金融工程 相关习题及答案

PRACTICE PROBLEMS FOR CHAPTER 1

1. Akihiko Takabe has designed a sophisticated forecasting model, which predicts the movements in the overall stock market, in the hope of earning a return in excess of a fair return for the risk involved. He uses the predictions of the model to decide whether to buy, hold, or sell the shares of an index fund that aims to replicate the movements of the stock market. Takabe would best be characterized as a (n): A. hedger. B. investor.

C. information-motivated trader.

2. James Beach is young and has substantial wealth. A significant proportion of his stock portfolio consists of emerging market stocks that offer relatively high expected returns at the cost of relatively high risk. Beach believes that investment in emerging market stocks is appropriate for him given his ability and willingness to take risk. Which of the following labels most appropriately describes Beach? A. Hedger. B. Investor.

C. Information-motivated trader.

3. Lisa Smith owns a manufacturing company in the United States. Her company has sold goods to a customer in Brazil and will be paid in Brazilian real (BRL) in three months. Smith is concerned about the possibility of the BRL depreciating more than expected against the U.S. dollar (USD). Therefore, she is planning to sell three-month futures contracts on the BRL. The seller of such contracts generally gains when the BRL depreciates against the USD. If Smith were to sell these future contracts, she would most appropriately be described as a (n): A. hedger. B. investor.

C. information-motivated trader.

4. Which of the following is not a function of the financial system? A. To regulate arbitrageurs’ profits (excess returns).

B. To help the economy achieve allocational efficiency.

C. To facilitate borrowing by businesses to fund current operations.

5. An investor primarily invests in stocks of publicly traded companies. The investor wants to increase the diversification of his portfolio. A friend has recommended investing in real estate properties. The purchase of real estate would best be

characterized as a transaction in the: A. derivative investment market. B. traditional investment market. C. alternative investment market.

6. A hedge fund holds its excess cash in 90-day commercial paper and negotiable certificates of deposit. The cash management policy of the hedge fund is best described as using:

A. capital market instruments. B. money market instruments.

C. intermediate-term debt instruments.

7. An oil and gas exploration and production company announces that it is offering 30 million shares to the public at $45.50 each. This transaction is most likely a sale in the:

A. futures market. B. primary market. C. secondary market.

8. Consider a mutual fund that invests primarily in fixed-income securities that have been determined to be appropriate given the fund’s investment goal. Which of the following is least likely to be a part of this fund? A. Warrants.

B. Commercial paper. C. Repurchase agreements.

9. A friend has asked you to explain the differences between open-end and closed-end funds. Which of the following will you most likely include in your explanation? A. Closed-end funds are unavailable to new investors.

B. When investors sell the shares of an open-end fund, they can receive a discount or a premium to the fund’s net asset value.

C. When selling shares, investors in an open-end fund sell the shares back to the fund whereas investors in a closed-end fund sell the shares to others in the secondary market.

10. The usefulness of a forward contract is limited by some problems. Which of the following is most likely one of those problems?

A. Once you have entered into a forward contract, it is difficult to exit from the contract.

B. Entering into a forward contract requires the long party to deposit an initial amount with the short party.

C. If the price of the underlying asset moves adversely from the perspective of the long party, periodic payments must be made to the short party.

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11. Tony Harris is planning to start trading in commodities. He has heard about the use of futures contracts on commodities and is learning more about them. Which of the following is Harris least likely to find associated with a futures contract? A. Existence of counterparty risk. B. Standardized contractual terms.

C. Payment of an initial margin to enter into a contract.

12. A German company that exports machinery is expecting to receive $10 million in three months. The firm converts all its foreign currency receipts into euros. The chief financial officer of the company wishes to lock in a minimum fixed rate for

converting the $10 million to euro but also wants to keep the flexibility to use the future spot rate if it is favorable. What hedging transaction is most likely to achieve this objective?

A. Selling dollars forward.

B. Buying put options on the dollar. C. Selling futures contracts on dollars.

13. A book publisher requires substantial quantities of paper. The publisher and a paper producer have entered into an agreement for the publisher to buy and the

producer to supply a given quantity of paper four months later at a price agreed upon today. This agreement is a: A. futures contract. B. forward contract. C. commodity swap.

14. The Standard & Poor’s Depositary Receipts (SPDRs) is an investment that tracks the S&P 500 stock market index. Purchases and sales of SPDRs during an average trading day are best described as:

A. primary market transactions in a pooled investment. B. secondary market transactions in a pooled investment.

C. secondary market transactions in an actively managed investment.

15. The Standard & Poor’s Depositary Receipts (SPDRs) is an exchange-traded fund in the United States that is designed to track the S&P 500 stock market index. The current price of a share of SPDRs is $113. A trader has just bought call options on shares of SPDRs for a premium of $3 per share. The call options expire in five months and have an exercise price of $120 per share. On the expiration date, the trader will exercise the call options (ignore any transaction costs) if and only if the shares of SPDRs are trading:

A. below $120 per share. B. above $120 per share. C. above $123 per share.

16. Which of the following statements about exchange-traded funds is most correct?

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A. Exchange-traded funds are not backed by any assets.

B. The investment companies that create exchange-traded funds are financial intermediaries.

C. The transaction costs of trading shares of exchange-traded funds are substantially greater than the combined costs of trading the underlying assets of the fund.

17. Jason Schmidt works for a hedge fund and he specializes in finding profit opportunities that are the result of inefficiencies in the market for convertible bonds—bonds that can be converted into a predetermined amount of a company’s common stock. Schmidt tries to find convertibles that are priced inefficiently relative to the underlying stock. The trading strategy involves the simultaneous purchase of the convertible bond and the short sale of the underlying common stock. The above process could best be described as: A. hedging. B. arbitrage. C. securitization.

18. Pierre-Louis Robert just purchased a call option on shares of the Michelin Group. A few days ago he wrote a put option on Michelin shares. The call and put options have the same exercise price, expiration date, and number of shares underlying.

Considering both positions, Robert’s exposure to the risk of the stock of the Michelin Group is: A. long. B. short. C. neutral.

19. An online brokerage firm has set the minimum margin requirement at 55 percent. What is the maximum leverage ratio associated with a position financed by this minimum margin requirement? A. 1.55. B. 1.82. C. 2.22.

20. A trader has purchased 200 shares of a non-dividend-paying firm on margin at a price of $50 per share. The leverage ratio is 2.5. Six months later, the trader sells these shares at $60 per share. Ignoring the interest paid on the borrowed amount and the transaction costs, what was the return to the trader during the six-month period? A. 20 percent. B. 33.33 percent. C. 50 percent.

21. Jason Williams purchased 500 shares of a company at $32 per share. The stock was bought on 75 percent margin. One month later, Williams had to pay interest on the amount borrowed at a rate of 2 percent per month. At that time, Williams received

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a dividend of $0.50 per share. Immediately after that he sold the shares at $28 per share. He paid commissions of $10 on the purchase and $10 on the sale of the stock. What was the rate of return on this investment for the one-month period? A. −12.5 percent. B. –15.4 percent. C. –50.1 percent.

22. Caroline Rogers believes the price of Gamma Corp. stock will go down in the near future. She has decided to sell short 200 shares of Gamma Corp. at the current market price of €47. The initial margin requirement is 40 percent. Which of the following is an appropriate statement regarding the margin requirement that Rogers is subject to on this short sale?

A. She will need to contribute €3,760 as margin. B. She will need to contribute €5,0 as margin.

C. She will only need to leave the proceeds from the short sale as deposit and does not need to contribute any additional funds.

23. The current price of a stock is $25 per share. You have $10,000 to invest. You borrow an additional $10,000 from your broker and invest $20,000 in the stock. If the maintenance margin is 30 percent, at what price will a margin call first occur? A. $9.62. B. $17.86. C. $19.71.

24. You have placed a sell market-on-open order—a market order that would automatically be submitted at the market’s open tomorrow and would fill at the market price. Your instruction, to sell the shares at the market open, is a(n): A. execution instruction. B. validity instruction. C. clearing instruction.

25. A market has the following limit orders standing on its book for a particular stock. The bid and ask sizes are number of shares in hundreds.

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What is the market?

A. 9.73 bid, offered at 10.14. B. 9.81 bid, offered at 10.10. C. 9.95 bid, offered at 10.02.

26. Consider the following limit order book for a stock. The bid and ask sizes are number of shares in hundreds

A new buy limit order is placed for 300 shares at ¥123.40. This limit order is said to:

A. take the market. B. make the market. C. make a new market.

27. Currently, the market in a stock is \"$54.62 bid, offered at $54.71.\" A new sell limit order is placed at $54.62. This limit order is said to: A. take the market. B. make the market. C. make a new market.

28. Jim White has sold short 100 shares of Super Stores at a price of$42 per share. He has also simultaneously placed a \"good-till-cancelled, stop 50, limit 55 buy\" order. Assume that if the stop condition specified by White is satisfied and the order

becomes valid, it will get executed. Excluding transaction costs, what is the maximum possible loss that White can have? A. $800. B. $1,300. C. Unlimited.

29. You own shares of a company that are currently trading at $30 a share. Your

technical analysis of the shares indicates a support level of $27.50. That is, if the price of the shares is going down, it is more likely to stay above this level rather than fall below it. If the price does fall below this level, however, you believe that the price may continue to decline. You have no immediate intent to sell the shares but are concerned about the possibility of a huge loss if the share price declines below the

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support level. Which of the following types of orders could you place to most appropriately address your concern? A. Short sell order.

B. Good-till-cancelled stop sell order. C. Good-till-cancelled stop buy order.

30. In an underwritten offering, the risk that the entire issue may not be sold to the public at the stipulated offering price is borne by the: A. issuer.

B. investment bank.

C. buyers of the part of the issue that is sold.

31 . A British company listed on the Alternative Investment Market of the London Stock Exchange, announced the sale of 6,686,665 shares to a small group of qualified investors at £0.025 per share. Which of the following best describes this sale?

A. Shelf registration. B. Private placement. C. Initial public offering.

32. A German publicly traded company, to raise new capital, gave its existing

shareholders the opportunity to subscribe for new shares. The existing shareholders could purchase two new shares at a subscription price of €4.58 per share for every 15 shares held. This is an example of a(n): A. rights offering. B. private placement. C. initial public offering.

33. Consider an order-driven system that allows hidden orders. The following four sell orders on a particular stock are currently in the system's limit order book. Based on the commonly used order precedence hierarchy, which of these orders will have precedence over others?

A. Order I (time of arrival of 9:52:01 ). B. Order II (time of arrival of 9:52:08). C. Order III (time of arrival of 9:53:04)

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34. Zhenhu Li has submitted an immediate-or-cancel buy order for 500 shares of a company at a limit price of CNY 74.25. There are two sell limit orders standing in that stock's order book at that time. One is for 300 shares at a limit price of CNY 74.30 and the other is for 400 shares at a limit price of CNY 74.35. How many shares in Li's order would get cancelled?

A. None (the order would remain open but unfilled). B. 200 (300 shares would get filled). C. 500 (there would be no fill).

35. A market has the following limit orders standing on its book for a particular stock:

Ian submits a day order to sell 1,000 shares, limit £19.83. Assuming that no more buy orders are submitted on that day after Ian submits his order, what would be Ian's average trade price? A. £19.70. B. £19.92. C. £20.05.

36. A financial analyst is examining whether a country's financial market is well functioning. She finds that the transaction costs in this market are low and trading volumes are high. She concludes that the market is quite liquid. In such a market: A. traders will find it hard to make use of their information.

B. traders will find it easy to trade and their trading will make the market less informationally efficient.

C. traders will find it easy to trade and their trading will make the market more informationally efficient.

37. The government of a country whose financial markets are in an early stage of development has hired you as a consultant on financial market regulation. Your first task is to prepare a list of the objectives of market regulation. Which of the following is least likely to be included in this list of objectives? A. Minimize agency problems in the financial markets.

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B. Ensure that financial markets are fair and orderly.

C. Ensure that investors in the stock market achieve a rate of return that is at least equal to the risk-free rate of return.

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Chapter 2 Portfolio Management: An Overview

PRACTICE PROBLEMS FOR CHAPTER 2

1. Investors should use a portfolio approach to: A. reduce risk. B. monitor risk. C. eliminate risk.

2. Which of the following is the best reason for an investor to be concerned with the composition of a portfolio? A. Risk reduction.

B. Downside risk protection.

C. Avoidance of investment disasters.

3. With respect to the formation of portfolios, which of the following statements is most accurate?

A. Portfolios affect risk less than returns. B. Portfolios affect risk more than returns. C. Portfolios affect risk and returns equally.

4. Which of the following institutions will on average have the greatest need for liquidity? A. Banks.

B. Investment companies.

C. Non-life insurance companies.

5. Which of the following institutional investors will most likely have the longest time horizon?

A. Defined benefit plan. B. University endowment. C. Life insurance company.

6. A defined benefit plan with a large number of retirees is likely to have a high need for

A. income. B. liquidity. C. insurance.

7. Which of the following institutional investors is most likely to manage investments

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in mutual funds?

A. Insurance companies. B. Investment companies. C. University endowments.

8. With respect to the portfolio management process, the asset allocation is determined in the: A. planning step. B. feedback step. C. execution step

9. The planning step of the portfolio management process is least likely to include an assessment of the client's A. securities. B. constraints. C. risk tolerance.

10. With respect to the portfolio management process, the rebalancing of a portfolio's composition is most likely to occur in the: A. planning step. B. feedback step. C. execution step.

11. An analyst gathers the following information for the asset allocations of three portfolios:

Which of the portfolios is most likely appropriate for a client who has a high degree of risk tolerance? A. Portfolio 1. B. Portfolio 2. C. Portfolio 3.

12. Which of the following investment products is most likely to trade at their net asset value per share? A. Exchange traded funds. B. Open-end mutual funds. C. Closed-end mutual funds.

13. Which of the following financial products is least likely to have a capital gain distribution?

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A. Exchange traded funds. B. Open-end mutual funds. C. Closed-end mutual funds.

14. Which of the following forms of pooled investments is subject to the least amount of regulation? A. Hedge funds.

B. Exchange traded funds. C. Closed-end mutual funds.

15. Which of the following pooled investments is most likely characterized by a few large investments? A. Hedge funds. B. Buyout funds.

C. Venture capital funds.

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Chapter 3 Portfolio Risk and Return: Part I

PRACTICE PROBLEMS FOR CHAPTER 3

1. An investor purchased 100 shares of a stock for $34.50 per share at the beginning of the quarter. If the investor sold all of the shares for $30.50 per share after receiving a $51.55 dividend payment at the end of the quarter, the holding period return is closest to: A. - 13.0%. B. - 11.6%. C. - 10.1%.

2. An analyst obtains the following annual rates of return for a mutual fund:

The fund's holding period return over the three-year period is closest to: A. 0.18%. B. 0.55%. C. 0.67%.

3. An analyst observes the following annual rates of return for a hedge fund:

The hedge fund's annual geometric mean return is closest to: A. 0.52%. B. 1.02%. C. 2.67%.

4. Which of the following return calculating methods is best for evaluating the annualized returns of a buy-and-hold strategy of an investor who has made annual deposits to an account for each of the last five years?

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A. Geometric mean return. B. Arithmetic mean return. C. Money-weighted return.

5. An investor evaluating the returns of three recently formed exchange-traded funds gathers the following information:

The ETF with the highest annualized rate of return is: A. ETF 1. B. ETF 2. C. ETF 3.

6. With respect to capital market theory, which of the following asset characteristics is least likely to impact the variance of an investor's equally weighted portfolio? A. Return on the asset.

B. Standard deviation of the asset.

C. Covariances of the asset with the other assets in the portfolio.

7. A portfolio manager creates the following portfolio:

If the correlation of returns between the two securities is 0.40, the expected standard deviation of the portfolio is closest to: A. 10.7%. B. 11.3%. C. 12.1%.

8. A portfolio manager creates the following portfolio:

If the covariance of returns between the two securities is - 0.0240, the expected

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standard deviation of the portfolio is closest to: A. 2.4%. B. 7.5%. C. 9.2%.

The following information relates to Questions 9-10 A portfolio manager creates the following portfolio:

9. If the standard deviation of the portfolio is 14.40%, the correlation between the two securities is equal to: A. - 1.0. B. 0.0. C. 1.0.

10. If the standard deviation of the portfolio is 14.40%, the covariance between the two securities is equal to: A. 0.0006. B. 0.0240. C. 1.0000.

The following information relates to Questions 11-14

An analyst observes the following historic geometric returns:

11 . The real rate of return for equities is closest to: A. 5.4%. B. 5.8%. C. 5.9%.

12. The real rate of return for corporate bonds is closest to: A. 4.3%. B. 4.4%. C. 4.5%.

13. The risk premium for equities is closest to:

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A. 5.4%. B. 5.5%. C. 5.6%.

14. The risk premium for corporate bonds is closest to: A. 3.5%. B. 3.9%. C. 4.0%.

15. With respect to trading costs, liquidity is least likely to impact the: A. stock price. B. bid-ask spreads.

C. brokerage commissions.

16. Evidence of risk aversion is best illustrated by a risk-return relationship that is: A. negative. B. neutral. C. positive.

17. With respect to risk-averse investors, a risk-free asset will generate a numerical utility that is:

A. the same for all individuals.

B. positive for risk-averse investors.

C. equal to zero for risk seeking investors

18. With respect to utility theory, the most risk-averse investor will have an indifference curve with the: A. most convexity.

B. smallest intercept value. C. greatest slope coefficient.

12　A, which 19. With respect to an investor's utility function expressed as:u=E(r)- 2of the following values for the measure for risk aversion has the least amount of risk

aversion? A. - 4. B. 0. C. 4.

The following information relates to Questions 20-23

A financial planner has created the following data to illustrate the application of utility theory to portfolio selection:

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20. A risk-neutral investor is most likely to choose: A. Investment 1. B. Investment 2. C. Investment 3. Expected

Standard Deviation (% ) 2 8 15 30

21. If an investor's utility function is expressed as U = E(r) ~A& and the measure for risk aversion has a value of- 2, the risk-seeking investor is most likely to choose: A. Investment 2. B. Investment 3. C. Investment 4.

22. If an investor's utility function is expressed as U = E(r) - ~A& and the measure for risk aversion has a value of2, the risk-averse investor is most likely to choose: A. Investment 1. B. Investment 2. C. Investment 3.

23. If an investor's utility function is expressed as U =E(r) - ~A& and the measure for risk aversion has a value of4, the risk-averse investor is most likely to choose: A. Investment 1. B. Investment 2. C. Investment 3.

24. With respect to the mean-variance portfolio theory, the capital allocation line, CAL, is the combination of the risk-free asset and a portfolio of all: A. risky assets. B. equity securities. C. feasible investments.

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25. Two individual investors with different levels of risk aversion will have optimal portfolios that are:

A. below the capital allocation line. B. on the capital allocation line. C. above the capital allocation line.

The following information relates to Questions 26-28 A portfolio manager creates the following portfolio:

26. If the portfolio of the two securities has an expected return of15%, the proportion invested in Security 1 is: A. 25%. B. 50%. C. 75%.

27. If the correlation of returns between the two securities is - 0.15, the expected standard deviation of an equal-weighted portfolio is closest to: A. 13.04%. B. 13.60%. C. 13.87%.

28. If the two securities are uncorrelated, the expected standard deviation of an equal-weighted portfolio is closest to: A. 14.00%. B. 14.14%. C. 20.00%.

29. As the number of assets in an equally-weighted portfolio increases, the contribution of each individual asset's variance to the volatility of the portfolio: A. increases. B. decreases.

C. remains the same.

30. With respect to an equally-weighted portfolio made up of a large number of assets, which of the following contributes the most to the volatility of the portfolio? A. Average variance of the individual assets. B. Standard deviation of the individual assets. C. Average covariance between all pairs of assets.

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31. The correlation between assets in a two-asset portfolio increases during a market decline. If there is no change in the proportion of each asset held in the portfolio or the expected standard deviation of the individual assets, the volatility of the portfolio is most likely to: A. increase. B. decrease.

C. remain the same.

The following information relates to Questions 32-34

An analyst has made the following return projections for each of three possible outcomes with an equal likelihood of occurrence:

32. Which pair of assets is perfectly negatively correlated? A. Asset 1 and Asset 2. B. Asset 1 and Asset 3. C. Asset 2 and Asset 3.

33. If the analyst constructs two-asset portfolios that are equally-weighted, which pair of assets has the lowest expected standard deviation? A. Asset 1 and Asset 2. B. Asset 1 and Asset 3. C. Asset 2 and Asset 3.

34. If the analyst constructs two-asset portfolios that are equally weighted, which pair of assets provides the least amount of risk reduction? A. Asset 1 and Asset 2. B. Asset 1 and Asset 3. C. Asset 2 and Asset 3.

35. Which of the following statements is least accurate? The efficient frontier is the set of all attainable risky assets with the:

A. highest expected return for a given level of risk. B. lowest amount of risk for a given level of return. C. highest expected return relative to the risk-free rate.

36. The portfolio on the minimum-variance frontier with the lowest standard deviation is:

A. unattainable.

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B. the optimal risky portfolio.

C. the global minimum-variance portfolio.

37. The set of portfolios on the minimum-variance frontier that dominates all sets of portfolios below the global minimum-variance portfolio is the: A. capital allocation line.

B. Markowitz efficient frontier. C. set of optimal risky portfolios.

38. The dominant capital allocation line is the combination of the risk-free asset and the:

A. optimal risky portfolio.

B. levered portfolio of risky assets. C. global minimum-variance portfolio.

39. Compared to the efficient frontier of risky assets, the dominant capital allocation line has higher rates of return for levels of risk greater than the optimal risky portfolio because of the investor's ability to: A. lend at the risk-free rate. B. borrow at the risk-free rate. C. purchase the risk-free asset.

40. With respect to the mean-variance theory, the optimal portfolio is determined by each individual investor's: A. risk-free rate. B. borrowing rate. C. risk preference.

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Chapter 4 Portfolio Risk and Return: Part II

PRACTICE PROBLEMS FOR CHAPTER 4

1. The line depicting the risk and return of portfolio combinations of a risk-free asset and any risky asset is the: A. security market line. B. capital allocation line. C. security characteristic line.

2. The portfolio of a risk-free asset and a risky asset has a better risk-return tradeoff than investing in only one asset type because the correlation between the risk-free asset and the risky asset is equal to: A. - 1.0. B. 0.0. C. 1.0.

3. With respect to capital market theory, an investor's optimal portfolio is the combination of a risk-free asset and a risky asset with the highest: A. expected return. B. indifference curve.

C. capital allocation line slope.

4. Highly risk-averse investors will most likely invest the majority of their wealth in: A. risky assets. B. risk-free assets.

C. the optimal risky portfolio.

5. The capital market line, CML, is the graph of the risk and return of portfolio combinations consisting of the risk-free asset and: A. any risky portfolio. B. the market portfolio. C. the leveraged portfolio.

6. Which of the following statements most accurately defines the market portfolio in capital market theory? The market portfolio consists of all: A. risky assets. B. tradable assets. C. investable assets.

7. With respect to capital market theory, the optimal risky portfolio:

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A. is the market portfolio.

B. has the highest expected return. C. has the lowest expected variance.

8. Relative to portfolios on the CML, any portfolio that plots above the CML is considered: A. inferior. B. inefficient. C. unachievable.

9. A portfolio on the capital market line with returns greater than the returns on the market portfolio represents a(n): A. lending portfolio. B. borrowing portfolio. C. unachievable portfolio.

10. With respect to the capital market line, a portfolio on the CML with returns less than the returns on the market portfolio represents a(n): A. lending portfolio. B. borrowing portfolio. C. unachievable portfolio.

11. Which of the following types of risk is most likely avoided by forming a diversified portfolio? A. Total risk.

B. Systematic risk. C. Nonsystematic risk.

12. Which of the following events is most likely an example of nonsystematic risk? A. A decline in interest rates.

B. The resignation of chief executive officer. C. An increase in the value of the U.S. dollar.

13. With respect to the pricing of risk in capital market theory, which of the following statements is most accurate? A. All risk is priced.

B. Systematic risk is priced. C. Nonsystematic risk is priced.

14. The sum of an asset's systematic variance and its nonsystematic variance of returns is equal to the asset's: A. beta. B. total risk. C. total variance.

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15. With respect to return-generating models, the intercept term of the market model is the asset's estimated: A. beta. B. alpha. C. variance.

16. With respect to return-generating models, the slope term of the market model is an estimate of the asset's: A. total risk.

B. systematic risk. C. nonsystematic risk.

17. With respect to return-generating models, which of the following statements is most accurate? Return-generating models are used to directly estimate the: A. expected return of a security.

B. weights of securities in a portfolio. C. parameters of the capital market line.

The following information relates to Questions 18-20 An analyst gathers the following information:

18, which security has the highest total risk? A. Security 1. B. Security 2. C. Security 3.

19. Which security has the highest beta measure? A. Security 1. B. Security 2. C. Security 3.

20. Which security has the least amount of market risk? A. Security 1. B. Security 2. C. Security 3.

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21 . With respect to capital market theory, the average beta of all assets in the market is:

A. less than 1.0. B. equal to 1.0. C. greater than 1.0.

22. The slope of the security characteristic line is an asset's: A. beta.

B. excess return. C. risk premium.

23. The graph of the capital asset pricing model is the: A. capital market line. B. security market line.

C. security characteristic line.

24. With respect to capital market theory, correctly priced individual assets can be plotted on the:

A. capital market line. B. security market line. C. capital allocation line.

25. With respect to the capital asset pricing model, the primary determinant of expected return of an individual asset is the: A. asset's beta.

B. market risk premium. C. asset's standard deviation.

26. With respect to the capital asset pricing model, which of the following values of beta for an asset is most likely to have an expected return for the asset that is less than the risk-free rate? A. - 0.5 B. 0.0 C. 0.5

27. With respect to the capital asset pricing model, the market risk premium is: A. less than the excess market return. B. equal to the excess market return. C. greater than the excess market return.

The following information relates to Questions 28-31 An analyst gathers the following information:

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28. With respect to the capital asset pricing model, if the expected market risk premium is 6% and the risk-free rate is 3%, the expected return for Security 1 is closest to: A. 9.0%. B. 12.0%. C. 13.5%.

29. With respect to the capital asset pricing model, if expected return for Security 2 is equal to 11.4% and the risk-free rate is 3%, the expected return for the market is closest to: A. 8.4%. B. 9.0%. C. 10.3%.

30. With respect to the capital asset pricing model, if the expected market risk premium is 6% the security with the highest expected return is: A. Security 1. B. Security 2. C. Security 3.

31 . With respect to the capital asset pricing model, a decline in the expected market return will have the greatest impact on the expected return of: A. Security 1. B. Security 2. C. Security 3.

32. Which of the following performance measures is consistent with the CAPM? A. M-squared. B. Sharpe ratio. C. Jensen's alpha.

33. Which of the following performance measures does not require the measure to be compared to another value? A. Sharpe ratio. B. Treynor ratio. C. Jensen's alpha.

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34. Which of the following performance measures is most appropriate for an investor who is not fully diversified? A. M -squared. B. Treynor ratio. C. Jensen's alpha.

35. Analysts who have estimated returns of an asset to be greater than the expected returns generated by the capital asset pricing model should consider the asset to be: A. overvalued. B. undervalued. C. properly valued.

36. With respect to capital market theory, which of the following statements best describes the effect of the homogeneity assumption? Because all investors have the same economic expectations of future cash flows for all assets, investors will invest in:

A. the same optimal risky portfolio. B. the Standard and Poor's 500 Index. C. assets with the same amount of risk.

37. With respect to capital market theory, which of the following assumptions allows for the existence of the market portfolio? All investors: A. are price takers.

B. have homogeneous expectations.

C. plan for the same, single holding period.

38. The intercept of the best fit line formed by plotting the excess returns of a manager's portfolio on the excess returns of the market is best described as Jensen's: A. beta. B. ratio. C. alpha.

39. Portfolio managers who are maximizing risk-adjusted returns will seek to invest more in securities with:

A. lower values of Jensen's alpha. B. values of Jensen's alpha equal to 0. C. higher values of Jensen's alpha.

40. Portfolio managers, who are maximizing risk-adjusted returns, will seek to invest less in securities with:

A. lower values for nonsystematic variance. B. values of nonsystematic variance equal to 0. C. higher values for nonsystematic variance.

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Chapter 5 Forward Markets and Contracts

PRACTICE PROBLEMS FOR CHAPTER 5

1. The treasurer of Company A expects to receive a cash inflow of $15,000,000 in 90 days. The treasurer expects short-term interest rates to fall during the next 90 days. In order to hedge against this risk, the treasurer decides to use an FRA that expires in 90 days and is based on 90-day LIBOR. The FRA is quoted at 5 percent. At expiration, LIBOR is 4.5 percent. Assume that the notional principal on the contract is $15,000,000.

A. Indicate whether the treasurer should take a long or short position to hedge interest rate risk.

B. Using the appropriate terminology, identify the type of FRA used here.

C. Calculate the gain or loss to Company A as a consequence of entering the FRA.

2. Suppose that a party wanted to enter into an FRA that expires in 42 days and is based on 137-day LIBOR. The dealer quotes a rate of4.75 percent on this FRA.

Assume that at expiration, the 137-day LIBOR is 4 percent and the notional principal is $20,000,000.

A. What is the term used to describe such nonstandard instruments? B. Calculate the FRA pay off on a long position.

3. Assume Sun Microsystems expects to receive €20,000,000 in 90 days. A dealer provides a quote of$0.875 for a currency forward contract to expire in 90 days.

Suppose that at the end of90 days, the rate is $0.90. Assume that settlement is in cash. Calculate the cash flow at expiration if Sun Microsystems enters into a forward contract expiring in 90days to buy dollars at $0.875.

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Chapter 6 Future Markets and Contracts

PRACTICE PROBLEMS FOR CHAPTER 6

1. A. In February, Dave Parsons purchased a June futures contract on the NASDAQ 100 Index. He decides to close out his position in April. Describe how he would do so.

B. Peggy Smith is a futures trader. In early August, she took a short position in an S&P 500 Index futures contract expiring in September. After a week, she decides to close out her position. Describe how she would do so.

2. A gold futures contract requires the long trader to buy 100 troy ounces of gold. The initial margin requirement is $2,000, and the maintenance margin requirement is $1,500.

A. Matthew Evans goes long one June gold futures contract at the futures price of $320 per troy ounce. When could Evans receive a maintenance margin call?

B. Chris Tosca sells one August gold futures contract at a futures price of $323 per ounce. When could Tosca receive a maintenance margin call?

3. A copper futures contract requires the long trader to buy 25,000 lbs of copper. A trader buys one November copper futures contract at a price of$0.75/lb.

Theoretically, what is the maximum loss this trader could have? Another trader sells one November copper futures contract. Theoretically, what is the maximum loss this trader with a short position could have?

4. Consider a hypothetical futures contract in which the current price is $212. The initial margin requirement is $10, and the maintenance margin requirement is $8. You go long 20 contracts and meet all margin calls but do not withdraw any excess margin. A. When could there be a margin call?

B. Complete the table below and explain any funds deposited. Assume that the

contract is purchased at the settlement price of that day so there is no mark to-market profit or loss on the day of purchase.

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C. How much are your total gains or losses by the end of Day 6?

5. Sarah Moore has taken a short position in one Chicago Board of Trade Treasury bond futures contract with a face value of $100,000 at the price of 96 6/32. The initial margin requirement is $2,700, and the maintenance margin requirement is $2,000. Moore would meet all margin calls but would not withdraw any excess margin. A. Complete the table below and provide an explanation of any funds deposited.

Assume that the contract is purchased at the settlement price of that day, so there is no mark-to-market profit or loss on the day of purchase.

B. How much are Moore's total gains or losses by the end of Day 6?

6. A. The IMM index price in yesterday's newspaper for a September Eurodollar futures contract is 95.23. What is the actual price of this contract?

B. The IMM index price in today's newspaper for the contract mentioned above is 95.25. How much is the change in the actual futures price of the contract since the previous day?

7. Consider the following statements about a futures clearinghouse:

Statement 1 \"A clearinghouse in futures contracts allows for the offsetting of contracts prior to delivery.'

Statement 2 \"A clearinghouse in futures contracts collects initial margin

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{performance bonds) from both the long and short sides in the contract:' Are the statements most likely correct or incorrect? A. Both statements are correct.

B. Statement 1 is incorrect, but Statement 2 is correct. C. Statement 1 is correct, but Statement 2 is incorrect.

8. A trader enters into a short position of 20 futures contracts at an initial futures price of $85.00.lnitial margin, per contract, is $7.50. Maintenance margin, per contract, is $7.00. Each contract is for one unit of the underlying asset. Over the next three days, the contract settles at $86.00, $84.25, and $85.50, respectively.

Assuming the trader does not withdraw any funds from his/her margin account during the period, but does post variation margin sufficient to meet any maintenance margin calls, the balance in the margin account will be:

A. $140.00 at initiation and $150.00 at settlement on Day 3. B. $150.00 at initiation and $150.00 at settlement on Day 3. C. $150.00 at initiation and $160.00 at settlement on Day 3.

9. Consider the following statements regarding futures contracts that may be settled by delivery:

Statement 1 \"The long initiates the delivery process.\"

Statement 2 \"For many such contracts, delivery can take place any business day during the delivery month:'

Are the statements most likely correct or incorrect? A. Both statements are correct.

B. Statement 1 is incorrect, but Statement 2 is correct. C. Statement 1 is correct, but Statement 2 is incorrect

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Chapter 7 Option Markets and Contracts

PRACTICE PROBLEMS FOR CHAPTER 7

1. A. Calculate the pay off at expiration for a call option on the S&P 100 stock index in which the underlying price is 579.32 at expiration, the multiplier isn100, and the exercise price is: i. 450. ii. 650.

B. Calculate the pay off at expiration for a put option on the S&P 100 in which the underlying is at 579.32 at expiration, the multiplier is 100 and the exercise price is: i 450. ii. 650.

2. A. Calculate the pay off at expiration for a call option on a bond in which the

underlying is at $0.95 per $1 par at expiration, the contract is on $100,000 face value bonds, and the exercise price is: i. $0.85. ii. $1.15.

B. Calculate the pay off at expiration for a put option on a bond in which the

underlying is at $0.95 per $1 par at expiration, the contract is on $100,000 face value bonds, and the exercise price is: i. $0.85. ii. $1.15.

3. A. Calculate the pay off at expiration for a call option on an interest rate in which the underlying is a 180-day interest rate at 6.53 percent at expiration, the notional principal is $10 million, and the exercise price is: i. 5 percent. ii. 8 percent.

B. Calculate the pay off at expiration for a put option on an interest rate in which the underlying is a 180-day interest rate at 6.53 percent at expiration, the notional principal is $10 million, and the exercise price is: i. 5 percent. ii. 8 percent.

4. A. Calculate the pay off at expiration for a call option on the British pound in which the underlying is at $1.438 at expiration, the options are on 125,000 British pounds, and the exercise price is:

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i. $1.35. ii. $1.55.

B. Calculate the pay off at expiration for a put option on the British pound where the underlying is at $1.438 at expiration, the options are on 125,000 British pounds, and the exercise price is: i. $1.35. ii. $1.55.

5. A. Calculate the pay off at expiration for a call option on a futures contract in which the underlying is at 1136.76 at expiration, the options are on a futures contract for $1,000, and the exercise price is: i 1130. ii 1140.

B. Calculate the pay off at expiration for a put option on a futures contract in which the underlying is at 1136.76 at expiration, the options are on a futures contract for $1,000, and the exercise price is: i 1130. ii 1140.

6. Consider a stock index option that expires in 75 days. The stock index is currently at 1240. and makes no cash payments during the life of the option. Assume that the stock index has a multiplier of1. The risk-free rate is 3 percent.

A. Calculate the lowest and highest possible prices for European-style call options on the above stock index with exercise prices of: i 1225. ii 1255.

B. Calculate the lowest and highest possible prices for European-style put options on the above stock index with exercise prices of: i 1225. ii 1255.

7. A. Consider American-style call and put options on a bond. The options expire in 60 days. The bond is currently at $1.05 per $1 par and makes no cash payments

during the life of the option. The risk-free rate is 5.5 percent. Assume that the contract is on $1 face value bonds. Calculate the lowest and highest possible prices for the calls and puts with exercise prices of: i $0.95. ii $1.10.

B. Consider European-style call and put options on a bond. The options expire in 60 days. The bond is currently at $1.05 per $1 par and makes no cash payments

during the life of the option. The risk-free rate is 5.5 percent. Assume that the contract is on $1 face value bonds. Calculate the lowest and highest possible prices for the calls and puts with exercise prices of: i $0.95.

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ii $1.10.

8. You are provided with the following information on put and call options on a stock: Call price, c0 = $6. Put price, p0 = $2.75 Exercise price, X = $30

Days to option expiration = 219 Current stock price, S0 = $33.19

Put- call parity shows the equivalence of a call/bond portfolio (fiduciary call) and a put/underlying portfolio {protective put). Illustrate put- call parity assuming stock prices at expiration (ST) of$20 and of$40. Assume that the risk-free rate, r, is 4 percent.

9. With respect to put-call parity, a protective put consists of a European: A. put option and the underlying asset. B. call option and the underlying asset.

C. put option and a risk-free bond with a face value equal to the exercise price of a European call option on the underlying asset.

10. Unless far out-of-the-money or far in-the-money, for otherwise identical call options, the longer the term to expiration, the lower the price for: A. American call options, but not European call options. B. both European call options and American call options. C. neither European call options nor American call options.

11. A call option with an exercise price of65 will expire in 73 days. No cash payments will be made by the underlying asset over the life of the option. If the underlying asset price is at 70 and the risk-free rate of return is 5.0 percent, the lower bounds for an American call option and a European call option, respectively, are closest to:

12. A put option with an exercise price of 75 will expire in 73 days. No cash payments will be made by the underlying asset over the life of the option. If the underlying asset is at 70 and the risk-free rate of return is 5.0 percent, the lower bounds for an American put option and a European put option, respectively, are closest to:

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13. Compare an American call with a strike of50 which expires in 90 days to an American call on the same underlying asset which has a strike of 60 and expires in 120 days. The underlying asset is selling at 55. Consider the following statements: Statement 1 \"The 50 strike call is in-the-money and the 60 strike call is out-of-the-money:'

Statement 2 \"The time value of the 60 strike call, as a proportion of the 60 strike call's premium, exceeds the time value of the 50 strike call as a proportion of the 50 strike call's premium:'

Are the statements most likely correct or incorrect? A. Both statements are correct.

B. Statement 1 is incorrect, but Statement 2 is correct. C. Statement 1 is correct, but Statement 2 is incorrect.

14. Marla Johnson priced both a put and a call on Alpha Numero using standard option pricing software. To use the program, Johnson entered the strike price of the options, the price of the underlying asset, an estimate of the risk-free rate, the time to expiration of the option, and an estimate of the volatility of the returns of the

underlying asset into her computer. Both prices calculated by the software program were substantially above the actual market values observed in that day's exchange trading. Which of the following is the most likely explanation? The value Johnson entered into the program for the: A. estimate of volatility was too low. B. estimate of volatility was too high.

C. time to expiration of the options was too low.

15. A call with a strike price of $40 is available on a stock currently trading for $35. The call expires in one year and the risk-free rate of return is 10%. The lower bound on this call's value: A. is zero.

B. is $5 if the call is American-style. C. is $1.36 if the call is European-style.

16. An investor writes a call option priced at $3 with an exercise price of$100 on a stock that he owns. The investor paid $85 for the stock. If at expiration of the call option the stock price has risen to $110, the profit for the investor's position would be closest to: A. $3.

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B. $12. C. $18.

17. If an investor paid $5 for a put option with an exercise price of$60 that is in-the-money $2, the price of the underlying is closest to: A. $53. B. $58. C. $62.

18. An investor paid $10 for an option that is currently in-the-money $5. If the underlying is priced at $90, which of the following best describes that option? A. Call option with an exercise price of$80. B. Put option with an exercise price of$95. C. Call option with an exercise price of$95.

19. Assume the probability of bankruptcy for the underlying asset is high. Compared to the price of an American put option on the same underlying asset, the price of an equivalent European put option will most likely be: A. lower. B. higher.

C. the same because the probability of bankruptcy does not affect pricing.

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Chapter 8 Swap Markets and Contracts

PRACTICE PROBLEMS FOR CHAPTER 8

1. A U.S. company enters into a currency swap in which it pays a fixed rate of

5.5 percent in euros and the counterparty pays a fixed rate of6.75 percent in dollars. The notional principals are $100 million and €116.5 million. Payments are made semiannually and on the basis of30 days per month and 360 days per year. A. Calculate the initial exchange of payments that takes place at the beginning of the swap.

B. Calculate the semiannual payments.

C. Calculate the final exchange of payments that takes place at the end of the swap.

2. A British company enters into a currency swap in which it pays a fixed rate of 6 percent in dollars and the counterparty pays a fixed rate of 5 percent in pounds. The notional principals are £75 million and $105 million. Payments are made semiannually and on the basis of30 days per month and 360 days per year.

A. Calculate the initial exchange of payments that takes place at the beginning of the swap.

B. Calculate the semiannual payments.

C. Calculate the final exchange of payments that takes place at the end of the swap.

3. A U.S. company has entered into an interest rate swap with a dealer in which the notional principal is $50 million. The company will pay a floating rate of LIBOR and receive a fixed rate of5.75 percent. Interest is paid semiannually, and the current LIBOR is 5.15 percent. Calculate the first payment and indicate which party pays which. Assume that floating-rate payments will be made on the basis of180/360 and fixed-rate payments will be made on the basis of180/365.

4. A German company that has issued floating-rate notes now believes that interest rates will rise. It decides to protect it self against this possibility by entering into an interest rate swap with a dealer. In this swap, the notional principal is €25 million and the company will pay a fixed rate of5.5 percent and receive Euribor. The current

Euribor is 5 percent. Calculate the first payment and indicate which party pays which. Assume that floating-rate payments will be made on the basis of90/360 and fixed-rate payments will be made on the basis of90/365.

5. An asset manager wishes to reduce his exposure to large-cap stocks and increase his exposure to small-cap stocks. He seeks to do so using an equity swap. He agrees to pay a dealer the return on a large-cap index, and the dealer agrees to pay the manager

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the return on a small-cap index. For each of the scenarios listed below, calculate the first overall payment and indicate which party makes the payment. Assume that payments are made semiannually. The notional principal is $100 million.

A. The value of the small-cap index starts off at 6.40, and the large-cap index starts at 1130.20. In six months, the small-cap index is at 625.60 and the large-cap index is at 1251.83.

B. The value of the small-cap index starts off at 6.40 and the large-cap index starts at 1130.20. In six months, the small-cap index is at 703.23 and the large-cap index is at 1143.56.

6. An asset manager wishes to reduce her exposure to small-cap stocks and increase her exposure to fixed-income securities. She seeks to do so using an equity swap. She agrees to pay a dealer the return on a small-cap index and the dealer agrees to pay the manager a fixed rate of5.5 percent. For each of the scenarios listed below, calculate the overall payment six months later and indicate which party makes the payment. Assume that payments are made semiannually (180 days per period) and there are 365 days in each year. The notional principal is $50 million.

A. The value of the small-cap index starts off at 234.10 and six months later is at 238.41.

B. The value of the small-cap index starts off at 234.10 and six months later is at 241.27.

7. An asset manager wishes to reduce his exposure to fixed-income securities and increase his exposure to large-cap stocks. He seeks to do so using an equity swap. He agrees to pay a dealer a fixed rate of4.5 percent, and the dealer agrees to pay the manager the return on a large-cap index. For each of the scenarios listed below, calculate the overall payment six months later and indicate which party makes it.

Assume that payments are made semiannually (180 days per period) and there are 365 days in a year. The notional principal is $25 million.

A. The value of the large-cap index starts off at 578.50 and six months later is at 622.54.

B. The value of the large-cap index starts off at 578.50 and six months later is at 581.35.

8. The party agreeing to make the fixed-rate payment might also be required to make the variable payment in:

A. an equity swap but not an interest rate swap. B. an interest rate swap but not an equity swap. C. both an equity swap and an interest rate swap.

9. The formula for calculating the pay off at expiration of a forward rate agreement (FRA) is:

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Use the above formula to solve for the payment at expiration for an investor who went long a 3 x 9 FRA with a notional principal of$10,000,000 where the 180-day LIBOR rate at expiration is 4.80 percent and the forward contract rate was set at 5.20 percent. A. -$588,235. B. -$19,531. C. $19,493.

10. Agrawal Telecom is considering issuing $10,000,000 of6.75% fixed-coupon bonds to finance an expansion. Alternatively, Agrawal could borrow the funds in the Eurodollar market using a series of six-month LIBOR contracts. A swap contract matching the maturity of the 6.75% coupon bonds is available. The swap uses

six-month LIBOR as the floating-rate component. Identify the interest rate swap that Agrawal should use to convert the Eurodollar borrowing to the equivalent of issuing fixed-income bonds.

A. Agrawal would use a pay-fixed, receive-floating interest rate swap. B. Agrawal would use a pay-floating, receive-fixed interest rate swap.

C. Agrawal would use a total return equity payer swaption to evaluate the two borrowing options.

11. Determine the upcoming payments on a swap with a notional principal of

$5,000,000 in which the fixed-rate payer makes semiannual fixed payments of 8%and the counterparty makes floating-rate payments at Euribor. The Euribor rate at the last settlement period was 7.25%.

The fixed-rate payments are made on the basis of180 days in the settlement period and 365 days in a year. The floating-rate payments use a 180/360 day convention. A. The net payment is $16,010 from the fixed-rate payer to the floating-rate payer. B. The net payment is $18,750 from the fixed-rate payer to the floating-rate payer. C. The net payment is $18,750 from the floating-rat e payer to the fixed-rate payer.

12. A portfolio manager entered into a swap with a dealer. The swap's notional

principal is $100 million, payments are to be made semiannually, and the swap allows netting of payments. The dealer agrees to pay a fixed annual rate of4 percent while the asset manager agrees to pay the return on a stock index. The index value at initiation of the swap is 280. If the value of the stock index six months after initiation of the swap is 250, the payment from the dealer to the asset manager would be closest to: A. $2 million. B. $9 million. C. $13 million.

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Chapter 9 Risk Management Applications of Option

Strategies

PRACTICE PROBLEMS FOR CHAPTER 9

1. Consider a call option selling for $4 in which the exercise price is $50. A. Determine the value at expiration and the profit for a buyer under the following outcomes:

i. The price of the underlying at expiration is $55. ii. The price of the underlying at expiration is $51. iii. The price of the underlying at expiration is $48.

B. Determine the value at expiration and the profit for a seller under the following outcomes:

i. The price of the underlying at expiration is $49. ii. The price of the underlying at expiration is $52. iii. The price of the underlying at expiration is $55. C. Determine the following:

i. The maximum profit to the buyer (maximum loss to the seller). ii. The maximum loss to the buyer (maximum profit to the seller). D. Determine the breakeven price of the underlying at expiration.

2. Suppose you believe that the price of a particular underlying, currently selling at $99, is going to increase substantially in the next six months. You decide to purchase a call option expiring in six months on this underlying. The call option has an exercise price of $105 and sells for $7.

A. Determine the profit under the following outcomes for the price of the underlying six months from now: i. $99. ii. $104. iii. $105. iv. $109.

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v. $112. vi. $115.

B. Determine the breakeven price of the underlying at expiration. Check that your answer is consistent with the solution to Part A of this problem.

3. Consider a put option on the NASDAQ 1 00 selling for $106.25 in which the exercise price is 2100.

A. Determine the value at expiration and the profit for a buyer under the following outcomes:

i. The price of the underlying at expiration is 2125. ii. The price of the underlying at expiration is 2050. iii. The price of the underlying at expiration is 1950.

B. Determine the value at expiration and the profit for a seller under the following outcomes:

i. The price of the underlying at expiration is 1975. ii. The price of the underlying at expiration is 2150. C. Determine the following:

i. The maximum profit to the buyer (maximum loss to the seller). ii. The maximum loss to the buyer (maximum profit to the seller). D. Determine the breakeven price of the underlying at expiration.

4. Suppose you believe that the price of a particular underlying, currently selling at $99, will decrease considerably in the next six months. You decide to purchase a put option expiring in six months on this underlying. The put option has an exercise price of $95 and sells for $5.

A. Determine the profit for you under the following outcomes for the price of the underlying six months from now: i. $100. ii. $95. iii. $93. iv. $90. v. $85.

B. Determine the breakeven price of the underlying at expiration. Check that your answer is consistent with the solution to Part A of this problem. C. i. What is the maximum profit that you can have?

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ii. At what expiration price of the underlying would this profit be realized?

5. You simultaneously purchase an underlying priced at $77 and write a call option on it with an exercise price of$80 and selling at $6.

A. What is the term commonly used for the position that you have taken? B. Determine the value at expiration and the profit for your strategy under the following outcomes:

i. The price of the underlying at expiration is $70. ii. The price of the underlying at expiration is $75. iii. The price of the underlying at expiration is $80. iv. The price of the underlying at expiration is $85. C. Determine the following: i. The maximum profit. ii. The maximum loss.

iii. The expiration price of the underlying at which you would realize the maximum profit.

iv. The expiration price of the underlying at which you would incur the maximum loss.

D. Determine the breakeven price at expiration.

6. Suppose you simultaneously purchase an underlying priced at $77 and a put option on it, with an exercise price of$75 and selling at $3.

A. What is the term commonly used for the position that you have taken? B. Determine the value at expiration and the profit for your strategy under the following outcomes:

i. The price of the underlying at expiration is $70. ii. The price of the underlying at expiration is $75. iii. The price of the underlying at expiration is $80. iv. The price of the underlying at expiration is $85. v. The price of the underlying at expiration is $90. C. Determine the following: i. The maximum profit. ii. The maximum loss.

iii. The expiration price of the underlying at which you would incur the maximum

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loss.

D. Determine the breakeven price at expiration.

7. The recent price per share of Dragon Vacations, Inc. is $50 per share. Calls with exactly six months left to expiration are available on Dragon with strikes of $45, $50, and $55. The prices of the calls are $8.75, $6.00, and $4.00, respectively. Assume that each call contract is for 100 shares of stock and that at initiation of the strategy the investor purchases 100 shares of Dragon at the current market price. Further assume that the investor will close out the strategy in six months when the options expire, including the sale of any stock not delivered against exercise of a call, whether the stock price goes up or goes down. If the closing price of Dragon stock in six months is exactly $60, the profit to a covered call using the $50 strike call is closest to: A. $400. B. $600. C. $1,600.

8. The recent price per share of Win Big, Inc. is €50 per share. Verna Hillsborough buys 100 shares at €50. To protect against a fall in price, Hillsborough buys one put, covering 100 shares of Win Big, with a strike price of€40. The put premium is €1 per share. If Win Big closes at €45 per share at the expiration of the put and Hillsborough sells her shares at €45, Hillsborough's profit from the stay/put is closest to: A. -€1,100. B. -€600. C. €900.

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