Advanced Investments
Textbook Exam Questions
Course Introduction
Advanced Investments builds upon foundational investment principles, delving into complex portfolio management strategies, asset pricing models, and risk management techniques. The course covers topics such as derivatives and alternative investments, behavioral finance, market efficiency, and advanced security valuation methods. Students engage with theoretical concepts and practical case studies to develop the analytical skills needed for informed decision-making in dynamic financial markets. Through rigorous analysis and real-world applications, this course prepares students for professional roles in investment analysis, portfolio management, and related financial sectors.
Recommended Textbook
Introduction to Derivatives and Risk Management 9th Edition by Don M. Chance
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Page 2
Chapter 1: Introduction
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Q1) Hybrid derivatives involve either bonds or stocks.
A)True
B)False
Answer: False
Q2) The process of selling borrowed assets with the intention of buying them back at a later date and lower price is referred to as
A) longing an asset
B) asset flipping
C) shorting
D) anticipated price fall arbitrage
E) none of the above
Answer: C
Q3) Exchange-traded derivatives volume is less than one billion according to the Futures Industry magazine in 2010.
A)True
B)False
Answer: False
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Page 3
Chapter 2: Structure of Options Markets
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Sample Questions
Q1) Over-the-counter options dealers do not have to be members of an options exchange.
A)True
B)False
Answer: True
Q2) The total number of long option contracts outstanding at any given time is called the
A) market cap
B) sum options outstanding (SOO)
C) option wealth outstanding (OWO)
D) open interest
E) none of the above
Answer: D
Q3) The spread between the bid price and the ask price is a transaction cost to the option trader.
A)True
B)False
Answer: True
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Chapter 3: Principles of Option Pricing
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Q1) What is the intrinsic value of the January 110 call?
A) 0.00
B) 8.30
C) 3.75
D) 5.00
E) none of the above
Answer: E
Q2) Transactions to exploit pricing errors in the put-call parity relationship are called conversions and reversals.
A)True
B)False
Answer: True
Q3) The difference between two American put options with different strike prices is less than or equal to the dollar difference between the strike prices, the higher strike price minus the lower strike price.
A)True
B)False
Answer: True
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Chapter 4: Option Pricing Models: The Binomial Model
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Sample Questions
Q1) If a call is underpriced and you buy the call and sell short the stock, it is equivalent to investing money at more than the risk-free rate.
A)True B)False
Q2) When pricing a put with the binomial model, the up and down probabilities are reversed.
A)True B)False
Q3) In a binomial model, if the call price in the market is higher than the call price given by the model, you should
A) sell the call and sell short the stock
B) buy the call and sell short the stock
C) buy the stock and sell the call
D) buy the call and buy the stock
E) none of the above
Q4) When calls are sold to adjust the hedge ratio, the funds must be placed in additional shares.
A)True B)False
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Chapter 5: Option Pricing Models: The
Black-Scholes-Merton Model
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Q1) The Black-Scholes-Merton model can be used with currency options by replacing the dividend yield with the foreign interest rate.
A)True
B)False
Q2) The relationship between the option price and the exercise price is called A) the gamma
B) the vega
C) the omega
D) the zeta
E) none of the above
Q3) The implied volatilities of a call and a put with the same terms should be the same. A)True
B)False
Q4) In the Black-Scholes-Merton model, stock prices are assumed to behave randomly. A)True
B)False
Q5) The option's rate of time value decay is represented by its theta.
A)True
B)False
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Chapter 6: Basic Option Strategies
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Sample Questions
Q1) Any strategy consisting of only long options will lose money if the stock price stays the same.
A)True
B)False
Q2) Which of the following strategies has the greatest potential loss?
A) an uncovered call
B) a long put
C) a covered call
D) a long position in the stock
E) it is impossible to tell
Q3) Each of the following is a bullish strategy except
A) a long call
B) a short put
C) a short stock
D) a protective put
E) none of the above
Q4) The following is the profit equation for a put option: = N<sub>P</sub>[Max(0, XS<sub>T</sub>) + P].
A)True
B)False
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Chapter 7: Advanced Option Strategies
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Sample Questions
Q1) What is the cost of the box spread?
A) $500
B) $2,018
C) $76
D) $484
E) none of the above
Q2) What is the profit if the stock price at expiration is $52.50?
A) $16
B) $500
C) -$234
D) $250
E) none of the above
Q3) What are the two breakeven stock prices at expiration?
A) $55.58 and $45.87
B) $54.13 and $45.87
C) $55.58 and $44.42
D) $59.71 and $40.29
E) none of the above
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9
Chapter 8: Structure of Forward and Futures Markets
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Sample Questions
Q1) Which of the following contract terms is not set by the futures exchange?
A) the dates on which delivery can occur
B) the expiration months
C) the deliverable commodities
D) the size of the contract
E) the price
Q2) Each futures contract has both a long and a short position and counts as only one unit of open interest.
A)True
B)False
Q3) Most futures contracts are closed by A) delivery
B) offset
C) exercise
D) default
E) none of the above
Q4) The federal regulator of the futures markets is the National Futures Association.
A)True
B)False
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Chapter 9: Principles of Pricing Forwards, Futures and Options on Futures
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Sample Questions
Q1) The value of a futures contract immediately after being marked to market is
A) numerically equal to the daily settlement amount
B) the spot price plus the original forward price
C) equal to the amount by which the price changed since the contract was opened
D) simply zero
E) none of the above
Q2) Why is the initial value of a futures contract zero?
A) the futures is immediately marked-to-market
B) you do not pay anything for it
C) the basis will converge to zero
D) the expected profit is zero
E) none of the above
Q3) Value is created in a futures contract with the passage of time.
A)True
B)False
Q4) The Black formula prices an option on an instrument with a positive cost of carry. A)True
B)False
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Chapter 10: Futures Arbitrage Strategies
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Q1) All of the following are limitations to Fed funds futures arbitrage, except
A) Fed funds rates are determined by Federal Reserve Bank policy
B) basis risk between Fed funds and LIBOR
C) repo rate is variable for the trading horizon
D) settlement is based on average in delivery month
E) transaction costs
Q2) If the invoice price of bond A is 122, the invoice price of bond B is 95, the adjusted spot price of bond A is 127 and the adjusted spot price of bond B is 97, the better bond to deliver is bond B.
A)True
B)False
Q3) The timing option results from the difference in closing times of the spot and futures market.
A)True
B)False
Q4) The unusual volatility that sometimes occurs at stock index futures expirations is because of the greater uncertainty.
A)True
B)False
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Chapter 11: Forward and Futures Hedging, Spread, and Target Strategies
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Q1) Based on the price sensitivity hedge ratio, if the modified duration of the futures contract increases (assumed to be positive), then the optimal number of futures contracts increases. Assume the durations are positive.
A)True
B)False
Q2) A short hedge is one in which
A) the margin requirement is waived
B) the hedger is short futures
C) the hedger is short in the spot market
D) the futures price is lower than the spot price
E) none of the above
Q3) When the target duration is set at zero, the correct number of futures contracts to use is the same as is obtained from the price sensitivity hedge ratio.
A)True
B)False
Q4) The risk of the basis is usually less than the risk of the spot position.
A)True
B)False
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Chapter 12: Swaps
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Sample Questions
Q1) The settlement period in a swap refers to the full life of the swap.
A)True
B)False
Q2) Find the upcoming payment interest payments in a currency swap in which party A pays U. S. dollars at a fixed rate of 5 percent on notional amount of $50 million and party B pays Swiss francs at a fixed rate of 4 percent on notional amount of SF35 million. Payments are annual under the assumption of 360 days in a year, and there is no netting.
A) party A pays $2,500,000, and party B pays SF1,400,000
B) party A pays SF1,400,000, and party B pays $2,500,000
C) party A pays SF1,750,000, and party B pays SF1,400,000
D) party A pays $2,500,000, and party B pays $2,000,000
E) party A pays $50 million, and party B pays SF35 million
Q3) In an interest rate swap, the upcoming floating payment will not be determined until the end of the current settlement period.
A)True B)False
Q4) A risk of equity swaps is that the company will pay dividends.
A)True
B)False
Page 14
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Chapter 13: Interest Rate Forwards and Options
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Q1) Determine the value of an interest rate call option at the maturity of a loan if the call has a strike of 12 percent, a face value of $50 million, the loan matures 90 days after the call is exercised, the call expires in 60 days, the call premium is $200,000, and LIBOR ends up at 13 percent.
A) $125,000
B) $83,333
C) $208,000
D) -$75,000
E) none of the above
Q2) Find the approximate market value of a long position in an FRA at a fixed rate of 5 percent in which the contract expires in 20 days, the underlying is 180-day LIBOR, the notional amount is $25 million, the 20-day rate is 7 percent, and the 200-day rate is 8.5 percent.
A) $433,658
B) -$454,954
C) $322,819
D) -$322,819
E) $454,954
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Chapter 14: Advanced Derivatives and Strategies
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Q1) Dynamic hedging can be performed by using stock and risk-free debt to achieve portfolio insurance by setting the delta of the stock-debt combination to the delta of a combination of stock and puts.
A)True
B)False
Q2) The opportunity cost of portfolio insurance is the difference in the value of the insured portfolio and the value of the uninsured portfolio when the market goes up.
A)True
B)False
Q3) What is the minimum value of the insured portfolio?
A) $16,672,344
B) $12,500,000
C) $12,091,709
D) $12,244,898
E) $13,375,000
Q4) The upside capture measure is always less than one hundred percent.
A)True
B)False
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Chapter 15: Financial Risk Management Techniques and Appplications
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Q1) A total return swap is best described as
A) A swap in which the payments include only capital gains
B) a swap in which the total return on a stock index is swapped for the total return on a bond
C) a swap in which the return on one bond is swapped for some other payment
D) a swap designed to substitute for a basis swap
E) none of the above
Q2) Each of the following is a benefit of practicing risk management by companies except
A) companies can manage risk better than their shareholders
B) risk management can avoid bankruptcy costs
C) risk management can lower taxes
D) risk management can increase employment opportunities
E) risk management can help prevent companies from passing up valuable investment opportunities
Q3) Conditional Value at Risk is the expected loss, given that a loss occurs.
A)True
B)False
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Chapter 16: Managing Risk in an Organization
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Sample Questions
Q1) End users are all of the following types of organizations except?
A) investment funds
B) non-financial corporations
C) governments
D) financial institutions
E) none of the above
Q2) The basic premise behind FAS 133 is that derivatives transactions must be marked to market and recorded somewhere in the financial statements.
A)True
B)False
Q3) Which of the following methods is not permitted to satisfy the SEC's requirements for disclosure of derivatives activity?
A) an explanation in the chairman's letter
B) a Value-at-Risk figure
C) a sensitivity analysis
D) a table of market values and related terms
E) none of the above
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