FIN405 “Financial Derivatives”

FIN405 “Financial Derivatives”

QUESTION 1

  1. A hedge in which the asset underlying the futures is not the asset being hedged is

 

  

a cross hedge

 

 

a minimum variance hedge

 

an optimal hedge

 

 

a basis hedge

0.5 points

QUESTION 2

  1. Suppose you buy an asset at $70 and sell a futures contract at $72. What is your profit if, prior to expiration, you sell the asset at $75 and the futures price is $78?

  

$1

 

 

-$6

 

 

$2

 

 

-$1

 

0.5 points

QUESTION 3

  1. Quantity risk is

  

the uncertainty about the size of the spot position

 

the risk of mismatching the futures maturity to the spot maturity

 

the possibility of regression error

 

the difficulty in measuring the volatility

 

 

 

 

 

 

0.5 points

QUESTION 4

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

  

risk premium

 

settlement spread

 

swap spread

 

swap basis

0.5 points

QUESTION 5

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

  

₤6.45 million

 

₤15.5 million

 

₤10 million

 

₤11.55 million

0.5 points

QUESTION 6

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

  

a company generating cash flows in a foreign currency

 

a company arranging a loan

 

a company issuing a bond

 

a dealer trying to hedge a currency option

0.5 points

QUESTION 7

  1. The advantage of a collar over a cap is

  

it has lower transaction costs

 

it offers the possibility of greater returns

 

it lowers the out-of-pocket cost

 

it eliminates the risk

 

 

 

 

 

 

0.5 points

QUESTION 8

  1. The fixed rate on an FRA expiring in 30 days on 180-day LIBOR with the 30-day rate being 5 percent and the 210 day rate being 6 percent is

  

5.5 percent

 

6 percent

 

5 percent

 

6.14 percent

0.5 points

QUESTION 9

  1. An equity forward contract is

  

a call option on a stock with greater downside risk than an ordinary call

 

a forward contract on LIBOR secured by a stock as collateral

 

a forward contract whose payoff is determined by a stock or index

 

a futures contract on a stock index that is not marked-to-market

0.5 points

QUESTION 10

  1. Asian options are also called

  

Pacific options

 

 

no-regrets options

 

average price options

 

 

installment options

0.5 points

QUESTION 11

  1. A currency swap for $10 million and SF 15 million. One party pays dollars at a fixed rate of 9 percent, and the other pays Swiss francs at a fixed rate of 8 percent. The payments are made semiannually based on the exact day count and 360 days in a year. The current period has 181 days. Calculate the next payment each party makes.

QUESTION 12

  • A three-year receiver swaption with an exercise rate of 11.75 percent in which the underlying swap is a $20 million notional amount four-year swap. The underlying rate is LIBOR. At the expiration of the swaption, the LIBOR rates are 10 percent (360 days), 10.5 percent (720 days), 10.9 percent (1,080 days), and 11.2 percent (1,440 days). Assume 360 days in a year. Determine the payoff value of the swaption.

FIN424 “Portfolio Management”

Question 1

 

What is Enterprise risk management? Explain the steps of enterprise Risk management.

Question 2

Value at Risk (VaR) is a premier risk management technique in the financial industry. Which of the following statements shows the correct explanation of “$1 million daily VaR at 5%”?

a.

5% chance of losing at least $1 million in one day

b.

95% chance that one day’s losses will be lower than $1 million.

c.

Both (a) and (b) Statements are correct.

d.

None

Question 3

Which of the following methods is known as the analytical method of estimation of “Value at Risk (VaR)”?

a.

Variance-Covariance method

b.

Historical Method

c.

Monte Carlo Method

d.

None of the above

 

 

Question 4

Which of the following statements is considered as a limitation of the “Value at Risk” Method?

a.

It is versatile.

b.

It is difficult to estimate, and estimation methods can lead to significant differences.

c.

It quantifies potential loss in simple terms.

d.

It is widely accepted by regulators.

Question 5

Choose the correct statement about the credit risk of Options.

a.

The credit risk of Options is a Unilateral credit risk – only the seller is obligated, so only the buyer is exposed after a premium is paid.

b.

With the European option, credit risk is potential until expiration.

c.

With the American option, credit risk exists throughout the option term.

d.

All the above statements are correct.

Question 6

Which of the following formula is the correct one for the Sharpe Ratio?

a.

Sharpe ratio = (Mean portfolio return + Risk Free Rate) / Standard deviation of portfolio return

b.

Sharpe ratio = (Mean portfolio return – Risk Free Rate) / Standard deviation of portfolio return

c.

Sharpe ratio = RiskFree Rate / (Mean portfolio return + Standard deviation of portfolio return)

d.

Sharpe ratio = (Risk Free Rate – Mean portfolio return) / Standard deviation of portfolio return

Question 7

In the share Market trading, which of the following statements is true about Limit Orders?

a.

These orders are executed promptly at the best available price (the lowest price a counterparty is willing to sell for)

b.

These orders include a time of expiration.

c.

If trading more shares than the best available counterparty will accept, the remainder of the order is filled by the next-best available price.

d.

Emphasizes immediacy of execution at the expense of a degree of price uncertainty

Question 8

In the share Market trading, which of the following statements is not true about Market Orders?

a.

If trading more shares than the best available counterparty will accept, the remainder of the order is filled by the next-best available price.

b.

Emphasizes immediacy of execution at the expense of a degree of price uncertainty

c.

These orders are executed promptly at the best available price (the lowest price a counterparty is willing to sell for)

d.

These orders include a time of expiration.

Question 9

Which of the following statements is true for quote-driven markets?

a.

A lack of dealers may either increase competition for orders or reduce it if no counterparties are willing to trade for inventory.

b.

These markets rely on dealers to establish firm prices.

c.

The current trend favors quote-driven markets, which include electronic crossing networks that batch orders and anonymously cross them at a specific time and do not provide price discovery.

d.

Transaction prices are established by public limit orders without intermediation by designated dealers.

Question 10

Which of the following statements is not true for Order-Driven Markets?

a.

The current trend favors Order-Driven Markets, which include electronic crossing networks that batch orders and anonymously cross them at a specific time and do not provide price discovery.

b.

A lack of dealers may either increase competition for orders or reduce it if no counterparties are willing to trade for inventory.

c.

These markets rely on dealers to establish firm prices

d.

Transaction prices are established by public limit orders without intermediation by designated dealers.

Question 11

Which of the following is not an example of the Implicit cost?

a.

Market impact of trade

b.

Opportunity costs of missed trades (execution failure, particularly with limit orders)

c.

broker commissions

d.

Bid-ask spread.

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