Fin 425 Exam 3 with Accurate
Solutions
American Depository Receipts (ADRs) - ANS-Certificates representing ownership of
foreign stock held in trust.
Arbitrage with mispriced options - ANS-
basis risk - ANS-risk attributable to uncertain movements in the spread between a
futures price and a spot price
benefits of diversification - ANS-Becomes really small after 20 to 30 different securities
Black-Scholes Option Pricing Model - ANS-A model for valuing options based upon five
variables: the value of the underlying asset, the time to expiration of the option, the
option's exercise price, the volatility of the underlying asset, and the risk-free rate of
interest.
correlation coefficient - ANS-a statistical index of the relationship between two things
(from -1 to +1)
correlation with global markets - ANS-
cross hedge - ANS-Hedging a particular spot position with futures contracts on a
related, but not identical, commodity or financial instrument.
Delta - ANS-
Delta hedge - ANS-An option strategy in which a position in an asset is converted to a
risk-free position with a position in a specific number of options. The number of options
per unit of the underlying changes through time, and the position must be revised to
maintain the hedge.
Determine if options are priced correctly - ANS-
diversifiable risk - ANS-A risk that affects only some individuals, businesses, or small
groups.
Domestic return of a foreign security - ANS-R (domestic) = Return (foreign currency) +
S (% change between two currencies) + (R foreign *S)
Solutions
American Depository Receipts (ADRs) - ANS-Certificates representing ownership of
foreign stock held in trust.
Arbitrage with mispriced options - ANS-
basis risk - ANS-risk attributable to uncertain movements in the spread between a
futures price and a spot price
benefits of diversification - ANS-Becomes really small after 20 to 30 different securities
Black-Scholes Option Pricing Model - ANS-A model for valuing options based upon five
variables: the value of the underlying asset, the time to expiration of the option, the
option's exercise price, the volatility of the underlying asset, and the risk-free rate of
interest.
correlation coefficient - ANS-a statistical index of the relationship between two things
(from -1 to +1)
correlation with global markets - ANS-
cross hedge - ANS-Hedging a particular spot position with futures contracts on a
related, but not identical, commodity or financial instrument.
Delta - ANS-
Delta hedge - ANS-An option strategy in which a position in an asset is converted to a
risk-free position with a position in a specific number of options. The number of options
per unit of the underlying changes through time, and the position must be revised to
maintain the hedge.
Determine if options are priced correctly - ANS-
diversifiable risk - ANS-A risk that affects only some individuals, businesses, or small
groups.
Domestic return of a foreign security - ANS-R (domestic) = Return (foreign currency) +
S (% change between two currencies) + (R foreign *S)
