Reference no: EM132215906

Questions -

Q1. KMW, Inc. plans to pay a dividend of $0.50 per share both 3 and 6 months from today. KMW's share price today is $36.00 and the continuously compounded quarterly interest rate is 1.5%. What is the price of a 6-month prepaid forward contract, which expires immediately after the second dividend?

(a) $35.00

(b) $35.02

(c) $36.98

(d) $37.00

Q2. The current currency spot rate is $1.31 per euro. If dollar denominated interest rates are 3.0% and euro denominated interest rates are 4.0%, what is the likely dollar per euro exchange rate for a 2 year forward contract?

(a) $1.28

(b) $1.30

(c) $1.31

(d) $1.33

Q3. The S&P 500 Index is priced at $950.46. The annualized dividend yield on the index is 1.40%. What is the price of a 6-month prepaid forward contract on the S & P 500 Index?

(a) $943.83

(b) $950.00

(c) $964.26

(d) $984.21

Q4. HAW, Inc. plans to pay a $1.10 dividend per share in 3 months and a $1.15 dividend in 6 months. HAW's share price today is $45.60 and the continuously compounded quarterly interest rate is 2.1%. What is the price of a forward contract, which expires immediately after the second dividend?

(a) $45.28

(b) $45.96

(c) $45.60

(d) $46.24

Q5. The S&P 500 Index is priced at $950.46. The annualized dividend yield on the index is 1.40%. The continuously compounded annual interest rate is 8.40%. What is the price of a forward contract that expires 9 months from today?

(a) $937.48

(b) $942.66

(c) $984.36

(d) $1001.69

Q6. Which of the following statements does NOT accurately reflect the relationship between securities and synthetic forward contracts?

(a) Forward = stock - zero coupon bond

(b) Zero coupon bond = stock forward

(c) Prepaid forward = forward - zero coupon bond

(d) Stock forward + zero coupon bond

Q7. The S&P 500 Index price is $925.28 and its annualized dividend yield is 1.40%. LIBOR is 4.2%. How many futures contracts will you need to hedge a $25 million portfolio with a beta of 0.9 for one year?

(a) 105

(b) 120

(c) 80

(d) 95

Q8. Interest rates on the U.S. dollar are 5.4% and euro rates are 4.6%. Given a dollar per euro spot rate of 0.918, what is the 6-month forward rate ($/E)?

(a) 0.912

(b) 0.917

(c) 0.922

(d) 0.934

Q9. What is the process involved in creating a cash-and-carry strategy?

Q10. Name some advantages that futures contracts have over forward contracts.

Q11. Explain the process of creating a synthetic forward.

Q12. Draw the payoff and profit diagrams for a long call position.

Q13. The S&P 500 Index price is 1992.28 and its annualized dividend yield is 2.30%. LIBOR is .2%. What is the value of a prepaid forward and the forward contract? (Show your Work)

Q14. An investor wants to hold 200 euro two years from today. The spot exchange rate is $1.31 per euro. If the euro denominated annual interest rate is 3.0% what is the price of a currency prepaid forward?

(a) $200

(b) $206

(c) $231

(d) $247

Q15. A stock is trading at $20 per share; and, does not pay a dividend. The annual rate of interest is 6%. What is the value of the one year prepaid forward?

Q16. A stock is trading at 20 dollars per share. The stock pays a $.25 quarterly dividend. The annual rate of interest is 6%. What is the value of a one year prepaid forward?

QI7. A company holding Australian dollars wishes to purchase UK Pounds. The current AUD/GBP (Australian Dollar/Swiss Franc) exchange rate is .4728. The rate on the 10 year bond (U.K.) is 1.79%. What is the value of a 10 year prepaid forward?

Q18. A company holding Australian dollars wishes to purchase UK Pounds. The current AUD/GBP (Australian Dollar/Swiss Franc) exchange rate is .4728. The rate on the 10 year bond (U.K.) is 1.79%. The rate on the 10 year AUD bond is 2.75%. What is the value of a 10 year forward?

Q19. A strategy consists of buying a market index product at $800 and longing a put on the index with a strike of $800. If the put premium is $32.00 and interest rates are 0.95% per month, what is the profit or loss at expiration (in 6 months) if the market index is $840?

Q20. The premium on a call option on the market index with an exercise price of 2010 is $19.70 when originally purchased. After 2 months the position is closed and the index spot price is 2072. If interest rates are 0.5 % per month, what is the Call Profit?

Q21. Define the following terms relating to option contracs:

Delta

Gamma

Theta

Vega

Rho

Q22. Which of the following is not a derivative instrument?

(a) Contract to sell corn

(b) Option agreement to buy land

(c) Installment sales agreement

(d) Mortgage backed security

Q23. All of the following are financially engineered products, except:

(a) Mortgage

(b) Mortgage backed security

(c) Interest only

(d) Principal only

Q24. What is the cost of 100 shares of Jiffy, Inc. stock given that the bid-ask prices are $31.25 - $32.00 and a $15.00 commission per transaction exists?

(a) $3215

(b) $3140

(c) $3125

(d) $3200

Q25. The spot price of the market index is $900. A 3-month forward contract on this index is priced at $930. What is the profit or loss to a short position if the spot price of the market index rises to $920 by the expiration date?

(a) $20 gain

(b) $20 loss

(c) $10 gain

(d) $10 loss

Q26. All of the positions listed will benefit from a price decline, except:

(a) Short put

(b) Long put

(c) Short call

(d) Short stock

Q27. The premium on a long term call option on the market index with an exercise price of 950 is $12.00 when originally purchased. After 6 months the position is closed and the index spot price is 965. If interest rates are 0.5 % per month, what is the Call Payoff?

(a) $2.64

(b) $12.00

(c) $12.36

(d) $15.00

Q28. The premium on a call option on the market index with an exercise price of 1050 is $9.30 when originally purchased. After 2 months the position is closed and the index spot price is 1072. If interest rates are 0.5 % per month, what is the Call Profit?

(a) $9.30

(b) $9.39

(c) $12.61

(d) $22.00

Q29. A put option if purchased and held for I year. The Exercise price on the underlying asset is $40. If the current price of the asset is $36.45 and the future value of the original option premium is $1.62 , what is the put profit, if any at the end of the year?

(a) $1.62

(b) $1.93

(c) $3.55

(d) $5.17

Q30. What are the similarities and differences between bear and bull spreads?

Q31. Why is a straddle position considered a speculation on the asset's volatility?

Q32. To plant and harvest 20,000 bushels of corn, Farmer Jayne incurs fixed and variable costs totaling $33,000. The current spot price of corn is $1.80 per bushel. What is the profit or loss if the spot price is $1.90 per bushel when she harvests and sells her corn?

(a) $3,000 gain

(b) $3,000 loss

(c) $5,000 gain

(d) $5,000 loss

Q33. When selecting among various put options with different strike prices, in order to hedge a long asset position, which of the following statements is true?

(a) Higher strike puts cost more and provide higher floors

(b) Higher strike puts cost less and provide higher floors

(c) Lower strike puts cost more and provide higher floors

(d) Lower strike puts cost less and provide higher floors.