What would be the spot price if a stock index futures price were $75, the risk-free rate were 10 percent, the continuously compounded dividend yield is 3 percent, and the futures contract expires in three months?

What would be the spot price if a stock index futures price were $75, the risk-free rate were 10 percent, the continuously compounded dividend yield is 3 percent, and the futures contract expires in three months?

a. $73.70
b. $77.48
c. $72.60
d. $76.32
e. none of the above

Answer: D

What is the lower bound of a European foreign currency call if the spot rate is $2.25, the domestic interest rate is 5.5 percent, the foreign interest rate is 6.2 percent, the option expires in three months, and the exercise price is $2.20? (The interest rates are continuously compounded.)

What is the lower bound of a European foreign currency call if the spot rate is $2.25, the domestic interest rate is 5.5 percent, the foreign interest rate is 6.2 percent, the option expires in three months, and the exercise price is $2.20? (The interest rates are continuously compounded.)

a. $0.0457
b. $0.05
c. $0.0793
d. $0.0529
e. none of the above

Answer: A

Find the value of a European put option on futures if the futures price is 72, the exercise price is 70, the continuously compounded risk-free rate is 8.5 percent, the volatility is 0.38 and the time to expiration is three months.

Find the value of a European put option on futures if the futures price is 72, the exercise price is 70, the continuously compounded risk-free rate is 8.5 percent, the volatility is 0.38 and the time to expiration is three months.

a. 6.30
b. 12.90
c. 4.34
d. 2.00
e. none of the above


Answer: C

What would be the spot price if a stock index futures price were $75, the risk-free rate were 10 percent, the continuously compounded dividend yield is 3 percent, and the futures contract expires in three months?

What would be the spot price if a stock index futures price were $75, the risk-free rate were 10 percent, the continuously compounded dividend yield is 3 percent, and the futures contract expires in three months?

a. $73.70
b. $77.48
c. $72.60
d. $76.32
e. none of the above

Answer: D

The additional return earned by holding a commodity that is in short supply or a non pecuniary gain from an asset is referred to as

The additional return earned by holding a commodity that is in short supply or a non pecuniary gain from an asset is referred to as 

a. the negative cost of carry
b. the convenience yield
c. cash-flow free gains
d. gains on the underlying
e. none of the above

Answer: B

The value of a futures contract immediately after being marked to market is

The value of a futures contract immediately after being marked to market is 

a. numerically equal to the daily settlement amount
b. the spot price plus the original forward price
c. equal to the amount by which the price changed since the contract was opened
d. simply zero
e. none of the above

Answer: D

The value of a long position in a forward contract at expiration is

The value of a long position in a forward contract at expiration is

a. the spot price plus the original forward price
b. the spot price minus the original forward price
c. the original forward price discounted to expiration
d. the spot price minus the original forward price discounted to expiration
e. none of the above

Answer: B

The cost of carry consists of all the following except

The cost of carry consists of all the following except

a. the risk-free rate
b. the cost of storage
c. insurance on the asset
d. the risk premium
e. none of the above

Answer: C

A transaction that exploits differences in the theoretical and actual values of a foreign currency forward or futures contract is called

A transaction that exploits differences in the theoretical and actual values of a foreign currency forward or futures contract is called

a. covered interest arbitrage
b. triangular arbitrage
c. a conversion
d. interest-rate parity
e. none of the above

Answer: A

Interest rate parity is essentially the same as

Interest rate parity is essentially the same as

a. the cross-rate relationship
b. the cost of carry relationship
c. the Garman-Kohlhagen model
d. all of the above
e. none of the above

Answer: A

Determine the value of a European foreign currency put if the call is at $0.05, the spot rate is $0.5702, the exercise price is $0.59, the domestic interest rate is 5.75 percent, the foreign interest rate is 4.95 percent and the options expire in 45 days. (The interest rates are continuously compounded.)

Determine the value of a European foreign currency put if the call is at $0.05, the spot rate is $0.5702, the exercise price is $0.59, the domestic interest rate is 5.75 percent, the foreign interest rate is 4.95 percent and the options expire in 45 days. (The interest rates are continuously compounded.)

a. $0.069
b. $0.031
c. $0.050
d. $0.517
e. none of the above

Answer: A

The spot price plus the cost of carry equals

The spot price plus the cost of carry equals

a. the convenience yield
b. the expected future spot price
c. the risk premium
d. the futures price
e. none of the above

Answer: D

Why is the initial value of a futures contract zero?

Why is the initial value of a futures contract zero?

a. the futures is immediately marked-to-market
b. you do not pay anything for it
c. the basis will converge to zero
d. the expected profit is zero
e. none of the above

Answer: B

Find the lower bound of a European foreign currency put if the spot rate is $3.50, the domestic interest rate is 8 percent, the foreign interest rate is 7 percent, the option expires in six months, and the exercise price is $3.75. (The interest rates are continuously compounded.)

Find the lower bound of a European foreign currency put if the spot rate is $3.50, the domestic interest rate is 8 percent, the foreign interest rate is 7 percent, the option expires in six months, and the exercise price is $3.75. (The interest rates are continuously compounded.)

a. zero
b. $0.250
c. $0.366
d. $0.108
e. none of the above

Answer: E

Suppose there is a risk premium of $0.50. The spot price is $20 and the futures price is $22. What is the expected spot price at expiration?

Suppose there is a risk premium of $0.50. The spot price is $20 and the futures price is $22. What is the expected spot price at expiration?

a. $21.50
b. $22.50
c. $20.50
d. $24.50
e. none of the above

Answer: E

A contango market is consistent with

A contango market is consistent with

a. a negative basis
b. futures prices exceeding spot prices
c. a positive cost of carry
d. all of the above
e. none of the above

Answer: C

Find the forward rate of foreign currency Y if the spot rate is $4.50, the domestic interest rate is 6 percent, the foreign interest rate is 7 percent, and the forward contract is for nine months. (The interest rates are continuously compounded.)

Find the forward rate of foreign currency Y if the spot rate is $4.50, the domestic interest rate is 6 percent, the foreign interest rate is 7 percent, and the forward contract is for nine months. (The interest rates are continuously compounded.)

a. $4.458
b. $5.104
c. $4.468
d. $4.532
e. none of the above

Answer: C

Futures prices differ from spot prices by which one of the following factors?

Futures prices differ from spot prices by which one of the following factors?

a. the systematic risk
b. the cost of carry
c. the spread
d. the risk premium
e. none of the above

Answer: B

A deep in-the-money call option on futures is exercised early because

A deep in-the-money call option on futures is exercised early because

a. the intrinsic value is maximized
b. it behaves like a futures but ties up funds
c. the futures price is not likely to rise any further
d. all of the above
e. none of the above

Answer: D

Find the price of a European call on a futures contract if the futures price is $106, the exercise price is $100, the continuously compounded risk-free rate is 7.2 percent, the volatility is 0.41 and the call expires in six months.

Find the price of a European call on a futures contract if the futures price is $106, the exercise price is $100, the continuously compounded risk-free rate is 7.2 percent, the volatility is 0.41 and the call expires in six months.

a. $14.57
b. $17.04
c. $6.00
d. $19.78
e. none of the above

Answer: A