A basis swap is priced by adding a spread to the higher rate or subtracting a spread from the lower rate. This spread is found as

A basis swap is priced by adding a spread to the higher rate or subtracting a spread from the lower rate. This spread is found as

a. the difference between the floating rate on a plain vanilla swap based on one of the rates and the fixed rate on a plain vanilla swap based on the other rate.
b. the addition of the fixed rate on a plain vanilla swap based on one of the rates and the fixed rate on a plain vanilla swap based on the other rate.
c. the difference between the fixed rate on a plain vanilla swap based on one of the rates and the fixed rate on a plain vanilla swap based on the other rate.
d. the difference between the floating rate on a plain vanilla swap based on one of the rates and the floating rate on a plain vanilla swap based on the other rate.
e. none of the above correctly explain how this spread is found

Answer: C

Which of the following statements about diff swaps is true?

Which of the following statements about diff swaps is true?

a. they involve interest payments in separate currencies
b. they are based on the difference between interest rates in two countries
c. they are based on the difference between interest rates of different maturities
d. the notional amount reduces throughout the life of the swap
e. the notional amount increases throughout the life of the swap

Answer: D

Equity swaps can be used for all of the following except:

Equity swaps can be used for all of the following except:

a. to synthetically buy stock
b. to synthetically sell stock
c. to convert dividends into capital gains
d. to synthetically re-align an equity portfolio
e. none of the above

Answer: C

Find the approximate upcoming net payment on an equity swap in which party A pays the return on stock index 1 and party B pays the return on stock index 2. The notional amount is $25 million. Stock index 1 starts the period at 1500 and goes up to 1600 at the end of the period. Stock index 2 starts the period at 3500 and goes up to 3300 at the end of the period.

Find the approximate upcoming net payment on an equity swap in which party A pays the return on stock index 1 and party B pays the return on stock index 2. The notional amount is $25 million. Stock index 1 starts the period at 1500 and goes up to 1600 at the end of the period. Stock index 2 starts the period at 3500 and goes up to 3300 at the end of the period.

a. The party paying index 1 pays about $238,000
b. The party paying index 2 pays about $238,000
c. The party paying index 2 pays about $3.095 million
d. The party paying index 1 pays about $25 million
e. The party paying index 1 pays about $3.095 million

Answer: E

Find the net payment on an equity swap in which party A pays the return on a stock index and party B pays a fixed rate of 6 percent. The notional amount is $10 million. The stock index starts off at 1,000 and is at 1,055.15 at the end of the period. The interest payment is calculated based on 180 days in the period and 360 days in the year.

Find the net payment on an equity swap in which party A pays the return on a stock index and party B pays a fixed rate of 6 percent. The notional amount is $10 million. The stock index starts off at 1,000 and is at 1,055.15 at the end of the period. The interest payment is calculated based on 180 days in the period and 360 days in the year.

a. party B pays $851,500
b. parry B pays $48,500
c. party B pays $251,500
d. party A pays $251,500
e. party A pays $851,500




Answer: D

The combination of a pay euro fixed and receive dollar fixed swap with a pay dollar floating and receive euro fixed results in

The combination of a pay euro fixed and receive dollar fixed swap with a pay dollar floating and receive euro fixed results in

a. a currency swap
b. a currency swap, receive euro fixed and pay euro floating
c. an interest rate swap, pay dollar fixed and receive dollar floating
d. an interest rate swap, receive euro fixed and pay euro floating
e. an interest rate swap, pay dollar floating and receive dollar fixed

Answer: E

Swap payments typically involve adjusting for the fraction of the year in some fashion. This adjustment is known as

Swap payments typically involve adjusting for the fraction of the year in some fashion. This adjustment is known as

a. the compounding convention
b. the accrual period
c. the fraction convention
d. the money market convention
e. the payment period

Answer: B

The value of a pay-fixed, receive-floating interest rate swap is found as the value of a

The value of a pay-fixed, receive-floating interest rate swap is found as the value of a

a. floating-rate bond minus the value of a fixed-rate bond.
b. fixed-rate bond minus the value of a floating-rate bond.
c. floating-rate bond minus the value of another floating-rate bond.
d. fixed-rate bond minus the value of another fixed-rate bond.
e. none of the above correctly identify how this value is found.






Answer: A

The value of a pay-fixed, receive floating interest rate swap is found as the value of a

The value of a pay-fixed, receive floating interest rate swap is found as the value of a

a. floating-rate bond times the value of a fixed-rate bond.
b. floating-rate bond plus the value of a fixed-rate bond.
c. floating-rate bond minus the value of another floating-rate bond.
d. fixed-rate bond minus the value of another fixed-rate bond.
e. floating-rate bond minus the value of a fixed-rate bond.

Answer: E

Interest rate swaps can be used for all of the following purposes except:

Interest rate swaps can be used for all of the following purposes except:

a. to borrow at the prime rate
b. to convert a fixed-rate loan into a floating-rate loan
c. to convert a floating-rate loan into a fixed-rate loan
d. to speculate on interest rates
e. to hedge interest rate risk

Answer: A

Equity swaps can be used for all of the following except:

Equity swaps can be used for all of the following except:

a. to synthetically buy stock
b. to synthetically sell stock
c. to convert dividends into capital gains
d. to synthetically re-align an equity portfolio
e. none of the above





Answer: E

Which of the following is not a way to terminate a swap:

Which of the following is not a way to terminate a swap:

a. the two counterparties cash settle the market value
b. enter into an opposite swap with another counterparty
c. hold the swap to its maturity date
d. use a forward contract or option on the swap to enter into an offsetting swap
e. borrow the notional amount and pay off the counterparty

Answer: E

Which of the following statements about constant maturity swaps is not true?

Which of the following statements about constant maturity swaps is not true?

a. the CMT rate is linked to a U. S. treasury security of equivalent maturity
b. the typical maturity is 2 to 5 years
c. the maturity is constant
d. one rate is based on a security of a longer rate than the settlement period
e. the swap is a type of interest rate swap

Answer: C

Find the market value of a plain vanilla swap from the perspective of the fixed rate payer in which the upcoming payment is in 30 days, and there is one more payment 180 days after that. The fixed rate is 7 percent and the upcoming floating payment is at 6.5 percent. The notional amount is $15 million. Assume 360 days in a year. The prices of Eurodollar zero coupon bonds are 0.9934 (30 days) and 0.9528 (210 days).

Find the market value of a plain vanilla swap from the perspective of the fixed rate payer in which the upcoming payment is in 30 days, and there is one more payment 180 days after that. The fixed rate is 7 percent and the upcoming floating payment is at 6.5 percent. The notional amount is $15 million. Assume 360 days in a year. The prices of Eurodollar zero coupon bonds are 0.9934 (30 days) and 0.9528 (210 days).

a. the fixed payer pays $31,763.75
b. the fixed payer pays $71,527.50
c. the floating payer pays $49,500
d. the floating payer pays $194,228
e. none of the above




Answer: B

Find the fixed rate on a plain vanilla interest rate swap with payments every 180 days (assume a 360-day year) for one year. The prices of Eurodollar zero coupon bonds are 0.9756 (180 days) and 0.9434 (360 days).

Find the fixed rate on a plain vanilla interest rate swap with payments every 180 days (assume a 360-day year) for one year. The prices of Eurodollar zero coupon bonds are 0.9756 (180 days) and 0.9434 (360 days).

a. 5.9 percent
b. 5 percent
c. 6 percent
d. 5.5 percent
e. 2.95 percent

Answer: A

Find the upcoming payment interest payments in a currency swap in which party A pays U. S. dollars at a fixed rate of 5 percent on notional amount of $50 million and party B pays Swiss francs at a fixed rate of 4 percent on notional amount of SF35 million. Payments are annual under the assumption of 360 days in a year, and there is no netting.

Find the upcoming payment interest payments in a currency swap in which party A pays U. S. dollars at a fixed rate of 5 percent on notional amount of $50 million and party B pays Swiss francs at a fixed rate of 4 percent on notional amount of SF35 million. Payments are annual under the assumption of 360 days in a year, and there is no netting.

a. party A pays $2,500,000, and party B pays SF1,400,000
b. party A pays SF1,400,000, and party B pays $2,500,000
c. equity party A pays SF1,750,000, and party B pays SF1,400,000
d. party A pays $2,500,000, and party B pays $2,000,000
e. party A pays $50 million, and party B pays SF35 million

Answer: A

Find the upcoming net payment in a plain vanilla interest rate swap in which the fixed party pays 10 percent and the floating rate for the upcoming payment is 9.5 percent. The notional amount is $20 million and payments are based on the assumption of 180 days in the payment period and 360 days in a year.

Find the upcoming net payment in a plain vanilla interest rate swap in which the fixed party pays 10 percent and the floating rate for the upcoming payment is 9.5 percent. The notional amount is $20 million and payments are based on the assumption of 180 days in the payment period and 360 days in a year.

a. fixed payer pays $1,950,000
b. fixed payer pays $950,000
c. floating payer pays $1 million
d. floating payer pays $50,000
e. fixed payer pays $50,000

Answer: E

Which of the following distinguishes equity swaps from currency swaps?

Which of the following distinguishes equity swaps from currency swaps?

a. equity swap payments are always hedged
b. equity swap payments are made on the first day of the month
c. equity swap payments can be negative
d. equity swap payments have more credit risk
e. none of the above

Answer: C

A currency swap without the exchange of notional amount is most likely to be used in what situation?

A currency swap without the exchange of notional amount is most likely to be used in what situation?

a. a company issuing a bond
b. a company generating cash flows in a foreign currency
c. a company arranging a loan
d. a dealer trying to hedge a currency option
e. none of the above

Answer: B

For a currency swap with $10 million notional amount, the notional amount in British pounds if the exchange rate is $1.55 is (approximately)

For a currency swap with $10 million notional amount, the notional amount in British pounds if the exchange rate is $1.55 is (approximately)

a. £11.55 million
b. £15.5 million
c. £10 million
d. £6.45 million
e. none of the above

Answer: D

Consider a swap to pay currency A floating and receive currency B floating. What type of swap would be combined with this swap to produce a swap to produce a plain vanilla swap in currency B.

Consider a swap to pay currency A floating and receive currency B floating. What type of swap would be combined with this swap to produce a swap to produce a plain vanilla swap in currency B.

a. pay currency B floating, receive currency A fixed
b. pay currency B fixed, receive currency A floating
c. pay currency B fixed, receive currency A fixed
d. pay currency B floating, receive currency A floating
e. none of the above

Answer: B

An interest rate swap with both sides paying a floating rate is called a

An interest rate swap with both sides paying a floating rate is called a

a. plain vanilla swap
b. two-way swap
c. floating swap
d. spread swap
e. basis swap

Answer: E

The most basic and common type of swap is called

The most basic and common type of swap is called

a. basis swap
b. plain vanilla swap
c. plain paper swap
d. commercial swap
e. bond swap

Answer: B

The underlying amount of money on which the swap payments are made is called

The underlying amount of money on which the swap payments are made is called

a. settlement value
b. market value
c. notional amount
d. base value
e. equity value

Answer: C

Which of the following is not a type of swap?

Which of the following is not a type of swap?

a. settlement swaps
b. commodity swaps
c. interest rate swaps
d. equity swaps
e. currency swaps




Answer: A

To determine the fixed rate on a swap, you would

To determine the fixed rate on a swap, you would 

a. use put-call parity
b. price it as the issuance of a fixed rate bond and purchase of a floating rate bond or vice versa
c. use the same fixed rate as that of a zero coupon bond of equivalent maturity
d. use the continuously compounded rate for the shortest maturity bond
e. none of the above

Answer: B

Interest rate swap payments are made

Interest rate swap payments are made

a. on the last day of the quarter
b. on the first day of each month
c. at whatever dates are agreed upon by the counterparties
d. on the 15th of the agreed-upon months
e. on the last day of the month

Answer: C

The difference between the swap rate and the rate on a Treasury security of the same maturity is called the

The difference between the swap rate and the rate on a Treasury security of the same maturity is called the

a. swap spread
b. risk premium
c. swap basis
d. settlement spread
e. LIBOR

Answer: A

Which of the following is the most actively traded U.S. futures contract?

Which of the following is the most actively traded U.S. futures contract?

a. S&P 500 Index
b. crude oil
c. Treasury bonds
d. Wheat
e. none of the above





Answer: E

Which of the following is not a type of futures trader?

Which of the following is not a type of futures trader?

a. scalpers
b. arbitrageurs
c. profit-takers
d. hedgers
e. day traders




Answer: C

Options on futures have been trading since

Options on futures have been trading since

a. 1973
b. 1982
c. 1966
d. 1936
e. none of the above 1983

Answer: E

Which is the most active group of futures?

Which is the most active group of futures?

a. energy
b. agriculture
c. currency
d. financials
e. none of the above





Answer: D

One of the advantages of forward markets is

One of the advantages of forward markets is

a. performance is guaranteed by the G-30
b. trading is conducted in the evening over computers
c. the contracts are private and customized
d. trading is less costly and governed by more rules
e. none of the above

Answer: C

A futures contract covers 5000 pounds with a minimum price change of $0.01 is sold for $31.60 per pound. If the initial margin is $2,525 and the maintenance margin is $1,000, at what price would there be a margin call?

A futures contract covers 5000 pounds with a minimum price change of $0.01 is sold for $31.60 per pound. If the initial margin is $2,525 and the maintenance margin is $1,000, at what price would there be a margin call?

a. 31.91
b. 32.11
c. 31.29
d. 31.09
e. 31.80




Answer: A

The trading procedure on the floor of the futures exchange is referred to as

The trading procedure on the floor of the futures exchange is referred to as

a. against actuals
b. open interest
c. open outcry
d. index participation
e. none of the above




Answer: C

Trading as both a broker and a dealer is called

Trading as both a broker and a dealer is called

a. dual trading
b. spreading
c. scalping
d. arbitraging
e. none of the above





Answer: A

Which of the following is not a method of terminating a futures contract?

Which of the following is not a method of terminating a futures contract?

a. offset
b. delivery
c. exchange for physicals
d. scalping
e. none of the above

Answer: D

What are circuit breakers?

What are circuit breakers?

a. rules that stop trading when futures are about to expire
b. a system that shuts down the exchange computer during periods of abnormal volume
c. limits on the number of contracts that can be traded on high volume days
d. rules that limit the number off contracts a speculator can hold
e. none of the above

Answer: E

Which of the following duties is not performed by the clearinghouse?

Which of the following duties is not performed by the clearinghouse?

a. holding margin deposits
b. guaranteeing performance of buyer and writer
c. maintaining records of transactions
d. lending money to meet margin requirements
e. none of the above

Answer: D

Variation margin is which of the following?

Variation margin is which of the following?

a. the difference in margin between hedger and speculator
b. margin differences according to trading style
c. margin deposited as a result of marking-to-market
d. margin set by the variability of a futures price
e. none of the above

Answer: C

Which of the following is a trader on the floor of the futures exchange?

Which of the following is a trader on the floor of the futures exchange?

a. introducing broker
b. commission broker
c. commodity trading advisor
d. commodity pool operator
e. none of the above

Answer: B

Where did the U.S. futures market originate?

Where did the U.S. futures market originate?

a. Chicago
b. Kansas
c. New York
d. Minneapolis
e. none of the above

Answer: A

Which of the following is not a forward contract?

Which of the following is not a forward contract?

a. a long-term employment contract at a fixed salary
b. an automobile lease non-cancelable for three years
c. a rain check
d. a signed contract to buy a house in six months
e. none of the above

Answer: C

Most forward contracts are closed by

Most forward contracts are closed by

a. delivery
b. offset
c. exercise
d. default
e. none of the above



Answer: A

Most futures contracts are closed by

Most futures contracts are closed by

a. delivery
b. offset
c. exercise
d. default
e. none of the above

Answer: B

The number of long or short futures positions outstanding is called the

The number of long or short futures positions outstanding is called the

a. reportable position
b. minimum volume
c. open interest
d. spread position
e. none of the above





Answer: C

If the initial margin is $5,000, the maintenance margin is $3,500 and your balance is $3,100, how much must you deposit?

If the initial margin is $5,000, the maintenance margin is $3,500 and your balance is $3,100, how much must you deposit?

a. $1,500
b. $400
c. $1,900
d. 0
e. none of the above

Answer: C

If the initial margin is $5,000, the maintenance margin is $3,500 and your balance is $4,000, how much must you deposit?

If the initial margin is $5,000, the maintenance margin is $3,500 and your balance is $4,000, how much must you deposit?

a. $6,000
b. $1,500
c. $9,000
d. nothing
e. none of the above





Answer: D

Margin in a futures transaction differs from margin in a stock transaction because

Margin in a futures transaction differs from margin in a stock transaction because

a. stock transactions are much smaller
b. delivery occurs immediately in a stock transaction
c. no money is borrowed in a futures transaction
d. futures are much more volatile
e. none of the above





Answer: C

Which of the following contract terms is not set by the futures exchange?

Which of the following contract terms is not set by the futures exchange?

a. the dates on which delivery can occur
b. the expiration months
c. the deliverable commodities
d. the size of the contract
e. the price




Answer: E

One of the advantages of forward markets is

One of the advantages of forward markets is

a. performance is guaranteed by the G-30
b. trading is conducted in the evening over computers
c. the contracts are private and customized
d. trading is less costly and governed by more rules
e. none of the above






Answer: C

"Wal-Mart calls" are an example of

"Wal-Mart calls" are an example of 

a. an option series
b. an option class
c. an option grade
d. a and b
e. none of the above




Answer: E

Option traders incur which of the following types of costs?

Option traders incur which of the following types of costs?

a. margin requirements
b. taxes
c. stock trading commissions
d. a and b
e. a, b and c

Answer: E

What amount must a call writer pay if a cash-settled index call is exercised?

What amount must a call writer pay if a cash-settled index call is exercised?

a. difference between the index level and the exercise price
b. exercise price
c. difference between the exercise price and the index level
d. index level
e. none of the above




Answer: C

An order that specifies a maximum price to pay if buying is a

An order that specifies a maximum price to pay if buying is a

a. stop order
b. market order
c. limit order
d. all or none order





Answer: D

Who determines whether options on a company's stock will be listed?

Who determines whether options on a company's stock will be listed?

a. the clearing house
b. Securities Exchange Commission
c. the company
d. the exchange
e. none of the above

Answer: D

In which city did organized option markets originate?

In which city did organized option markets originate?

a. New York
b. Chicago
c. Philadelphia
d. San Francisco
e. none of the above





Answer: B

Which of the following index options is the most widely traded?

Which of the following index options is the most widely traded?

a. S&P 500
b. Nikkei 225
c. Technology Index
d. New York Stock Exchange Index
e. none of the above

Answer: D

All of the following are forms of options except

All of the following are forms of options except

a. convertible bonds
b. callable bonds
c. warrants
d. mutual funds
e. none of the above





Answer: D

A writer selected to exercise an option is said to be

A writer selected to exercise an option is said to be

a. marginal
b. assigned
c. restricted
d. designated
e. none of the above

Answer: B

The exchange with the largest share of the options market is the

The exchange with the largest share of the options market is the

a. American Stock Exchange
b. Boston Options Exchange
c. Chicago Board Options Exchange
d. Pacific Stock Exchange
e. Philadelphia Stock Exchange





Answer: C

Which of the following are long-term options?

Which of the following are long-term options?

a. Bond options
b. LEAPS
c. currency options
d. Nikkei put warrants
e. none of the above





Answer: B

An investor who exercises a call option on an index must

An investor who exercises a call option on an index must

a. accept the cash difference between the index and the exercise price
b. purchase all of the stocks in the index in their appropriate proportions from the writer
c. immediately buy a put option to offset the call option
d. immediately write another call option to offset
e. none of the above

Answer: D

Index options trading on organized exchanges expire according to which of the following cycles?

Index options trading on organized exchanges expire according to which of the following cycles?

a. March, June, September, and December
b. each of the next four consecutive months
c. the current month, the next month, and the next two months in one of the other cycles
d. every other month for each of the next nine months
e. none of the above





Answer: C

The option price is also referred to as the

The option price is also referred to as the

a. strike
b. spread
c. premium
d. fee
e. none of the above

Answer: C

Which type of trader legitimately practices dual trading?

Which type of trader legitimately practices dual trading?

a. floor brokers
b. off-floor option traders
c. board brokers
d. designated primary market makers
e. none of the above





Answer: D

An investor who owns a call option can close out the position by any of the following types of transactions except

An investor who owns a call option can close out the position by any of the following types of transactions except

a. exercise
b. offset
c. expiring out-of-the-money
d. buying a put
e. none of the above




Answer: D

The exercise price can be set at any desired level on each of the following types of options except

The exercise price can be set at any desired level on each of the following types of options except

a. FLEX options
b. equity options
c. over-the-counter options
d. all of the above
e. none of the above

Answer: A

Which of the following is a legitimate type of option order on the exchange?

Which of the following is a legitimate type of option order on the exchange?

a. purchase order
b. limit order
c. execution order
d. floor order
e. all of the above




Answer: B

If the market maker will buy at 4 and sell at 4.50, the bid-ask spread is

If the market maker will buy at 4 and sell at 4.50, the bid-ask spread is

a. 8.50
b. 4.25
c. 0.50
d. 4.00
e. none of the above

Answer: C

Which one of the following is not a type of transaction cost in options trading?

Which one of the following is not a type of transaction cost in options trading?

a. the bid-ask spread
b. the commission
c. clearing fees
d. the cost of obtaining a quote
e. all of the above




Answer: D

The advantages of the over-the-counter options market include all of the following except

The advantages of the over-the-counter options market include all of the following except

a. customized contracts
b. privately executed
c. freedom from government regulation
d. lower prices
e. none of the above

Answer: D

The number of options acquired when one contract is purchased on an exchange is

The number of options acquired when one contract is purchased on an exchange is

a. 1
b. 5
c. 100
d. 500
e. 8,000




Answer: C

Organized options markets are different from over-the-counter options markets for all of the following reasons except

Organized options markets are different from over-the-counter options markets for all of the following reasons except

a. exercise terms
b. physical trading floor
c. regulation
d. standardized contracts
e. credit risk

Answer: A

A put option in which the stock price is $60 and the exercise price is $65 is said to be

A put option in which the stock price is $60 and the exercise price is $65 is said to be

a. in-the-money
b. out-of-the-money
c. at-the-money
d. exercisable
e. none of the above

Answer: A

A call option priced at $2 with a stock price of $30 and an exercise price of $35 allows the holder to buy the stock at

A call option priced at $2 with a stock price of $30 and an exercise price of $35 allows the holder to buy the stock at

a. $2
b. $32
c. $33
d. $35
e. none of the above




Answer: D

Options are traded on which of the following exchanges?

Options are traded on which of the following exchanges?

a. NYSE Amex
b. NYSE Euronext (Arca)
c. Chicago Board Options Exchange
d. International Securities Exchange
e. all of the above

Answer: E