Mc Question

CHAPTER 1: INTRODUCTION

MULTI MULTIPLE PLE CHOICE TEST QUESTIONS 1. The marke markett val value ue of the deri deriva vativ tives es o!tr o!tra ats ts "orl "orld" d"id idee tota totals ls a#ou a#outt a. $% trillio!  #. 1&.$ trillio! tri llio! . ' t ri l l i o ! d. (.) trillio! e. !o!e of the a#ove (. Cash markets are also k!o"! as a. s*eulative markets  #. s*ot markets . derivative markets d. dollar markets e. !o!e of the a#ove +. , all o* o*tio! -ives the holder   a. the ri-ht to #u somethi! #. the ri-ht ri-h t to sell somethi!. the o#li-atio! to to #u somethi!d. t he he o#li-atio! to sell somethi!e. !o!e of the a#ove /. 0hi 0hih h of the the foll follo" o"i! i!- i!st i!stru rume me!t !tss are are o!t o!tra rat tss #ut #ut are are !ot !ot seu seuri riti ties es a. stoks  #. o*tio!s . s"a*s d. a a! d # e. # a!d  &. The The *os *osit itiv ivee rela relati tio! o!sh shi* i* #et" #et"ee ee! ! ris risk k a!d a!d retu retur! r! is all alled ed a. e*eted retur!  #. market effiie! . the la" of o!e *rie d. ar#itra-e e. !o!e of the a#ove ). , tra! tra!sa satio tio! ! i! "hih "hih a! a! i!ves i!vesto torr hold holdss a *osi *ositio tio! ! i! the s*o s*ott marke markett a!d sel sells ls a fut futur ures es o! o!tra trat t or "rit "rites es a all is a. a -am#le  #. a s*eulative *ositio! . a hed-e d. a risk2free tra!satio! e. !o!e of the a#ove 3. 0hi 0hih h of of the the foll follo" o"i! i!- are are adva adva!t !taa-es es of deri deriva vati tive ves4 s4 a. lo"e lo"err tra! tra!sa sat tio io! ! ost ostss tha! tha! seu seuri riti ties es a!d a!d om ommo modi diti ties es  #. reveal i!formatio! a#out e*eted *ries a!d volatilit volatilit  . hel* o!trol risk   d. make make s*ot *ot *r *rie ies sta sta  los loser to to the their true true valu values es e. all of the a#ove $. , for for"ard "ard o!t o!tra rat t has has "hi "hih h of of the the follo ollo"i "i!!- ha hara rat ter eris isti tis s44 a. has a #uer a!d a seller    #. trades o! a! or-a!i5ed eha!-e . has a dail settleme!t d. -ives the the riri-ht ht #ut !o !ot th the o# o#li-a i-atio! tio! to #u e. all of the a#ove '. O*tio!s o o! ! futures ar are al also k!o"! as as a. s*ot o*tio!s  #. ommodit o*tio!s . eha!-e o*tio!s d. seurit o*tio!s e. !o!e of the a#ove 1%. 1%.

, mar marke kett i! "hi "hih h the the *ri *rie e e6ua e6uals ls the the tru truee eo eo!o !omi mi val value ue 1-3

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a. is risk2free  #. has hi-h hi- h e*eted retur!s . is or-a!i5ed d. is effiie!t e. all of the a#ove 0hi 0hih h of the the fol follo lo"i "i!!- tra trade de o! o! or-a or-a!i !i5e 5ed d eh eha! a!-e -es4 s4 a. a*s  #. for"ards . o*tio!s d. s"a*s e. !o!e of the a#ove 0hih 0hih of of the the follo follo"i "i!!- mark market etss is9ar is9aree said said to *ro *rovi vide de *ri *rie e dis diso ove ver r44 a. futures  #. for"ards . o*tio!s d. a a! d # e. # a!d  I!ve I!vest stor orss "ho "ho do do !ot !ot o! o!sid sider er risk risk i! their their de deis isio io!s !s are are said said to #e a. s*eulati! #. short selli!selli! . risk !eutral d. traders e. !o!e of the a#ove 0hih 0hih of of the the fol follo lo"i "i!!- stat statem eme! e!ts ts is !ot !ot true true a#ou a#outt the the la" la" of o!e o!e *rie *rie a. i !v !vestors *r *refer mo more "e "ealth to to le less  #. i!vestme!ts that t hat offer the same retur! i! all states must *a the risk2free rate . if t"o t"o i!ves i!vestme tme!t !t o**o o**ort rtu!i u!itie tiess off offer e6ui e6uiva vale le!t !t out outom omes es88 the the must must have have the the sam samee *ri *riee d. i!vestors are risk !eutral e. !o!e of the a#ove 0hih 0hih of the foll follo" o"i!i!- o!tr o!trat atss o#li-a o#li-ates tes a #ue #uerr to #u #u or sell sell som someth ethi!i!- at a later later date4 date4 a. all  #. futures . a* d. *ut e. s"a*tio! CHAPTER 2: THE STRUCTURE OF OPTIONS MARKETS

1.

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+.

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O*ti O*tio! o!ss are are tra trade ded d o! "hi "hih h of of the the follo ollo"i "i!!- eh eha! a!-e -es4 s4 a. ,meria! Stok Eha!-e  #. Paifi Stok Eha!-e . Chia-o :o :oard O* O*tio!s E E ha!-e d. Philadel*hia Stok Eha!-e e. all of the a#ove , al alll o*tio o*tio! ! *rie *ried d at ;( "ith "ith a sto stok k *ri *riee of ;+% ;+% a!d a! a! eer eeris isee *ri *riee of ;+& ;+& allo" allo"ss the the hold holder er to #u #u the stok at a. ;(  #. ;+( . ;++ d. ; +& e. !o!e of the a#ove , *ut *ut o*tio o*tio! ! i! "hi "hih h the the sto stok k *rie *rie is ;)% ;)% a!d a!d the the ee eer rise ise *rie *rie is ;)& ;)& is is sai said d to #e a. i!2the2mo!e  #. out2of2the2mo!e . at2the2mo!e d. eerisa#le e. !o!e of the a#ove Or-a Or-a!i5 !i5ed ed o*tio o*tio!s !s marke markets ts are are diff differe! ere!tt from from over over2t 2the he2 2ou ou!t !ter er o*tio o*tio!s !s mark markets ets for for all all of the the follo follo"i "i!!reaso!s ee*t a. eerise terms 1-4

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a. is risk2free  #. has hi-h hi- h e*eted retur!s . is or-a!i5ed d. is effiie!t e. all of the a#ove 0hi 0hih h of the the fol follo lo"i "i!!- tra trade de o! o! or-a or-a!i !i5e 5ed d eh eha! a!-e -es4 s4 a. a*s  #. for"ards . o*tio!s d. s"a*s e. !o!e of the a#ove 0hih 0hih of of the the follo follo"i "i!!- mark market etss is9ar is9aree said said to *ro *rovi vide de *ri *rie e dis diso ove ver r44 a. futures  #. for"ards . o*tio!s d. a a! d # e. # a!d  I!ve I!vest stor orss "ho "ho do do !ot !ot o! o!sid sider er risk risk i! their their de deis isio io!s !s are are said said to #e a. s*eulati! #. short selli!selli! . risk !eutral d. traders e. !o!e of the a#ove 0hih 0hih of of the the fol follo lo"i "i!!- stat statem eme! e!ts ts is !ot !ot true true a#ou a#outt the the la" la" of o!e o!e *rie *rie a. i !v !vestors *r *refer mo more "e "ealth to to le less  #. i!vestme!ts that t hat offer the same retur! i! all states must *a the risk2free rate . if t"o t"o i!ves i!vestme tme!t !t o**o o**ort rtu!i u!itie tiess off offer e6ui e6uiva vale le!t !t out outom omes es88 the the must must have have the the sam samee *ri *riee d. i!vestors are risk !eutral e. !o!e of the a#ove 0hih 0hih of the foll follo" o"i!i!- o!tr o!trat atss o#li-a o#li-ates tes a #ue #uerr to #u #u or sell sell som someth ethi!i!- at a later later date4 date4 a. all  #. futures . a* d. *ut e. s"a*tio! CHAPTER 2: THE STRUCTURE OF OPTIONS MARKETS

1.

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+.

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O*ti O*tio! o!ss are are tra trade ded d o! "hi "hih h of of the the follo ollo"i "i!!- eh eha! a!-e -es4 s4 a. ,meria! Stok Eha!-e  #. Paifi Stok Eha!-e . Chia-o :o :oard O* O*tio!s E E ha!-e d. Philadel*hia Stok Eha!-e e. all of the a#ove , al alll o*tio o*tio! ! *rie *ried d at ;( "ith "ith a sto stok k *ri *riee of ;+% ;+% a!d a! a! eer eeris isee *ri *riee of ;+& ;+& allo" allo"ss the the hold holder er to #u #u the stok at a. ;(  #. ;+( . ;++ d. ; +& e. !o!e of the a#ove , *ut *ut o*tio o*tio! ! i! "hi "hih h the the sto stok k *rie *rie is ;)% ;)% a!d a!d the the ee eer rise ise *rie *rie is ;)& ;)& is is sai said d to #e a. i!2the2mo!e  #. out2of2the2mo!e . at2the2mo!e d. eerisa#le e. !o!e of the a#ove Or-a Or-a!i5 !i5ed ed o*tio o*tio!s !s marke markets ts are are diff differe! ere!tt from from over over2t 2the he2 2ou ou!t !ter er o*tio o*tio!s !s mark markets ets for for all all of the the follo follo"i "i!!reaso!s ee*t a. eerise terms 1-4

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 #. *hsial tradi! - floor  . re-ulatio! d. sta!dardi5ed o o!trats e. redit risk   The !um !um#e #err of of o*tio o*tio!s !s a6u a6uire ired d "he! "he! o!e o!e o! o!tra trat t is is * *ur urha hase sed d o! a! e eha ha!-e !-e is a. 1  #. & . 1%% d. & %% e. $ 8% % % The adv adva!t a!taa-es es of of the the ove over2 r2the the2 2ou ou!te !terr o*tio o*tio!s !s mark market et i!lu i!lude de all all of the fol follo lo"i "i!!- e ee* e*tt a. ustomi5ed o o!trats  #. *rivatel eeuted . freedom fr from -o -over!me!t re re-ulatio! d. lo"er *ries e. !o!e of the a#ove 0hih 0hih o!e o!e of the foll follo" o"i! i!- is !ot !ot a t* t*ee of of tra!sa tra!sati tio! o! os ostt i! o*ti o*tio!s o!s tradi! tradi!-4 -4 a. the #id2ask s*read  #. the ommissio! . leari!- fees d. the ost of o#tai!i!- a 6uote e. all of the a#ove If the the mar marke kett make makerr "ill "ill #u #u at / a!d a!d sell sell at at / 19( 19(88 the the #id #id2a 2ask sk s*re s*read ad is is a. $ 19(  #. / 19/ . 19( d. / e. !o!e of the a#ove 0hih 0hih of of the follo follo"i "i!!- is a lele-iti itimat matee t*e t*e of o*tio o*tio! ! ord order er o! o! the the e eha ha!!-e4 e4 a. *urhase order    #. limit order  . eeutio! order   d. floor order   e. all of the a#ove The eer eeris isee *rie *rie a! a! #e set at a! desire desired d level level o! o! eah eah of the foll follo"i o"i!!- t*e t*ess of o*tio!s o*tio!s except  a.
1(. 1(.

1+. 1+.

a. eerise  #. offset offset . e*iri!- ou out2of2the2mo!e d. #ui!- a *ut e. !o!e of the a#ove 0hi 0hih h t*e t*e of of trad trader er lele-it itim imat atel el  *ra *rati tie ess du dual al trad tradi!i!-44 a. floor #rokers  #. off>floor off>floor o*tio! traders . #oard #rokers d. desi-!ated *rimar market makers e. !o!e of the a#ove The The o* o*tio! tio! *ri *riee is is als also o re referr ferred ed to as the the a. strike  #. s*read . *remium d. fee 1-5

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e. !o!e of the a#ove I!de I!de o*tio! o*tio!ss tradi!tradi!- o! or-a!i5 or-a!i5ed ed eh eha!a!-es es e*ir e*iree aor aordi!di!- to "hih "hih of the foll follo" o"i!i!-  les les44 a. Marh8 ?u ?u!e8 Se Se*tem#er8 a! a!d @e @eem#er    #. eah of the !et four o!seutive mo!ths . the urr urre!t e!t mo!th mo!th88 the the !et !et mo!th mo!th88 a!d a!d the the !e !ett t"o t"o mo!th mo!thss i! o!e o!e of the other other l les es d. ever er othe otherr mo! mo!th th for for eah eah of the the !e !et !i!e !i!e mo mo!t !ths hs e. !o!e of the a#ove ,! i!v i!ves esto torr "ho "ho eer eris ises es a al alll o*ti o*tio! o! o! o! a! a! i!de i!de  must must a. ae ae*t *t the the ash ash dif difffere! ere!e e #et" #et"eee! the the i!d i!de e a!d a!d the the eer eeri ise se *ri *riee  #. *urhase all of the stoks i! the i!de i! their a**ro*riate *ro*ortio!s from the "riter  . imme immed diate iatel l #u #u a *u *ut o*t o*tio io! ! to to of offset the the all all o*t o*tio io! ! d. imme immed diate iatel l "rit "ritee a!o a!oth ther er all all o*t o*tio io! ! to to of offset e. !o!e of the a#ove 0hi 0hih h of of the the fol follo lo"i "i!!- are are lo! lo!-2 -2te term rm o*ti o*tio! o!s4 s4 a. :o!d o*tio!s  #. LE,PS . urre! o*tio!s d. Nikkei *ut "arra!ts e. !o!e of the a#ove The eh eha!a!-ee "ith "ith the larlar-es estt shar sharee of the o*tio o*tio!s !s marke markett is is the the a. ,meria! Stok Eha!-e  #. Ne" Aork Aork Stok Eha!-e . Chia-o :o :oard O* O*tio!s E E ha!-e d. Paifi Stok Eha!-e e. Philadel*hia St Stok E Eha!-e , "rit "riter er sel sele ete ted d to to ee eer ris isee a! a! o*ti o*tio! o! is said said to to #e #e a. mar-i!al  #. assi-!ed . restrited d. desi-!ated e. !o!e of the a#ove ,ll ,ll of of the the follo ollo"i "i!!- are are fo forms rms of of o*t o*tio io!s !s except  a. o!verti#le #o!ds  #. alla#le #o!ds . "arra!ts d. mutual fu!ds e. !o!e of the a#ove 0hih 0hih of of the follo follo"i "i!!- i!de i!de o*ti o*tio!s o!s is the most most "ide "idel l trade traded4 d4 a. SBP &%%  #. Nikkei ((& . Teh!olo- I!de d. Ne" Aork St Stok E Eha!-e I! I!de e. !o!e of the a#ove

(1. (1.

0her 0heree did did or-a or-a!i !i5e 5ed d o*t o*tio io! ! mar marke kets ts oriori-i! i!at ate4 e4 a. Ne" Aork    #. Chia-o . Philadel*hia d. Sa!
((. ((.

0ho 0ho dete determi rmi!e !ess "het "hethe herr o*tio o*tio!s !s o! o! a om om*a *a! !s ssto tok k "ill "ill #e #e lis liste ted4 d4 a. the leari!- house  #. Seurities Eha!-e Commissio! . the om*a! d. the eha!-e e. !o!e of the a#ove

(+. (+.

,! orde orderr that that s*e s*ei ifi fies es a ma maimu imum m *rie *rie to *a *a if #ui #ui!!- is a 1-6

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a.  #. . d. e.

sto* order   market order  limit order   all or !o!e order   !o!e of the a#ove

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0hat amou!t must a all "riter *a if a ash>settled i!de all is eerised4 a. differe!e #et"ee! the i!de level a!d the eerise *rie  #. eerise *rie . differe!e #et"ee! the eerise *rie a!d the i!de level d. i!de level e. !o!e of the a#ove

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O*tio! a.  #. . d. e.

1.

, *ortfolio that om#i!es the u!derli!- stok a!d a short *ositio! i! a! o*tio! is alled a. a risk ar#itra-e *ortfolio  #. a hed-e *ortfolio . a ratio *ortfolio d. a t"o2state *ortfolio e. !o!e of the a#ove

(.

I! a #i!omial model8 if the all *rie i! the market is hi-her tha! the all *rie -ive! # the model8 ou should a. sell the al l a!d sell short the stok    #. #u the all a!d sell short the stok  . #u the stok a!d sell the all d. #u the all a!d #u the stok   e. !o!e of the a#ove

+.

I! a t"o2*eriod #i!omial "orld8 a mis*ried all "ill lead to a! ar#itra-e *rofit if a. the *ro*er hed-e ratio is mai!tai!ed over the t"o *eriods  #. the hed-e *ortfolio is termi!ated after o!e *eriod . the o*tio! -oes from over2 to u!der*ried or vie versa d. the o*tio! remai!s mis*ried over #oth *eriods e. !o!e of the a#ove

/.

The values of u a!d d are "hih of the follo"i!-4 a. the retur! o! the stok if it -oes u* a!d do"!8 res*etivel  #. the i!verse of the ratio of the u* a!d do"! *ro#a#ilities8 res*etivel8 a!d the risk2free rate . the !ormal *ro#a#ilities of u* a!d do"! moveme!ts8 res*etivel d. o!e *lus the retur! o! the stok if it -oes u* a!d do"!8 res*etivel e. !o!e of the a#ove

&.

If the stok *as a s*eifi dollar divide!d a!d the stok *rie8 to i!lude the divide!d8 follo"s the  #i!omial u* a!d do"! fators8 "hih of the follo"i!- "ill ha**e!4 a. the #i!omial tree "ill reom#i!e  #. the #i!omial tree "ill !ot reom#i!e . the o*tio! "ill #e mis*ried d. a! ar#itra-e *rofit "ill !ot #e *ossi#le e. !o!e of the a#ove

).

0he! *uts are *ried "ith the #i!omial model8 "hih of the follo"i!- is true4 a. the *uts must #e ,meria!

traders i!ur "hih of the follo"i!- t*es of osts4 mar-i! re6uireme!ts taes stok tradi!- ommissio!s a a!d # a8 # a!d  CHAPTER 4: OPTION PRICING MODELS: THE BINOMIAL MODEL

1-7

Co*ri-ht 7 (%%1 # Harourt8 I!

 #. . d. e.

the *uts a!!ot #e *ro*erl hed-ed t he *uts "ill violate *ut2all *arit  the hed-e ratio is o!e throu-hout the tree !o!e of the a#ove

3.

If the #i!omial model is ete!ded to multi*le *eriods for a fied o*tio! life8 "hih of the follo"i!adDustme!ts must #e made4 a. the u* a!d do"! fators must #e i!reased  #. the risk2free rate must #e i!reased . the u* a!d do"! fators a!d the risk2free rate must #e dereased d. the i!itial stok *rie must #e *ro*ortio!atel redued e. !o!e of the a#ove $. 0hih of the follo"i!- are !ot *ath2de*e!de!t o*tio!s "he! the stok *as a o!sta!t divide!d ield4 a. Euro*ea! alls a!d Euro*ea! *uts  #. Euro*ea! alls a!d ,meria! *uts . ,meria! *uts a!d Euro*ea! *uts d. ,meria! *uts a!d Euro*ea! alls e. !o!e of the a#ove '. I! a !o!2reom#i!i!- tree8 the !um#er of *aths that "ill our after three *eriods is a. three  #. four  . te! d. ei-ht e. si 1%. 0he! the !um#er of time *eriods i! a #i!omial model is lar-e8 a Euro*ea! all o*tio! value does "hat4 a. flutuates arou!d its i!t ri !si value  #. o!ver-es to a s*eifi value . i!reases "ithout limit d. o!ver-es to the Euro*ea! lo"er #ou!d e. !o!e of the a#ove 11. 0he! the !um#er of time *eriods i! a #i!omial model is lar-e8 "hat ha**e!s to the #i!omial *ro#a#ilit of a! u* move4 a. it a**roahes 1.%  #. it a**roahes 5ero . it flutuates "ithout *atter! d. it o!ver-es to .& e. !o!e of the a#ove Co!sider a #i!omial "orld i! "hih the urre!t stok *rie of $% a! either -o u* # 1% *ere!t or do"! # $  *ere!t. The risk2free rate is / *ere!t. ,ssume a o!e2*eriod "orld. ,!s"er 6uestio!s 1( t hrou-h 1& a#out a all "ith a! eerise *rie of $%. 1(.

0hat "ould #e the alls *rie if the stok -oes u*4 a. +.)%  #. $.%% . &.31 d. /.+' f. !o!e of the a#ove

1+.

0hat "ould #e the alls *rie if the stok -oes do"!4 a. $.%%  #. +.)% . %.%% d. '.%% e. !o!e of the a#ove

1/.

0hat is the hed-e ratio4 a. ./('  #. .31/ . .&31 1-8

Co*ri-ht 7 (%%1 # Harourt8 I!

d. e. 1&.

.$(+ !o!e of the a#ove

0hat is the theoretial value of the all4 a. $.%%  #. /.+' . &.1& d. &.+) e. !o!e of the a#ove

 No" ete!d the o!e2*eriod #i!omial model to a t"o2*eriod "orld. ,!s"er 6uestio!s 1) throu-h 1$. 1). 0hat is the value of the all if the stok -oes u*8 the! do"!4 a. %.')  #. 1).$% . $.%% d. %.%% e. !o!e of the a#ove 13.

0hat is the hed-e ratio if the stok -oes do"! o!e *eriod4 a. %.%%  #. %.%3(& . 1.%% d. %.3+ e. !o!e of the a#ove

1$.

0hat is the urre!t value of the all4 a. $.%%  #. 3.+% . 11.1+ d. %.)1' e. !o!e of the a#ove

1'.

I! the #i!omial model8 if a! o*tio! has !o ha!e of e*iri!- out2of2the2mo!e8 the hed-e ratio "ill #e a. %.&  #. i!fi!ite . 1 d. % e. !o!e of the a#ove Su**ose S F 3%8 = F )&8 r F .%&8 * F .)8 Cu F 3.138 Cd F 1.(( a!d there is o!e *eriod left i! a! ,meria! alls life. 0hat "ill the o*tio! #e "orth4 a. ).$+  #. %.%% . /.&) d. &.%% e. !o!e of the a#ove I! a o!e2*eriod #i!omial model "ith Su F /'.&8 Sd F /%.&8 * F .$8 r F .%)8 S F /& a!d = F &%8 "hat is a Euro*ea! *ut "orth4 a. (.13  #. %.&% . '.&% d. &.%% e. !o!e of the a#ove 0hih of the follo"i!- stateme!ts a#out the #i!omial model is i!orret4 a. it o!ver-es to the :lak2Sholes model  #. it a! aommodate earl eerise . it allo"s o!l t"o stok *ries at e*iratio! d. it a! #e ete!ded to a lar-e !um#er of time *eriods e. !o!e of the a#ove

(%.

(1.

((.

1-9

Co*ri-ht 7 (%%1 # Harourt8 I!

(+.

, stok *ried at &% a! -o u* or do"! # 1% *ere!t over t"o *eriods. The risk2free rate is / *ere!t. 0hih of the follo"i!- is the orret *rie of a! ,meria! *ut "ith a! eerise *rie of &&4 a. 3.$$  #. +.+$ . /.%% d. &.%% e. 1.)&G (/. @etermi!e the value of u for a three *eriod #i!omial *ro#lem "he! the o*tio!s life is o!e2half a ear a!d the volatilit is ./$. Use the model for u that does !ot re6uire the risk2free rate. a. 1.((  #. 1./$ . 1./% d. 1.+( e. !o!e of the a#ove (&. 0hih of the follo"i!- stateme!ts a#out the #i!omial o*tio! *rii!- model is !ot al"as true4 a. it a! a*ture the effet of earl eerise  #. it a! aommodate a lar-e !um#er of *ossi#le stok *ries at e*irati o! . it reflets the effets of the stok *rie8 eerise *rie8 risk2free rate8 volatilit a!d time to e*iratio! d. it -ives the *rie at "hih the o*tio! "ill trade i! the market. e. !o!e of the a#ove CHAPTER 5: OPTION PRICING MODELS: THE BLACK-SCHO LES MODEL

The follo"i!- i!formatio! is -ive! a#out o*tio!s o! the stok of a ertai! om*a!. S% F (+ r  F .%' ( σ F .1&

= F (% T F .&

 No divide!ds are e*eted. Use this i!formatio! to a!s"er 6uestio!s 1 throu-h $. 1. 0hat value does the :lak2Sholes model *redit for the all4 a. &.+&  #. 1.1% . /.3+ d. ).&% e. !o!e of the a#ove (. Su**ose ou feel that the all is over*ried. 0hat strate- should ou use to e*loit the a**are!t misvaluatio!4 a. #u 3'1 shares8 sell 18%%% alls  #. #u 3%& shares8 sell 18%%% alls . sell short 3'1 shares8 #u 18%%% alls d. sell short 3%& shares8 #u 18%%% alls e. !o!e of the a#ove +. The *rie of a *ut o! the stok is a. %.$&  #. $.)/ . (.+& d. /.$$ e. !o!e of the a#ove /. To o!strut a riskless hed-e8 the !um#er of *uts *er 1%% shares *urhased is a. .3&$%  #. .(/(% . 2.(/$% d. 2.))($ e. !o!e of the a#ove &. The alls ve-a is a. 2+.%(  #. .%/) 1-10

Co*ri-ht 7 (%%1 # Harourt8 I!

).

3.

$.

'.

1%.

11.

. 2.3'( d. /.)3 e. !o!e of the a#ove If the atual all *rie is +.3'8 the im*lied sta!dard deviatio! is a. .(&  #. -reater tha! .(& . less tha! .(& d. i!fi!ite e. !o!e of the a#ove If "e !o" assume that the stok *as a divide!d at a k!o"! o!sta!t rate of +.& *ere!t8 "hat stok *rie should "e use i! the model4 a. ((.)%  #. 1'.)& . (+ d. (1.'' e. !o!e of the a#ove If "e !o" assume that the stok *as a si!-le divide!d of (.(& i! three mo!ths8 "hat stok *rie should "e use i! the model4 a. 13.3&  #. (%.3& . (% d. (%.$% e. !o!e of the a#ove If the sim*le retur! o! a Treasur #ill is $.& *ere!t8 the risk2free rate i! the :lak2Sholes model is a. $.33 *ere!t  #. $.'+ *ere!t . $.&& *ere!t d. $.(% *ere!t e. !o!e of the a#ove 0hih of the follo"i!- varia#les i! the :lak2Sholes o*tio! *rii!- model is the most diffiult to o#tai!4 a. the volatilit  #. the risk2free rate . the stok *rie d. the time to e*iratio! e. the eerise *rie The #i!omial *rie "ill theoretiall e6ual the :lak2Sholes *rie u!der "hih of the follo"i!o!ditio!s4 a. "he! the !um#er of time *eriods is lar-e  #. "he! the o*tio! is at2the2mo!e . "he! the o*tio! is i!2the2mo!e d. "he! the o*tio! is out2of2the2mo!e e. !o!e of the a#ove

1(.

If the stok *rie is //8 the eerise *rie is /%8 the *ut *rie is 1.&/8 a!d the :lak2Sholes *rie usi!- .($ as the volatilit is 1.118 the im*lied volatilit "ill #e a. hi-her tha! .($  #. lo"er tha! .($ . .($ d. lo"er tha! the risk2free rate e. !o!e of the a#ove 1+. 0hih of the follo"i!- stateme!ts a#out the :lak2Sholes model is !ot true4 a. dereasi!- the volatilit lo"ers the all *rie  #. the e*eted stok *rie *las a role i! the model . the risk2free rate is o!ti!uousl om*ou!ded d. the model is o!siste!t "ith *ut2all *arit e. !o!e of the a#ove 1/. 0hih of the follo"i!- harateristis of the :lak2Sholes model is !ot orret4 a. it is a disrete time model 1-11

Co*ri-ht 7 (%%1 # Harourt8 I!

1&.

1).

13.

1$.

1'.

(%.

 #. it is the limi t of the #i!omial model . it is a o!ti!uous time model d. it -ives the *rie of a Euro*ea! o*tio! e. !o!e of the a#ove 0hih of the follo"i!- assum*tio!s of the :lak2Sholes model is !ot orret4 a. t he stok volatilit is o!sta!t  #. the stok retur! follo"s a !ormal distri#utio! . there are !o tra!satio! osts d. there are !o taes e. !o!e of the a#ove 0hih of the follo"i!- stateme!ts a#out the delta is !ot true4 a. it ra!-es from 5ero to o!e  #. it o!ver-es to 5ero or o!e at e*irat io! . it is -ive! # Nd1 i! the :lak2Sholes model d. it ha!-es slo"l !ear e*iratio! if the o*tio! is at2the2mo!e e. !o!e of the a#ove 0hih of the follo"i!- JKreeks is !ot a measure of the o*tio!s se!sitivit to a ha!-e i! o!e of its i!*ut values4 a. delta  #. -amma . rho d. theta e. si-ma 0hih of the follo"i!- stateme!ts is true a#out the relatio!shi* #et"ee! the o*tio! *rie a!d the risk2free rate4 a. a all *rie is !earl li!ear "ith res*et to the risk2free rate  #. a all *rie is hi-hl se!sitive to the risk2free rate . the risk2free rate affets a all #ut !ot a *ut d. the risk2free rate does !ot affet a all *rie e. !o!e of the a#ove The relatio!shi* #et"ee! the volatilit a!d the time to e*iratio! is alled the a. volatilit smile  #. volatilit ske" . term struture of volatilit d. theta e. !o!e of the a#ove 0hat is the reaso! for eeuti!- a -amma hed-e4 a. the volatilit a! ha!-e  #. the stok *rie a! make a lar-e move . the stok *rie moves are too small for a delta hed-e to "ork  d. there is !o true risk2free rate e. !o!e of the a#ove

(1. 0hih of the follo"i!- stateme!ts a#out the volatilit is !ot true4 a. the im*lied volatilit ofte! differs aross o*tio!s "ith differe!t eerise *ries  #. the im*lied volatilit e6uals the historial volatilit if the o*tio! is orretl *ried . the im*lied volatilit is determi!ed # trial a!d error  d. the im*lied volatilit is !earl li!earl related to the o*tio! *rie e. !o!e of the a#ove

((. The relatio!shi* #et"ee! the o*tio! *rie a!d the eerise *rie is alled a. the -amma  #. the ve-a . the ome-a d. the 5eta e. !o!e of the a#ove (+. 0hat ha**e!s "he! the volatilit is 5ero i! the :lak2Sholes model4 1-12

Co*ri-ht 7 (%%1 # Harourt8 I!

a.  #. . d. e.

the o*tio! *rie o!ver-es to either 5ero or the lo"er #ou!d the o*tio! *rie o!ver-es to the i!tri!si  value the o*tio! automatiall e*ires out of the mo!e the -amma a!d delta o!ver-e !o!e of the a#ove

(/. 0hih of the follo"i!- is !ot orret a#out a alls -amma4 a. it is the same as a *uts -amma  #. it is lar-e "he! the all is at2the2mo!e . it a! #e vie"ed as a measure of the risk of the delta d. it is a soure of risk that a! #e hed-ed o!l # usi!- a!other o*tio! e. !o!e of the a#ove (&. 0hih of the follo"i!- stateme!ts is i!orret a#out the historial volatilit4 a. if used i! the :lak2Sholes model8 it -ives the urre!t market *rie  #. it is #ased o! the volatilit of the lo- retur! o! the stok  . it re6uires a sam*le of ree!t retur!s d. it should #e o!verted to a! a!!uali5ed volatilit e. !o!e of the a#ove CHAPTER 6: BASIC OPTION STRATEGIES

Co!sider a stok *ried at ;+% "ith a sta!dard deviatio! of .+. The risk2free rate is .%&. There are *ut a!d all o*tio!s availa#le at eerise *ries of +% a!d a time to e*iratio! of si mo!ths. The alls are *ried at ;(.$' a!d the  *uts ost ;(.1&. There are !o divide!ds o! the stok a!d the o*tio!s are Euro*ea!. ,ssume that all tra!satio!s o!sist of 1%% shares or o!e o!trat 1%% o*tio!s. Use this i!formatio! to a!s"er 6uestio!s 1 throu-h 1%. 1.

0hat is our *rofit if ou #u a all8 hold it to e*iratio! a!d the stok *rie at e*iratio! is ;+34 a. ;3%%  #. 2;($' . ;(8311 d. ;/11 e. !o!e of the a#ove

(.

0hat is the #reakeve! stok *rie at e*iratio! o! the tra!satio! desri#ed i! *ro#lem 14 a. ;+(.$'  #. ;+%.%% . ;(3.11 d. ;+(.1& e. there is !o #reakeve!

+.

0hat is the maimum *rofit o! the tra!satio! desri#ed i! *ro#lem 14 a. ;(8311  #. i!fi!it . 5ero d. ;+8($' e. ;+8%%%

/.

0hat is the maimum *rofit that the "riter of a all a! make4 a. ;(8311  #. ;($' . ;+8%%% d. ;+8($' e. !o!e of the a#ove

&.

Su**ose the #uer of the all i! *ro#lem 1 sold the all t"o mo!ths #efore e*iratio! "he! the stok *rie "as ;++. Ho" muh *rofit "ould the #uer make4 a. ;+(.$' 1-13

Co*ri-ht 7 (%%1 # Harourt8 I!

 #. . d. f.

;+%.11 ;3$.%% ;11.%% !o!e of the a#ove

).

Su**ose the i!vestor o!struted a overed all. ,t e*iratio! the stok *rie is ;(3. 0hat is the i!vestors  *rofit4 a. ;&$'  #. ;($' . ;(8'$' d. ;(8311 e. !o!e of the a#ove

3.

0hat is the #reakeve! stok *rie at e*iratio! for the tra!satio! desri#ed i! *ro#lem )4 a. ;(3.11  #. ;+%.%% . ;+(.$' d ;('.$' e. !o!e of the a#ove

$.

If the tra!satio! desri#ed i! *ro#lem ) is losed out "he! the o*tio! has three mo!ths to -o a!d the stok   *rie is at ;+)8 "hat is the i!vestors *rofit4 a. ;)%%  #. ;+11 . ;$$' d. ;((' e. !o!e of the a#ove

'.

0hat is the maimum *rofit from the tra!satio! desri#ed i! Questio! ) if the *ositio! is held to e*iratio!4 a. ;+8($'  #. ;($' . i!fi!it d. ;(8311 e. !o!e of the a#ove

1%.

0hat is the mi!imum *rofit from the tra!satio! desri#ed i! Questio! ) if the *ositio! is held to e*iratio!4 a. 2;(8311  #. 2;+8($' . 2;+8%%% d. !e-ative i!fi!it e. !o!e of the a#ove Co!sider t"o *ut o*tio!s differi!- o!l # eerise *rie. The o!e "ith the hi-her eerise *rie has a. the lo"er #reakeve! a!d lo"er *rofit *ote!tial  #. the lo"er #reakeve! a!d -reater *rofit *ote!tial . the hi-her #reakeve! a!d -reater *rofit *ote!tial d. the hi-her #reakeve! a!d lo"er *rofit *ote!tial e. the -reater *remium a!d lo"er *rofit *ote!tial

11.

1(.

0hih of the follo"i!- stateme!ts is true a#out losi!- a lo!- all *ositio! *rior to e*iratio! relative to holdi!- it to e*iratio!4 a. the *rofit is -reater at all stok *ries  #. the *rofit is -reater o!l at lo" stok *ries . the *rofit is -reater o!l at hi-h stok *ries d. the ra!-e of *ossi#le *rofits is -reater  e. !o!e of the a#ove are true

1+.

0hih of the follo"i!- tra!satio!s does !ot *rofit i! a stro!- #ull market. 1-14

Co*ri-ht 7 (%%1 # Harourt8 I!

a.  #. . d. e.

a short *ut a overed all a *rotetive *ut a s!theti all !o!e of the a#ove

1/.

0hih of the follo"i!- is e6uivale!t to a s!theti all4 a. a lo!- stok a!d a short *ut *ositio!  #. a lo!- *ut a!d a lo!- stok *ositio! . a lo!- *ut a!d a short risk2free #o!d *ositio! d. a lo!- stok a!d a short risk2free #o!d *ositio! e. !o!e of the a#ove

1&.

Earl eerise im*oses a risk to all #ut o!e of the follo"i!- tra!satio!s. a. a short all  #. a short *ut . a *rotetive *ut d. a! u!overed all e. !o!e of the a#ove

1).

Eah of the follo"i!- is a #ullish strate- except  a. a lo!- all  #. a short *ut . a short stok   d. a *rotetive *ut e. !o!e of the a#ove

13.

0hih of the follo"i!- strate-ies has the -reatest *ote!tial loss4 a. a! u!overed all  #. a lo!- *ut . a overed all d. a lo!- *ositio! i! the stok   e. it is im*ossi#le to tell 0hih of the follo"i!- strate-ies has esse!tiall the same *rofit dia-ram as a overed all4 a. a lo!- *ut  #. a short *ut . a *rotetive *ut d. a lo!- all e. !o!e of the a#ove 0hih of the follo"i!- stateme!ts is true a#out the *urhase of a *rotetive *ut at a hi-her eerise *rie relative to a lo"er eerise *rie4 a. the #reakeve! is lo"er    #. the maimum loss is -reater  . the i!sura!e is less ostl d. the i!sura!e is more ostl e. !o!e of the a#ove

1$.

1'.

(%.

0hat is the disadva!ta-e of a strate- of rolli!- over a overed all to avoid eerise4 a. the all *remium is esse!tiall thro"! a"a  #. tra!satio! osts te!d to #e hi-h . the stok "ill i!ur losses d. the all is more e*e!sive "he! rolled over  e. !o!e of the a#ove

(1.

0hih of the follo"i!- is the #reakeve! for a *rotetive *ut4 a. =  S% 2 P  #. P  S% . = 2 ST d. = > S% 2 P 1-15

Co*ri-ht 7 (%%1 # Harourt8 I!

e.

!o!e of the a#ove

((.

0hih of the follo"i!- stateme!ts a#out a overed all "riti!- strate- is true4 a. the losses are limited  #. retur! a!d risk are -reater tha! that of sim*l holdi!- the stok  . it is a hea*er form of i!sura!e tha! a *rotetive *ut d. it -e!erall makes a lar-e !um#er of small *rofits e. !o!e of the a#ove

(+.

The differe!e i! *rofit from a! atual *ut a!d a s!theti *ut is a. =  #. ST 2 = . = 2 ST d. ST  =1  r2T e. !o!e of the a#ove

(/.

, overed all "riter "ho *refers eve! less risk should a. -et rid of the all  #. s"ith to a all "ith a lo"er eerise *rie . -et rid of the stok   d. s"ith to a all "ith a hi-her eerise *rie e. !o!e of the a#ove

(&.

0hih a.  #. . d. e.

of the follo"i!- i!vestors ma #e o#li-ated to #u stok4 overed all "riter   all #uer  *ut "riter   *rotetive *ut #uer   !o!e of the a#ove

CHAPTER 7: ADVANCED OPTION STRATEGIES

The follo"i!- *ries are availa#le for all a!d *ut o*tio!s o! a stok *ried at ;&%. The risk2free rate is ) *ere!t a!d the volatilit is .+&. The Marh o*tio!s have '% das remai!i!- a!d the ?u!e o*tio!s have 1$% das remai!i!-. The :lak2Sholes model "as used to o#tai! the *ries. Calls

Puts

Strike

Marh

?u!e

Marh

?u!e

/&

).$/

$./1

1.1$

(.%'

&%

+.$(

&.&$

+.%$

/.1+

&&

1.$'

+.&/

).%$

).'+

Use this i!formatio! to a!s"er 6uestio!s 1 throu-h (%. ,ssume that eah tra!satio! o!sists of o!e o!trat 1%% o*tio!s u!less other"ise i!diated.
Ho" muh "ill the s*read ost4 a. ;'$) 1-16

Co*ri-ht 7 (%%1 # Harourt8 I!

 #. . d. e. (.

+.

/.

&.

).

;+%( ;($+ ;1'+ !o!e of the a#ove

0hat is the maimum *rofit o! the s*read4 a. ;&%%  #. ;$%( . ;1'$ d. ;+%( e. !o!e of the a#ove 0hat is the maimum loss o! the s*read4 a. ;&%%  #. ;)'$ . ;1'$ d. ;$%( e. !o!e of the a#ove 0hat is the *rofit if the stok *rie at e*iratio! is ;/34 a. 2;1%(  #. ;+'$ . 2;+%( d. ;&%% e. !o!e of the a#ove 0hat is the #reakeve! *oi!t4 a. ;/$.%(  #. ;/1.'$ . ;&&.)) d. ;&%.%% e. !o!e of the a#ove Su**ose ou losed the s*read )% das later. 0hat "ill #e the *rofit if the stok *rie is still at ;&%4 a. ;/1  #. ;1'$ . ;+%( d. ;1%( e. !o!e of the a#ove


0hat "ill #e the ost of the #utterfl s*read4 a. ;181'&  #. ;)+3 . ;3' d. ;18%/& e. !o!e of the a#ove

$.

0hat "ill #e the *rofit if the stok *rie at e*iratio! is ;&(.&%4 a. ;131  #. ;18/(1 . ;1.%+3 d. ;/(1 e. !o!e of the a#ove Su**ose ou "ish to o!strut a ratio s*read usi!- the Marh a!d ?u!e &% alls. Aou "a!t to #u 1%% ?u!e &% all o!trats. Ho" ma! Marh &% alls "ould ou sell4 a. 1%&  #. '& . 1%% d. &3 e. !o!e of the a#ove

'.

1-17

Co*ri-ht 7 (%%1 # Harourt8 I!

,!s"er 6uestio!s 1% a!d 11 a#out a ale!dar s*read #ased o! the assum*tio! that stok *ries are e*eted to remai! fairl o!sta!t. Use the ?u!e9Marh &% all s*read. ,ssume o!e o!trat of eah. 1%. 0hat "ill the s*read ost4 a. 2;13)  #. ;13) . ;&&$ d. ;1%& e. !o!e of the a#ove 11. 0hat "ill #e the *rofit if the s*read is held '% das a!d the stok *rie is ;/&4 a. ;+)  #. ;(% . ;&&$ d. 2;(% e. !o!e of the a#ove ,!s"er 6uestio!s 1( throu-h 13 a#out a lo!- straddle o!struted usi!- the ?u!e &% o*tio!s. 1(. 0hat "ill the straddle ost4 a. ;1/&  #. ;)'% . ;'31 d. ;/1+ e. !o!e of the a#ove 1+. 0hat are the t"o #reakeve! stok *ries at e*iratio!4 a. ;&&.&$ a!d ;/&.$3  #. ;&/.1+ a!d ;/&.$3 . ;&&.&$ a!d ;//./( d. ;&'.31 a!d ;/%.(' e. !o!e of the a#ove 1/. 0hat is the *rofit if the stok *rie at e*iratio! is at ;)/.3&4 a. 2;'31  #. ;18/3& . 2;+8&(& d. ;&%% e. !o!e of the a#ove 1&. 0hat is the *rofit if the *ositio! is held for '% das a!d the stok *rie is ;&&4 a. 2;'31  #. 2;&$ . 2;1%' d. 2;/31 e. !o!e of the a#ove 1).

Su**ose the i!vestor adds a all to the lo!- straddle8 thus reati!- a stra*. 0hat "ill this do to the  #reakeve! stok *ries4 a. lo"er #oth the u*side a!d do"!side #reakeve!s  #. raise #oth the u*side a!d do"!side #reakeve!s . raise the u*side a!d lo"er the do"!side #reakeve!s d. lo"er the u*side a!d raise the do"!side #reakeve!s e. !o!e of the a#ove

13.

@etermi!e the *rofit at e*iratio! o! a stri* if the stok *rie at e*iratio! is ;+). a. 2;1('  #. ;18/1) . ;/(' d. ;18+$/ e. !o!e of the a#ove

,!s"er 6uestio!s 1$ throu-h (% a#out a lo!- #o s*read usi!- the ?u!e &% a!d && o*tio!s. 1$. 0hat is the ost of the #o s*read4 a. ;&%%  #. ;(8%1$ 1-18

Co*ri-ht 7 (%%1 # Harourt8 I!

1'.

. ;3) d. ;/$/ e. !o!e of the a#ove 0hat is the *rofit if the stok *rie at e*iratio! is ;&(.&%4 a. ;1)  #. ;&%% . 2;(+/ d. ;(&% e. !o!e of the a#ove

(%.

0hat is the !et *rese!t value of the #o s*read4 a. ;'.$/  #. ;&.%% . ;1).%% d. ;1.$/ e. !o!e of the a#ove

(1.

0hih a.  #. . d. e.

((.

0hih of the follo"i!- tra!satio!s a! have a! u!limited loss4 a. lo!- straddle  #. ale!dar s*read . #utterfl s*read d. reverse #o s*read e. !o!e of the a#ove

(+.

0hih of the follo"i!- is the #est strate- for a! e*eted fall i! the market4 a. lo!- stri*  #. *ut #ull s*read . ale!dar s*read d. #utterfl s*read e. !o!e of the a#ove

(/.

Earl eerise is a disadva!ta-e i! "hih of the follo"i!- tra!satio!s4 a. short #o s*read  #. *ut #ear s*read . lo!- stri* d. lo!- stra* e. !o!e of the a#ove 0hih of the follo"i!- have similar *rofit -ra*hs4 a. al l #ull s*read a!d lo!- #o s*read  #. *ut #ear s*read a!d short #o s*read . #utterfl s*read a!d rat io s*read d. ale!dar s*read a!d all #ear s*read e. !o!e of the a#ove

(&.

of the follo"i!- strate-ies does !ot *rofit i! a risi!- market4 *ut #ull s*read lo!- straddle ollar   all #ull s*read !o!e of the a#ove

CHAPTER 8: THE STRUCTURE OF FORWARD AND FUTURES MARKETS

1.

0hih a.  #. . d. e.

of the follo"i!- is !ot a futures eha!-e4 Mi!!ea*olis Krai! Eha!-e :osto! Commodit Eha!-e Coffee8 Su-ar a!d Cooa Eha!-e a!sas Cit :oard of Trade Mid,meria Commodit Eha! -e

1-19

Co*ri-ht 7 (%%1 # Harourt8 I!

(.

0hih of the follo"i!- o!trat terms is !ot set # the futures eha!-e4 a. the dates o! "hih deliver a! our   #. the e*iratio! mo!ths . the delivera#le ommodities d. the si5e of the o!trat e. the *rie

+.

0hih of the follo"i!- or-a!i5atio!s has the ultimate re-ulator authorit i! the futures i!dustr4 a. Natio!al
/.

Mar-i! a.  #. . d. e.

&.

If the i!itial mar-i! is ;&8%%%8 the mai!te!a!e mar-i! is ;+8&%% a!d our #ala!e is ;/8%%%8 ho" muh must ou de*osit4 a. ;)8%%%  #. ;18&%% . ;'8%%% d. !othi!e. !o!e of the a#ove If the i!itial mar-i! is ;&8%%%8 the mai!te!a!e mar-i! is ;+8&%% a!d our #ala!e is ;+81%%8 ho" muh must ou de*osit4 a. ;18&%%  #. ;/%% . ;18'%% d. % e. !o!e of the a#ove The !um#er of futures o!trats outsta!di!- is alled the a. re*orta#le *ositio!  #. mi!imum volume . o*e! i!terest d. s*read *ositio! e. !o!e of the a#ove Most futures o!trats are losed # a. deliver  #. offset . eerise d. default e. !o!e of the a#ove Most for"ard o!trats are losed # a. deliver  #. offset . eerise d. default e. !o!e of the a#ove 0hih of the follo"i!- is !ot a for"ard o!trat4 a. a lo!-2term em*lome!t o!trat at a fied salar  #. a! automo#ile lease !o!2a!ela#le for three ears . a rai! hek   d. a si-!ed o!trat to #u a house i! si mo!ths e. !o!e of the a#ove

).

3.

$.

'.

1%.

i! a futures tra!satio! differs from mar-i! i! a stok tra!satio! #eause stok tra!satio!s are muh smaller  deliver ours immediatel i! a stok tra!satio! !o mo!e is #orro"ed i! a futures tra!satio! futures are muh more volatile !o!e of the a#ove

1-20

Co*ri-ht 7 (%%1 # Harourt8 I!

11.

1(.

1+.

1/.

0here did the U.S. futures market ori-i!ate4 a. Chia-o  #. a!sas . Ne" Aork   d. Mi!!ea*olis e. !o!e of the a#ove 0hih of the follo"i!- is a trader o! the floor of the futures eha!-e4 a. i!trodui!- #roker    #. ommissio! #roker  . ommodit tradi!- advisor   d. ommodit *ool o*erator   e. !o!e of the a#ove ariatio! mar-i! is "hih of the follo"i!-4 a. the differe!e i! mar-i! #et"ee! hed-er a!d s*eulator   #. mar-i! differe!es aordi!- to tradi!- stle . mar-i! de*osited as a result of marki!-2to2market d. mar-i! set # the varia#ilit of a futures *rie e. !o!e of the a#ove 0hih of the follo"i!- is the most ativel traded U.S. futures o!trat4 a. SBP &%% I!de  #. rude oil . Treasur #o!ds d. 0heat f. !o!e of the a#ove

1&.

0hih a.  #. . d. e.

of the follo"i!- duties is !ot *erformed # the leari!-house4 holdi!- mar-i! de*osits -uara!teei!- *erforma!e of #uer a!d "riter  mai!tai!i!- reords of tra!satio!s le!di!- mo!e to meet mar-i! re6uireme!ts !o!e of the a#ove

1).

0hat are iruit #reakers4 a. rules that sto* tradi!- "he! futures are a#out to e*ire  #. a sstem that shuts do"! the eha!-e om*uter duri!- *eriods of a#!ormal volume . limits o! the !um#er of o!trats that a! #e traded o! hi-h volume das d. rules that limit the !um#er of o!trats a s*eulator a! hold e. !o!e of the a#ove

13.

,! after2hours om*uteri5ed tradi!- sstem at the CME is alled a. COME=  #. KLO:E=( . LI<
1$.

0hih a.  #. . d. e.

1'.

Tradi!- as #oth a #roker a!d a dealer is alled a. dual tradi! #. s*readi!. sal*i!-

of the follo"i!- is !ot a method of termi!ati!- a futures o!trat4 offset deliver eha!-e for *hsials sal*i!!o!e of the a#ove

1-21

Co*ri-ht 7 (%%1 # Harourt8 I!

d. e.

ar#itra-i!!o!e of the a#ove

(%.

The tradi!- *roedure o! the floor of the futures eha!-e is referred to as a. a-ai!st atuals  #. o*e! i!terest . o*e! outr d. i!de *artii*atio! e. !o!e of the a#ove

(1.

, futures o!trat overs &%%% *ou!ds "ith a mi!imum *rie ha!-e of ;%.%1 is sold for ;+1.)% *er   *ou!d. If t he i!itial mar-i! is ;(8&(& a!d t he mai!te!a!e mar-i! is ;18%%%8 at "hat *rie "ould there #e a mar-i! all4 a. +1.'1  #. +(.11 . +1.(' d. +1.%' e. +1.

%$((.

O!e of the adva!ta-es of for"ard markets is a. *erforma!e is -uara!teed # the K2+%  #. tradi!- is o!duted i! the eve!i!- over om*uters . the o!trats are *rivate a!d ustomi5ed d. tradi!- is less ostl a!d -over!ed # more rules -. !o!e of the a#ove

(+.

0hih a.  #. . d. e.

(/.

0hih eha!-e is the lar-est futures eha!-e i! the "orld4 a. Chia-o :oard of Trade  #. EUE= . Chia-o Mera!tile Eha!-e d. Toko Commodit Eha!-e e. !o!e of the a#ove

(&.

0hih of the follo"i!- is !ot a t*e of futures trader4 a. sal*ers  #. ar#itra-eurs . *rofit2takers d. hed-ers e. da t raders

is the most ative -rou* of futures4 e!er- a-riulture urre! fi!a!ials !o!e of the a#ove

CHAPTER : PRINCIPLES OF FORWARD AND FUTURES PRICING

1.

, market "ith o!ta!-o a!d #ak"ardatio! is said to #e a. at less tha! full arr  #. i!effiie!t . offeri!- a risk *remium d. #iased e. !o!e of the a#ove

(.

0hih a.  #. . d.

of the follo"i!- #est desri#es !ormal o!ta!-o4 the s*ot *rie is less tha! the futures *rie the futures *rie is less tha! the s*ot *rie the e*eted s*ot *rie is less tha! the futures *rie the ost of arr is !e-ative 1-22

Co*ri-ht 7 (%%1 # Harourt8 I!

e.

!o!e of the a#ove

+.

0hih a.  #. . d. e.

/.

U!der "hih of the follo"i!- situatio!s "ill futures *ries !ot e6ual for"ard *ries a. "he! futures *ries a!d i!terest rates are u!orrelated  #. "he! i!terest rates do !ot ha!-e . o!e da *rior to e*iratio! d. at e*iratio! e. !o!e of the a#ove

&.

Su**ose ou #u a o!e2ear for"ard o!trat at ;)&. ,t e*iratio!8 the s*ot *rie is ;3+. The risk2free rate is 1% *ere!t. 0hat is the value of the o!trat at e*iratio!4 a. ;$.%%  #. 2;$.%% . ;%.%% d. ;3.(3 e. !o!e of the a#ove

).

Su**ose ou sell a three2mo!th for"ard o!trat at ;+&. O!e mo!th later8 !e" for"ard o!trats are selli!- for ;+%. The risk2free rate is 1% *ere!t. 0hat is the value of our o!trat4 a. ;/.')  #. ;&.%% . ;/.'( d. ;/.&& e. !o!e of the a#ove Su**ose ou #u a futures o!trat at ;1&%. If the futures *rie ha!-es to ;1/38 "hat is its value a! i!sta!t #efore it is marked2to2market4 a. %  #. ;+ . 2;+ d. it is im*ossi#le to tell e. !o!e of the a#ove

3.

of the follo"i!- a! e*lai! a o!ta!-o4 the i!terest rate eeeds the divide!d ield the ost of arr is !e-ative futures *ries eeed for"ard *ries t he m arket is at less tha! full arr !o!e of the a#ove

$.

0hih a.  #. . d. e.

o!e of the follo"i!- o!ditio!s is suffiie!t for futures *ries to eeed for"ard *ries4 it is o!e da *rior to e*iratio! for"ard rates e6ual future s*ot rates i!terest rates are o!sta!t futures *ries are *ositivel orrelated "ith i!terest rates !o!e of the a#ove

'.

If futures *ries are #elo" s*ot *ries8 "e sa that a. s*ot *ries are e*eted to fall  #. there is #ak"ardatio! . there is a risk *remium *aid # lo!- hed-ers d. the market is at full arr e. !o!e of the a#ove

1%.

, market i! "hih the futures *rie eeeds the s*ot *rie is a. a o!ta!-o  #. a #ak"ardatio! . a! ar#itra-e o**ortu!it d. risk2free e. !o!e of the a#ove 1-23

Co*ri-ht 7 (%%1 # Harourt8 I!

11.


1(.

, o!ve!ie!e ield is a. a retur! ear!ed for deliveri!- a -ood o! time  #. the ost of arr mi!us the risk2free rate . a retur! ear!ed for holdi!- a -ood i! short su**l d. the ield o! a! asset that is eas to a6uire e. !o!e of the a#ove

1+.

, o!ta!-o market is o!siste!t "ith a. a !e-ative #asis  #. futures *ries eeedi!- s*ot *ries . a *ositive ost of arr d. all of the a#ove e. !o!e of the a#ove

1/.

0hih of the follo"i!- situatio!s "ould #e most o!siste!t "ith !o risk *remium4 a. there is !o hed-i! #. there is a !e-ative ost of arr . futures are mis*ried d. all of the a#ove e. !o!e of the a#ove

1&.

Su**ose there is a risk *remium of ;%.&%. The s*ot *rie is ;(% a!d the futures *rie is ;((. 0hat is the e*eted s*ot *rie at e*iratio!4 a. ;(1.&%  #. ;((.&% . ;(%.&% d. ;(/.&% e. !o!e of the a#ove

1).

If hed-ers are *redomi!a!tl short the ommodit8 "hat a! "e sa a#out the risk *remium4 a. it "ould #e *ositive  #. it "ould eeed the ost of arr . it "ould #e !e-ative d. it "ould #e 5ero e. !o!e of the a#ove

13.

0hat "ould #e the s*ot *rie if a stok i!de futures *rie "ere ;3&8 the risk2free rate "ere 1% *ere!t8 the divide!d ield + *ere!t8 a!d the futures e*ires i! three mo!ths4 a. ;3+.3%  #. ;33./$ . ;3(.)% d. ;3).+( e. !o!e of the a#ove

1$.

If i!terest rates "ere o!sta!t a!d ou #ou-ht o!e t"o2da for"ard o!trat8 ho" ma! futures o!trats should ou sell to eeute a risk2free hed-e4 r is the o!e2da i!terest rate. a. %  #. 1  r  . 1 d. 191  r e. !o!e of the a#ove 1-24

Co*ri-ht 7 (%%1 # Harourt8 I!

1'.

(%.

(1.

((.

Su**ose it is urre!tl ?ul. The Se*tem#er futures *rie is ;)% a!d the @eem#er futures *rie is ;)$. 0hat does the s*read of ;$ re*rese!t4 a. the ost of arr from ?ul to Se*tem#er   #. the e*eted risk *remium from ?ul to Se*tem#er  . the ost of arr from Se*tem#er to @eem#er  d. the e*eted risk *remium from Se*tem#er to @eem#er  e. !o!e of the a#ove 0h is the i!itial value of a futures o!trat 5ero4 a. the futures is immediatel marked2to2market  #. ou do !ot *a a!thi!- for it . the #asis "ill o!ver-e to 5ero d. the e*eted *rofit is 5ero e. !o!e of the a#ove The s*ot *rie *lus the ost of arr e6uals a. the o!ve!ie!e ield  #. the e*eted future s*ot *rie . the risk *remium d. the futures *rie e. !o!e of the a#ove isk *remiums are likel to eist i! "hat ki!d of market4 a. o!e "ith !o hed-ers  #. o!e "ith o!l s*eulators . o!e "ith ma! hed-ers d. o!e "ith o!ta!-o e. !o!e of the a#ove

(+.

If the three>ear s*ot rate is 1/ *ere!t a!d the o!e>ear s*ot rate is 1( *ere!t8 "hat is the for"ard rate for t"o>ear loa!s i! o!e ear4 a. +(.($ *ere!t  #. 1&.%1 *ere!t . (.(' *ere!t d. 1+ *ere!t e. !o!e of the a#ove

(/.

If the 1$%>da s*ot of '.& a!d a '%>da futures e*iri!- i! 1$% das im*lies a ield of 1%.$8 "hat is the estimated rate o! a (3%>da s*ot tra!satio!4 a. &.+( *ere!t  #. '.'+ *ere!t . 1%.% *ere!t d. 3.() *ere!t e. !o!e of the a#ove

(&.

The ost of arr o!sists of all the follo"i!- ee*t a. the risk>free rate  #. the ost of stora-e . i!sura!e o! the asset d. the risk *remium e. !o!e of the a#ove

1.

, short a.  #. . d. e.

(.

,! a!tii*ator hed-e is o!e i! "hih a. the #asis is e*eted to fall  #. the hed-er e*ets to make a *rofit o! the futures

CHAPTER 1!: FUTURES HEDGING STRATEGIES

hed-e is o!e i! "hih the mar-i! re6uireme!t is "aived the hed-er is short futures t he hed-er is short i! the s*ot market the futures *rie is lo"er tha! the s*ot *rie !o!e of the a#ove

1-25

Co*ri-ht 7 (%%1 # Harourt8 I!

. d. e.

the s*ot *ositio! "ill #e take! i! the future all of the a#ove !o!e of the a#ove

+.

, stre!-the!i! - of the #asis mea!s a. the s*ot *rie rises more tha! the futures *rie  #. the futures *rie falls more tha! the s*ot *rie . a short hed-er #e!efits d. all of the a#ove e. !o!e of the a#ove

/.

, hed-e i! "hih the asset u!derli!- the futures is !ot the asset #ei!- hed-ed is a. a ross hed-e  #. a! o*timal hed-e . a #asis hed-e d. a mi!imum varia!e hed-e e. !o!e of the a#ove

&.

0he! the futures e*ires #efore the hed-e is termi!ated a!d the hed-er moves i!to the !et futures e*iratio!8 it is alled a. s*readi!- the hed-e  #. rolli!- the hed-e for"ard . o*timall "ei-hti!- the hed-e d. all of the a#ove e. !o!e of the a#ove

).

The duratio! of the futures o!trat used i! the *rie se!sitivit hed-e ratio is a. the duratio! of the s*ot #o!d #ei!- hed-ed usi!- the futures *rie i!stead of the s*ot *rie  #. the duratio! of the delivera#le #o!d usi!- the s*ot *rie . the duratio! of the delivera#le #o!d usi!- the futures *rie d. the duratio! of the overall #o!d *ortfolio f. !o!e of the a#ove

3.

0hih a.  #. . d. e.

$.

0hih of the follo"i!- measures is used i! the *rie se!sitivit hed-e ratio for #o!d futures4 a. #eta  #. duratio! . orrelatio! d. varia!e e. !o!e of the a#ove

'.

Su**ose ou #u a! asset at ;&% a!d sell a futures o!trat at ;&+. 0hat is our *rofit at e*iratio! if the asset *rie -oes to ;/'4 I-!ore arri!- osts a. 2;1  #. 2;/ . ;+ d. ;/ e. !o!e of the a#ove Su**ose ou #u a! asset at ;3% a!d sell a futures o!trat at ;3(. 0hat is our *rofit if8 *rior to e*iratio!8 ou sell the asset at ;3& a!d the futures *rie is ;3$4 a. 2;1  #. ;( . ;1

1%.

teh!i6ue a! #e used to om*ute the mi!imum varia!e hed-e ratio4 duratio! a!alsis *rese!t value re-ressio! all of the a#ove !o!e of the a#ove

1-26

Co*ri-ht 7 (%%1 # Harourt8 I!

11.

1(.

d. 2;) e. !o!e of the a#ove 0hih of the follo"i!- is !ot a reaso! for firms to hed-e4 a.
1-27

Co*ri-ht 7 (%%1 # Harourt8 I!

1+.

@etermi!e the o*timal hed-e ratio for Treasur #o!ds "orth ;18%%%8%%% "ith a duratio! of 1(./&8 ieldi!11.' *ere!t if the futures has a *rie of ;'%8%%%8 a duratio! of $.& ears a!d a! im*lied ield of '.&  *ere!t. a. 1&.'+  #. 1).)+ . 3./( d. 11.11 e. !o!e of the a#ove

1/.

0hat is the *rofit o! a hed-e if #o!ds are *urhased at ;1&%8%%%8 t"o futures o!trats are sold at ;3(8&%% eah8 the! the #o!ds are sold at ;1/38&%% a!d the futures are re*urhased at ;3/8%%% eah4 a. 2;(8&%%  #. 2;&8&%% . 2;&%% d. 2;+8%%% e. !o!e of the a#ove

1&.


1).

I! "hih of the follo"i!- situatio!s "ould ou use a short hed-e4 a. the *la!!ed *urhase of a stok    #. the *la!!ed *urhase of ommerial *a*er  . the *la!!ed issua!e of #o!ds d. the *la!!ed re*urhase of stok to over a short *ositio! e. !o!e of the a#ove O! the #asis of li6uidit8 the #est futures o!trat for hed-i!- short2term i!terest rates is a. Treasur #ills  #. the *rime rate . ommerial *a*er   d. Eurodollars e. !o!e of the a#ove If a firm is *la!!i!- to #orro" mo!e i! the s*ot market8 the rate it is tri!- to lok i! is a. the urre!t for"ard rate  #. the urre!t s*ot rate . the differe!e #et"ee! the s*ot rate a!d the for"ard rate d. the for"ard rate at the termi!atio! of the hed-e e. !o!e of the a#ove 0hat reaso! mi-ht #e -ive! for !ot "a!ti!- to hed-e the future issua!e of a lia#ilit if i!terest rates are u!usuall hi-h4 a. t he m ar-i ! ost "ill #e e*e!sive  #. ou are loki!- i! a hi-h rate . tra!satio! osts are hi-her  d. futures *ries are lo"er   e. !o!e of the a#ove

13.

1$.

1'.

(%.

Thou-h a ross hed-e has some"hat hi-her risk tha! a! ordi!ar hed-e8 it "ill redue risk if "hih of the follo"i!- ours4 a. futures *ries are more volatile tha! s*ot *ries  #. the s*ot a!d futures o!trats are orretl *ried at the o!set . s*ot a!d futures *ries are *ositivel orrelated d. futures *ries are less volatile tha! s*ot *ries e. !o!e of the a#ove

1-28

Co*ri-ht 7 (%%1 # Harourt8 I!

(1.

0hih a.  #. . d. e.

of the follo"i!- orretl e*resses the *rofit o! a hed-e4 t he #asis "he! the hed-e is losed the ha!-e i! the #asis the s*ot *rofit mi!us the futures *rofit the futures *rofit mi!us the s*ot *rofit !o!e of the a#ove

((.

0hat ha**e!s to the #asis throu-h the o!trats life4 a. it i!itiall dereases8 the! i!reases  #. it i!itiall i!reases8 the! dereases . it remai!s relativel stead d. it moves to"ard 5ero e. !o!e of the a#ove

(+.

edui!- the hed-e ratio to reflet the effets of the dail settleme!t is alled a. mi!imum varia!e hed-i! #. ross hed-i!. s*read hed-i!d. taili!- the hed-e e. !o!e of the a#ove

(/.

Qua!tit risk is a. !ot k!o"i!- ho" ma! futures o!trats to use  #. the u!ertai!t a#out the si5e of the s*ot *ositio! . the u!ertai!t i! estimati!- the hed-e ratio d. the diffiult i! 6ua!tifi!- hed-i!- risk  e. !o!e of the a#ove

(&.

The relatio!shi* #et"ee! the s*ot ield a!d the ield im*lied # the futures *rie is alled a. the ield #eta  #. the *rie se!sitivit . the tail d. the hed-e ratio e !o!e of the a#ove

1.

The tra!satio! desi-!ed to e*loit mis*rii!- i! the relatio!shi* #et"ee! futures a!d s*ot *ries is alled a. a re*urhase a-reeme!t  #. a hed-e . s*eulatio! d. ash a!d arr e. !o!e of the a#ove

(.

The im*lied re*o rate is simi lar to the a. i!ter!al rate of retur!  #. ost of hed-i!. ield o! the futures o!trat d. all of the a#ove e. !o!e of the a#ove
CHAPTER 11: ADVANCED FUTURES STRATEGIES

+.

/.

0hih o!e of the follo"i!- o*tio!s is !ot assoiated "ith the Treasur #o!d futures o!trat4 a. e!d2of2the2mo!th 1-29

Co*ri-ht 7 (%%1 # Harourt8 I!

 #. . d. e. &.

).

3.

$.

'.

1%.

11.

1(.

s*read o*tio! "ild ard o*tio! 6ualit o*tio! !o!e of the a#ove

The tra!satio! i! "hih a Treasur #o!d futures s*read is om#i!ed "ith a Treasur #ill futures tra!satio! is alled a a. :o!d2#ill s*read  #. MO: s*read . desi-!ated order tur!arou!d d. turtle trade e. !o!e of the a#ove The o**ortu!it to lok i! the i!voie *rie a!d *urhase the delivera#le Treasur #o!d later is alled a. #o!d i!sura!e  #. *ro-ram tradi!. the "ild ard d. deliver ar#itra-e e !o!e of the a#ove If the futures *rie at +R%% *.m. is 1((8 the s*ot *rie is 1/(.& a!d the C< is 1.1&3&8 # ho" muh must the s*ot *rie fall # &R%% *.m. to Dustif deliver4 a. 1.($&  #. 1.11%( . (%.&% d. 13.31 e. /(.'/ Ho" is the ost of a deliver o*tio! *aid4 a. the lo!- *as the short "ith a ash settleme!t  #. the short *as the lo!- "ith a ash settleme!t . a hi-her losi!- futures *rie d. a lo"er losi!- futures *rie e. !o!e of the a#ove
Co*ri-ht 7 (%%1 # Harourt8 I!

 #. . d. e.

over*ried # (.& over*ried # '.3) over*ried # %.)/ u!der*ried # (.&

1+.

0hih a.  #. . d. e.

1/.

Aou hold a stok *ortfolio "orth ;+% millio! "ith a #eta of 1.%&. Aou "ould like to lo"er the #eta to .'% usi!- SBP &%% futures8 "hih have a *rie of /)%.(% a!d a multi*lier of &%%. 0hat tra!satio! should ou do4 ou!d off to the !earest "hole o!trat. a. sell 1+% o!trats  #. sell '833$ o!trats . sell (% o!trats d. #u &%8%%% o!trats e. sell &%8%%% o!trats

1&.

If the stok i!de is at 1/$8 the three2mo!th futures *rie is 1&18 the divide!d ield is & *ere!t a!d the i!terest rate is $ *ere!t8 determi!e the *rofit from a! i!de ar#itra-e if the stok e!ds u* at 1// at e*iratio!. I-!ore tra!satio! osts. a. 1.$'  #. /.%% . 3.%% d. &.11 e. 23.%%

1).

The tra!satio! i! "hih mo!e is #orro"ed # selli!- a seurit a!d *romisi!- to #u it #ak i! several "eeks is alled a a. term re*o  #. over!i-ht re*o . term ar#itra-e d. MO: s*read e. !o!e of the a#ove The e!d2of2the2mo!th o*tio! is a. the ri-ht to eerise a! o*tio! o! the last da of the mo!th  #. a! o*tio! e*iri!- o! the last da of the mo!th . the ri-ht to deliver duri!- the last seve! #usi!ess das of the mo!th d. a! o*tio! that trades o!l at the e!d of the mo!th e. !o!e of the a#ove

13.

of the follo"i!- is !ot a risk of *ro-ram tradi!-4 the stoks a!!ot #e simulta!eousl sold at e*iratio! fratio!al o!trats a!!ot #e *urhased or sold the divide!ds are !ot ertai! the stoks a!!ot #e *urhased simulta!eousl !o!e of the a#ove

1$.

Aou hold a #o!d *ortfolio "orth ;1% millio! "ith a ield of 1%.(& *ere!t a!d a duratio! of $.&. 0hat futures tra!satio! "ould ou do to raise the duratio! to 1% if the futures *rie is ;'+8%%%8 its duratio! is '.(& a!d its im*lied ield is 1%.%& *ere!t4 ou!d u* to the !earest "hole o!trat. a. #u 1%' o!trats  #. #u 1$ o!trats . #u ))' o!trats d. sell 1%% o!trats e sell ))' o!trats

1'.


Co*ri-ht 7 (%%1 # Harourt8 I!

e.

''.&&

(%.

If ou #u #oth a +%2da Eurodollar C@ *ai!- ).3 *ere!t a!d a '%2da futures o! a '%2da Eurodollar  C@ "ith a *rie im*li!- a ield of 3.( *ere!t8 "hat is our total a!!uali5ed retur!4 :oth ields are  #ased o! +)%2da ears. a. 3.(& *ere!t  #. 3.%3 *ere!t . 1%.1& *ere!t d. 3.3& *ere!t e. ).'& *ere!t

(1.

, delivera#le Treasur #o!d has arued i!terest of +./( *er ;1%%8 a ou*o! of '.& *ere!t8 a *rie of 1+& a!d a o!versio! fator of 1.1'&. The futures *rie is 11(.(&. 0hat is the i!voie amou!t4 a. 1+3.&)  #. 1/+.)/ . 1)1.++ d. 1+/.1/ e. !o!e of the a#ove

((.

@etermi!e the o!versio! fator for deliver of the 3 19/s off Ma 1&8 (%1) o! the Marh (%%% T>#o!d futures o!trat. a. 1.((&  #. %.'+( . 1.%$+ d. 1.1(3 e. 1.&%'

(+.

0hih of the follo"i!- is !ot !eeded "he! alulati!- the im*lied re*o rate for stok i!de futures4 a. futures *rie  #. o!versio! fator  . time>to>e*iratio! d. s*ot *rie e. !o!e of the a#ove The urre!t *rie of a stok i!de is 11&8 a!d the three>mo!th futures *rie is 113. The Euro*ea! all o! the i!de8 e*iri!- i! three mo!ths8 has a strike *rie of 1(% a!d a value of +.+%. If the risk>free rate is &8 "hat is the value of the three>mo!th 1(% Euro*ea! *ut4 a. (.')  #. /.'/ . ).() d. $.(/ e. !o!e of the a#ove

(/.

(&.

0hih a.  #. . d. e.

of the follo"i!- is a form of *ro-ram tradi!-4 i!de ar#itra-e "ild ard ar#itra-e tria!-ular ar#itra-e timi!- ar#itra-e !o!e of the a#ove

1.

O*tio!s a.  #. . d. e.

CHAPTER 12: OPTIONS ON FUTURES

o! futures have #ee! tradi!- si!e 1'3+ 1'$( 1')) 1'+) !o!e of the a#ove

1-32

Co*ri-ht 7 (%%1 # Harourt8 I!

(.

0hat is  *rie4 a.  #. . d. e.

the lo"er #ou!d of a Euro*ea! all o! a futures "here f % is the futures *rie a!d = is the eerise the differe!e #et"ee! f%  a!d = 5ero the *rese!t value of the differe!e #et"ee! f % a!d = the ratio of f%  to = !o!e of the a#ove

+.

0hih of the follo"i!- o*tio!s o! futures "ill !ot #e eerised earl4 a. a Euro*ea! *ut o! a futures  #. a! ,meria! all o! a futures . a! ,meria! *ut o! a futures d. all of the a#ove e. !o!e of the a#ove

/.

@etermi!e the a**ro*riate *rie of a Euro*ea! *ut o! a futures if the all is "orth ;).&&8 the risk2free rate is &.) *ere!t8 the futures *rie is ;$%8 the eerise *rie is ;3&8 a!d the e*iratio! is i! three mo!ths. a. ;1(.&)  #. ;%.&/ . ;11./$ d. ;1.)( e. !o!e of the a#ove
&.

).

3.

$.

'.

1%.

The :lak o*tio! o! futures *rii!- model is e6uivale!t to the :lak2Sholes model u!der "hih of the follo"i!- o!ditio!s4 a. the o*tio! a!d futures e*ire simulta!eousl  #. the futures is *ried # the ost of arr . the o*tio! o! futures is Euro*ea! d. all of the a#ove e. !o!e of the a#ove , dee* i!2the2mo!e all o*tio! o! futures is eerised earl #eause a. the i!tri!si value is maimi5ed 1-33

Co*ri-ht 7 (%%1 # Harourt8 I!

11.

1(.

1+.

1/.

1&.

1).

 #. it #ehaves like a futures #ut ties u* fu!ds . the futures *rie is !ot likel to rise a! further  d. all of the a#ove e. !o!e of the a#ove
13.


1$.

The delta of a all o*tio! o! a futures is e6ual to the delta of a all o*tio! o! the s*ot times a. the *rese!t value fator for the risk2free rate a!d time to e*iratio! 1-34

Co*ri-ht 7 (%%1 # Harourt8 I!

 #. . d. e.

o!e the futures *rie the eerise *rie !o!e of the a#ove CHAPTER 14: INTEREST RATE DERIVATIVES

1.

(.

+.

/.

&.

).

3.

$.

, firm #orro"s ;(% millio! from its #a!k a!d a-rees to make *ame!ts ever '% das at the #e-i!!i!- of  the *eriod at LI:O8 "hih is urre!tl 1%.& *ere!t. It arra!-es a! i!terest rate s"a*8 a-reei!- to make fied *ame!ts ever '% das at a rate of 1+ *ere!t a!d reeive floati!- *ame!ts ever '% das at a rate of LI:O mi!us 1%% #asis *oi!ts. @etermi!e the !et ash flo" o! its first *ame!t from the s"a* o!l. a. a! outflo" of ;&(&8%%%  #. a! i!flo" of ;/3&8%%% . a! outflo" of ;13&8%%% d. a! outflo" of ;)&%8%%% e. !o!e of the a#ove @etermi!e the value of a! i!terest rate all o*tio! at the maturit of a loa! if the all has a strike of 1(  *ere!t8 a fae value of ;&% millio!8 the loa! matures '% das after the all is eerised8 the all e*ires i! )% das8 the all *remium is ;(%%8%%%8 a!d LI:O e!ds u* at 1+ *ere!t. a. ;1(&8%%%  #. ;$+8+++ . ;(%$8%%% d. 2;3&8%%% e. !o!e of the a#ove , #a!k makes a ;& millio! 1$%2da *ure disou!t loa! at LI:O of ' *ere!t. ,t the same time8 ho"ever8 it eerises a! i!terest rate *ut that has a strike of 11 *ere!t.
Co*ri-ht 7 (%%1 # Harourt8 I!

'.

1%.

11.

1(.

a. fi!di!- the !e" floati!- rate  #. assumi!- that t he market value "ill -o to *ar o! the !et *ame!t date . fi!di!- its *rese!t value usi!- the fied rate as the disou!t rate d. fi!di!- its urre!t market value a!d om*ou!di!- it to the !et ou*o! date e. !o!e of the a#ove 0hih of the follo"i!- "as of termi!ati!- a! i!terest rate s"a* a! #e do!e o!l if a**roved # the ou!ter*art4 a. eerisi!- a! o*tio! "ith the ou!ter*art  #. sale or assi-!me!t to a!other ou!ter*art . reversal or offset d. all of the a#ove e. !o!e of the a#ove S"a*tio!s are like for"ard s"a*s i! "hih of the follo"i!- "as a. :oth are free of redit risk    #. :oth re6uire the eeutio! of a s"a* at e*iratio! . The have the same *rie d. :oth are traded o! s"a*tio! eha!-es e. !o!e of the a#ove
1+.

,! <, differs from a! i!terest rate s"a* i! "hih of the follo"i!- "as4 a. ,! <, has more redit risk    #. <,s are federall re-ulated . Traditio!all the *ame!t i! a! <, is delaed d. <,s are used o!l # #a!ks a!d s"a*s are used o!l # or*oratio!s e. !o!e of the a#ove

1/.

0hih a.  #. . d. e.

1&.


1).

I!terest rate s"a* *ame!ts are made

of the follo"i!- i!formatio! is !ot re6uired to determi!e a s"a*tio! *aoff at e*iratio!4 the eerise rate the term struture of 5ero ou*o! rates at the s"a*tio! e*irat io! t he m aturit of the u!derli!- s"a* the ield o! a #o!d of e6uivale!t maturit as the s"a* !o!e of the a#ove

1-36

Co*ri-ht 7 (%%1 # Harourt8 I!

a.  #. . d. e. 13.

1$.

1'.

(%.

(1.

o! the last da of the 6uarter   o! the first da of eah mo!th at "hatever dates are a-reed u*o! # the ou!ter*arties o! the 1&t h of the a-reed2u*o! mo!ths !o!e of the a#ove

,! i!terest rate s"a* is e6uivale!t to "hih of the follo"i!- tra!satio!s a. a series of <,s  #. the *urhase of a stok a!d sale of a #o!d . #orro"i!- mo!e at o!e floati!- rate a!d le!di!- it at a!other  d. all of the a#ove e. !o!e of the a#ove 0hih of the follo"i!- strate-ies is a**ro*riate if ou e*et i!terest rates to i!rease4 a. a *a2fied8 reeive2floati !- s"a*  #. a short i!terest rate all . a short for"ard rate a-reeme!t d. all of the a#ove e. !o!e of the a#ove Com*a!ies use i!terest rate s"a*s for all of the follo"i!- reaso!s ee*t a. to o!vert floati!- rate loa!s to fied rate loa!s  #. to alter the *atter!s of asset ash flo"s . to o!vert fied rate loa!s to floati!- rate loa!s d. to save le-al a!d *a*er"ork osts e. !o!e of the a#ove 0hih of the follo"i!- is the fied rate o! a t"o2ear s"a* if o!e2ear LI:O is ) *ere!t a!d t"o2ear  LI:O is 3 *ere!t4 Use +)% das i! disou!ti!-. a. ).3& *ere!t  #. ).%% *ere!t . 3.%% *ere!t d. 3.+& *ere!t e. !o!e of the a#ove , firm e!tered i!to a! i!terest rate s"a* to *a a fied rate of & *ere!t a!!uall for t"o ears. It is !o" !i!e mo!ths i!to the s"a*. The three2mo!th rate is $ *ere!t a!d the 1&2mo!th rate is $.& *ere!t. The u*omi!- floati!- *ame!t is at the rate &. ( *ere!t. 0hih of the follo"i!- is the value of the s"a* *er  ;1 !otio!al *ri!i*al. ,ll rates are LI:O a!d use +)% das i! disou!ti!-. a. %.%++(  #. %.%+1/ . 2%.%%1$ d. 1.%%%% e. !o!e of the a#ove

((.

0hih a.  #. . d. e.

of the follo"i!- stateme!ts a#out i!terest rate o*tio!s a!d9or i!terest rate s"a*s is true4 i!terest rate s"a*s as "ell as a*s a!d floors *a off o! the date o! "hih the rate is determi!ed a om#i!atio! of i!terest rate a*s is e6uivale!t to s a s"a* i!terest rate a*s a!d floors adhere to *ut2all *arit if there is o!l a si!-le e*iratio! a lo!- all a!d short *ut "ith the same strike rate set at the s"a* rate re*liates a s"a* !o!e of the a#ove

(+.

, *aer s"a*tio! is e*iri!-. The u!derli!- s"a* has a t"o ear maturit. Th e *rese!t value fators are .'(&' o!e ear a!d .$)&1 t"o ears. The strike rate is 3 *ere!t. 0hat is the value of the s"a*tio!  *er ;1 !otio!al *ri!i*al. a. %.%%%%8 si!e it is out2of2the2mo!e  #. 1.%%%% . %.%3&+ d. %.%%'& e. !o!e of the a#ove

(/.

To determi!e the fied rate o! a s"a*8 ou "ould 1-37

Co*ri-ht 7 (%%1 # Harourt8 I!

(&.

a. use *ut2all *arit  #. *rie it as the issua!e of a fied rate #o!d a!d *urhase of a floati!- rate #o!d or vie versa . use the same fied rate as that of a 5ero ou*o! #o!d of e6uivale!t maturit d. all of the a#ove methods are e6uivale!t e. !o!e of the a#ove ,ll of the follo"i!- are uses of s"a*tio!s ee*t a. to s*eulate o! i!terest rates  #. to -ive a firm flei#ilit i! future #orro"i!-s . to #orro" mo!e d. to reate alla#le from !o!2alla#le #o!ds e. !o!e of the a#ove

CHAPTER 15: ADVANCED DERIVATIVES AND STRATEGIES

,!s"er 6uestio!s 1 throu-h ) a#out i!suri!- a *ortfolio ide!tial to the SBP &%% "orth ;1(8&%%8%%% "ith a three2 mo!th hori5o!. The risk2free rate is 3 *ere!t. Three2mo!th T2#ills are availa#le at a *rie of ;'$.)/ *er ;1%% fae value. The SBP &%% is at +$&. Puts "ith a! eerise *rie of +'% are availa#le at a *rie of 1+. Calls "ith a! eerise *rie of +'% are availa#le at a *rie of 1+.1(&. ou!d off our a!s"ers to the !earest i!te-er. 1.

0hat is the mi!imum value of the i!sured *ortfolio4 a. ;1)8)3(8+//  #. ;1(8&%%8%%% . ;1(8%'183%' d. ;1(8(//8$'$ e. ;1+8+3&8%%%

(.

Ho" ma! *uts should #e used to i!sure this *ortfolio4 a. 1((8&$/  #. +18+'3 . )(8$1/ d. ')18&+$ e. +(8/)$

+.

If the SBP &%% e!ds u* at /%18 determi!e the u*side a*ture. a. ').3 *ere!t  #. ') *ere!t . ''.+ *ere!t d. '/ *ere!t e. 1%% *ere!t

/.

If the i!sured *ortfolio o!sisted e!tirel of alls a!d T2#ills8 ho" ma! "ould #e used4 a. 1'81/+ alls a!d 1(/813) T2#ills  #. +18+'3 alls a!d 1((8//' T2#ills . '++8(+$ alls a!d (8&/3 T2#ills d. +18/%3 alls a!d 11'8''3 T2#ills e. +(8/)$ alls a!d +(8/)$ T2#ills If the i!sured *ortfolio "ere d!amiall hed-ed "ith stok i!de futures8 ho" ma! futures "ould #e used4 The all delta is .&( a!d the o!ti!uous risk2free rate is &./$ *ere!t. Eah futures has a multi*lier  of &%% a!d a *rie of +$$.)&. a. )%  #. )/ . +% d. +( e. !o!e of the a#ove If the i!sured *ortfolio "ere d!amiall hed-ed "ith T2#ills8 ho" ma! T2#ills "ould #e used4 a. 1)8++(  #. )+8%%( . 1()83(+ d. )18)3( e. +(8/)$

&.

).

1-38

Co*ri-ht 7 (%%1 # Harourt8 I!

3.

Su**ose a firm offers a! e6uit2li!ked seurit. The fae value is ;1 millio! a!d its *aoff is #ased o! a! a**reiatio! i! a! e6uit i!de urre!tl at $&&.&%. It has determi!ed that of the ;1 millio! raised8 it a! struture the o*tio! om*o!e!t so that its value is ;1+&8%%%. Curre!tl a! at2the2mo!e all o*tio! is "orth ;1(&. 0hat *ere!ta-e of the -ai! i! the i!de a! it offer4 a. '(   #. 1%%  . &%  d. $.(+  e. !o!e of the a#ove

$.

Su**ose a! i!vestor a-rees to s"a* the SBP &%% retur! for the ussell (%%% small2stok retur!. The SBP &%% i!reases from /&%.'1 to /&).)% "hile the ussell (%%% i!reases from ()%.3+ to ()(.$(. 0hat "ould #e the i!vestors ash flo" o! a !otio!al *ri!i*al of ;1& millio!. a. ;)'8%/&  #. ;1&81(%8(+' . 2;1&81$'8($/ d. 2;)'8%/& e. !o!e of the a#ove

'.

0hih of the follo"i!- stateme!ts a#out mort-a-e2#aked seurit stri*s is true4 a. #oth i!terest2o!l a!d *ri!i*al2o!l stri*s are su#Det to *re2*ame!t risk   #. o!l *ri!i*al2o!l stri*s are su#Det to *re*ame!t risk  . o!l i!terest2o!l stri*s are su#Det to *re*ame!t risk  d. the *re*ame!t risk of i!terest2o!l a!d *ri!i*al2o!l stri*s is *reisel offsetti!e. !o!e of the a#ove , hooser o*tio! is similar to "hat other t*e of o*tio! strate- a. *ut2all *arit  #. a overed all . a *rotetive *ut d. a om#i!atio! #ull a!d #ear s*read e. !o!e of the a#ove The !um#er of *ossi#le fi!al avera-e *ries i! a! ,sia! o*tio! for a four *eriod #i!omial model is a. $  #. / . 1) d. +( e. !o!e of the a#ove , look#ak all o*tio! *rovides the ri-ht a. to ha!-e the stok o! "hih the o*tio! is "ritte!  #. to #u the stok at its lo"est *rie over the o*tio!s li fe . to i!sure a stok a-ai!st loss d. to ha!-e our mi!d a#out the eerise *rie e. !o!e of the a#ove If the stok *rie is urre!tl +)8 the eerise *rie is +& a!d the stok e!ds u* at //8 the value of a! asset2 or2!othi!- o*tio! at e*iratio! is a. +&  #. $ . ' d. // e. !o!e of the a#ove 0hih of the follo"i!- is harateristi of a #asis s"a*4 a. o!e *art *as a floati!- rate a!d the other *as a fied rate  #. o!e *art *as the #asis o! a futures tra!satio! . eah *art *as a floati!- rate d. at least o!e *arts *ame!ts is #ased o! a! o*tio! retur! e. !o!e of the a#ove

1%.

11.

1(.

1+.

1/.

1&.

,! e6ui t for"ard o!t rat is a. a for"ard o!trat o! LI:O seured # a stok as ollateral 1-39

Co*ri-ht 7 (%%1 # Harourt8 I!

 #. . d. e. 1).

13.

1$.

1'.

(%.

a futures o!trat o! a stok i!de t hat is !ot marked2to2market a all o*tio! o! a stok "ith -reater do"!side risk tha! a! ordi!ar all a for"ard o!trat "hose *aoff is determi!ed # a stok or i!de !o!e of the a#ove

, seurit that *as off the retur! from a om#i!atio! of mort-a-es is alled a a. homeo"!ers e6uit laim  #. mort-a-e *ortfolio . mort-a-e o*tio! d. mort-a-e2#aked seurit e. !o!e of the a#ove ,sia! o*tio!s are also alled a. avera-e *rie o*tio!s  #. Paifi o*tio!s . i!stallme!t o*tio!s d. !o2re-rets o*tio!s e. !o!e of the a#ove 0hih of the follo"i!- stateme!ts is orret a#out ash2or2!othi!- o*tio!s a. t he are su#Det to !o redit ri sk    #. the must #e *ried # the #i!omial model . the have lo"er u*side -ai!s a!d lo"er do"!side losses tha! ordi!ar o*tio!s d. the are e6uivale!t to short *ositio!s i! asset2or2!othi!- o*tio!s e. !o!e of the a#ove , o!sta!t maturit s"a* has "hih of the follo"i!- harateristis a. the s"a* maturit is held o!sta!t at a fied !um#er of ears  #. the floati!- *ame!t is usuall #ased o! the rate o! a Treasur !ote . the s"a* alls for all *ame!ts to #e made at its maturit d. the floati!- *ame!t a!d the maturit are #oth o!sta!t e. !o!e of the a#ove , ra!-e floater is a seurit "ith "hih of the follo"i!- harateristis a. the *ame!ts ra!-e from a -ive! maimum to a -ive! mi!imum  #. the maturit is limited to a fied ra!-e . its *ame!ts are #ased o! "hether the rate stas "ithi! a ra!-e d. all of the a#ove e. !o!e of the a#ove

(1.

, seurit that is su#2divided i!to seurities alled tra!hes is alled a a. *ri!i*al2o!l stri*  #. asia! look#ak o*tio! . ra!-e mort-a-e stri* d. ollaterali5ed m ort-a-e o#li-at io! e. !o!e of the a#ove

((.

0hih a.  #. . d. f.

(+.

0hih of the follo"i!- is a reaso! for usi!- e6uit s"a*s a. to realloate a stok *ortfolio amo!- asset lasses  #. to s*eulate o! the *erforma!e of a stok or i!de . to avoid the tra!satio! ost of tradi!- i! i!dividual stoks d. all of the a#ove e. !o!e of the a#ove

(/.

0hih of the follo"i!- #est desri#es the ost of *ortfolio i!sura!e4 a. the mar-i! *ut do"! o! the futures o!trat

of the follo"i!- is a *ath2i!de*e!de!t o*tio! a fied strike ,sia! all o*tio! a sta!dard Euro*ea! all o*tio! a! u*2a!d2out all o*tio! a! ,meria! *ut o*tio! !o!e of the a#ove

1-40

Co*ri-ht 7 (%%1 # Harourt8 I!

 #. . d. e. (&.

0hih a.  #. . d. e.

the -ai! -ive! u* "he! t he stok moves u* the differe!e #et"ee! the all a!d *ut *ries all of the a#ove !o!e of the a#ove of the follo"i!- is !ot a t*e of strutured !ote4 ra!-e floater   i!verse floater  diff floater   reverse floater   !o!e of the a#ove

CHAPTER 16: FINANCIAL RISK MANAGEMENT

1.

isk ma!a-eme!t e!om*asses all of the follo"i!- ee*t a. determi!i!- a firms atual level of risk   #. determi!i!- a firms desired level of risk  . setti!- *oliies a!d *roedures d. mo!itori!- our *ositio! after2the2fat e. !o!e of the a#ove

(.

Market a.  #. . d. e.

risk is "hih of the follo"i!the risk assoiated "ith faili!- to *ro*erl reord market tra!satio!s the risk that a dealer "ill lose market share to a om*eti!- dealer  the risk assoiated "ith moveme!ts i! suh fators as i!terest rates a!d eha!-e rates the risk of the -over!me!t delari!- a tra!satio! ille-al !o!e of the a#ove

+.

0hat is the reaso! for u!dertaki!- a -amma hed-e4 a. -over!me!t re-ulatio!  #. the *ossi#ilit of ou!ter*art default . ha!-es i! volatilit d. l ar-e moveme!ts i ! the u!derli!e. !o!e of the a#ove

/.

0hih of the follo"i!- is the i!ter*retatio! of a , of ;& millio! for o!e ear at .%&. a. the *ro#a#ilit is .%& that the firm "ill lose at least ;& millio! i! o!e ear   #. the *ro#a#ilit is at least .%& that the firm "ill lose ;& mil lio! i! o!e ear  . the *ro#a#ilit is .%& that the firm "ill lose ;& millio! i! o!e ear  d. the *ro#a#ilit is less tha! .%& that the firm "ill lose ;& millio! i! o!e ear  e. !o!e of the a#ove 0hih of the follo"i!- are !ot methods of determi!i!- the ,4 a. simulatio! method  #. historial method . estimatio! method d. a!altial method e. !o!e of the a#ove

&.

).

3.

0hih of the follo"i!- methods are !ot used to redue redit risk4 a. delta2-amma2ve-a hed-i! #. ollateral . marki!- to market d. limiti!- the amou!t of #usi!ess ou do "ith a *art e. !o!e of the a#ove 0hih of the follo"i!- are t*es of risks faed # a derivatives dealer4 a. ta risk    #. o*eratio!al risk  . aou!ti!- risk   d. le-al risk   e. !o!e of the a#ove

1-41

Co*ri-ht 7 (%%1 # Harourt8 I!

$.

0hat does !etti!- *ermi t a firm to do4 a. su#trat losses from *rie i!reases from losses from *rie dereases  #. !et its tra!satio!s "ith a -ive! ou!ter*art a-ai!st eah other  . !et all of its -ai!s a-ai!st all of its losses d. all of the a#ove e. !o!e of the a#ove

'.

Sstemi risk is a. the risk of a failure of the e!tire fi!a!ial sstem  #. the risk assoiated "ith #road market moveme!ts . the risk of a failure of a firms fi!a!ial risk ma!a-eme!t sstem d. the risk of lar-e *rie moveme!ts throu-hout the fi!a!ial sstem e. !o!e of the a#ove JI!de*e!de!t risk ma!a-eme!t mea!s "hih of the follo"i!-4 a. that risk ma!a-eme!t of a firm is i!de*e!de!t of its overall or*orate *oli deisio!s  #. that the risk ma!a-eme!t fu!tio! is *rovided # a! outside o!sulti !- firm . that the risk ma!a-er a!!ot #e i!flue!ed # the traders d. that the risk ma!a-er is i!de*e!de!t of the firms se!ior ma!a-ers e. !o!e of the a#ove E!d users are all of the follo"i!- t*es of or-a!i5atio!s except 4 a. i!vestme!t fu!ds  #. !o!2fi!a!ial or*oratio!s . -over!me!ts d. fi!a!ial i!stitutio!s e. !o!e of the a#ove 0hat is the *rimar ativit of a firms fro!t offie4 a. risk ma!a-eme!t  #. tradi!. *rii!- derivative *roduts d. auditi!e. !o!e of the a#ove

1%.

11.

1(.

1+.

, total retur! s"a* is #est desri#ed as a. , s"a* i! "hih the *ame!ts i!lude o!l a*ital -ai!s  #. a s"a* i! "hih the total retur! o! a stok i!de is s"a**ed for the total retur! o! a #o!d . a s"a* i! "hih the retur! o! o!e #o!d is s"a**ed for some other *ame!t d. a s"a* desi-!ed to su#stitute for a #asis s"a* e. !o!e of the a#ove

1/.

0hih a.  #. . d. e.

of the follo"i!- #est desri#es a redit default s"a*4 it is *roteted a-ai!st default it has a hi-her rate to om*e!sate for the *ossi#ilit of o!e *art defaulti!it arries a hi-her redit rati!- tha! most other s"a*s it off if a!other *art eter!al to the s"a* defaults !o!e of the a#ove

1&.

0hih a.  #. . d. e.

of the follo"i!- stateme!ts is !ot true a#out a redit s*read o*tio!4 it is a! o*tio! o! the s*read of a #o!d over a refere!e #o!d its value "ould ha!-e "ith ha!-es i! i!vestors *ere*tio!s of a *arts redit 6ualit it re6uires *ame!t of a *remium u* fro!t it re6uires that the u!derli!- #o!d #e relativel li6uid !o!e of the a#ove

1).

0hih a.  #. . d.

of the follo"i!- forms of hed-i!- re6uires the use of o*tio!s4 delta hed-i!ve-a hed-i!-amma hed-i!redit risk hed-i!1-42

Co*ri-ht 7 (%%1 # Harourt8 I!

e.

!o!e of the a#ove

13.

If a firm e!-a-es i! risk ma!a-eme!t to a*ture ar#itra-e *rofits8 "hat is it eas to overlook4 a. t he addit io!al redit risk it assumes  #. the ost is -reater tha! the #e!efit . the market risk is hi-h d. all of the a#ove e. !o!e of the a#ove

1$.

@erivatives dealers *rimaril o!dut derivatives tra!satio!s for "hih of the follo"i!- reaso!s4 a. to e!ha!e the retur!s o! their other i!vestme!t tra!satio!s  #. to *rofit off of their a#ilit to eeute trades at the ri-ht time . to *rofit off of their market maki!- servies d. to *rovide servies to e!ha!e the overall attrative!ess of their *rodut li!e f. !o!e of the a#ove

1'.

The risk that errors a! our i! i!*uts to a *rii!- model is alled a. i!*ut risk    #. model risk  . *rii!- risk   d. valuatio! risk   e. !o!e of the a#ove

(%.

Hed-e aou!ti!- is "hih of the follo"i!-4 a. desri#i!- all hed-es i! foot!otes to aou!ti!- stateme!ts  #. deferri!- all reordi!- of hed-e *rofits a!d losses u!til the hed-e is over  . assoiati!- the derivative *rofit or loss "ith the i!strume!t #ei!- hed-ed d. all of the a#ove e. !o!e of the a#ove

(1.

0hih a.  #. . d. e.

of the follo"i!- stateme!ts is !ot true a#out fair value hed-es4 it re6uires a method of determi!i!- the fair value of the derivative it defers reo-!itio! of all *rofits a!d losses u!til the hed-e is termi!ated it "ill ause ear!i!-s to flutuate if hed-es are !ot effetive it re6uires *ro*er doume!tat io! !o!e of the a#ove

((.

0hih a.  #. . d. e.

of the follo"i!- stateme!ts is !ot true a#out fair value hed-es4 it re6uires ide!tifiatio! of the effetive a!d i!effetive *arts derivatives *rofits a!d losses are tem*oraril arried i! a! e6uit aou!t it re6uires *ro*er doume!tat io! o!l dealer firms are eli-i#le to use it !o!e of the a#ove

(+.

0hih of the follo"i!- methods is !ot *ermitted to satisf the SECs re6uireme!ts for dislosure of  derivatives ativit4 a. a! e*l a!at io! i! the hai rma!s letter    #. a alue2at2isk fi-ure . a se!sitivit a!alsis d. a ta#le of market values a!d related terms e. !o!e of the a#ove

(/.

0hih a.  #. . d. e.

of the follo"i!- i!strume!ts ould #e used to eeute a delta8 -amma a!d ve-a hed-e4 a s"a* a! o*tio! a futures a! <, !o!e of the a#ove 1-43

Co*ri-ht 7 (%%1 # Harourt8 I!