BMGT 444 Final Exam Lecture 2 UPDATED
ACTUAL Exam Questions and CORRECT
Answers
What does a principal protected note do? - CORRECT ANSWER - allows investor to take
risky position without risking
any principal.
Other info about principal protected notes - CORRECT ANSWER - • Financial
institutions want to do this for you and take a cut
• Financial institution will likely get a better deal than you could
• They will face tighter bid-ask spreads
• They will likely get higher interest rate than you would for lent money
• On the other hand, Financial institution gets a piece of the action
• Risk that bank won't be around to pay you off
Protective put - CORRECT ANSWER - An option plus the underlying stock
what are the payoffs to owning a stock and a put? - CORRECT ANSWER - • Owning
stock has certain payoff ST
• Owning put has payoff P = MAX(X - ST, 0)
So the combined payoffs of owning a stock and put are: - CORRECT ANSWER - • If ST
> X ST + MAX(X - ST, 0) = ST
• If ST ≤ X ST + MAX(X - ST, 0) = ST + X - ST = X
What kind of investment guarantees you $50 at expiration? - CORRECT ANSWER -A
risk-free zero coupon bond with face value = $50
, What kind of investment gives you a one-for-one increase in value for each
dollar increase in stock price above $50? - CORRECT ANSWER - A call option with
exercise price = $50
What are payoffs to owning a call and zero coupon bond? - CORRECT ANSWER - Risk-
free zero coupon bond has a certain payoff of X at expiration since bond's duration
is equal to time to expiration
What are the combined payoffs of owning a call and zero coupon bond? - CORRECT
ANSWER - same payoffs as buying stock and put
So values of these 2 strategies must be the same!
Combined payoffs are:
• If ST > X X + MAX(ST - X, 0) = X + ST - X = ST
• If ST ≤ X X + MAX(ST - X, 0) = X
put call parity theorem - CORRECT ANSWER - - represents the proper relationship
between put and call prices.
- allows for arbitrage opportunities if violated.
- may be violated by small amounts, but not enough to earn arbitrage profits, once transaction
costs are considered.
A put option is equivalent to - CORRECT ANSWER - shorting the stock and lending
money plus a call
option
Put call parity equation - CORRECT ANSWER - C + Xe^-rT = S + P
True or false: Given Put-Call Parity Theorem and value of any 3 securities (stock, call, put,
bond), you can always create the fourth - CORRECT ANSWER - True
ACTUAL Exam Questions and CORRECT
Answers
What does a principal protected note do? - CORRECT ANSWER - allows investor to take
risky position without risking
any principal.
Other info about principal protected notes - CORRECT ANSWER - • Financial
institutions want to do this for you and take a cut
• Financial institution will likely get a better deal than you could
• They will face tighter bid-ask spreads
• They will likely get higher interest rate than you would for lent money
• On the other hand, Financial institution gets a piece of the action
• Risk that bank won't be around to pay you off
Protective put - CORRECT ANSWER - An option plus the underlying stock
what are the payoffs to owning a stock and a put? - CORRECT ANSWER - • Owning
stock has certain payoff ST
• Owning put has payoff P = MAX(X - ST, 0)
So the combined payoffs of owning a stock and put are: - CORRECT ANSWER - • If ST
> X ST + MAX(X - ST, 0) = ST
• If ST ≤ X ST + MAX(X - ST, 0) = ST + X - ST = X
What kind of investment guarantees you $50 at expiration? - CORRECT ANSWER -A
risk-free zero coupon bond with face value = $50
, What kind of investment gives you a one-for-one increase in value for each
dollar increase in stock price above $50? - CORRECT ANSWER - A call option with
exercise price = $50
What are payoffs to owning a call and zero coupon bond? - CORRECT ANSWER - Risk-
free zero coupon bond has a certain payoff of X at expiration since bond's duration
is equal to time to expiration
What are the combined payoffs of owning a call and zero coupon bond? - CORRECT
ANSWER - same payoffs as buying stock and put
So values of these 2 strategies must be the same!
Combined payoffs are:
• If ST > X X + MAX(ST - X, 0) = X + ST - X = ST
• If ST ≤ X X + MAX(ST - X, 0) = X
put call parity theorem - CORRECT ANSWER - - represents the proper relationship
between put and call prices.
- allows for arbitrage opportunities if violated.
- may be violated by small amounts, but not enough to earn arbitrage profits, once transaction
costs are considered.
A put option is equivalent to - CORRECT ANSWER - shorting the stock and lending
money plus a call
option
Put call parity equation - CORRECT ANSWER - C + Xe^-rT = S + P
True or false: Given Put-Call Parity Theorem and value of any 3 securities (stock, call, put,
bond), you can always create the fourth - CORRECT ANSWER - True
