CHAPTER 1

1. A one-year forward contract is an agreement where

A. One side has the right to buy an asset for a certain price in one year's time.
B. One side has the obligation to buy an asset for a certain price in one year's time.
C. One side has the obligation to buy an asset for a certain price at some time during the next
year.
D. One side has the obligation to buy an asset for the market price in one year's time.
B
2. Which of the following is NOT true
A. When a CBOE call option on IBM is exercised, IBM issues more stock
B. An American option can be exercised at any time during its life
C. An call option will always be exercised at maturity if the underlying asset price is greater than
the strike price
D. A put option will always be exercised at maturity if the strike price is greater than the
underlying asset price.
A
3. A one-year call option on a stock with a strike price of $30 costs $3; a one-year put option 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 above which the trader makes a profit is
A. $35
B. $40
C. $30
D. $36
A
4. A one-year call option on a stock with a strike price of $30 costs $3; a one-year put option 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 trader makes a profit is
A. $25
B. $28
C. $26
D. $20
D
5. Which of the following is approximately true when size is measured in terms of the underlying
principal amounts or value of the underlying assets
A. The exchange-traded market is twice as big as the over-the-counter market.
B. The over-the-counter market is twice as big as the exchange-traded market.
C. The exchange-traded market is ten times as big as the over-the-counter market.
D. The over-the-counter market is ten times as big as the exchange-traded market.
D
6. Which of the following best describes the term "spot price"
A. The price for immediate delivery
B. The price for delivery at a future time
C. The price of an asset that has been damaged
D. The price of renting an asset
A
7. Which of the following is true about a long forward contract
A. The contract becomes more valuable as the price of the asset declines
B. The contract becomes more valuable as the price of the asset rises
C. The contract is worth zero if the price of the asset declines after the contract has been entered
into
D. The contract is worth zero if the price of the asset rises after the contract has been entered into
B
8. An investor sells a futures contract an asset when the futures price is $1,500. Each contract is
on 100 units of the asset. The contract is closed out when the futures price is $1,540. Which of
the following is true
A. The investor has made a gain of $4,000
B. The investor has made a loss of $4,000
C. The investor has made a gain of $2,000
D. The investor has made a loss of $2,000
B
9. Which of the following describes European options?
A. Sold in Europe
B. Priced in Euros
C. Exercisable only at maturity
D. Calls (there are no puts)
C
10. Which of the following is NOT true
A. A call option gives the holder the right to buy an asset by a certain date for a certain price
B. A put option gives the holder the right to sell an asset by a certain date for a certain price
C. The holder of a call or put option must exercise the right to sell or buy an asset
D. The holder of a forward contract is obligated to buy or sell an asset
C
11. Which of the following is NOT true about call and put options:
A. An American option can be exercised at any time during its life
B. A European option can only be exercised only on the maturity date
C. Investors must pay an upfront price (the option premium) for an option contract
D. The price of a call option increases as the strike price increases
D
12. The price of a stock on July 1 is $57. A trader buys 100 call options on the stock with a strike
price of $60 when the option price is $2. The options are exercised when the stock price is $65.
The trader's net profit is
A. $700
B. $500
C. $300
D. $600
C
13. 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 $2,800
D. Loss of $1,000
D
14. The price of a stock on February 1 is $84. A trader buys 200 put options on the stock with a
strike price of $90 when the option price is $10. The options are exercised when the stock price
is $85. The trader's net profit or loss is
A. Loss of $1,000
B. Loss of $2,000
C. Gain of $200
D. Gain of $1000
A
15. The price of a stock on February 1 is $48. A trader sells 200 put options on the stock with a
strike price of $40 when the option price is $2. The options are exercised when the stock price is
$39. The trader's net profit or loss is
A. Loss of $800
B. Loss of $200
C. Gain of $200
D. Loss of $900
C
16. A speculator can choose between buying 100 shares of a stock for $40 per share and buying
1000 European call options on the stock with a strike price of $45 for $4 per option. For second
alternative to give a better outcome at the option maturity, the stock price must be above
A. $45
B. $46
C. $55
D. $50
D
17. A company knows it will have to pay a certain amount of a foreign currency to one of its
suppliers in the future. Which of the following is true
A. A forward contract can be used to lock in the exchange rate
B. A forward contract will always give a better outcome than an option
C. An option will always give a better outcome than a forward contract
D. An option can be used to lock in the exchange rate
A
18. A short forward contract on an asset plus a long position in a European call option on the
asset with a strike price equal to the forward price is equivalent to
A. A short position in a call option
B. A short position in a put option
C. A long position in a put option
D. None of the above
C
19. A trader has a portfolio worth $5 million that mirrors the performance of a stock index. The
stock index is currently 1,250. Futures contract trade on the index with one contract being on 250
times the index. To remove market risk from the portfolio the trader should
A. Buy 16 contracts
B. Sell 16 contracts
C. Buy 20 contracts
D. Sell 20 contracts
B
20. Which of the following best describes a central counterparty
A. It is a trader that works for an exchange
B. It stands between two parties in the over-the-counter market
C. It is a trader that works for a bank
D. It helps facilitate futures trades
B

CHAPTER 2: MECHANICS OF FUTURES MARKETS

1.Which of the following is true

Both forward and futures contracts are traded on exchanges.
Forward contracts are traded on exchanges, but futures contracts are not.
Futures contracts are traded on exchanges, but forward contracts are not.
Neither futures contracts nor forward contracts are traded on exchanges.
Answer: C
Futures contracts trade only on exchanges. Forward contracts trade only in the over-the-counter
market.
2.Which of the following is NOT true
Futures contracts nearly always last longer than forward contracts
Futures contracts are standardized; forward contracts are not.
Delivery or final cash settlement usually takes place with forward contracts; the same is not true
of futures contracts.
Forward contracts usually have one specified delivery date; futures contract often have a range of
delivery dates.
Answer: A
Forward contracts often last longer than futures contracts. B, C, and D are true

3.In the corn futures contract a number of different types of corn can be delivered (with price
adjustments specified by the exchange) and there are a number of different delivery locations.
Which of the following is true
This flexibility tends increase the futures price.
This flexibility tends decrease the futures price.
This flexibility may increase and may decrease the futures price.
This flexibility has no effect on the futures price
Answer: B
The party with the short position chooses between the alternatives. The alternatives therefore
make the futures contract more attractive to the party with the short position. The lower the
futures price the less attractive it is to the party with the short position. The benefit of the
alternatives available to the party with the short position is therefore compensated for by the
futures price being lower than it would otherwise be.
4.A company enters into a short futures contract to sell 50,000 units of a commodity for 70 cents
per unit. The initial margin is $4,000 and the maintenance margin is $3,000. What is the futures
price per unit above which there will be a margin call?
78 cents
76 cents
74 cents
72 cents
Answer: D
5.There will be a margin call when more than $1000 has been lost from the margin account so
that the balance in the account is below the maintenance margin level. Because the company is
short, each one cent rise in the price leads to a loss or 0.01×50,000 or $500. A greater than 2 cent
rise in the futures price will therefore lead to a margin call. The futures price is currently 70
cents. When the price rises above 72 cents there will be a margin call.
6.A company enters into a long futures contract to buy 1,000 units of a commodity for $60 per
unit. The initial margin is $6,000 and the maintenance margin is $4,000. What futures price will
allow $2,000 to be withdrawn from the margin account?
A. $58
B. $62
C. $64
D. $66
Answer: B
7.Amounts in the margin account in excess of the initial margin can be withdrawn. Each $1
increase in the futures price leads to a gain of $1000. When the futures price increases by $2 the
gain will be $2000 and this can be withdrawn. The futures price is currently $60. The answer is
therefore $62.
One futures contract is traded where both the long and short parties are closing out existing
positions. What is the resultant change in the open interest?
No change
Decrease by one
Decrease by two
Increase by one
Answer: B
The open interest goes down by one. There is one less long position and one less short position.
8.Who initiates delivery in a corn futures contract
The party with the long position
The party with the short position
Either party
The exchange
Answer: B
The party with the short position initiates delivery by sending a “Notice of Intention to Deliver”
to the exchange. The exchange has a procedure for choosing a party with a long position to take
delivery.
9.You sell one December futures contracts when the futures price is $1,010 per unit. Each
contract is on 100 units and the initial margin per contract that you provide is $2,000. The
maintenance margin per contract is $1,500. During the next day the futures price rises to $1,012
per unit. What is the balance of your margin account at the end of the day?
$1,800
$3,300
$2,200
$3,700
Answer: A
The price has increased by $2. Because you have a short position you lose 2×100 or $200. The
balance in the margin account therefore goes down from $2,000 to $1,800.
10.A hedger takes a long position in a futures contract on a commodity on November 1, 2012 to
hedge an exposure on March 1, 2013. The initial futures price is $60. On December 31, 2012 the
futures price is $61. On March 1, 2013 it is $64. The contract is closed out on March 1, 2013.
What gain is recognized in the accounting year January 1 to December 31, 2013? Each contract
is on 1000 units of the commodity.
$0
$1,000
$3,000
$4,000
Answer: D
Hedge accounting is used. The whole of the gain or loss on the futures is therefore recognized in
2013. None is recognized in 2012. In this case the gain is $4 per unit or $4,000 in total.
11.A speculator takes a long position in a futures contract on a commodity on November 1, 2012
to hedge an exposure on March 1, 2013. The initial futures price is $60. On December 31, 2012
the futures price is $61. On March 1, 2013 it is $64. The contract is closed out on March 1, 2013.
What gain is recognized in the accounting year January 1 to December 31, 2013? Each contract
is on 1000 units of the commodity.
A. $0
B. $1,000
$3,000
$4,000
Answer: C
In this case there is no hedge accounting. Gains or losses are accounted for as they are accrued.
The price per unit increases by $3 in 2013. The total gain in 2013 is therefore $3,000.
12.The frequency with which futures margin accounts are adjusted for gains and losses is
Daily
Weekly
Monthly
Quarterly
Answer: A
In futures contracts margin accounts are adjusted for gains or losses daily.
12.Margin accounts have the effect of
Reducing the risk of one party regretting the deal and backing out
Ensuring funds are available to pay traders when they make a profit
Reducing systemic risk due to collapse of futures markets
All of the above
Answer: D
Initial margin requirements dramatically reduce the risk that a party will walk away from a
futures contract. As a result they reduce the risk that the exchange clearing house will not have
enough funds to pays profits to traders. Furthermore, if traders are less likely to suffer losses
because of counterparty defaults there is less systemic risk.
13.Which entity in the United States takes primary responsibility for regulating futures market?
Federal Reserve Board
Commodities Futures Trading Commission (CFTC)
Security and Exchange Commission (SEC)
US Treasury
Answer: B
The CFTC has primary responsibility for regulating futures markets
14.For a futures contract trading in April 2012, the open interest for a June 2012 contract, when
compared to the open interest for Sept 2012 contracts, is usually
Higher
Lower
The same
Equally likely to be higher or lower
Answer: A
The contracts which are close to maturity tend to have the highest open interest. However, during
the maturity month itself the open interest declines.
15.Clearing houses are
Never used in futures markets and sometimes used in OTC markets
Used in OTC markets, but not in futures markets
Always used in futures markets and sometimes used in OTC markets
Always used in both futures markets and OTC markets
Answer: C
Clearing houses are always used by exchanges trading futures. Increasingly, OTC products are
cleared through CCPs, which are a type of clearing house.
16.A haircut of 20% means that
A bond with a market value of $100 is considered to be worth $80 when used to satisfy a
collateral request
A bond with a face value of $100 is considered to be worth $80 when used to satisfy a collateral
request
A bond with a market value of $100 is considered to be worth $83.3 when used to satisfy a
collateral request
A bond with a face value of $100 is considered to be worth $83.3 when used to satisfy a
collateral request
Answer: A
A haircut is the amount the market price of asset is reduced by for the purposes of determining
its value for collateral purposes. A is therefore correct.
17.With bilateral clearing, the number of agreements between four dealers, who trade with each
other, is
12
1
6
2
Answer: C
Suppose the dealers are W, X, Y , and Z. The agreements are between W and X, W and Y, W
and Z, X and Y, X and Z, and Y and Z. There are therefore a total of 6 agreements.
18.Which of the following best describes central clearing parties
Help market participants to value derivative transactions
Must be used for all OTC derivative transactions
Are used for futures transactions
Perform a similar function to exchange clearing houses
Answer: D
CCPs do for the OTC market what exchange clearing houses do for the exchange-traded market.
The correct answer is therefore D. CCPs must be used for most standard OTC derivatives
transactions, but not for all derivatives transactions.
19.Which of the following are cash settled
All futures contracts
All option contracts
Futures on commodities
Futures on stock indices
Answer: D
Futures on stock indices are usually cash settled. The rest are usually settled by delivery of the
underlying assets
20.A limit order
Is an order to trade up to a certain number of futures contracts at a certain price
Is an order that can be executed at a specified price or one more favorable to the investor
Is an order that must be executed within a specified period of time
None of the above
Answer: B
In a limit order a trader specifies the worst price (from the trader’s perspective) at which the
trade can be carried out.
CHAPTER 3

1. The basis is defined as spot minus futures. A trader is hedging the sale of an asset with a short
futures position. The basis increases unexpectedly. Which of the following is true?
A. The hedger's position improves.
B. The hedger's position worsens.
C. The hedger's position sometimes worsens and sometimes improves.
D. The hedger's position stays the same.
A
2. Futures contracts trade with every month as a delivery month. A company is hedging the
purchase of the underlying asset on June 15. Which futures contract should it use?
A. The June contract
B. The July contract
C. The May contract
D. The August contract
B
3. On March 1 a commodity's spot price is $60 and its August futures price is $59. On July 1 the
spot price is $64 and the August futures price is $63.50. A company entered into futures
contracts on March 1 to hedge its purchase of the commodity on July 1. It closed out its position
on July 1. What is the effective price (after taking account of hedging) paid by the company?
A. $59.50
B. $60.50
C. $61.50
D. $63.50
A
4. On March 1 the price of a commodity is $1,000 and the December futures price is $1,015. On
November 1 the price is $980 and the December futures price is $981. A producer of the
commodity entered into a December futures contracts on March 1 to hedge the sale of the
commodity on November 1. It closed out its position on November 1. What is the effective price
(after taking account of hedging) received by the company for the commodity?
A. $1,016
B. $1,001
C. $981
D. $1,014
D
5. Suppose that the standard deviation of monthly changes in the price of commodity A is $2.
The standard deviation of monthly changes in a futures price for a contract on commodity B
(which is similar to commodity A) is $3. The correlation between the futures price and the
commodity price is 0.9. What hedge ratio should be used when hedging a one month exposure to
the price of commodity A?
A. 0.60
B. 0.67
C. 1.45
D. 0.90
A
6. A company has a $36 million portfolio with a beta of 1.2. The futures price for a contract on
an index is 900. Futures contracts on $250 times the index can be traded. What trade is necessary
to reduce beta to 0.9?
A. Long 192 contracts
B. Short 192 contracts
C. Long 48 contracts
D. Short 48 contracts
D
7. A company has a $36 million portfolio with a beta of 1.2. The futures price for a contract on
an index is 900. Futures contracts on $250 times the index can be traded. What trade is necessary
to increase beta to 1.8?
A. Long 192 contracts
B. Short 192 contracts
C. Long 96 contracts
D. Short 96 contracts
C
8. Which of the following is true?
A. The optimal hedge ratio is the slope of the best fit line when the spot price (on the y-axis) is
regressed against the futures price (on the x-axis).
B. The optimal hedge ratio is the slope of the best fit line when the futures price (on the y-axis) is
regressed against the spot price (on the x-axis).
C. The optimal hedge ratio is the slope of the best fit line when the change in the spot price (on
the y-axis) is regressed against the change in the futures price (on the x-axis).
D. The optimal hedge ratio is the slope of the best fit line when the change in the futures price
(on the y-axis) is regressed against the change in the spot price (on the x-axis).
C
9. Which of the following describes tailing the hedge?
A. A strategy where the hedge position is increased at the end of the life of the hedge
B. A strategy where the hedge position is increased at the end of the life of the futures contract
C. A more exact calculation of the hedge ratio when forward contracts are used for hedging
D. None of the above
D
10. A company due to pay a certain amount of a foreign currency in the future decides to hedge
with futures contracts. Which of the following best describes the advantage of hedging?
A. It leads to a better exchange rate being paid
B. It leads to a more predictable exchange rate being paid
C. It caps the exchange rate that will be paid
D. It provides a floor for the exchange rate that will be paid
B
11. Which of the following best describes the capital asset pricing model?
A. Determines the amount of capital that is needed in particular situations
B. Is used to determine the price of futures contracts
C. Relates the return on an asset to the return on a stock index
D. Is used to determine the volatility of a stock index
C
12. Which of the following best describes "stack and roll"?
A. Creates long-term hedges from short term futures contracts
B. Can avoid losses on futures contracts by entering into further futures contracts
C. Involves buying a futures contract with one maturity and selling a futures contract with a
different maturity
D. Involves two different exposures simultaneously
A
13. Which of the following increases basis risk?
A. A large difference between the futures prices when the hedge is put in place and when it is
closed out
B. Dissimilarity between the underlying asset of the futures contract and the hedger's exposure
C. A reduction in the time between the date when the futures contract is closed and its delivery
month
D. None of the above
B
14. Which of the following is a reason for hedging a portfolio with an index futures?
A. The investor believes the stocks in the portfolio will perform better than the market but is
uncertain about the future performance of the market
B. The investor believes the stocks in the portfolio will perform better than the market and the
market is expected to do well
C. The portfolio is not well diversified and so its return is uncertain
D. All of the above
A
15. Which of the following does NOT describe beta?
A. A measure of the sensitivity of the return on an asset to the return on an index
B. The slope of the best fit line when the return on an asset is regressed against the return on the
market
C. The hedge ratio necessary to remove market risk from a portfolio
D. Measures correlation between futures prices and spot prices for a commodity
D
16. Which of the following is true?
A. Hedging can always be done more easily by a company's shareholders than by the company
itself
B. If all companies in an industry hedge, a company in the industry can sometimes reduce its risk
by choosing not to hedge
C. If all companies in an industry do not hedge, a company in the industry can reduce its risk by
hedging
D. If all companies in an industry do not hedge, a company is liable increase its risk by hedging
D
17. Which of the following is necessary for tailing a hedge?
A. Comparing the size in units of the position being hedged with the size in units of the futures
contract
B. Comparing the value of the position being hedged with the value of one futures contract
C. Comparing the futures price of the asset being hedged to its forward price
D. None of the above
B
18. Which of the following is true?
A. Gold producers should always hedge the price they will receive for their production of gold
over the next three years
B. Gold producers should always hedge the price they will receive for their production of gold
over the next one year
C. The hedging strategies of a gold producer should depend on whether it shareholders want
exposure to the price of gold
D. Gold producers can hedge by buying gold in the forward market
C
19. A silver mining company has used futures markets to hedge the price it will receive for
everything it will produce over the next 5 years. Which of the following is true?
A. It is liable to experience liquidity problems if the price of silver falls dramatically
B. It is liable to experience liquidity problems if the price of silver rises dramatically
C. It is liable to experience liquidity problems if the price of silver rises dramatically or falls
dramatically
D. The operation of futures markets protects it from liquidity problems
B
20. A company will buy 1000 units of a certain commodity in one year. It decides to hedge 80%
of its exposure using futures contracts. The spot price and the futures price are currently $100
and $90, respectively. The spot price and the futures price in one year turn out to be $112 and
$110, respectively. What is the average price paid for the commodity?
A. $92
B. $96
C. $102
D. $106
B

CHAPTER 5

1.Which of the following is a consumption asset?

A.The S&P 500 index
B.The Canadian dollar
C.Copper
D.IBM stock
C
2.An investor shorts 100 shares when the share price is $50 and closes out the position six
months later when the share price is $43. The shares pay a dividend of $3 per share during the
six months. How much does the investor gain?
A. $1,000
B. $400
C. $700
D. $300
B
3.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
A
4.The spot price of an investment asset is $30 and the risk-free rate for all maturities is 10% with
continuous compounding. The asset provides an income of $2 at the end of the first year and at
the end of the second year. What is the three-year forward price?
A. $19.67
B. $35.84
C. $45.15
D. $40.50
B
5.An exchange rate is 0.7000 and the six-month domestic and foreign risk-free interest rates are
5% and 7% (both expressed with continuous compounding). What is the six-month forward rate?
A. 0.7070
B. 0.7177
C. 0.7249
D. 0.6930
D
6.Which of the following is true?
A.The convenience yield is always positive or zero.
B.The convenience yield is always positive for an investment asset.
C.The convenience yield is always negative for a consumption asset.
D.The convenience yield measures the average return earned by holding futures contracts
A
7.A short forward contract that was negotiated some time ago will expire in three months and has
a delivery price of $40. The current forward price for three-month forward contract is $42. The
three month risk-free interest rate (with continuous compounding) is 8%. What is the value of the
short forward contract?
A. +$2.00
B. −$2.00
C. +$1.96
D. −$1.96
D
8.The spot price of an asset is positively correlated with the market. Which of the following
would you expect to be true?
A.The forward price equals the expected future spot price.
B.The forward price is greater than the expected future spot price.
C.The forward price is less than the expected future spot price.
D.The forward price is sometimes greater and sometimes less than the expected future spot price.
C
9.Which of the following describes the way the futures price of a foreign currency is quoted by
the CME group?
A.The number of U.S. dollars per unit of the foreign currency
B.The number of the foreign currency per U.S. dollar
C.Some futures prices are always quoted as the number of U.S. dollars per unit of the foreign
currency and some are always quoted the other way round
D.There are no quotation conventions for futures prices
A
10.Which of the following describes the way the forward price of a foreign currency is quoted?
A.The number of U.S. dollars per unit of the foreign currency
B.The number of the foreign currency per U.S. dollar
C.Some forward prices are quoted as the number of U.S. dollars per unit of the foreign currency
and some are quoted the other way round
D.There are no quotation conventions for forward prices
C
11. Which of the following is NOT a reason why a short position in a stock is closed out?
A.The investor with the short position chooses to close out the position
B.The lender of the shares issues instructions to close out the position
C.The broker is no longer able to borrow shares from other clients
D.The investor does not maintain margins required on his/her margin account
B
12.Which of the following is NOT true?
A.Gold and silver are investment assets
B.Investment assets are held by significant numbers of investors for investment purposes
C.Investment assets are never held for consumption
D.The forward price of an investment asset can be obtained from the spot price, interest rates,
and the income paid on the asset
C
13.What should a trader do when the one-year forward price of an asset is too low? Assume that
the asset provides no income.
A.The trader should borrow the price of the asset, buy one unit of the asset and enter into a short
forward contract to sell the asset in one year.
B.The trader should borrow the price of the asset, buy one unit of the asset and enter into a long
forward contract to buy the asset in one year.
C.The trader should short the asset, invest the proceeds of the short sale at the risk-free rate, enter
into a short forward contract to sell the asset in one year
D.The trader should short the asset, invest the proceeds of the short sale at the risk-free rate,
enter into a long forward contract to buy the asset in one year
D
14.Which of the following is NOT true about forward and futures contracts?
A.Forward contracts are more liquid than futures contracts
B.The futures contracts are traded on exchanges while forward contracts are traded in the over-
the-counter market
C.In theory forward prices and futures prices are equal when there is no uncertainty about future
interest rates
D.Taxes and transaction costs can lead to forward and futures prices being different
A
15.As the convenience yield increases, which of the following is true?
A.The one-year futures price as a percentage of the spot price increases
B.The one-year futures price as a percentage of the spot price decreases
C.The one-year futures price as a percentage of the spot price stays the same
D.Any of the above can happen
B
16.As inventories of a commodity decline, which of the following is true?
A.The one-year futures price as a percentage of the spot price increases
B.The one-year futures price as a percentage of the spot price decreases
C.The one-year futures price as a percentage of the spot price stays the same
D.Any of the above can happen
B
17.Which of the following describes a known dividend yield on a stock?
A.The size of the dividend payments each year is known
B.Dividends per year as a percentage of today's stock price are known
C.Dividends per year as a percentage of the stock price at the time when dividends are paid are
known
D.Dividends will yield a certain return to a person buying the stock today
C
18.Which of the following is an argument used by Keynes and Hicks?
A.If hedgers hold long positions and speculators holds short positions, the futures price will tend
to be higher than the expected future spot price
B.If hedgers hold long positions and speculators holds short positions, the futures price will tend
to be lower than the expected future spot price
C.If hedgers hold long positions and speculators holds short positions, the futures price will tend
to be lower than today's spot price
D.If hedgers hold long positions and speculators holds short positions, the futures price
A
19.Which of the following describes contango?
A.The futures price is below the expected future spot price
B.The futures price is below today's spot price
C.The futures price is a declining function of the time to maturity
D.The futures price is above the expected future spot price
D
20.Which of the following is true for a consumption commodity?
A.There is no limit to how high or low the futures price can be, except that the futures price
cannot be negative
B.There is a lower limit to the futures price but no upper limit
C.There is an upper limit to the futures price but no lower limit, except that the futures price
cannot be negative
D.The futures price can be determined with reasonable accuracy from the spot price and interest
rates
C
CHAPTER 6

1. Which of following is applicable to corporate bonds in the United States?

A. Actual/360
B. Actual/Actual
C. 30/360
D. Actual/365
C
2. It is May 1. The quoted price of a bond with an Actual/Actual (in period) day count and 12%
per annum coupon (paid semiannually) in the United States is 105. It has a face value of 100 and
pays coupons on April 1 and October 1. What is the cash price?
A. 106.00
B. 106.02
C. 105.98
D. 106.04
C
3. It is May 1. The quoted price of a bond with a 30/360 day count and 12% per annum coupon
in the United States is 105. It has a face value of 100 and pays coupons on April 1 and October 1.
What is the cash price?
A. 106.00
B. 106.02
C. 105.98
D. 106.04
A
4. The most recent settlement bond futures price is 103.5. Which of the following four bonds is
cheapest to deliver?
A. Quoted bond price = 110; conversion factor = 1.0400.
B. Quoted bond price = 160; conversion factor = 1.5200.
C. Quoted bond price = 131; conversion factor = 1.2500.
D. Quoted bond price = 143; conversion factor = 1.3500.
C
5. Which of the following is NOT an option open to the party with a short position in the
Treasury bond futures contract?
A. The ability to deliver any of a number of different bonds
B. The wild card play
C. The fact that delivery can be made any time during the delivery month
D. The interest rate used in the calculation of the conversion factor
D
6. A trader enters into a long position in one Eurodollar futures contract. How much does the
trader gain when the futures price quote increases by 6 basis points?
A. $6
B. $150
C. $60
D. $600
B
7. The bonds that can be delivered in a Treasury bond futures contract are
A. Assets that provide no income
B. Assets that provide a known cash income
C. Assets that provide a known yield
D. None of the above
B
8. An ultra T-bond futures contract is one where
A. Bonds with maturities less than 3 years can be delivered
B. Bonds with maturities less than 10 years can be delivered
C. Bonds with maturities greater than 15 years can be delivered
D. Bonds with maturities greater than 25 year can be delivered
D
9. A portfolio is worth $24,000,000. The futures price for a Treasury note futures contract is 110
and each contract is for the delivery of bonds with a face value of $100,000. On the delivery date
the duration of the bond that is expected to be cheapest to deliver is 6 years and the duration of
the portfolio will be 5.5 years. How many contracts are necessary for hedging the portfolio?
A. 100
B. 200
C. 300
D. 400
B
10. Which of the following is true?
A. The futures rates calculated from a Eurodollar futures quote are always less than the
corresponding forward rate
B. The futures rates calculated from a Eurodollar futures quote are always greater than the
corresponding forward rate
C. The futures rates calculated from a Eurodollar futures quote should equal the corresponding
forward rate
D. The futures rates calculated from a Eurodollar futures quote are sometimes greater than and
sometimes less than the corresponding forward rate
B
11. How much is a basis point?
A. 1.0%
B. 0.1%
C. 0.01%
D. 0.001%
C
12. Which of the following day count conventions applies to a US Treasury bond?
A. Actual/360
B. Actual/Actual (in period)
C. 30/360
D. Actual/365
B
13. What is the quoted discount rate on a money market instrument?
A. The interest rate earned as a percentage of the final face value of a bond
B. The interest rate earned as a percentage of the initial price of a bond
C. The interest rate earned as a percentage of the average price of a bond
D. The risk-free rate used to calculate the present value of future cash flows from a bond
A
14. Which of the following is closest to the duration of a 2-year bond that pays a coupon of 8%
per annum semiannually? The yield on the bond is 10% per annum with continuous
compounding.
A. 1.82
B. 1.85
C. 1.88
D. 1.92
C
15. Which of the following is NOT true about duration?
A. It equals the years-to-maturity for a zero coupon bond
B. It equals the weighted average of payment times for a bond, where weights are proportional to
the present value of payments
C. Equals the weighted average of individual bond durations for a portfolio, where weights are
proportional to the present value of bond prices
D. The prices of two bonds with the same duration change by the same percentage amount when
interest rate moves up by 100 basis points
D
16. The conversion factor for a bond is approximately
A. The price it would have if all cash flows were discounted at 6% per annum
B. The price it would have if it paid coupons at 6% per annum
C. The price it would have if all cash flows were discounted at 8% per annum
D. The price it would have if it paid coupons at 8% per annum
A
17. The time-to-maturity of a Eurodollars futures contract is 4 years and the time-to-maturity of
the rate underlying the futures contract is 4.25 years. The standard deviation of the change in the
short term interest rate, = 0.011. What does the model in the text estimate as the difference
between the futures and the forward interest rate?
A. 0.105%
B. 0.103%
C. 0.098%
D. 0.093%
B
18. A trader uses 3-month Eurodollar futures to lock in a rate on $5 million for six months. How
many contracts are required?
A. 5
B. 10
C. 15
D. 20
B
19. In the U.S. what is the longest maturity for 3-month Eurodollar futures contracts?
A: 2 years
B: 5 years
C: 10 years
D: 20 years
C
20. Duration matching immunizes a portfolio against
A. Any parallel shift in the yield curve
B. All shifts in the yield curve
C. Changes in the steepness of the yield curve
D. Small parallel shifts in the yield curve
D

1. A company can invest funds for five years at LIBOR minus 30 basis points. The five-year
swap rate is 3%. What fixed rate of interest can the company earn by using the swap?
A. 2.4%
B. 2.7%
C. 3.0%
D. 3.3%
B. 2.7%
When the company invests at LIBOR minus 0.3% and then enters into a swap where it pays
LIBOR and receives 3% it earns 2.7% per annum. Note that it is the bid rate that will apply to the
swap.
2. Which of the following is true?
A. Principals are not usually exchanged in a currency swap
B. The principal amounts usually flow in the opposite direction to interest payments at the
beginning of a currency swap and in the same direction as interest payments at the end of the
swap.
C. The principal amounts usually flow in the same direction as interest payments at the
beginning of a currency swap and in the opposite direction to interest payments at the end of the
swap.
D. Principals are not usually specified in a currency swap
B. The principal amounts usually flow in the opposite direction to interest payments at the
beginning of a currency swap and in the same direction as interest payments at the end of
the swap.
The correct answer is B. There are two principals in a currency swap, one for each currency.
They flow in the opposite direction to the corresponding interest payments at the beginning of
the life of the swap and in the same direction as the corresponding interest payments at the end of
the life of the swap.
3. Company X and Company Y have been offered the following rates
Fixed Rate Floating Rate
Company X 3.5% 3-month LIBOR plus 10bp
Company Y 4.5% 3-month LIBOR plus 30 bp
Suppose that Company X borrows fixed and company Y borrows floating. If they enter into a
swap with each other where the apparent benefits are shared equally, what is company X's
effective borrowing rate?
A. 3-month LIBOR−30bp
B. 3.1%
C. 3-month LIBOR−10bp
D. 3.3%
A. 3-month LIBOR−30bp
The interest rate differential between the fixed rates is 100 basis points. The interest rate
differential between the floating rates is 20 basis points. The difference between the interest rates
differentials is 100 - 20 = 80 basis points. This is the total apparent gain from the swap to the two
sides. Since the benefits are shared equally company X should be able to borrow at 40 bp less
than it is currently offered in the floating rate market, i.e., at LIBOR minus 30 bp.
4. Which of the following describes the five-year swap rate?
A. The fixed rate of interest which a swap market maker is prepared to pay in exchange for
LIBOR on a 5-year swap
B. The fixed rate of interest which a swap market maker is prepared to receive in exchange for
LIBOR on a 5-year swap
C. The average of A and B
D. The higher of A and B
C. The average of A and B
The swap rate is the average of the bid swap rate (i.e. A) and the offer swap rate (i.e. B)
5. Which of the following is a use of a currency swap?
A. To exchange an investment in one currency for an investment in another currency
B. To exchange borrowing in one currency for borrowings in another currency
C. To take advantage situations where the tax rates in two countries are different
D. All of the above
D. All of the above
A currency swap can be used for any of A, B, and C.
6. The reference entity in a credit default swap is
A. The buyer of protection
B. The seller of protection
C. The company or country whose default is being insured against
D. None of the above
C. The company or country whose default is being insured against
In a credit default swap the buyer of protection pays a CDS spread to the seller of protection and
the protection seller has to make a payoff if there is a default by the reference entity.
7. Which of the following describes an interest rate swap?
A. The exchange of a fixed rate bond for a floating rate bond
B. A portfolio of forward rate agreements
C. An agreement to exchange interest at a fixed rate for interest at a floating rate
D. All of the above
D. All of the above
The answer is D because all of A, B, and C are true for an interest rate swap.
8. Which of the following is true for an interest rate swap?
A. A swap is usually worth close to zero when it is first negotiated
B. Each forward rate agreement underlying a swap is worth close to zero when the swap is first
entered into
C. Comparative advantage is a valid reason for entering into the swap
D. None of the above
A. A swap is usually worth close to zero when it is first negotiated
A swap is worth close to zero at the beginning of its life. (It may not be worth exactly zero
because of the impact of the market maker's bid-offer spread.) It is not true that each of the
forward contracts underlying the swap are worth zero. (The sum of the value of the forward
contracts is zero, but this does not mean that each one is worth zero.) The remaining floating
payments on a swap are worth the notional principal immediately after a swap payment date, but
this is not necessarily true for the remaining fixed payments.
9. Which of the following is true for the party paying fixed in a newly negotiated interest rate
swap when the yield curve is upward sloping?
A. The early forward contracts underlying the swap have a positive value and the later ones have
a negative value
B. The early forward contracts underlying the swap have a negative value and the later ones have
A. Positive value
C. The swap is designed so that all forward contracts have zero value
D. Sometimes A is true and sometimes B is true
B. The early forward contracts underlying the swap have a negative value and the later ones have
A. Positive value
The forward contracts are contracts where fixed is paid and floating is received. They can be
valued assuming that forward rates are realized. Forward rates increase with maturity. This
means that the value of the forward contracts increase with maturity. The total value of the
forward contracts is zero. This means that the value of the early contracts is negative and the
value of the later contracts is positive.
10. A bank enters into a 3-year swap with company X where it pays LIBOR and receives 3.00%.
It enters into an offsetting swap with company Y where is receives LIBOR and pays 2.95%.
Which of the following is true:
A. If company X defaults, the swap with company Y is null and void
B. If company X defaults, the bank will be able to replace company X at no cost
C. If company X defaults, the swap with company Y continues
D. The bank's bid-offer spread is 0.5 basis points
C. If company X defaults, the swap with company Y continues
The bank`s bid-offer spread is 5 basis points not 0.5 basis points. The bank has quite separate
transactions with X and Y. If one defaults, it still has to honor the swap with the other.
11. When LIBOR is used as the discount rate:
A. A swap is worth zero immediately after a payment date
B. A swap is worth zero immediately before a payment date
C. The floating rate bond underlying a swap is worth par immediately after a payment date
D. The floating rate bond underlying a swap is worth par immediately before a payment date
C. The floating rate bond underlying a swap is worth par immediately after a payment
date
The value of the floating rate bond underlying an interest rate swap is worth par immediately
after a swap payment date. This result is used when the swap is valued as the difference between
two bonds.
12. A company enters into an interest rate swap where it is paying fixed and receiving LIBOR.
When interest rates increase, which of the following is true?
A. The value of the swap to the company increases
B. The value of the swap to the company decreases
C. The value of the swap can either increase or decrease
D. The value of the swap does not change providing the swap rate remains the same
A. The value of the swap to the company increases
It is receiving the floating rate. When interest rates increase the floating rate can be expected to
be higher and so the swap becomes more valuable. The answer is therefore A.
13. A floating for floating currency swap is equivalent to
A. Two interest rate swaps, one in each currency
B. A fixed-for-fixed currency swap and one interest rate swap
C. A fixed-for-fixed currency swap and two interest rate swaps, one in each currency
D. None of the above
C. A fixed-for-fixed currency swap and two interest rate swaps, one in each currency
A floating-for-floating currency swap where the currency paid is X and the currency received is
Y is equivalent to (a) a fixed-for-fixed currency swap where, say, 5% in currency X is paid and
say, say, 4% in currency Y is received, (b) a regular interest rate swap where 5% in currency X is
received and floating in currency X is paid and (c) a regular interest rate swap where 4% in
currency Y is paid and floating in currency Y is received.
14. A floating-for-fixed currency swap is equivalent to
A. Two interest rate swaps, one in each currency
B. A fixed-for-fixed currency swap and one interest rate swap
C. A fixed-for-fixed currency swap and two interest rate swaps, one in each currency
D. None of the above
B. A fixed-for-fixed currency swap and one interest rate swap
A floating-for-fixed currency swap where the floating rate is paid in currency X and the fixed
rate is received in currency Y is equivalent to (a) a fixed-for-fixed currency swap where, say, 5%
in currency X is paid and the fixed rate in currency Y is received, (b) a regular interest rate swap
where 5% in currency X is received and floating in currency X is paid.
15. An interest rate swap has three years of remaining life. Payments are exchanged annually.
Interest at 3% is paid and 12-month LIBOR is received. A exchange of payments has just taken
place. The one-year, two-year and three-year LIBOR/swap zero rates are 2%, 3% and 4%. All
rates an annually compounded. What is the value of the swap as a percentage of the principal
when LIBOR discounting is used.
A. 0.00%
B. 2.66%
C. 2.06%
D. 1.06%
B. 2.66%
Suppose the principal 100. The value of the floating rate bond underlying the swap is 100. The
value of the fixed rate bond is 3/1.02+3/(1.03)2+103/(1.04)3=97.34. The value of the swap is
therefore 100−97.34 = 2.66 or 2.66% of the principal
16. A semi-annual pay interest rate swap where the fixed rate is 5.00% (with semi-annual
compounding) has a remaining life of nine months. The six-month LIBOR rate observed three
months ago was 4.85% with semi-annual compounding. Today's three and nine month LIBOR
rates are 5.3% and 5.8% (continuously compounded) respectively. From this it can be calculated
that the forward LIBOR rate for the period between three- and nine-months is 6.14% with semi-
annual compounding. If the swap has a principal value of $15,000,000, what is closest to the
value of the swap to the party receiving a fixed rate of interest?
B. −$70,760
The forward rates for the floating payment at time 9 months is 6.14%. The swap can be valued
assuming that the fixed payments are 2.5% of principal at 3 months and 9 months and that the
floating payments are 2.425% and 3.07% of the principal at 3 months and 9 months. The value of
the swap to the party receiving fixed is therefore
15,000,000(0.025-0.02425)e-0.053×0.25+15,000,000(0.025-0.0307)e-0.058×0.75 = -$70,760
17. Which of the following describes the way a LIBOR-in-arrears swap differs from a plain
vanilla interest rate swap?
A. Interest is paid at the beginning of the accrual period in a LIBOR-in-arrears swap
B. Interest is paid at the end of the accrual period in a LIBOR-in-arrears swap
C. No floating interest is paid until the end of the life of the swap in a LIBOR-in-arrears swap,
but fixed payments are made throughout the life of the swap
D. Neither floating nor fixed payments are made until the end of the life of the swap
A. Interest is paid at the beginning of the accrual period in a LIBOR-in-arrears swap
In a LIBOR-in-arrears swap interest is observed for an accrual period and paid at the beginning
of that accrual period (not at the end of the accrual period which is normal)
18. In a fixed-for-fixed currency swap, 3% on a US dollar principal of $150 million is received
and 4% on a British pound principal of 100 million pounds is paid. The current exchange rate is
1.55 dollar per pound. Interest rates in both countries for all maturities are currently 5%
(continuously compounded). Payments are exchanged every year. The swap has 2.5 years left in
its life. What is the value of the swap?
A. −$7.15
B. −$8.15
C. −$9.15
D. −$10.15
C. −$9.15
The value of the British pound bond underlying the swap is in millions of pounds
4e-0.05×0.5+4e-0.05×1.5+104e-0.05×2.5 = 99.39
The value of the U.S. dollar bond is in millions of dollars
4.5e-0.05×0.5+4.5e-0.05×1.5+154.5e-0.05×2.5 = 144.91
The value of the swap is 144.91 - 99.39×1.55 = -9.15
19. Which of the following is a typical bid-offer spread on the swap rate for a plain vanilla
interest rate swap?
A. 3 basis points
B. 8 basis points
C. 13 basis points
D. 18 basis points
A. 3 basis points
3 basis points is a typical spread between the bid and the offer on a plain vanilla interest rate
swap.
20. Which of the following describes the five-year swap rate?
A. The rate on a five-year loan to a AA-rated company
B. The rate on a five-year loan to an A-rated company
C. The rate that can be earned over five years from a series of short-term loans to AA-rated
companies
D. The rate that can be earned over five years from a series of short-term loans to A-rated
companies
C. The rate that can be earned over five years from a series of short-term loans to AA-
rated companies
By considering the effect of making a series of LIBOR loans to AA-rated companies and
entering into a swap we see that the swap rate corresponds to the risk in a series of short-term
loans.

CHAPTER 7

Which of the following describes a call option?

A. The right to buy an asset for a certain price
B. The obligation to buy an asset for a certain price
C. The right to sell an asset for a certain price
D. The obligation to sell an asset for a certain price
A
Which of the following is true?
A. A long call is the same as a short put
B. A short call is the same as a long put
C. A call on a stock plus a stock is the same as a put
D. None of the above
D
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 six months
D. A position where an option has been sold
D
Which of the following describes a difference between a warrant and an exchange-traded stock
option?
A. In a warrant issue, someone has guaranteed the performance of the option seller in the event
that the option is exercised
B. The number of warrants is fixed whereas the number of exchange-traded options in existence
depends on trading
C. Exchange-traded stock options have a strike price
D. Warrants cannot be traded after they have been purchased
B
Which of the following is an example of an option class?
A. All calls on a certain stock
B. All calls with a particular strike price on a certain stock
C. All calls with a particular time to maturity on a certain stock
D. All calls with a particular time to maturity and strike price on a certain stock
A
Which of the following must post margin?
A. The seller of an option
B. The buyer of an option
C. The seller and the buyer of an option
D. Neither the seller nor the buyer of an option
A
Which of the following describes a long position in an option?
A. A position where there is more than one year to maturity
B. A position where there is more than five years to maturity
C. A position where an option has been purchased
D. A position that has been held for a long time
C
When a six-month option is purchased
A. The price must be paid in full
B. Up to 25% of the option price can be borrowed using a margin account
C. Up to 50% of the option price can be borrowed using a margin account
D. Up to 75% of the option price can be borrowed using a margin account
A
A trader buys a call and sells a put with the same strike price and maturity date. What is the
position equivalent to?
A. A long forward
B. A short forward
C. Buying the asset
D. None of the above
A
Consider a put option and a call option with the same strike price and time to maturity. Which of
the following is true?
A. It is possible for both options to be in the money
B. It is possible for both options to be out of the money
C. One of the options must be in the money
D. One of the options must be either in the money or at the money
D

CHAPTER 8

1.When the stock price increases with all else remaining the same, which of the following is
true?
Both calls and puts increase in value
Both calls and puts decrease in value
Calls increase in value while puts decrease in value
Puts increase in value while calls decrease in value
C
2.When the strike price increases with all else remaining the same, which of the following is
true?
Both calls and puts increase in value
Both calls and puts decrease in value
Calls increase in value while puts decrease in value
Puts increase in value while calls decrease in value
D
3.When volatility increases with all else remaining the same, which of the following is true?
Both calls and puts increase in value
Both calls and puts decrease in value
Calls increase in value while puts decrease in value
Puts increase in value while calls decrease in value
A
4.When dividends increase with all else remaining the same, which of the following is true?
Both calls and puts increase in value
Both calls and puts decrease in value
Calls increase in value while puts decrease in value
Puts increase in value while calls decrease in value
D
5.When interest rates increase with all else remaining the same, which of the following is true?
Both calls and puts increase in value
Both calls and puts decrease in value
Calls increase in value while puts decrease in value
Puts increase in value while calls decrease in value
C
6.When the time to maturity increases with all else remaining the same, which of the following is
true?
European options always increase in value
The value of European options either stays the same or increases
There is no effect on European option values
European options are liable to increase or decrease in value
D
7.The price of a stock, which pays no dividends, is $30 and the strike price of a one year
European call option on the stock is $25. The risk‐free rate is 4% (continuously compounded).
Which of the following is a lower bound for the option such that there are arbitrage opportunities
if the price is below the lower bound and no arbitrage opportunities if it is above the lower
bound?
A. $5.00 B. $5.98 C. $4.98 D. $3.98
B

8.A stock price (which pays no dividends) is $50 and the strike price of a two year European put
option is $54. The risk‐free rate is 3% (continuously compounded). Which of the following is a
lower bound for the option such that there are arbitrage opportunities if the price is below the
lower bound and no arbitrage opportunities if it is above the lower bound?
A. $4.00 B. $3.86 C. $2.86 D. $0.86
D
9.Which of the following is NOT true? (Present values are calculated from the end of the life of
the option to the beginning.)
An American put option is always worth less than the present value of the strike price
A European put option is always worth less than the present value of the strike price
A European call option is always worth less than the stock price
An American call option is always worth less than the stock price
A
10.Which of the following best describes the intrinsic value of an option?
The value it would have if the owner had to exercise it immediately or not at all
The Black‐Scholes‐Merton price of the option
The lower bound for the option's price
The amount paid for the option
A
11.Which of the following describes a situation where an American put option on a stock
becomes more likely to be exercised early?
Expected dividends increase
Interest rates decrease
The stock price volatility decreases
All of the above
C
12.Which of the following is true?
An American call option on a stock should never be exercised early
An American call option on a stock should never be exercised early when no dividends are
expected
There is always some chance that an American call option on a stock will be exercised early
There is always some chance that an American call option on a stock will be exercise dearly
when no dividends are expected
B
13.Which of the following is the put‐call parity result for a non‐dividend‐paying stock?
The European put price plus the European call price must equal the stock price plus the present
value of the strike price
The European put price plus the present value of the strike price must equal the European call
price plus the stock price
The European put price plus the stock price must equal the European call price plus the strike
price
The European put price plus the stock price must equal the European call price plus the present
value of the strike price
D
14.Which of the following is true when dividends are expected?
Put‐call parity does not hold
The basic put‐call parity formula can be adjusted by subtracting the present value of expected
dividends from the stock price
The basic put‐call parity formula can be adjusted by adding the present value of expected
dividends to the stock price
The basic put‐call parity formula can be adjusted by subtracting the dividend yield from the
interest rate
B
15.The price of a European call option on a non‐dividend‐paying stock with a strike price of $50
is $6. The stock price is $51, the continuously compounded risk‐free rate (all maturities) is 6%
and the time to maturity is one year. What is the price of a one ‐year European put option on the
stock with a strike price of $50?
A. $9.91 B. $7.00 C. $6.00 D. $2.09
D
The price of a European call option on a stock with a strike price of $50 is $6. The stock price is
$51, the continuously compounded risk‐free rate (all maturities) is 6% and the time to maturity is
one year. A dividend of $1 is expected in six months. What is the price of a one ‐year European
put option on the stock with a strike price of $50?
A. $8.97 B. $6.97 C. $3.06 D. $1.12
C
16.A European call and a European put on a stock have the same strike price and time to
maturity. At 10:00am on a certain day, the price of the call is $3 and the price of the put is $4. At
10:01am news reaches the market that has no effect on the stock price or interest rates, but
increases volatilities. As a result the price of the call changes to $4.50. Which of the following is
correct?
The put price increases to $6.00
The put price decreases to $2.00
The put price increases to $5.50
It is possible that there is no effect on the put price
C
17.Interest rates are zero. A European call with a strike price of $50 and a maturity of one year is
worth $6. A European put with a strike price of $50 and a maturity of one year is worth $7. The
current stock price is $49. Which of the following is true?
The call price is high relative to the put price
The put price is high relative to the call price
Both the call and put must be mispriced
None of the above
D
18.Which of the following is true for American options?
Put‐call parity provides an upper and lower bound for the difference between call and put prices
Put call parity provides an upper bound but no lower bound for the difference between call and
put prices
Put call parity provides an lower bound but no upper bound for the difference between call and
put prices
There are no put‐call parity results
A
19.Which of the following can be used to create a long position in a European put option on a
stock?
Buy a call option on the stock and buy the stock
Buy a call on the stock and short the stock
Sell a call option on the stock and buy the stock
Sell a call option on the stock and sell the stock
B
CHAPTER 9

1. Which of the following creates a bull spread?

A. Buy a low strike price call and sell a high strike price call
B. Buy a high strike price call and sell a low strike price call
C. Buy a low strike price call and sell a high strike price put
D. Buy a low strike price put and sell a high strike price call
A
2. Which of the following creates a bear spread?
A. Buy a low strike price call and sell a high strike price call
B. Buy a high strike price call and sell a low strike price call
C. Buy a low strike price call and sell a high strike price put
D. Buy a low strike price put and sell a high strike price call
B
3. 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
A
4.Which of the following creates a bear 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
B
5. What is the number of different option series used in creating a butterfly spread?
A. 1
B. 2
C. 3
D. 4
C
6. A stock price is currently $23. A reverse (i.e short) butterfly spread is created from options
with strike prices of $20, $25, and $30. Which of the following is true?
A. The gain when the stock price is greater that $30 is less than the gain when the stock price is
less than $20
B. The gain when the stock price is greater that $30 is greater than the gain when the stock price
is less than $20
C. The gain when the stock price is greater that $30 is the same as the gain when the stock price
is less than $20
D. It is incorrect to assume that there is always a gain when the stock price is greater than $30 or
less than $20
C
7. Which of the following is correct?
A. A calendar spread can be created by buying a call and selling a put when the strike prices are
the same and the times to maturity are different
B. A calendar spread can be created by buying a put and selling a call when the strike prices are
the same and the times to maturity are different
C. A calendar spread can be created by buying a call and selling a call when the strike prices are
different and the times to maturity are different
D. A calendar spread can be created by buying a call and selling a call when the strike prices are
the same and the times to maturity are different
D
8. What is a description of the trading strategy where an investor sells a 3-month call option and
buys a one-year call option, where both options have a strike price of $100 and the underlying
stock price is $75?
A. Neutral Calendar Spread
B. Bullish Calendar Spread
C. Bearish Calendar Spread
D. None of the above
B
9. Which of the following is correct?
A. A diagonal spread can be created by buying a call and selling a put when the strike prices are
the same and the times to maturity are different
B. A diagonal spread can be created by buying a put and selling a call when the strike prices are
the same and the times to maturity are different
C. A diagonal spread can be created by buying a call and selling a call when the strike prices are
different and the times to maturity are different
D. A diagonal spread can be created by buying a call and selling a call when the strike prices are
the same and the times to maturity are different
C
10. Which of the following is true of a box spread?
A. It is a package consisting of a bull spread and a bear spread
B. It involves two call options and two put options
C. It has a known value at maturity
D. All of the above
D
11. How can a straddle 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
A
12. 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
C
13. How can a strap 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
D
14. How can a strangle 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
B
15. Which of the following describes a protective put?
A. A long put option on a stock plus a long position in the stock
B. A long put option on a stock plus a short position in the stock
C. A short put option on a stock plus a short call option on the stock
D. A short put option on a stock plus a long position in the stock
A
16. Which of the following describes a covered call?
A. A long call option on a stock plus a long position in the stock
B. A long call option on a stock plus a short put option on the stock
C. A short call option on a stock plus a short position in the stock
D. A short call option on a stock plus a long position in the stock
D
17. When the interest rate is 5% per annum with continuous compounding, which of the
following creates a principal protected note worth $1000?
A. A one-year zero-coupon bond plus a one-year call option worth about $59
B. A one-year zero-coupon bond plus a one-year call option worth about $49
C. A one-year zero-coupon bond plus a one-year call option worth about $39
D. A one-year zero-coupon bond plus a one-year call option worth about $29
B
18. A trader creates a long butterfly spread from options with strike prices $60, $65, and $70 by
trading a total of 400 options. The options are worth $11, $14, and $18. What is the maximum
net gain (after the cost of the options is taken into account)?
A. $100
B. $200
C. $300
D. $400
D
19. A trader creates a long butterfly spread from options with strike prices $60, $65, and $70 by
trading a total of 400 options. The options are worth $11, $14, and $18. What is the maximum
net loss (after the cost of the options is taken into account)?
A. $100
B. $200
C. $300
D. $400
A
20. Six-month call options with strike prices of $35 and $40 cost $6 and $4, respectively. What is
the maximum gain when a bull spread is created by trading a total of 200 options?
A. $100
B. $200
C. $300
D. $400
C