Reading 42 Derivative Strategies FinQuiz.com FinQuiz.com © 2018 - All rights reserved. FinQuiz.com CFA Level II Item-set - Solution Study Session 14 June 2018 Copyright © 2010-2018. FinQuiz.com. All rights reserved. Copying, reproduction or redistribution of this material is strictly prohibited. [email protected]
Reading 42 Derivative Strategies FinQuiz.com FinQuiz.com © 2018 - All rights reserved. FinQuiz Level II 2018 – Item-sets Solution Reading 42: Derivative Strategies 1. Question ID: 71824 Correct Answer : B An equity swap does not involve any initial outlay but involves an agreement by one party to trade the return on a stock portfolio for the return of another asset. Therefore, this type of agreement is the cheapest in terms of required initial investment amount. Strategy 1 is relatively expensive compared to Strategy 2 as WLC will need to pay option premium to purchase call options. Initial investment outlay = $0.85/call × 1,000 calls/contract × 125 contracts = $106,250 Strategy 3 is the most expensive out of the three as the initial investment cost is $2.5 million.
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