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Midterm-1-Solution

# Midterm-1-Solution - FINE 448 Derivatives and Risk...

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FINE 448 - Derivatives and Risk Management Summer 2007 Solution to Midterm # 1, 80 minutes Wednesday May 23rd 2007 Prof. Chayawat Ornthanalai Part A: Short questions (2 points each) Choose the best answer(s) from the following multiple choice questions. Please read each question carefully. Make sure you clearly and precisely circle your answers. Solutions are bolded. Question 1 Which of the following is not true ? a) Futures contracts nearly always last longer than forward contracts b) Futures contracts are standardized; forward contracts are not c) Delivery or °nal cash settlement usually takes place with forward contracts; the same is not true of futures contracts. d) Forward contract usually have one speci°ed delivery date; futures contract often have a range of delivery dates. e) None, all of the above answers are true Question 2 When the zero curve is downward sloping, which of the following is true? a) The one-year zero rate is always greater than the forward rate for the period between 1 year and 1.5 years. b) The one-year zero rate is always less than the forward rate for the period between 1 year and 1.5 years. c) The one-year par yield is always greater than the one-year zero rate. d) None of the above. 1

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Question 3 The current spot price for an asset is S 0 = \$100 ; you can borrow and lend at the rate of 5% for all maturities with continuous compounding. Assumes that this asset pays no dividend. You are now interest to buy a European call " c " and a European put " p " options at the strike price of \$100 with maturity of 1 year. What can we say about their relative prices a) The European put is more expensive than the European call b) The European put is less expensive than the European call c) The European put is the same price as the European call d) None of the above Question 4 Which of the following are always positively related to the price of a European call option on a stock ( choose three ) a) The strike price b) The time to expiration c) The volatility d) The stock price e) The risk-free rate f) The magnitude of dividends anticipated during the life of the option Question 5 Futures contracts in general are exposed to more credit risks than forward contracts a) True b) False c) Cannot say for sure Question 6 Kyle is a bullish investor who expects to have a large positive cash ±ow in 6 months from now. He wishes to enter into a forward rate agreement to lock in the rate of r K = 6 : 7% at which he can lend his future cash ±ow. The value of his forward rate agreement is currently negative to him. Given this information, what can we infer on the current forward rate r F that corresponds to the same borrowing/lending period as his forward rate agreement? a) The forward rate is equal to the forward rate agreement, r K = r F : 2
b) The forward rate is equal or higher than the forward rate agreement, r K ° r F : c) The forward rate is equal or lower than the forward rate agreement, r K ± r F : d) The forward rate is higher than the forward rate agreement, r K < r F : e) The forward rate is lower than the forward rate agreement, r K > r F : f) Cannot conclude anything on the forward rate. Not enough information is given.

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