Financial Derivatives Final UPDATED
ACTUAL Exam Questions and CORRECT
Answers
Which of the following is NOT true about a range forward contract?
A. It ensures that the exchange rate for a future transaction will lie between two values
B. It can be structured so that it costs nothing to set up
C. It requires a forward contract as well as two options
D. It can be used to hedge either a future inflow or a future outflow of a foreign currency -
CORRECT ANSWER - C. It requires a forward contract as well as two options
A portfolio manager in charge of a portfolio worth $10 million is concerned that the market
might decline rapidly during the next six months and would like to use put options on an index to
provide protection against the portfolio falling below $9.5 million. The index is currently
standing at 500 and each contract is on 100 times the index. What should the strike price of
options on the index be the portfolio has a beta of 0.5? Assume that the risk‐free rate is 10% per
annum and there are no dividends.
A. 400 B. 410 C. 420 D. 425 - CORRECT ANSWER - D. 425
A portfolio manager in charge of a portfolio worth $10 million is concerned that the market
might decline rapidly during the next six months and would like to use put options on an index to
provide protection against the portfolio falling below $9.5 million. The index is currently
standing at 500 and each contract is on 100 times the index. What should the strike price of
options on the index be the portfolio has a beta of 1?
A. 425 B. 450 C. 475 D. 500 - CORRECT ANSWER - C.475
Which of the following is true when a European currency option is valued using forward
exchange rates?
A. It is not necessary to know the domestic interest rate or the spot exchange rate
B. It is not necessary to know either the foreign or domestic interest rate
,C. It is necessary to know the difference between the foreign and domestic interest rates
but not the rates themselves
D. It is not necessary to know the foreign interest rate or the spot exchange rate - CORRECT
ANSWER - D. It is not necessary to know the foreign interest rate or the spot exchange
rate
Which of the following is acquired (in addition to a cash payoff) when the holder of a put futures
exercises?
A. A long position in a futures contract
B. A short position in a futures contract
C. A long position in the underlying asset
D. A short position in the underlying asset - CORRECT ANSWER - B. A short position in
a futures contract
Which of the following is acquired (in addition to a cash payoff) when the holder of a call futures
exercises?
A. A long position in a futures contract
B. A short position in a futures contract
C. A long position in the underlying asset
D. A short position in the underlying asset - CORRECT ANSWER - A. A long position in
a futures contract
Which of the following is NOT true?
A. Black's model can be used to value an American‐style option on futures
B. Black's model can be used to value a European‐style option on futures
C. Black's model can be used to value a European‐style option on spot
D. Black's model is widely used by practitioners - CORRECT ANSWER - A. Black's
model can be used to value an American‐style option on futures
10. Which of the following are true?
, A. Futures options are usually European
B. Futures options are usually American
C. Both American and European futures options trade actively are exchanges
D. Both American and European futures options trade actively in the OTC market - CORRECT
ANSWER - B. Futures options are usually American
16. What is the value of a European call futures option where the futures price is 50, the strike
price is 50, the risk‐free rate is 5%, the volatility is 20% and the time to maturity is three
months?
A. 49.38N(0.05)‐49.38N(‐0.05)
B. 50N(0.05)‐50N(‐0.05)
C. 49.38N(0.1)‐49.38N(‐0.1)
D. 50N(0.1)‐49.38N(‐0.1) - CORRECT ANSWER - A. 49.38N(0.05)‐49.38N(‐0.05)
current price - K
c = So*e^-rT*N(d1) - K*e^-rT*N(d2)
50*e^-.05*.25 = 49.38
d1 = ln(So/K) + (vola^2/2)T/ vola*sqrt(T)
d1 = .05
When Black's model used to value a European option on the spot price of an asset, which of the
following is NOT true?
A. It is necessary to know the futures or forward price for a contract maturing at the same time as
the option
B. It is not necessary to estimate income on the underlying asset
C. It is not necessary to know the risk‐free rate
D. The underlying asset can be an investment or a consumption asset - CORRECT
ANSWER - C. It is not necessary to know the risk‐free rate
what are call and long? positive or negative? - CORRECT ANSWER - positive
ACTUAL Exam Questions and CORRECT
Answers
Which of the following is NOT true about a range forward contract?
A. It ensures that the exchange rate for a future transaction will lie between two values
B. It can be structured so that it costs nothing to set up
C. It requires a forward contract as well as two options
D. It can be used to hedge either a future inflow or a future outflow of a foreign currency -
CORRECT ANSWER - C. It requires a forward contract as well as two options
A portfolio manager in charge of a portfolio worth $10 million is concerned that the market
might decline rapidly during the next six months and would like to use put options on an index to
provide protection against the portfolio falling below $9.5 million. The index is currently
standing at 500 and each contract is on 100 times the index. What should the strike price of
options on the index be the portfolio has a beta of 0.5? Assume that the risk‐free rate is 10% per
annum and there are no dividends.
A. 400 B. 410 C. 420 D. 425 - CORRECT ANSWER - D. 425
A portfolio manager in charge of a portfolio worth $10 million is concerned that the market
might decline rapidly during the next six months and would like to use put options on an index to
provide protection against the portfolio falling below $9.5 million. The index is currently
standing at 500 and each contract is on 100 times the index. What should the strike price of
options on the index be the portfolio has a beta of 1?
A. 425 B. 450 C. 475 D. 500 - CORRECT ANSWER - C.475
Which of the following is true when a European currency option is valued using forward
exchange rates?
A. It is not necessary to know the domestic interest rate or the spot exchange rate
B. It is not necessary to know either the foreign or domestic interest rate
,C. It is necessary to know the difference between the foreign and domestic interest rates
but not the rates themselves
D. It is not necessary to know the foreign interest rate or the spot exchange rate - CORRECT
ANSWER - D. It is not necessary to know the foreign interest rate or the spot exchange
rate
Which of the following is acquired (in addition to a cash payoff) when the holder of a put futures
exercises?
A. A long position in a futures contract
B. A short position in a futures contract
C. A long position in the underlying asset
D. A short position in the underlying asset - CORRECT ANSWER - B. A short position in
a futures contract
Which of the following is acquired (in addition to a cash payoff) when the holder of a call futures
exercises?
A. A long position in a futures contract
B. A short position in a futures contract
C. A long position in the underlying asset
D. A short position in the underlying asset - CORRECT ANSWER - A. A long position in
a futures contract
Which of the following is NOT true?
A. Black's model can be used to value an American‐style option on futures
B. Black's model can be used to value a European‐style option on futures
C. Black's model can be used to value a European‐style option on spot
D. Black's model is widely used by practitioners - CORRECT ANSWER - A. Black's
model can be used to value an American‐style option on futures
10. Which of the following are true?
, A. Futures options are usually European
B. Futures options are usually American
C. Both American and European futures options trade actively are exchanges
D. Both American and European futures options trade actively in the OTC market - CORRECT
ANSWER - B. Futures options are usually American
16. What is the value of a European call futures option where the futures price is 50, the strike
price is 50, the risk‐free rate is 5%, the volatility is 20% and the time to maturity is three
months?
A. 49.38N(0.05)‐49.38N(‐0.05)
B. 50N(0.05)‐50N(‐0.05)
C. 49.38N(0.1)‐49.38N(‐0.1)
D. 50N(0.1)‐49.38N(‐0.1) - CORRECT ANSWER - A. 49.38N(0.05)‐49.38N(‐0.05)
current price - K
c = So*e^-rT*N(d1) - K*e^-rT*N(d2)
50*e^-.05*.25 = 49.38
d1 = ln(So/K) + (vola^2/2)T/ vola*sqrt(T)
d1 = .05
When Black's model used to value a European option on the spot price of an asset, which of the
following is NOT true?
A. It is necessary to know the futures or forward price for a contract maturing at the same time as
the option
B. It is not necessary to estimate income on the underlying asset
C. It is not necessary to know the risk‐free rate
D. The underlying asset can be an investment or a consumption asset - CORRECT
ANSWER - C. It is not necessary to know the risk‐free rate
what are call and long? positive or negative? - CORRECT ANSWER - positive
