Futures and Options
1. Which one of the following scenarios is in-the-money?
A. Put with a strike price of $32 and an underlying stock price of $32.50
B. Call with a strike price of $25 and an underlying stock price of $24.85
C. Put with a strike price of $75 and an underlying stock price of $76.24
D. Call with a strike price of $80 and an underlying stock price of $80.42
2. A call option with 3 months to expiration currently sells for $1.23. A put option with the same expiration sells for $1.67. The options are European style. The risk-free rate is 2.5 percent and the strike price of both options is $35.00. What’s the current stock price?
A. $32.19 B. $35.87 C. $27.82 D. $34.34
3. Which of the following best describes a speculator?
A. An investor who invests only in risk-free securities
B. An investor who purchases government bonds
C. An investor who accepts the risk of loss for the chance to earn a profit
D. An investor who purchases Treasury bills
4. Which of the following best explains why many corporations issue employee stock options?
A. To replace employer-provided insurance benefits
B. To align management and shareholder interests
C. To reduce the cost of employee compensation
D. To provide an employee benefit in place of a retirement plan
5. What’s another term that could be used for implied standard deviation?
A. Covariance B. Alpha C. Implied volatility D. Beta
6. Suppose you purchase five corn futures contracts. The contract size is 5,000 bushels and the price is quoted in cents per bushel. Assume the initial margin requirement is 6.5 percent of the contract value. What’s the amount of the initial margin if the futures quote is 784?
A. $13,348 B. $13,186 C. $12,740 D. $12,980
7. Which of the following statements defines a European-style option?
A. An option that’s in-the-money B. An option that’s out-of-the-money
C. An option that can be exercised at any time D. An option that can only be exercised at expiration
8. A combination is an option trading strategy that uses
A. both put and call options. B. two or more put options.
C. both writing and buying call options. D. two or more call options.
9. Which one of the following statements is true regarding futures contracts?
A. The seller of a futures contract has the option to deliver cash in an amount equal to the contract value in lieu of the underlying asset.
B. Futures contracts generally grant the buyer the option to accept only a portion of the contract.
C. Cost and convenience are the two key considerations when establishing the settlement procedures.
D. Futures prices are generally set equal to the spot price on the delivery date.
10. A stock is currently priced at $22 a share while the $30 put option is priced at $5.22. The put option delta is -.25. What is the approximate put price if the stock increases in value to $25?
A. $3.76 B. $5.08 C. $5.27 D. $4.97
11. Which of the following statements best describes a hedger?
A. A speculator B. A value investor C. An investor who shifts risk D. An arbitrageur
12. What grants its owner the right but not the obligation to sell a stock at a specified price?
A. A put option B. A call option C. A banker’s acceptance D. A futures contract
13. Which one of the following is a difference between a forward contract and a futures contract?
A. Forward contracts are based on commodities while futures contracts are based on financial instruments.
B. Futures contracts are managed through an organized exchange while forward contracts are not.
C. A forward contract is a formal agreement while a futures contract is an informal agreement.
D. The price of the asset exchanged is determined when a forward contract is entered while the price is set on the exchange date for a futures contract.
14. Suppose you purchase 5 put option contracts on a stock when the strike price is $65.00 and the option premium is $2.45. On the expiration date the stock is valued at $63.65 a share. What’s the payoff on the option contracts?
A. $0 B. $400 C. $675 D. $525
15. Suppose you purchased 10 call options on a stock with a strike price of $55.00. On the expiration date, the stock was priced at $54.58 a share. What is the total payoff on your purchase of the option contracts?
A. $530 B. $42 C. $0 D. –$5,500
16. You bought a put with a strike price of $45. The current stock price is $42.50. What’s the current payoff value of this option?
A. $2.00 B. $0.00 C. $.50 D. $2.50
17. Which of the following describes marking to market?
A. Recognizing gains and losses on outstanding futures positions daily
B. Adjusting margin levels on outstanding stock positions
C. Taking any available profits on open positions
D. Trading stocks on a daily basis
18. A 3-month put option has a strike price of $55.50. The price of the underlying stock is $53.48. What’s the intrinsic value of this put?
A. $0 B. $1.02 C. $1.98 D. $2.02
19. Which of the following is most closely associated with convexity?
A. The relationship between a stock’s beta and its total return
B. The relationship between risk and return
C. The graphical relationship between put and call prices
D. The graphical relationship between stock prices and option prices
20. which of the following is the minimum margin required in a futures account at all times?
A. Maintenance margin B. Close-out margin C. Initial margin D. Starting margin
Topics in Investments
21. What type of asset is a patent?
A. Intangible long-term liability B. Tangible fixed asset
C. Intangible fixed asset D. noncash short-term asset
22. If there were 550 million people in the United States, with 224 million making up the labor force, what would the unemployment rate be if 23 million were unemployed?
A. 10.27% B. 10.48% C. 10.12% D. 10.78%
23. What type of bonds have limited downside risk with unlimited upside potential?
A. Municipal bonds B. Convertible bonds C. Senior debenture D. High-yield bonds
24. A $1,000 par value bond has a market price of $993 and a conversion ratio of 20. The stock is selling for $32.85. What’s the conversion value?
A. $657 B. $723 C. $824 D. $712
25. Which of the following reports is filed with the SEC on an annual basis?
A. Red herring B. 10K C. 10Q D. Prospectus
26. How often do U.S. Treasury bonds make coupon payments?
A. Quarterly B. Annually C. Monthly D. Semiannually
27. Which of the following will result from an increase in return on equity?
A. Increase in the tax rate B. Decrease in fixed costs
C. Decrease in cash on the balance sheet D. Increase in fixed costs
28. A semi-annual coupon bond has an 8.0 percent coupon rate, a $1,000 face value, a current value of $1,021.32, and 5 years until the first call date. What’s the call price if the yield to call is 8.5?
A. $996 B. $1063 C. $985 D. $1085
29. Which of the following is a characteristic of a defensive sector?
A. High payout ratio B. Low sensitivity to the business cycle
C. Rapid growth D. Low dividend yield
30. M1 plus time deposits, saving accounts, and money markets is known as _____ money supply.
A. M5 B. M2 C. M4 D. M3
31. Unsecured debt is debt issued
A. with security through a corporation’s cash flow.
B. without specific collateral pledged as security.
C. with collateral that’s less than the total value of the debt.
D. with a call provision.
32. Suppose you invest $54,000 into an investment in Mexico. The investment gains 13.5 percent. If the exchange rate moves from 8.1804 Mexican peso per dollar to $8.1794 peso per dollar over the period, what’s your total return on the investment?
A. 13.14% B. 12.82% C. 13.51% D. 13.42%
33. Which of the following is cash generated by a firm’s normal business activities?
A. Operating cash flow B. Retained earnings C. Net income D. Paid-in capital
34. Which of the following is a primary goal of the Federal Reserve?
A. Create a Goldilocks scenario B. Purchase real estate assets
C. Generate full employment D. Encourage consumer spending
35. What’s an indenture agreement?
A. A red herring
B. A summary of the agreement between a bond issuer and the bondholders
C. The entire formal contract between a bond issuer and the bondholders
D. The summary of the prospectus agreement for an IPO
36. A company has $8,300 of cash, equipment worth $87,500, inventory of $49,600, a building worth $345,000, and $72,400 of accounts receivable. What’s the value of the total fixed assets?
A. $432,500 . $562,800 C. $554,500 D. $482,100
37. Which of the following is an element of the industry life cycle?
A. Bust B. Boom C. Consolidation D. Rapid growth
38. A Treasury bond has a face value of $50,000 and a quoted price of 103:15. What’s the bond’s dollar price?
A. $54,658.92 B. $51,781.25 C. $53,242.89 D. $52,185.26
39. A sinking fund is an account used for which of the following purposes?
A. To provide funds to make interest payments if a corporation experiences financial distress
B. To provide for scheduled redemptions of outstanding bonds
C. To make dividend payments to shareholders
D. To store stock certificates to be used for convertible bonds
40. Of the following uses of proceeds from private activity bonds, which will most likely qualify as exempt from federal taxes?
A. Dance hall B. Public transportation hub C. Office building D. Football stadium