Booking a expert for final online test of
Options, Futures & Risk Management.
SAMPLE EXAMINATION PAPER Solutions Guide SECTION A 15 Multiple Choice Questions [30 marks] – 2 marks each 1. C 2. C 3. C 4. A 5. C 6. D 7. E 8. D 9. A 10. A 11. B 12. B 13. E 14. E 15. B SECTION B 4 Long-Answer questions [35 marks] Question 1 [7 marks] (a) Construct transactions that will increase the beta of the portfolio to 1.3 using one or more of these December futures contracts: S&P 500 futures, which are currently trading at 151. SPI 200 futures, which are currently trading at 373. Goodday Inc. futures, which are currently trading a 394. All prices are in Australian dollars and assume all futures contracts have a contract multiplier of $250 per index point. [4 marks] Calculate portfolio beta, appropriate hedge ratio etc – see Topic 3 slides for examples on index futures hedging and market timing. Be mindful of relevant market instrument to use. No room for error in long/short hedge, if in doubt recap “rules of thumb” I offered in lecture. (b) Identify two alternative methods (other than selling securities from the portfolio or using futures) that replicates the feature strategy in Part a. Contrast each of these methods with the futures strategy. [3 marks] Think options, think synthetics. Be mindful of characteristics of intended instruments. Question 2 [7 marks] The current December SPI 200 futures contract is at 3301. The ASX 200 is at 3305.4. The current 30-day bank bill is at 4.492%. a) If there are 45 days remaining until December 2001 futures contracts expire, determine whether put-call parity is maintained for the December call & put options on SPI 200 futures with the exercise price closest to the current SPI 200 price. [4 marks] Use put-call parity, see examples in Topic 9 on proof. b) If put-call parity is not maintained, explain the possible reasons why it might not be. [3 marks] As discussed in Tutorial 9. Question 3 [12 marks] a) Detail 3 possible solutions available to the client to achieve her aims, along with the advantages/disadvantages associated with each method. One of these solutions should be a swap contract. [4.5 marks] Solutions can involve transactions in: 1. spot market 2. futures market 3. options market 4. swap Remember to discuss features and pros/cons of each. b) Fill in the missing values from the cash flow schedule below: [4 marks] c) What is the total incremental return for the above swap? [1.5 mark] Incremental Return = 3.47% d) Swaps can be viewed as an amalgamation of a number of alternate financial instruments. What type of portfolio of financial instruments is the above swap replicating? What benefits are there from using the swap over the alternative? [2 marks] Long S&P 500 at Libor. Explain benefits in light of concepts discussed at beginning of Topic 10. Time Notional Libor Index Dividend Net #1 1000000 8215 7812 5156 4753 #2 1004753 8127 7789 5141 4802 #3 1009556 7911 -15532 5125 -18317 Maturity 991328 8143 46464 5111 43432 Total 34670 Question 4. [9 marks] a) The current price of gold is $300 per ounce. Carrying costs in total are 0.5 % (not including interest) of the gold value payable in 6 months time. If the interest rate is 8%, is there an arbitrage opportunity if the gold futures price for delivery in six months is $310 per ounce? [3 marks] Compare futures price and theoretical price. b) If an arbitrage opportunity exists, explain how you would conduct it and calculate the arbitrage profit. [2 marks] Illustrate arbitrage transaction and compute profit therefrom. c) Why is it not possible in reality to perfectly hedge a portfolio using options and/or futures Instruments? [2 marks] Review hedging concepts in Topic 3 for answers. d) Explain the shortcomings of LTCM’s financial strategy that led to its eventual downfall. [2 marks] Read LTCM article in Tutorial 8 for answers. END OF EXAMINATION Notes on the Sample Final Examination Script The final exam for the course will take the form illustrated in the sample exam following this page. Examinable material includes everything that has been covered in either the lectures or tutorials during the whole semester. Many of the questions are discussed and included in the class activities and so you should have access to most of the answers. Sample Examination Paper OPTIONS FUTURES AND RISK MANAGEMENT Official Reading Time: 10 mins Writing Time: 180 mins Total Duration 190 mins Instructions to Candidate: 1. Answer ALL questions. 2. You should answer all questions in the answer book(s). No attachments will be considered. If you used an additional book, please incorporate it within the first book. 3. Please allocate your time according to the percentage contribution of the questions. 4. You should answer Section A questions (multiple-choice) on the first writing page of the answer book and start each Section B question on a new page in the answer book. Please label your answers appropriately and show sufficient workings for all Section B questions. 5. Please submit this examination question paper with your answer book at the end of the examination. Examination materials must NOT be removed from the examination room. Materials: This is a Closed Book examination. No textbook is allowed. A calculator incapable of storing text is permitted. Special Instructions: 1. Unless otherwise instructed, assume continuous compounding/discounting for all calculations 2. Unless otherwise stated, contract multipliers for options and futures are assumed to be on a 1:1 ratio. PLEASE DO NOT COMMENCE WRITING UNTIL INSTRUCTED TO DO SO PLEASE SEE NEXT PAGE SECTION A Answer all questions. Where appropriate, be sure to show your solutions in the answer booklet. 15 Multiple Choice Questions [30 Marks] – 2 Marks Each 1. The following diagram shows the value of a put option at expiration: Ignoring transaction costs, which of the following statements about the value of the put option at expiration is TRUE? A. The value of the short position in the put is $4 if the stock price is $76. B. The value of the long position in the put is –$4 if the stock price is $76. C. The long put has value when the stock price is below the $80 exercise price. D. The value of the short position in the put is zero for stock prices equalling or exceeding $76. 2. Which of the following statements about the value of a call option at expiration is FALSE? A. The short position in the same call option can result in a loss if the stock price exceeds the exercise price. B. The value of the long position equals zero or the stock price minus the exercise price, whichever is higher. C. The value of the long position equals zero or the exercise price minus the stock price, whichever is higher. D. The short position in the same call option has a zero value for all stock prices equal to or less than the exercise price. 76 80 Stock Price ($) -4 0 4 Option Value Short Put Long Put Exercise price of both Options 3. Which of the following statements about “short selling” is TRUE? A. A short position may be hedged by writing call options. B. A short position may be hedged by purchasing call options. C. Short sellers may be subject to margin calls if the stock price increases. D. Stocks that pay large dividends should be sold short before the ex-dividend date and bought afterward to take advantage of the large price decline in a short time period. 4. The current price of an asset is 75. A three-month, at-the-money American call option on the asset has a current value of 5. At what value of the asset will a covered call writer break even at expiration? A. 70. B. 75. C. 80. D. 85. 5. A silver futures contract requires the seller to deliver 5,000 Troy ounces of silver. An investor sells one July silver futures contract at a price of $8 per ounce, posting a $2,025 initial margin. If the required maintenance margin is $1,500, the price per ounce at which the investor would first receive a maintenance margin call is closest to: A. $5.92. B. $7.89. C. $8.11. D. $10.80. 6. Which of the following statements about an American call is not true? A. Its time value decreases as expiration approaches B. Its maximum value is the stock price C. It can be exercised prior to expiration D. It pays dividends E. none of the above 7. When puts are priced with the binomial model, which of the following is true? A. the puts