A 47) B 59) A 48) C 60) D 49) C 61) A* 50) B 62) C 51) A 63) A 52) C 64) D 53) B 54) C 55) B 56) C Answer 61: Breakeven equals current price minus premium obtained by selling call.