SECTION A
Answer ALL questions in this section
1.A one-year call option on a stock with a strike price of $30 costs $3; a one-year putoption on the stock with a strike price of $30 costs $4. Suppose that a trader buys two call options and one put option. The breakeven stock price below which the tradermakes a profit is
a)$25
b)$28
c)$26
d)$20
[3 marks]
2.The price of a stock on February 1 is $124. A trader sells 200 put options on the stock with a strike price of $120 when the option price is $5. The options are exercised when the stock price is $110. The trader’s net profit or loss is
a)Gain of $1,000
b)Loss of $2,000
c)Loss of $2,800d)Loss of $1,000[3 marks]
3.Which of the following is NOT true
a)Futures contracts nearly always last longer than forward contracts
b)Futures contracts are standardized; forward contracts are not.
c)Delivery or final cash settlement usually takes place with forward contracts;the same is not true of futures contracts.
d)Forward contracts usually have one specified delivery date; futures contract often have a range of delivery dates. [3 marks]
4.Margin accounts have the effect of
a)Reducing the risk of one party regretting the deal and backing out
b)Ensuring funds are available to pay traders when they make a profit
c)Reducing systemic risk due to collapse of futures markets
d)All of the above
[3 marks]
5.An interest rate is 5% per annum with continuous compounding. What is theequivalent rate with semiannual compounding
a)5.06%
b)5.03%
c)4.97%
d)4.94%
[3 marks]
6.Which of the following is true of LIBOR
a)The LIBOR rate is free of credit risk
b)A LIBOR rate is lower than the Treasury rate when the two have the samematurity
c)It is a rate used when borrowing and lending takes place between banks
d)It is subject to favorable tax treatment in the U.S.[3 marks]
7.The spot price of an investment asset that provides no income is $30 and the risk-free rate for all maturities (with continuous compounding) is 10%. What is the three-year forward price?
a)$40.50
b)$22.22
c)$33.00
d)$33.16
[3 marks]
8.Which of the following describes a short position in an option?a)A position in an option lasting less than one month
b)A position in an option lasting less than three months
c)A position in an option lasting less than sixmonthsd)A position where an option has been sold[3 marks]
9.Which of the following creates a bull spread?a)Buy a low strike price put and sell a high strike price put
b)Buy a high strike price put and sell a low strike price put
c)Buy a high strike price call and sell a low strike price put
d)Buy a high strike price put and sell a low strike price call[3 marks]
10.How can a strip trading strategy be created?
a)Buy one call and one put with the same strike price and same expiration date
b)Buy one call and one put with different strike prices and same expiration date
c)Buy one call and two puts with the same strike price and expiration date
d)Buy two calls and one put with the same strike price and expiration date[3 marks]
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