edu-2009-fall-exam-fm-ques - SAMPLE QUESTIONS FOR...

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1 SAMPLE QUESTIONS FOR DERIVATIVES MARKETS These questions have been written to assist the student in studying for the Exam FM/2. They are not intended to cover the entire breadth of the syllabus for Financial Economics. 1. Which statement about zero-cost purchased collars is FALSE? A. A zero-width, zero-cost collar can be created by setting both the put and call strike prices at the forward price. B. There are an infinite number of zero-cost collars. C. The put option can be at-the-money. D. The call option can be at-the-money. E. The strike price on the put option must be at or below the forward price. 2. You are given the following information: The current price to buy one share of XYZ stock is 500. The stock does not pay dividends. The risk-free interest rate, compounded continuously, is 6%. A European call option on one share of XYZ stock with a strike price of K that expires in one year costs 66.59. A European put option on one share of XYZ stock with a strike price of K that expires in one year costs 18.64. Using put-call parity, determine the strike price, K . A. 449 B. 452 C. 480 D. 559 E. 582
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2 3. Happy Jalapenos, LLC has an exclusive contract to supply jalapeno peppers to the organizers of the annual jalapeno eating contest. The contract states that the contest organizers will take delivery of 10,000 jalapenos in one year at the market price. It will cost Happy Jalapenos 1,000 to provide 10,000 jalapenos and today’s market price is 0.12 for one jalapeno. The continuously compounded risk-free interest rate is 6%. Happy Jalapenos has decided to hedge as follows (both options are one-year, European): Buy 10,000 0.12-strike put options for 84.30 and sell 10,000 0.14-stike call options for 74.80. Happy Jalapenos believes the market price in one year will be somewhere between 0.10 and 0.15 per pepper. Which interval represents the range of possible profit one year from now for Happy Jalapenos? A. –200 to 100 B. –110 to 190 C. –100 to 200 D. 190 to 390 E. 200 to 400 4. Zero-coupon risk-free bonds are available with the following maturities and yield rates (effective, annual): Maturity (years) Yield 1 0.06 2 0.065 3 0.07 You need to buy corn for producing ethanol. You want to purchase 10,000 bushels one year from now, 15,000 bushels two years from now, and 20,000 bushels three years from now. The current forward prices, per bushel, are 3.89, 4.11, and 4.16 for one, two, and three years respectively. You want to enter into a commodity swap to lock in these prices. Which of the following sequences of payments at times one, two, and three will NOT be acceptable to you and to the corn supplier? A. 38,900, 61,650, 83,200 B. 39,083, 61,650, 82,039 C. 40,777, 61,166, 81,554 D. 41,892, 62,340, 78,997 E. 60,184, 60,184, 60,184
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3 5. You are given the following information: One share of the PS index currently sells for 1,000. The PS index does not pay dividends. The effective annual risk-free interest rate is 5%.
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edu-2009-fall-exam-fm-ques - SAMPLE QUESTIONS FOR...

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