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Unformatted text preview: 1. (4 points) List the four uses of derivatives. 2. (6 points) The S&R Index has a current spot price of 700. 5&R Index pays dividends at a rate of
3% compounded continuously. The risk free interest rate is 5% compounded continuously. Sandy buys a 6 month prepaid forward on the 5&R Index. Calculate the price of this prepaid
forward. 3. 4. (1 point) A market crash is a diversifiabie risk.
True or False
(8 points) You are given the following prices for a zero coupon bond which matures for 1000: Term in Zero Coupon Years Bond Price Austin has a loan of 1 million that has an interest rate the will be reset each year. Austin wants
to purchase a three year interest rate swap which will lock in a fixed level interest rate for each
of the next three years. Determine the fixed interest rate on Austin’s swap. i
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x 5. (4 points) The stock of WU lnc sells for 100 today and does not pay a dividend. Hechen enters
into a short 6 month forward on WU. The annual effective risk free interest rate is 5%. Determine the maximum profit that Hechen can achieve on this transaction. 6. Profit Stock Price (2 points) The profit graph at the top of this page could represent which of the following
positions. Circle all that it could represent. Long Put Long Call Floor Cap 7. (8 points) The stock of Ben Corporation sells for 250 per share today and does not pay a
dividend. The annual effective risk free interest rate is 4%. Elaine purchases a two year straddle
on Ben Corporation. You are given the following call prices for two year calls on Ben Corporation. Remember that if
you need put prices that those can be found using the Put Call Parity formula. Premium for Two Year Call Strike Price Calculate the maximum loss that Elaine could incur. 8. (4 points) The stock of Ben Corporation sells for 250 per share today and does not pay a
dividend. The annual effective risk free interest rate is 4%. Patrick purchases a two year Cap on
Ben Corporation. You are given the following call prices for two year calls on Ben Corporation. Remember that if
you need put prices that those can be found using the Put Call Parity formula. Calculate Patrick’s profit if the spot price in two years is 200. i
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i 9. (1 point) Transaction costs include commissions and the Bid—Ask spread. True or False 10. (1 point) The profit on a long forward is the same as the profit on the purchase of the underlying
stock. l, True or False l
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I] 11. (6 points) The bid and ask price of Eckerly Estates Stock is 50 and 51. Eckerly does not pay a
dividend. l a
The transaction cost to buy or sell the stock or a zero coupon bond is 0.45. g The risk free lending interest rate is 6% and the risk free borrowing interest rate is 7%. Both
interest rates are annual effective interest rates. Determine the range of one year forward prices for which there would not be arbitrage. 12. (1 point) For both a long synthetic forward and a purchased coIIar, you buy a call and sell a put. True or False 13. (8 points) Cynthia buys 12 S&P 500 Futures Contracts. The current Futures’ price for the S&P
500 is 1300. Cynthia’s futures contracts require a margin of 8% and a maintenance margin of 75%. The
margin account earns a risk free interest rate of 5.2% compounded continuously. Assuming that the margin account is marked to market on a weekly basis, determine the
amount of Cynthia’s margin call if the S&P 500 Futures’ price is 1272 in one week. 14. (4 points) List the three types of options and define each one. 15. (1 point) Apple Stock is a derivative. True or False 16. (4 points) Circle each of the following which are equal to zero. (More than one may be equal to
zero.) a. The profit on a long put contract if the spot price at expiration is greater than the strike
price. b. The payoff when you borrow money. c. The profit on the purchase of a stock if the spot price of the stock when it is sold in one
year is equal to the spot price at time of purchase. d. The cost of a short forward contract. 17. (8 points) Su Soybean Importers wants to buy 200,000 bushels of soybeans at the end of one
year. Additionally, Su want to buy 400,000 bushels of soybeans at the end of 2 years and
600,000 bushels of soybeans at the end of 3 years. You are given: 51_ Su enters a swap to lock in a level price for the cost of a bushel of soybeans for the next three years. The swap rate is 15.05. Determine Y. 18. (1 points) When you sell a stock, you receive the ask price. True or False l
l 19. (3 points) The current spot price ofthe stock of Timen Company sells for 28.00. The stock does
not pay a dividend. The prices of puts and calls on Timen stock are: .
 The annual effective risk free interest rate is 4%. Calculate the cost to enter into a purchased strangle. 20. (6 points) Three years ago, Kwadwo purchased a five year swap which gave him the right to
1000 barrels of oil at the end of each year for five years for a price of 80 per barrel. Now, with two years left on the swap, Kwadwo wants to sell the swap. The current spot interest
rates and forward oil rates are given by the following: Spot Interest Rate Forward Price of Oil
003
135 Determine the market value of Kwadwo’s swap. 21. (6 points) The stock of Myers Moving Company sells for 74. Myers does not pay a dividend. The
risk free interest rate compounded continuously if 6%. The 6 month forward price of Myers is
75. Assume that there are no transaction costs. State explicitly what actions you should take to arbitrage this situation. How much profit will
you make? 22. (2 point) Circle the graph that represents the profits on a Bull Spread. Proﬁt
Profit ' ‘ . Stock Price Stock .Price Proﬁt
Profit Stock Price Stock Price 23. (6 points) The one year forward price for the stock of Chen Company is 296.53. Chen pays a
quarterly dividend of 10 with the next dividend payable in 2 months. The risk free interest rate
is 5% compounded continuously. Calculate the current spot price of Chen stock. 24. (5 points) The stock of Candace’s Candy Company sells for 40. The annual effective risk free
interest rate is 5%. Carly sells a one year put with as strike price of 42 on the stock for a
premium of 3. Complete the following table. Payoff Future Value of Cost ...
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 Spring '08
 Staff
 Math

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