1. The fair price of a 2-month forward contract written on gold, excluding storage cost, is $1200.
All else being equal, the fair price of the 2-month forward contract written on the same
underlying asset (i.e., gold), including storage cost, is likely to be
a) Less than $1200
b) Equal to $1200
c) Greater than $1200
d) None of them above
2. Your stock portfolio has a beta of 1.30 and is currently worth $20m. The S&P/ASX200 index is
currently priced at 3540. The December-2009 maturity SPI200 futures contract is quoted at
3560. How many SPI200 futures contracts are required to fully hedge your stock portfolio?
Round your answer to the nearest whole number.
a) 292 contracts
b) 225 contracts
c) 7344 contracts
d) 294 contracts
e) 7303 contracts
3. A stock is currently priced at $40. The risk-free rate of interest is 8% p.a. compounded
continuously and an 18-month maturity forward contract is currently traded in the market at
$43. You suspect an arbitrage opportunity exists. Which one of the following transactions do
you need to undertake at time t = 0 to arbitrage based on the given information?
a) Long the forward, borrow money and buy the share
b) Short the forward, short-sell the share and invest at risk-free rate
c) Long the forward, short-sell the share and invest at risk-free rate
d) Short the forward, borrow money and buy the share
4. When a European put is priced higher than its upper bound, you can arbitrage by devising a
trading strategy that consists of
a) Writing the European call
b) Writing the corresponding European call and investing the proceeds at a risk-free
interest rate
c) Writing the European put and investing the proceeds at a risk-free interest rate
d) Holding the European put and borrowing at a risk-free interest rate
Semester Two Mid-Semester Examinations, FINM3405 Derivatives and Risk Management
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5. Elizabeth intends to use the Hang Seng Index (HSI) futures to hedge her portfolio. Which of
the followings is her least concern with respect to using the HSI futures contract?
a) Expiry of the futures contract
b) Current level of Hang Seng Index
c) Systematic risk of her portfolio
d) Volatility of the stock market
e) Risk-free rate
6. We can use stocks and/or zero coupon bonds to replicate the payoff of (choose
the best answer from the list below).
a) A call option
b) A put option
c) A forward contract
d) Options, forward and a wide range of derivatives.
7. The current spot exchange rate is AUD 1.00 = USD 0.80. The Australian risk-free rate is 3.0%
p.a. compounded continuously, whereas the US risk-free rate is 0.8% p.a. compounded
continuously. The no-arbitrage price on a 9-month forward contract written on the exchange
rate is likely to be
a) USD 0.813 / AUD
b) AUD 0.787 / USD
c) AUD 1.271 / USD
d) AUD 1.230 / USD
8. A portfolio manager intends to buy some stocks next month and wishes to hedge against share
price risk. Which of the followings provides the best hedge against this risk?
a) Short futures on the stocks
b) Long futures on the stocks
c) Buy put options on the stocks
d) Sell call options on the stocks
9. You believe that the yield for 90-day bank bills is about to fall, and you plan to speculate on
your prediction using interest rate options on 90-day bank bills. Which of the following option
positions will you enter?
a) Long a call option on 90-day bank bills
b) Long a put option on 90-day bank bills
c) Short a call option on 90-day bank bills
d) Short a put option on 90-day bank bills
Semester Two Mid-Semester Examinations, FINM3405 Derivatives and Risk Management
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10. The fair price of a forward contract is GBP 0.46 for 1 SGD (Singapore dollar), whereas the
traded forward price for the contract is GBP 0.40 for 1 SGD. With this in mind, which one of
the followings will most likely yield an arbitrage profit?
a) Invest in a U.K. bank and borrow from a Singaporean bank
b) Invest in a Singaporean bank and borrow from a U.K. bank
c) Invest in both Singaporean and UK banks
d) Borrow from both Singaporean and UK banks
11. Ms. Doanne shorts a futures contract today. Which of the following is most likely to be true?
a) She will get dividends on the underlying asset.
b) She agrees to sell the asset at a fixed price at a future date.
c) She receives a premium today for shorting the futures.
d) None of the above.
12. The figure below is relevant to answer Question 12. Suppose that today is 13 August 2019 and
the current exchange rate is HKD 6.20 per AUD 1.00. The figure above shows your prediction
with respect to the HKD’s movements relative to the AUD between now and mid-September
2019.
Note: HKD = Hong Kong Dollar; AUD = Australian Dollar.
You intend to capitalize on your prediction by using the 15/9/2019-maturity forward
contract, which is currently priced at HKD 6.00 per AUD 1.00. Which of the following are you
most likely to undertake today to capitalize on your prediction? (Select the best answer.)
a) Long forward contract to buy AUD
b) Short forward contract to sell AUD
c) Short forward contract to sell HKD
d) Either (a) or (c) will work
5.2
5.6
6.0
6.4
13/08 18/08 23/08 28/08 2/09 7/09 12/09
HKD per AUD
Semester Two Mid-Semester Examinations, FINM3405 Derivatives and Risk Management
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13. Suppose that the fair price of a put option is $1.50 whereas its observed (i.e., market traded)
price is considerably lower at $1.00. Obviously, this presents an arbitrage opportunity. Select
the best practical answer from the followings to demonstrate how you could arbitrage from the
situation.
a) Buy the put at $1.00 and then, sell the same put at $1.50
b) Buy the put at $1.00 and at the same time, sell a call (assuming it is priced fairly), buy
a stock and borrow from the bank
c) Buy the put at $1.00 and at the same time, sell a call (assuming it is priced fairly),
short-sell a stock and invest in the bank
d) Buy the put at $1.00 and at the same time, buy a call (assuming it is priced fairly),
short-sell a stock and invest in the bank
14. A put option written on CBA has a strike price of $78 and trades at $3.42. CBA share price is
$76. The split up of option value into intrinsic value and time value is:
a) $3.00 intrinsic value and $0.42 time value
b) -$2.00 intrinsic value and $5.42 time value
c) $2.00 intrinsic value and $1.42 time value
d) zero intrinsic value and $3.42 time value
15. Which of the following is the most likely answer? On the maturity of the European call option,
its value must equal to ________
a) The larger of the strike price minus the stock price or zero
b) The stock price minus the strike price
c) The larger of zero, or the stock price minus the strike price
d) The strike price minus the stock price
16. Which of the followings is the most likely answer? Mr. Hamish paid a premium of $5 to buy a
put on a stock that is currently valued at $60. The put strike price is $55. The maximum profit
(including the premium) is ______
a) $0
b) $50
c) $55
d) $60
17. Interest rates are zero. A European call with a strike price of $50 and a maturity of one year is
worth $6. A European put with a strike price of $50 and a maturity of one year is worth $7.
The current stock price is $49. Which of the following is true?
a) The call price is high relative to the put price
b) The put price is high relative to the call price
c) Both the call and put must be mispriced
d) None of the above
Semester Two Mid-Semester Examinations, FINM3405 Derivatives and Risk Management
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18. A trader buys a call and sells a put with the same strike price and maturity date. What is the
position equivalent to?
a) A long forward
b) A short forward
c) Buying the asset
d) None of the above
19. A one-year call option on a stock with a strike price of $30 costs $3; a one-year put option on
the stock with a strike price of $30 costs $4. Suppose that a trader buys two call options and
one put option. The breakeven stock price above which the trader makes a profit is
a) $35
b) $40
c) $30
d) $36
20. Which of the following is NOT true? (Present values are calculated from the end of the life of
the option to the beginning.)
a) An American put option is always worth less than the present value of the strike
price
b) A European put option is always worth less than the present value of the strike
price
c) A European call option is always worth less than the stock price
d) An American call option is always worth less than the stock price
21. Which of the following inputs is not required to price option using the Black-Scholes model?
a) the asset price
b) the time to maturity
c) the asset’s risk premium
d) the risk-free rate of interest
22. Consider the following information for a stock index:
• Current index is 400
• Dividend yield is 3% pa compounded continuously
• Risk-free rate is 8% pa compounded continuously
• Volatility of the index (σ) is 30% pa
• Strike index is 420
• Time to maturity of the option is 5 mths
Use the closed-form Black-Scholes model to price the European call option with the above
characteristics.
a) 31.22
b) 25.62
c) 23.37
d) 21.98
Semester Two Mid-Semester Examinations, FINM3405 Derivatives and Risk Management
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23. Consider the following information for an individual stock:
• Current share price is $10
• Risk-free rate is 5% pa compounded continuously
• Volatility of the stock returns (σ) is 30% pa
• Strike price is $12
• Time to maturity of the option is 9 mths
• The firm is expected to pay dividend estimated at $1 per share in 2 mths, $1.40 per
share in 8 mths and $1.80 per share in 14 mths.
Use the closed-form Black-Scholes model to price the European put option with the above
characteristics
a) 3.96
b) 5.13
c) 1.25
d) None of the above.
24. The price of a European call option on a non-dividend-paying stock with a strike price of $50 is
$6. The stock price is $51, the continuously compounded risk-free rate (all maturities) is 6%
and the time to maturity is one year. What is the price of a one-year European put option on
the stock with a strike price of $50?
a) $9.91
b) $7.00
c) $6.00
d) $2.09
25. An exchange rate is 0.7000 and the six-month domestic and foreign risk-free interest rates are
5% and 7% (both expressed with continuous compounding). What is the six-month forward
rate?
a) 0.7070
b) 0.7177
c) 0.7249
d) 0.6930