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Question 1 of 30
1. Question
Your simple derivatives portfolio holds two short positions: you are short a forward contract with a delivery price of $30.00, and you are short a put option with a strike price of $30.00. Both have identical maturities. Which of the positions below has the same payoff (not profit)?
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Question 2 of 30
2. Question
Ceteris paribus, each of the following can be expected to associate with an increase in the price of a futures contract EXCEPT for which?
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Question 3 of 30
3. Question
A trader buys three December futures contract on Corn while each contract is for the delivery of 5,000 bushels. The current futures price is $4.00 (400 cents) per bushel. The initial margin is $2,000 per contract and the maintenance margin is $1,500 per contract. What is the minimum fall required to trigger a margin call?
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Question 4 of 30
4. Question
Starbuckaroos is a coffee producer who is committed to the purchase of one million (1,000,000) pounds of coffee in November. The company will hedge this planned purchase with Coffee future contracts; each contract is for the delivery of 37,500 pounds. The daily standard deviation (volatility) of the spot price of coffee is three cents ($0.03) while the daily standard deviation of the coffee futures contract is four cents ($0.04). The correlation between the futures price change and the spot price change is 0.70. Which is nearest to Starbuckaroos desired hedge transaction?
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Question 5 of 30
5. Question
A Portfolio Manager has a $50.0 million portfolio with a beta of 1.360. The manager wants to reduce the net beta of the portfolio to 1.00 by employing futures contracts on the S&P 500. The index futures contract currently trades at 1990; as usual, each contract is for delivery of $250 times the index. Which is nearest to the manager’s desired trade?
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Question 6 of 30
6. Question
It is June and you manage a long bond portfolio with a value of $20.0 million. You expect the duration of the portfolio will be 6.90 years in December, six months from today. You want to hedge against an increase in interest rates by employing U.S. Treasure bond futures contracts. The December Treasury bond futures price is currently 13728 (aka, 137’28) and you expect the cheapesttodeliver bond will have a duration of 5.70 years in December. Which is nearest to the hedge trade?
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Question 7 of 30
7. Question
Assume a corporate bond with a face value of $1,000 that pays a semiannual coupon (coupons pay January and July 1st) with a 12.0% coupon rate. The bond settles on June 13th, 2014 and matures, more than six years later, on July 1st, 2020. At the current traded price, the bond’s yield (YTM) is 10.0%. Which is NEAREST to the bond’s quoted (aka, clean) price? (Hint: the TI BA II+ calculator only computes a full/dirty price so you need to compute the full price at that last coupon date, compound the price forward to the settlement date and infer the quoted price from this full price at settlement.)
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Question 8 of 30
8. Question
Your colleague Peter is comparing two investments, either of which require an initial cash outlay of $1,000:
 A long position in one (1) Eurodollar futures contract with initial quote of 97.00. The contract is closed 90 days later, after the quoted price will have increased to 97.50 (i.e., he is going to assume he knows this). The initial margin is $1,000 per contract. To simplify his calculations, he will assume no interim cash flows: although this futures contract would settle daily, his calculation will assume neither margin calls nor interim
excess margin withdrawals.  The cash purchase of $1,000 worth of 90day US Treasury bills with an initial quote of 6.00. Note the face value of this purchase will be greater than $1,000 as the US Treasury bill is a socalled discount instrument.
For return calculation purposes, both investments involve ONLY two cash flows: the initial $1,000 outflow and an inflow 90 days later (where we ignore any interim daily settlement in the case of the Eurodollar futures contract). In the case of the futures contract, the cash inflow is the return of margin plus any cumulative gain. In the case of the Treasury bill, the cash inflow is simply the return of the par value at maturity. In this case of full knowledge, where the he knows the futures quote will increase to 97.50 and the Treasury bill maturity is known, he wants to compare returns on the two investment. Which investment has a superior return?
CorrectIncorrect  A long position in one (1) Eurodollar futures contract with initial quote of 97.00. The contract is closed 90 days later, after the quoted price will have increased to 97.50 (i.e., he is going to assume he knows this). The initial margin is $1,000 per contract. To simplify his calculations, he will assume no interim cash flows: although this futures contract would settle daily, his calculation will assume neither margin calls nor interim

Question 9 of 30
9. Question
Suppose the Treasury bond futures settlement price is $98.250 and there are four bonds eligible for delivery, as listed below:
Which bond is the cheapest to deliver (CTD)?
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Question 10 of 30
10. Question
The spot price of silver is $20.00 per ounce. The storage cost is $3.00 per ounce per year payable quarterly in arrears. The riskfree interest rate is flat at 3.0% per annum with continuous compounding. Further, you have determined that the owning silver confers a convenience yield of 0.20% (20 basis points) per month with continuous compounding. Which is nearest to the theoretical futures price of silver for delivery in six months?
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Question 11 of 30
11. Question
The spot price of the Euro is USD $1.280 per 1.0 EUR; i.e., EUR/USD = $1.280 where EUR is the base currency and USD is the quote currency. Riskfree interest rates are flat for all maturities, with continuous compounding: 1.00% for USD and 3.00% for EUR. Which is nearest to the theoretical fouryear EUR/USD forward exchange rate?
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Question 12 of 30
12. Question
The spot price of oil is $100.00 per barrel and the oneyear futures price is $98.22 per barrel. Storage costs is 3.00% per annum and the riskfree rate is 1.20% per annum, both with continuous compounding. Which is nearest to the implied convenience yield?
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Question 13 of 30
13. Question
In an interest rate swap with semiannual payments, StreetBase Bank has agreed to pay a fixed rate of 4.0% per annum with semiannual compounding and receive sixmonth LIBOR on a notional of USD 100 million. The swap has remaining maturity of 15 months. The LIBOR curve is flat at 2.0% per annum with continuous compounding for all maturities (out to 15 months), including the sixmonth LIBOR at the last payment date was also 2.0% (but with semiannual compounding). Which is nearest to the value of the swap to StreetBase Bank?
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Question 14 of 30
14. Question
A currency swap with a remaining life of 15 months exchanges payments once a year: interest at 10.0% on EUR €70 million is exchanged for interest at 5.0% on USD $100 million. The term structure of rates is currently flat in the Eurozone and the United States. If the swap were negotiated today the interest exchanges would be 4.0% in dollars and 3.0% in euros. All interest rates are quoted with annual compounding. The current EUR/USD exchange rate is $1.25 with EUR as base and USD as quote currency; that is, $1.25 “quote” dollars per €1.0 “base” euro. Which is nearest to the value of the currency swap to the counterparty who is paying US dollars?
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Question 15 of 30
15. Question
Four years ago, Cantrans Bank entered into a fiveyear interest rate swap with a counterparty. Payments are made every six months on a notional amount of $100.0 million. It is currently the end of the fourth year but the counterparty is defaulting on this payment; i.e., the counterparty will not make this eighth swap payment (out of ten total payments during the swap’s life). Under the swap’s terms, Cantrans receives a fixed rate of 4.0% per annum and pays sixmonth LIBOR. Six months ago, the sixmonth LIBOR was 3.0% per annum with semiannual compounding but the LIBOR has since shifted down and is now flat at 2.0% for all maturities with semiannual compounding. Which is nearest to the loss experienced by Cantrans Bank (aka, its credit exposure)?
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Question 16 of 30
16. Question
Two European options, a call and a put, have the same strike price and maturity. The value of the call option is $3.26 and the value of the put option is $4.01. The riskfree rate is 3.0%. What are the lower bounds, respectively, of the call and put?
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Question 17 of 30
17. Question
About the value of European options and the advisability of early exercise of American options, each of the following is a true statement EXCEPT which is false?
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Question 18 of 30
18. Question
The riskfree rate is 3.0% per annum while the current price of a nondividendpaying stock is $56.00. An underwater (OTM) European put option on the stock has a strike price of $42.00 and maturity of one year; the value of this European put is $1.06. Which is nearest to the value of a European call option with the same strike price ($42.00; i.e., an inthe money call option) and oneyear maturity?
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Question 19 of 30
19. Question
A nondividendpaying stock currently trades for $100.00. An atthemoney call option (strike = $100) on the stock trades for $17.00. An atthemoney put option (strike = $100) on the stock trades for $12.89. Both options have one year maturities. Which is nearest to the implied riskfree rate with continuous compounding?
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Question 20 of 30
20. Question
A stock currently trades at $50.00. Consider the following four options on the stock:
 An inthemoney (ITM) European call option (on the stock) with a strike price of $48.00 has a price of $6.00.
 An out ofthemoney (OTM) European call option with a strike price of $52.00 has a price of $4.00.
 An outofthemoney (OTM) European put option with a strike price of $48.00 has a price of $2.19
 An inthemoney (ITM) European put option with a strike price of $52.00 has a price of $3.96
Please note that option profit equals the payoff minus the initial cost, such the profit is net cash flows without regard to the time value of money. If we consider only spread trades that use the above option(s), each of the following is true about such spread trades EXCEPT which is false?
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Question 21 of 30
21. Question
A stock currently trades at $40.00. An atthemoney call option (strike = $40.00) is priced at $4.00 while an atthemoney put option is priced at $2.40. Asset net profit and net loss includes the initial premiums without regard to the time value of money. If you take a long straddle position that employs these options (aka, straddle purchase, bottom straddle) what is the final stock price range that will produce a net loss?
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Question 22 of 30
22. Question
A U.S. bank borrows liabilities of $200 million that pay an interest rate of 3.0% in order to fund two investments: $100 million invested into dollardenominated assets and the remaining $100 million equivalent invested into eurodenominated assets. The expected net (of default risk) yield on the USD assets is 5.0% and the net yield on the EUR assets is 7.0%. Consequently, under an assumption of an unchanged EUR/USD currency, the expected return on the investment (ROI) is 3.0% as the difference between the blended ROA of 6.0% (average of 5.0% and 7.0%) and the cost of funds (COF) of 3.0%. However, the bank is unhedged with respect to currency risk. At the beginning of the year, the exchange rate is EUR/USD $1.25. At the end of the year, the EUR has depreciated relative to the dollar such that the exchange rate has moved to EUR/USD $1.10. The nominal returns for the year were exactly as expected.
If the EUR/USD FX rate were unchanged, the ROI on the funded $200 million would have been 3.0%. Instead, given the euro’s depreciation, which is nearest to the realized ROI? (please assume annual compounding for all yields, consistent with assigned Saunders)
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Question 23 of 30
23. Question
A U.S. bank makes equally sized two investments: $100 million invested into dollardenominated assets and another $100 million equivalent invested into eurodenominated assets. The expected net (of default risk) yield on the USD assets is 5.0% and the net yield on the EUR assets is 7.0%. Rather than fund the entire $200 million by borrowing US dollars, the bank raises $100 million in US dollars plus another $100 million equivalent with deposits raised in euros. In this situation, the bank has both a matched maturity and currency foreign asset–liability book. The borrowed deposits both pay interest rates of 3.0%. At the beginning of the year, the exchange rate is EUR/USD $1.25. At the end of the year, the EUR has depreciated relative to the dollar such that the exchange rate has moved to EUR/USD $1.10. The nominal returns for the year were exactly as expected.
Given the euro’s depreciation and the matched book, which is nearest to the bank’s realized ROI?
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Question 24 of 30
24. Question
According to Saunders, each of the following is true EXCEPT which is false?
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Question 25 of 30
25. Question
Consider the following rating migration (aka, transition) matrix that gives the migration probabilities of corporate bonds for oneyear period:
If we can assume yeartoyear independence (“Markovian assumption”), which is nearest to the unconditional probability that a CCCrated bond (the lowest rating category short of default) will default before the end of the next two (2) years?
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Question 26 of 30
26. Question
Consider the following threeyear bond with a coupon rate of 15.0% that pays an annual coupon:
Given its market price of $114.03, the bond’s yield (yield to maturity) is 9.0% per annum with continuous compounding. Consequently, the oneyear discount factor, df(1.0), is given by exp(9%*1) = 0.914. Which is nearest to the modified duration of the bond?
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Question 27 of 30
27. Question
A $1,000 face value 5year bond that pays a 9.0% annual coupon has a Macaulay duration of 4.140 years and a modified duration of 3.600 years. If we assume an annual compound frequency (to match the annual coupon payments), which is nearest to the bond’s price?
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Question 28 of 30
28. Question
A 30year mortgage has an original balance of $160,000 and a fixed rate of 5.0% per annum with typical monthly payments. Which of the following is nearest to the principal reduced by the first month’s mortgage payment?
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Question 29 of 30
29. Question
As Tuckman explains, “Mortgage borrowers have a prepayment option, that is, the option to pay the lender the outstanding principal at any time and be freed of the obligation to make further payments.” In this way, prepayment risk is a defining characteristic of mortgages and mortgagebacked securities (MBS). Each of the following is true about prepayment risk and the prepayment option EXCEPT which is not?
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Question 30 of 30
30. Question
According to Tuckman, “A prepayment model uses loan characteristics and the economic environment (i.e., interest rates and sometimes housing prices) to predict prepayments. The most common practice identifies four components of prepayments, namely, in order of importance, refinancing, turnover, defaults, and curtailments. These components are typically modeled separately and their parameters estimated or calibrated so as to approximate available historical data.” In regard to these four components of prepayment, each of the following is true EXCEPT which is false?
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