Question 1

A riskless hedge can best be defined as

Accepted Answer

A)  A situation in which aggregate risk can be reduced by derivatives transactions between two parties. 
B)  A hedge in which an investor buys a stock and simultaneously sells a call option on that stock and ends up with a riskless position. 
C)  Standardized contracts that are traded on exchanges and are "marked to market" daily, but where physical delivery of the underlying asset is virtually never taken. 
D)  Two parties agree to exchange obligations to make specified payment streams. 
E)  Simultaneously buying and selling a call option with the same exercise price. 
A)  A situation in which aggregate risk can be reduced by derivatives transactions between two parties. 
B)  A hedge in which an investor buys a stock and simultaneously sells a call option on that stock and ends up with a riskless position. 
C)  Standardized contracts that are traded on exchanges and are "marked to market" daily, but where physical delivery of the underlying asset is virtually never taken. 
D)  Two parties agree to exchange obligations to make specified payment streams. 
E)  Simultaneously buying and selling a call option with the same exercise price.

Question 2

Which of the following is NOT a way risk management can be used to increase the value of a firm?

Accepted Answer

A)  Risk management can increase debt capacity. 
B)  Risk management can help a firm maintain its optimal capital budget. 
C)  Risk management can reduce the expected costs of financial distress. 
D)  Risk management can help firms minimize taxes. 
E)  Risk management can allow managers to defer receipt of their bonuses and thus postpone tax payments. 
A)  Risk management can increase debt capacity. 
B)  Risk management can help a firm maintain its optimal capital budget. 
C)  Risk management can reduce the expected costs of financial distress. 
D)  Risk management can help firms minimize taxes. 
E)  Risk management can allow managers to defer receipt of their bonuses and thus postpone tax payments.

Question 3

A 6-month call option on Romer Technologies' stock has a strike price of $45 and sells in the market for $8.25. Romer's current stock price is $48. What is the exercise value of the option?

Accepted Answer

A)  $3.00 
B)  $3.75 
C)  $4.69 
D)  $5.86 
E)  $7.32 
A)  $3.00 
B)  $3.75 
C)  $4.69 
D)  $5.86 
E)  $7.32

Question 4

A 6-month put option on Smith Corp.'s stock has a strike price of $45 and sells in the market for $8.90. Smith's current stock price is $41. What is the option premium?

Accepted Answer

A)  $4.41 
B)  $4.90 
C)  $5.39 
D)  $5.93 
E)  $6.52 
A)  $4.41 
B)  $4.90 
C)  $5.39 
D)  $5.93 
E)  $6.52

Question 5

Speculative risks are symmetrical in the sense that they offer the chance of a gain as well as a loss, while pure risks are those that can only lead to losses.

Accepted Answer

A) True 
 B)False

Question 6

An investor who "writes" a call option without the stock in his or her portfolio to back it up is selling a(n)

Accepted Answer

A)  Call option. 
B)  Put option. 
C)  Out-of-the-money option. 
D)  Naked option. 
E)  Covered option. 
A)  Call option. 
B)  Put option. 
C)  Out-of-the-money option. 
D)  Naked option. 
E)  Covered option.

Question 7

Suppose a CBOT 10-year U.S. Treasury note futures contract has a quoted price of 103-18. If annual interest rates go up by 1.00 percentage point, what is the gain or loss on the futures contract? (Assume a $1,000 par value, round the new interest rate to 4 decimal places when written as a decimal, and round the change in price up to the nearest whole dollar.)

Accepted Answer

A)  -$61.00 
B)  -$64.00 
C)  -$67.00 
D)  -$71.00 
E)  -$75.00 
A)  -$61.00 
B)  -$64.00 
C)  -$67.00 
D)  -$71.00 
E)  -$75.00

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A)  An option's value is determined by its exercise value, which is the market price of the stock less its strike price. Thus, an option can't sell for more than its exercise value. 
B)  As a stock's price increases, the premium portion of an option on that stock increases because the difference between the stock price and the fixed strike price increases. 
C)  If the company is consistently profitable, its call options will always be in the money. 
D)  The market value of an option depends in part on the option's length of time until expiration and on the variability of the underlying stock's price. 
E)  The potential loss on an option decreases as the option sells at higher and higher prices because the profit margin becomes larger. 
A)  An option's value is determined by its exercise value, which is the market price of the stock less its strike price. Thus, an option can't sell for more than its exercise value. 
B)  As a stock's price increases, the premium portion of an option on that stock increases because the difference between the stock price and the fixed strike price increases. 
C)  If the company is consistently profitable, its call options will always be in the money. 
D)  The market value of an option depends in part on the option's length of time until expiration and on the variability of the underlying stock's price. 
E)  The potential loss on an option decreases as the option sells at higher and higher prices because the profit margin becomes larger.

Question 9

A swap is a method used to reduce financial risk. Which of the following statements about swaps, if any, is NOT CORRECT?

Accepted Answer

A)  A swap involves the exchange of cash payment obligations. 
B)  The earliest swaps were currency swaps, in which companies traded debt denominated in different currencies, say dollars and pounds. 
C)  Swaps are very often arranged by a financial intermediary, who may or may not take the position of one of the counterparties. 
D)  A problem with swaps is that no standardized contracts exist, which has prevented the development of a secondary market. 
E)  Swaps can involve side payments in order to get the counterparty to agree to the swap. 
A)  A swap involves the exchange of cash payment obligations. 
B)  The earliest swaps were currency swaps, in which companies traded debt denominated in different currencies, say dollars and pounds. 
C)  Swaps are very often arranged by a financial intermediary, who may or may not take the position of one of the counterparties. 
D)  A problem with swaps is that no standardized contracts exist, which has prevented the development of a secondary market. 
E)  Swaps can involve side payments in order to get the counterparty to agree to the swap.

Question 10

Which of the following statements is CORRECT?

Accepted Answer

A)  Put options give investors the right to buy a stock at a certain exercise price before a specified date. 
B)  Call options give investors the right to sell a stock at a certain exercise price before a specified date. 
C)  Options typically sell for less than their exercise value. 
D)  LEAPS are very short-term options that have begun trading on the exchanges in recent years. 
E)  Option holders are not entitled to receive dividends unless they choose to exercise their option. 
A)  Put options give investors the right to buy a stock at a certain exercise price before a specified date. 
B)  Call options give investors the right to sell a stock at a certain exercise price before a specified date. 
C)  Options typically sell for less than their exercise value. 
D)  LEAPS are very short-term options that have begun trading on the exchanges in recent years. 
E)  Option holders are not entitled to receive dividends unless they choose to exercise their option.

Question 11

The value of a stock option depends on all of the following EXCEPT:

Accepted Answer

A)  Exercise price. 
B)  Variability of the stock price. 
C)  Length of time until option expiration. 
D)  Risk-free rate of interest. 
E)  Bond price. 
A)  Exercise price. 
B)  Variability of the stock price. 
C)  Length of time until option expiration. 
D)  Risk-free rate of interest. 
E)  Bond price.

Question 12

The two basic types of hedges involving the futures market are long hedges and short hedges, where the words "long" and "short" refer to the maturity of the hedging instrument. For example, a long hedge might use Treasury bonds, while a short hedge might use 3-month T-bills.

Accepted Answer

A) True 
 B)False

Question 13

An investor who "writes" a call option against stock held in his or her portfolio is selling a(n)

Accepted Answer

A)  Straddle option. 
B)  Put option. 
C)  Out-of-the-money option. 
D)  Naked option. 
E)  Covered option. 
A)  Straddle option. 
B)  Put option. 
C)  Out-of-the-money option. 
D)  Naked option. 
E)  Covered option.

Question 14

A call option whose underlying stock value is less than the corresponding exercise price is an example of a(n)

Accepted Answer

A)  Straddle option. 
B)  Put option. 
C)  Out-of-the-money option. 
D)  Naked option. 
E)  Covered option. 
A)  Straddle option. 
B)  Put option. 
C)  Out-of-the-money option. 
D)  Naked option. 
E)  Covered option.

Question 15

Suppose a CBOT 10-year U.S. Treasury note futures contract has a quoted price of 89-09. What is the implied annual interest rate inherent in this futures contract?

Accepted Answer

A)  6.81% 
B)  7.17% 
C)  7.55% 
D)  7.92% 
E)  8.32% 
A)  6.81% 
B)  7.17% 
C)  7.55% 
D)  7.92% 
E)  8.32%

A riskless hedge can best be defined as

Which of the following is NOT a way risk management can be used to increase the value of a firm?

A 6-month call option on Romer Technologies' stock has a strike price of $45 and sells in the market for $8.25. Romer's current stock price is $48. What is the exercise value of the option?

A 6-month put option on Smith Corp.'s stock has a strike price of $45 and sells in the market for $8.90. Smith's current stock price is $41. What is the option premium?

Speculative risks are symmetrical in the sense that they offer the chance of a gain as well as a loss, while pure risks are those that can only lead to losses.

An investor who "writes" a call option without the stock in his or her portfolio to back it up is selling a(n)

Which of the following statements is CORRECT?

A swap is a method used to reduce financial risk. Which of the following statements about swaps, if any, is NOT CORRECT?

Which of the following statements is CORRECT?

The value of a stock option depends on all of the following EXCEPT:

The two basic types of hedges involving the futures market are long hedges and short hedges, where the words "long" and "short" refer to the maturity of the hedging instrument. For example, a long hedge might use Treasury bonds, while a short hedge might use 3-month T-bills.

An investor who "writes" a call option against stock held in his or her portfolio is selling a(n)

A call option whose underlying stock value is less than the corresponding exercise price is an example of a(n)

Suppose a CBOT 10-year U.S. Treasury note futures contract has a quoted price of 89-09. What is the implied annual interest rate inherent in this futures contract?

Overview

Financial Markets

Financial Statements

Statement Analysis

Time Value of Money

Interest Rates

Bonds

Risk and Return

Stocks

Cost of Capital

Capital Budgeting

Cash Flow and Risk

Real Options

Capital Structure

Dividends

Working Capital

Forecasting

Multinational

Hybrid Financing

Mergers

Filters

Exam 18: Derivatives

A riskless hedge can best be defined as

Which of the following is NOT a way risk management can be used to increase the value of a firm?

A 6-month call option on Romer Technologies' stock has a strike price of $45 and sells in the market for $8.25. Romer's current stock price is $48. What is the exercise value of the option?

A 6-month put option on Smith Corp.'s stock has a strike price of $45 and sells in the market for $8.90. Smith's current stock price is $41. What is the option premium?

Speculative risks are symmetrical in the sense that they offer the chance of a gain as well as a loss, while pure risks are those that can only lead to losses.

An investor who "writes" a call option without the stock in his or her portfolio to back it up is selling a(n)

Which of the following statements is CORRECT?

A swap is a method used to reduce financial risk. Which of the following statements about swaps, if any, is NOT CORRECT?

Which of the following statements is CORRECT?

The value of a stock option depends on all of the following EXCEPT:

The two basic types of hedges involving the futures market are long hedges and short hedges, where the words "long" and "short" refer to the maturity of the hedging instrument. For example, a long hedge might use Treasury bonds, while a short hedge might use 3-month T-bills.

An investor who "writes" a call option against stock held in his or her portfolio is selling a(n)

A call option whose underlying stock value is less than the corresponding exercise price is an example of a(n)

Suppose a CBOT 10-year U.S. Treasury note futures contract has a quoted price of 89-09. What is the implied annual interest rate inherent in this futures contract?

Overview

Financial Markets

Financial Statements

Statement Analysis

Time Value of Money

Interest Rates

Bonds

Risk and Return

Stocks

Cost of Capital

Capital Budgeting

Cash Flow and Risk

Real Options

Capital Structure

Dividends

Working Capital

Forecasting

Multinational

Hybrid Financing

Mergers

Filters