Interest rate parity is essentially the same as (Points : 4)

the cross-rate relationship

the cost of carry relationship
the Garman-Kohlhagen model
all of the above
none of the above

Question 2. 2. Determine the appropriate price of a European put on a futures if the call is worth
$5.66, the continuously compounded risk-free rate is 5.6 percent, the futures price is $80, the
exercise price is $75, and the expiration is in three months. (Points : 6)
Q 2.2 non of above
C+PV X = P + S
5.66 + 75e^-0.0566*3/12 - 80 = -1.4

Question 3. 3. What would be the spot price if a stock index futures price were $77, the risk-free
rate were 10 percent, the continuously compounded dividend yield is 3 percent, and the futures
contract expires in three months? (Points : 6)
Q3
75.66
spot price = 77/(1+(0.1 - 0.03)*3/12)
75.66

Question 4. 4. The current exchange rate is $1.35/Euro. Find the forward rate if current US risk
free rate is 7 percent, the Euro-zone interest rate is 2 percent, and the forward contract is for six
months. (The interest rates are continuously compounded.) (Points : 6)
4 none of above
none of the above
forward rate = 1.35 * (1+(0.07*6/12))/(1+(0.02*6/12) = 1.38
Question 5. 5. The value of a futures contract immediately after being marked to market is
(Points : 4)

numerically equal to the daily settlement amount

the spot price plus the original forward price
equal to the amount by which the price changed since the contract was opened
simply zero
none of the above

Question 6. 6. What reason might be given for not wanting to hedge the future issuance of a
liability if interest rates are unusually high? (Points : 4)
the margin cost will be effective
you are locking in a high rate
transaction costs are higher
futures prices are lower
none of the above

Question 7. 7. Find the annualized implied repo rate on a T-bond arbitrage if the spot price is
115.75, the accrued interest is 1.45, the futures price is 119.75 the Conversion Factor is 1.0025,
the accrued interest at delivery is 0.85, and the holding period is three months. (Points : 6)
13.04%
3.46%
14.10%
0.77%
13.24%

Question 8. 8. Determine the amount by which a stock index futures is mispriced if the stock
index is at 260, the futures is at 261, the risk-free rate is 7.50 percent, the dividend yield is 3.85
percent, and the contract expires in three months (Points : 6)

Underpriced by 1.38
Overpriced by 1.11
Overpriced by 0.64
Overpriced by 1.0
Underpriced by 1.11

Question 9. 9. Suppose you observe the spot euro at $1.38/ and the three month euro futures at
$1.379/. Based on carry arbitrage, you conclude (Points : 4)
this futures market is inefficient because the futures price is below the spot price
this futures market is indicating that the spot price is expected to fall
the spot price is too high relative to the observed futures price
the risk-free rate in Europe is higher than the risk-free rate in the U.S.
none of the above

Question 10. 10. Suppose you observe the spot rate in France to be 0.90/USD, the U. S. riskfree interest rate of 3.25% (continuously compounded), and the current risk-free (cc) interest
rate in the Eurozone is 6.75%, what is the theoretical value of a six month foreign exchange
futures contract in terms of per US dollar (select the closest answer). (Points : 6)
0.8851
0.9129
0.9035
0.8756
0.9254

Question 11. 11. Which technique can be used to compute the minimum variance hedge ratio?
(Points : 4)

duration analysis
present value
regression
all of the above
none of the above

Question 12. 12. Big Bank, Inc. has a portfolio of Treasury bonds worth $1,000,000 with a
modified duration of 16.5 and is concerned that a change in interest rates will negatively affect
the value of the portfolio. The newest MBA in the office has been asked to determine the
optimal hedge ratio if the futures contract has a value of $98,000 and has a modified duration of
9.25 years. Help this new MBA out and determine the optimal hedge ratio. (Points : 6)
14.78
16.27
12.75
18.20
8.75

Question 13. 13. You hold a stock portfolio worth $20 million with a beta of 1.63. You would
like to lower the beta to 0.95 using S&P 500 futures, which have a price of 475.8 and a
multiplier of 250. What transaction should you do? Round off to the nearest whole contract.
(Points : 6)
buy 168 contracts
sell 168 contracts
buy 114 contracts
sell 57 contracts
sell 114 contracts

Question 14. 14. Suppose you buy an asset at $60 and sell a futures contract at $63. What is
your profit if, prior to expiration, you sell the asset at $64 and the futures price is $67? (Points :
6)
-4
-1
0
-3
none of the above

Question 15. 15. Though a cross hedge has somewhat higher risk than an ordinary hedge, it will
reduce risk if which of the following occurs? (Points : 4)
futures prices are more volatile than spot prices
the spot and futures contracts are correctly priced at the onset
spot and futures prices are positively correlated
futures prices are less volatile than spot prices
none of the above

Question 16. 16. Which of the following distinguishes equity swaps from currency swaps?
(Points : 4)
equity swap payments are always hedged
equity swap payments are made on the first day of the month
equity swap payments can be negative
equity swap payments have more credit risk
none of the above

Question 17. 17. Find the upcoming net payment in a plain vanilla interest rate swap in which
the fixed party pays 11 percent and the floating rate for the upcoming payment is 10.1 percent.
The notional amount is $25 million and payments are based on the assumption of 90 days in the
payment period and 360 days in a year. (Points : 6)
fixed payer pays $65,000
floating payer pays $505,000
fixed payer pays $50,000
fixed payer pays $45,000
fixed payer pays $550,000

Question 18. 18. Find the upcoming payment interest payments in a currency swap in which
party A pays Euros at a fixed rate of 7 percent on notional amount of $50 million Euros and
party B pays US dollars at a fixed rate of 6 percent on notional amount of 61.5 million.
Payments are annual under the assumption of 360 days in a year, and there is no netting.
(Points : 6)
Party A pays 3,500,000 Euros and Party B pays 3,000,000 Dollars
Party A pays 3,500,000 Euros and Party B pays 3,690,000 Dollars
Party A pays 3,690,000 Dollars and Party B pays 3,500,000 Euros
Party A pays 4,305,000 Dollars and Party B pays 3,690,000 Dollars
Party A pays 2,000,000 Euros and Party B pays 3,075,000 Dollars

Question 19. 19. My local bank has a portfolio of $250 million invested in an NYSE Index. The
regulators want a 5% 10-day VAR and have recommended that the statistical analysis method be
used. Over the past year, the NYSE Index has had an average daily return of 0.0475% and a
daily standard deviation of 1.7589%. Assume a 253 day trading year. (Points : 6)
$21,756,287
$71,367,125
$11,606,695

$30,072,415
$22,943,787

Question 20. 20. Interest rate swaps can be used for all of the following purposes except: (Points
: 4)
to borrow at the prime rate
to convert a fixed-rate loan into a floating-rate loan
to convert a floating-rate loan into a fixed-rate loan
to speculate on interest rates
to hedge interest rate risk

Question 21. 21. A major international bank makes a $7.5 million 270-day pure discount loan at
LIBOR of 8.25%. At the same time, however, it exercises an interest rate put that has a strike of
10.9%. Find the annualized rate of return on the loan. Ignore the cost of the put. (Points : 6)
11.47%
10.29%
9.47%
8.45%
8.09%

Question 22. 22. The fixed rate on an FRA expiring in 60 days on 180-day LIBOR with the 60day rate being 5 percent and the 270 day rate being 6 percent is (Points : 6)
6.14%
7.71%
9.00%

7.47%
6.23%

Question 23. 23. Which of the following is a limitation of using the Black model to price interest
rate options? (Points : 4)
the risk-free rate is not constant
the volatility is not constant
interest rates are not lognormally distributed
all of the above
none of the above

Question 24. 24. A payer swaption is equivalent to which of the following instruments (Points :
4)
a call option on a bond
a long Treasury bond futures option
a long Eurodollar futures
an interest rate cap
a put option on a bond

Question 25. 25. Suppose your firm invested in a callable bond recently when interest rates were
high and the bond has three more years to go before the first call date. If interest rates are
expected to fall over the next three years, which of the following is one potential strategy would
take advantage of this view. (Points : 6)
buy a payer swaption
sell a payer swaption
sell a receiver swaption

buy a receiver swaption

buy an interest rate floor

Compare and contrast the characteristics of contango, backwardation, normal contango, and
normal backwardation markets. (Points : 8)

Question 2. 2. Use the following data from January 31 of a particular year for a group of March
480 options on futures contracts to answer parts A through G:
Futures Price: 483.10
Expiration: March 13
Risk-Free Rate: 0.0284% (simple)
Call Price: 6.95
Put Price: 5.25
A. What is the intrinsic value of the call?
B. What is the time value of the call?
C. What is the lower bound of the call?
D. What is the intrinsic value of the put?
E. What is the time value of the put?
F. What is the lower bound of the put?
G. Determine whether put-call parity holds.
(Points : 12)

Question 3. 3. On July 5, a stock index futures contract was at 394.85. The index was at 392.54,

the risk-free rate was 2.83%, the dividend yield was 2.08%, and the contract expired on
September 20. Determine whether an arbitrage opportunity was available and explain what
transactions were executed. (Points : 8)

Question 4. 4. Explain how to determine whether to buy or sell futures when hedging. What are
the three easy approaches to resolve the determination? (Points : 8)

Question 5. 5. During the first six months of the year, yields on long-term government debt have
fallen about 100 basis points. You believe that the decline in rates s over, and you are interested
in speculating on a rise in rates. You are, however, unwilling to assume much risk, so you
decide to do an intramarket spread. Use the following information to construct a T-bond futures
spread on July 15 and determine the profit when the position is closed on November 15.
July 15
December Futures Price: 76 9/32
March Futures Price: 75 9/32
November 15
December Futures Price: 79 13/32
March Futures Price: 78 9/32
(Points : 8)

Question 6. 6. Consider a $30MM notional amount interest rate swap with a fixed rate of 7%,
paid quarterly on the basis of 90 days in the quarter and 360 days in the year. The first floating
payment is set at 7.2%. Calculate the first net payment and identify which party, the party
paying fixed or the party paying floating, pays. (Points : 8)

Question 7. 7. Consider a currency swap for $10MM and Swiss Franc 15MM. One party pays
dollars at a fixed rate of 9% and the other pays Swiss Francs at a fixed rate of 8%. 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. (Points : 8)

Question 8. 8. Explain how a forward swap is like a swaption and how it is different. (Points : 8)