exam: 081061RR - Futures and Options
1. Which of the following best describes a speculator?
A. An investor who accepts the risk of loss for the chance to earn a profit
B. An investor who purchases government bonds
C. An investor who purchases Treasury bills
D. An investor who invests only in risk-free securities
2. A 3-month put has a strike price of $50 and an option premium of $3.10. The underlying stock is selling for $47.80 per share. What is the time value of the put?
A. $0
B. $2.20
C. $1.10
D. $.90
3. Which one of the following is the primary purpose of a protective put?
A. guarantee a higher return than is possible from just owning the underlying security
B. increase in potential rate of return due to increase in risk
C. profit from an expected future increase in the underlying stock's value
D. offset the risk associated with a decrease in the value of the underlying asset
4. Your broker requires an initial margin of $7,050 per futures contract on wheat and a maintenance margin of $5,000 per contract. Wheat futures contracts are based on 5,000 bushels and quoted in cents per bushel. You sold one wheat futures contract yesterday at the closing settlement price quote of 723. Today, the settlement quote is 854. Will you receive a margin call and if so, for what amount? All margin calls restore the margin level to its initial level.
A. Yes; $550
B. No
C. Yes; $4,500
D. Yes; $6,550
5. If spot-futures parity exists for an index future then the future price must equal the
A. present value of the spot price at the risk-free rate.
B. spot price.
C. future value of the spot price at the market rate.
D. future value of the spot price at the risk-free rate.
6. You wrote a $40 call option on a stock that has a market price of $43. Which one of the following statements must be correct if the option expires three months from now?
A. Your option payoff will increase if the market price of the stock increases.
B. Your option currently has zero intrinsic value.
C. If the market price remains stable, you will make the decision to exercise this option prior to expiration.
D. Your option currently has a negative payoff.
7. In 2007, the Chicago Mercantile Exchange merged with which one of the following exchanges?
A. Intercontinental Exchange
B. New York Futures Exchange
C. Chicago Board of Trade
D. New York Board of Trade
8. What's another name for the spot market?
A. Forward market
B. Options market
C. Cash market
D. Contango
9. Which one of the following statements related to futures contracts is correct?
A. Futures contracts can be cancelled by either the buyer or the seller with 10 days notice to the other party.
B. The buyer of the contract has the right to either accept delivery or cancel the contract.
C. Both the buyer and the seller of the contract are obligated to fulfill their duties as outlined in the futures contract.
D. The buyer of the contract has a short position.
10. The Country Farm and the Cookie Maker met today and agreed to exchange wheat six months from now at a price which they negotiated today. This agreement was made between the two firms and did not pass through an organized exchange. Which one of the following best describes this transaction?
A. Cash market
B. Futures contract
C. CME transaction
D. Forward contract
11. A combination is an option trading strategy that uses
A. both writing and buying call options.
B. two or more put options.
C. two or more call options.
D. both put and call options.
12. Suppose you manage an $858 million bond portfolio with a duration of 7.32 years. You want to hedge the portfolio with Treasury note futures that have a duration of 7.68 years and a futures price of 114. U.S. Treasury note futures contracts are based on a par value of $100,000 and quoted a percentage of par. How many contracts will you need to sell to complete this hedge?
A. 7,532 contracts
B. 9,391 contracts
C. 8,236 contracts
D. 7,174 contracts
13. Which of the following is the market in which financial instruments or commodities are traded for immediate delivery?
A. futures market
B. arbitrage market
C. current basis market
D. cash market
14. Which of the following statements defines a European-style option?
A. An option that can only be exercised at expiration
B. An option that can be exercised at any time
C. An option that's in-the-money
D. An option that's out-of-the-money
15. What's the difference between the cash and futures price of a commodity?
A. Margin
B. Forward
C. Basis
D. Spot
16. Suppose you purchased 10 call options on a stock with a strike price of $55.00. On the expiration date, the stock was priced at $54.58 a share. What is the total payoff on your purchase of the option contracts?
A. $0
B. $530
C. –$5,500
D. $42
17. Silver is currently trading for $18.32 an ounce, while the six- month futures price is $18.54. If you believe that silver will actually sell for $18.89 in six months, which of the following positions in silver should you take today?
A. Take a short position in the futures market
B. Take a long position in the future market
C. Sell in the future market
D. Take a short position in the spot market
18. The T-Shirt Factory purchased 12 futures contracts on cotton at a quoted price of 55.50 as a hedge against its inventory needs. At the time it actually needed the cotton, the spot price was 56.10. Cotton futures are based on 50,000 pounds and quoted in cents per pound. How much did the Shirt Factory save by hedging cotton?
A. $3,600
B. $560
C. $2,400
D. $1,280
19. You own a portfolio which is valued at $10 million and has a beta of 1.5. You would like to create a riskless portfolio by hedging using S&P 500 futures contracts. The contract size is $250 times the index level. How many futures contracts do you need to acquire if the current S&P 500 index is 1500?
A. short 40 contracts
B. long 30 contracts
C. short 50 contracts
D. long 25 contracts
20. Suppose you own 300 shares of a stock which is currently worth $18 a share. You just paid an option premium of $.65 to buy one put contract on this stock with a strike price of $15. What's the maximum loss per share you are avoiding by purchasing the option contract?
A. $15.65
B. $15
C. $13
D. $18
