International Finance
Question Bank
Course Introduction
International Finance explores the financial dynamics that arise in an interconnected global economy, focusing on the movement of capital across borders, exchange rate systems, international monetary policies, and the functioning of foreign exchange markets. Students will examine topics such as balance of payments, currency risk management, international investment strategies, and the impact of globalization on financial decision-making. The course also delves into contemporary issues like financial crises, the role of multinational corporations, and regulatory frameworks governing international financial transactions, equipping students with the analytical tools needed to navigate the complexities of global finance.
Recommended Textbook Fundamentals of Futures and Options Markets Global Edition 8th Edition by John Hull
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Page 2
Chapter 1: Introduction
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Q1) Which of the following is approximately true when size is measured in terms of the underlying principal amounts or value of the underlying assets?
A)The exchange-traded market is twice as big as the over-the-counter market
B)The over-the-counter market is twice as big as the exchange-traded market
C)The exchange-traded market is ten times as big as the over-the-counter market
D)The over-the-counter market is ten times as big as the exchange-traded market
Answer: D
Q2) Which of the following is NOT true?
A)A call option gives the holder the right to buy an asset by a certain date for a certain price
B)A put option gives the holder the right to sell an asset by a certain date for a certain price
C)The holder of a call or put option must exercise the right to sell or buy an asset
D)The holder of a forward contract is obligated to buy or sell an asset
Answer: C
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3
Chapter 2: Mechanics of Futures Markets
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Q1) Which of the following are cash settled?
A)All futures contracts
B)All option contracts
C)Futures on commodities
D)Futures on stock indices
Answer: D
Q2) Which of the following is true?
A)Both forward and futures contracts are traded on exchanges
B)Forward contracts are traded on exchanges.but futures contracts are not
C)Futures contracts are traded on exchanges.but forward contracts are not
D)Neither futures contracts nor forward contracts are traded on exchanges
Answer: C
Q3) Who initiates delivery in a corn futures contract?
A)The party with the long position
B)The party with the short position
C)Either party
D)The exchange
Answer: B
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4
Chapter 3: Hedging Strategies Using Futures
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Q1) Futures contracts trade with every month as a delivery month.A company is hedging the purchase of the underlying asset on June 15.Which futures contract should it use?
A)The June contract
B)The July contract
C)The May contract
D)The August contract
Answer: B
Q2) On March 1 a commodity's spot price is $60 and its August futures price is $59.On July 1 the spot price is $64 and the August futures price is $63.50.A company entered into futures contracts on March 1 to hedge its purchase of the commodity on July 1.It closed out its position on July 1.What is the effective price (after taking account of hedging)paid by the company?
A)$59.50
B)$60.50
C)$61.50
D)$63.50
Answer: A
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Chapter 4: Interest Rates
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Q1) The six month and one-year rates are 3% and 4% per annum with semiannual compounding.Which of the following is closest to the one-year par yield expressed with semiannual compounding?
A)3.99%
B)3.98%
C)3.97%
D)3.96%
Q2) A repo rate is
A)An uncollateralized rate
B)A rate where the credit risk is relatively high
C)The rate implicit in a transaction where securities are sold and bought back at a higher price
D)None of the above
Q3) The zero curve is upward sloping.Define X as the 1-year par yield,Y as the 1-year zero rate and Z as the forward rate for the period between 1 and 1.5 year.Which of the following is true?
A)X is less than Y which is less than Z
B)Y is less than X which is less than Z
C)X is less than Z which is less than Y
D)Z is less than Y which is less than X
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Chapter 5: Determination of Forward and Futures Prices
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Q1) Which of the following is true?
A)The convenience yield is always positive or zero
B)The convenience yield is always positive for an investment asset
C)The convenience yield is always negative for a consumption asset
D)The convenience yield measures the average return earned by holding futures contracts
Q2) Which of the following is NOT a reason why a short position in a stock is closed out?
A)The investor with the short position chooses to close out the position
B)The lender of the shares issues instructions to close out the position
C)The broker is no longer able to borrow shares from other clients
D)The investor does not maintain margins required on his/her margin account
Q3) Which of the following describes contango?
A)The futures price is below the expected future spot price
B)The futures price is below today's spot price
C)The futures price is a declining function of the time to maturity
D)The futures price is above the expected future spot price
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Chapter 6: Interest Rate Futures
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Q1) The conversion factor for a bond is approximately
A)The price it would have if all cash flows were discounted at 6% per annum
B)The price it would have if it paid coupons at 6% per annum
C)The price it would have if all cash flows were discounted at 8% per annum
D)The price it would have if it paid coupons at 8% per annum
Q2) In the U.S.what is the longest maturity for 3-month Eurodollar futures contracts?
A)2 years
B)5 years
C)10 years
D)20 years
Q3) The time-to-maturity of a Eurodollars futures contract is 4 years,and the time-to-maturity of the rate underlying the futures contract is 4.25 years.The standard deviation of the change in the short term interest rate, = 0.011.What is the difference between the futures and the forward interest rate?
A)0.105%
B)0.103%
C)0.098%
D)0.093%
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Chapter 7: Swaps
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Q1) A floating for floating currency swap is equivalent to A)Two interest rate swaps.one in each currency
B)A fixed-for-fixed currency swap and one interest rate swap
C)A fixed-for-fixed currency swap and two interest rate swaps.one in each currency
D)None of the above
Q2) Which of the following describes the way a LIBOR-in-arrears swap differs from a plain vanilla interest rate swap?
A)Interest is paid at the beginning of the accrual period in a LIBOR-in-arrears swap
B)Interest is paid at the end of the accrual period in a LIBOR-in-arrears swap
C)No floating interest is paid until the end of the life of the swap in a LIBOR-in-arrears swap.but fixed payments are made throughout the life of the swap
D)Neither floating nor fixed payments are made until the end of the life of the swap
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Chapter 8: Securitization and the Credit Crisis of 2007
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Q1) What,as a percent of tranche principal,are losses on the mezzanine tranche of the ABS CDO?
A)50%
B)60%
C)80%
D)100%
Q2) How high can losses on the mortgages be before the mezzanine tranche of the ABD CDO bears losses?
A)5.0%
B)5.5%
C)6.0%
D)6.5%
Q3) Which of the following is true of a non-recourse mortgage?
A)The house buyer.if unable to make payments.can lose all possessions
B)The house buyer has an American style put option on the house
C)The house buyer has a European style put option on the house
D)The lender is less likely to lose money on the mortgage
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10
Chapter 9: Mechanics of Options Markets
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Q1) An investor has exchange-traded put options to sell 100 shares for $20.There is a $1 cash dividend.Which of the following is then the position of the investor?
A)The investor has put options to sell 100 shares for $20
B)The investor has put options to sell 100 shares for $19
C)The investor has put options to sell 105 shares for $19
D)The investor has put options to sell 105 shares for $19.05
Q2) Which of the following describes a short position in an option?
A)A position in an option lasting less than one month
B)A position in an option lasting less than three months
C)A position in an option lasting less than six months
D)A position where an option has been sold
Q3) When a six-month option is purchased
A)The price must be paid in full
B)Up to 25% of the option price can be borrowed using a margin account
C)Up to 50% of the option price can be borrowed using a margin account
D)Up to 75% of the option price can be borrowed using a margin account
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Chapter 10: Properties of Stock Options
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Q1) When the time to maturity increases with all else remaining the same,which of the following is true?
A)European options always increase in value
B)The value of European options either stays the same or increases
C)There is no effect on European option values
D)European options are liable to increase or decrease in value
Q2) Which of the following is true when dividends are expected?
A)Put-call parity does not hold
B)The basic put-call parity formula can be adjusted by subtracting the present value of expected dividends from the stock price
C)The basic put-call parity formula can be adjusted by adding the present value of expected dividends to the stock price
D)The basic put-call parity formula can be adjusted by subtracting the dividend yield from the interest rate
Q3) Which of the following best describes the intrinsic value of an option?
A)The value it would have if the owner were forced to exercise immediately
B)The Black-Scholes-Merton price of the option
C)The lower bound for the option's price
D)The amount paid for the option
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Page 12
Chapter 11: Trading Strategies Involving Options
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Q1) When the interest rate is 5% per annum with continuous compounding,which of the following creates a $1000 principal protected note?
A)A one-year zero-coupon bond plus a one-year call option worth about $59
B)A one-year zero-coupon bond plus a one-year call option worth about $49
C)A one-year zero-coupon bond plus a one-year call option worth about $39
D)A one-year zero-coupon bond plus a one-year call option worth about $29
Q2) Which of the following describes a covered call?
A)A long call option on a stock plus a long position in the stock
B)A long call option on a stock plus a short put option on the stock
C)A short call option on a stock plus a short position in the stock
D)A short call option on a stock plus a long position in the stock
Q3) What is a description of the trading strategy where an investor sells a 3-month call option and buys a one-year call option,where both options have a strike price of $100 and the underlying stock price is $75?
A)Neutral Calendar Spread
B)Bullish Calendar Spread
C)Bearish Calendar Spread
D)None of the above
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Chapter 12: Introduction to Binomial Trees
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Q1) An investor sells call options with a strike price of $32. Which of the following hedges the position?
A)Buy 0.6 shares for each call option sold
B)Buy 0.4 shares for each call option sold
C)Short 0.6 shares for each call option sold
D)Short 0.4 shares for each call option sold
Q2) The current price of a non-dividend paying stock is $50.Use a two-step tree to value an American put option on the stock with a strike price of $48 that expires in 12 months.Each step is 6 months,the risk free rate is 5% per annum,and the volatility is 20%.Which of the following is the option price?
A)$1.95
B)$2.00
C)$2.05
D)$2.10
Q3) Which of the following is necessary to hedge the position?
A)Buy 0.2 shares for each option purchased
B)Sell 0.2 shares for each option purchased
C)Buy 0.8 shares for each option purchased
D)Sell 0.8 shares for each option purchased
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Page 14
Chapter 13: Valuing Stock Options: The BSM Model
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Q1) When the Black-Scholes-Merton and binomial tree models are used to value an option on a non-dividend-paying stock,which of the following is true?
A)The binomial tree price converges to a price slightly above the Black-Scholes-Merton price as the number of time steps is increased
B)The binomial tree price converges to a price slightly below the Black-Scholes-Merton price as the number of time steps is increased
C)Either A or B can be true
D)The binomial tree price converges to the Black-Scholes-Merton price as the number of time steps is increased
Q2) When there are two dividends on a stock,Black's approximation sets the value of an American call option equal to which of the following?
A)The value of a European option maturing just before the first dividend
B)The value of a European option maturing just before the second (final)dividend
C)The greater of the values in A and B
D)The greater of the value in B and the value assuming no early exercise
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Chapter 14: Employee Stock Options
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Q1) Which of the following is true about the practice of backdating a stock options grant?
A)It is illegal
B)It is illegal in the majority of states in the U.S..but not all states
C)It is illegal in roughly half the states in the U.S.
D)It is unethical.but not illegal
Q2) Which of the following is true about employee stock options after they have been issued?
A)They have to be revalued every year
B)They have to be revalued every quarter
C)They have to be revalued every day like other derivatives
D)They never have to be revalued
Q3) When a CEO has employee stock options,he or she is in theory motivated to do which of the following?
A)Take more risk
B)Take less risk
C)Buy some of the company's stock
D)None of the above
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Chapter 15: Options on Stock Indices and Currencies
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Q1) What should the strike price of options on the index be the portfolio has a beta of 1?
A)425
B)450
C)475
D)500
Q2) A binomial tree with one-month time steps is used to value an index option.The interest rate is 3% per annum and the dividend yield is 1% per annum.The volatility of the index is 16%.What is the probability of an up movement?
A)0.4704
B)0.5065
C)0.5592
D)0.5833
Q3) What is the size of one option contract on the S&P 500?
A)250 times the index
B)100 times the index
C)50 times the index
D)25 times the index
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17
Chapter 16: Futures Options
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Q1) What is the cash settlement if a call futures option on 50 units of the underlying asset is exercised?
A)(Current Futures Price - Strike Price)times 50
B)(Strike Price - Current Futures Price)times 50
C)(Most Recent Futures Settlement Price - Strike Price)times 50
D)(Strike Price - Most Recent Futures Settlement Price)times 50
Q2) Which of the following is acquired (in addition to a cash payoff)when the holder of a call futures exercises?
A)A long position in a futures contract
B)A short position in a futures contract
C)A long position in the underlying asset
D)A short position in the underlying asset
Q3) Which of the following is NOT true?
A)Black's model can be used to value an American-style option on futures
B)Black's model can be used to value a European-style option on futures
C)Black's model can be used to value a European-style option on spot
D)Black's model is widely used by practitioners
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Chapter 17: The Greek Letters
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Q1) A call option on a stock has a delta of 0.3.A trader has sold 1,000 options.What position should the trader take to hedge the position?
A)Sell 300 shares
B)Buy 300 shares
C)Sell 700 shares
D)Buy 700 shares
Q2) Which of the following is true?
A)The delta of a European put equals minus the delta of a European call
B)The delta of a European put equals the delta of a European call
C)The gamma of a European put equals minus the gamma of a European call
D)The gamma of a European put equals the gamma of a European call
Q3) When the interest rate is zero which of the following is true for a delta-neutral portfolio with a positive gamma?
A)As gamma increases theta becomes more positive
B)As gamma decreases theta declines
C)Theta is zero
D)As gamma increases theta becomes more negative
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Chapter 18: Binomial Trees in Practice
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Q1) Which of the following is possible in a modified Cox,Ross,Rubinstein binomial tree?
A)The interest rate and volatility can both be functions of time
B)The interest rate or the volatility can be a function of time.but not both
C)The interest rate can be a function of time but the volatility cannot
D)The interest rate and volatility must be constant
Q2) A binomial tree prices an American option at $3.12 and the corresponding European option at $3.04.The Black-Scholes price of the European option is $2.98.What is the control variate price of the American option?
A)$3.06
B)$3.18
C)$2.90
D)$3.08
Q3) What is the recommended way of making volatility a function of time in a Cox,Ross,Rubinstein tree?
A)Make u a function of time
B)Make p a function of time
C)Make u and p a function of time
D)Make the lengths of the time steps unequal
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Chapter 19: Volatility Smiles
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Q1) Which of the following is NOT true?
A)A volatility surface provides more information than a single volatility smile
B)A volatility surface is used to determine the implied volatility of an option that does not trade actively
C)A volatility surface can be determined from a single volatility smile using interpolation
D)A volatility surface incorporates information about options with different maturity dates
Q2) Which of the following is true for European call and put options?
A)If they have the same strike price.they have the same implied volatility
B)If they have the same time to maturity.they have the same implied volatility
C)If they have the same strike price and time to maturity.they have the same implied volatility
D)None of the above
Q3) Which of the following is true?
A)Volatility smile for European puts is the same as for European calls
B)Volatility smile for European puts is the same as for American puts
C)Volatility smile for European calls is the same as for American calls
D)Volatility smile for American puts is the same as for American calls
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21
Chapter 20: Value at Risk
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Q1) Which of the following is true?
A)The quadratic model approximates daily changes in using delta and gamma
B)The quadratic model approximates daily changes using delta.but not gamma
C)The quadratic model approximates daily changes using gamma.but not delta
D)None of the above
Q2) Which of the following is true of the 99.9% value at risk?
A)There is 1 chance in 10 that the loss will be greater than the value of risk
B)There is 1 chance in 100 that the loss will be greater than the value of risk
C)There is 1 chance in 1000 that the loss will be greater than the value of risk
D)None of the above
Q3) At the end of Thursday,the estimated covariance between assets A and B is 0.0001.During Friday asset A produces a return of 3% and asset B produces a return of zero.An EWMA model with lambda equal to 0.9 is used.What is an estimate of the covariance at the end of Friday?
A)0.000090
B)0.000081
C)0.000100
D)0.000095
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Chapter 21: Interest Rate Options
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Q1) Which of the following is true?
A)A puttable bond allows the lender to ask for the principal to be repaid early
B)A puttable bond allows the borrower to repay the principal early
C)A puttable bond is a bond with an embedded stock option
D)None of the above
Q2) In put-call parity for caps and floors,which of the following is true?
A)Long cap plus long floor equals swap
B)Long cap plus swap equals short floor
C)Long cap equals long floor plus swap
D)Long cap minus long floor equals swaption
Q3) A ten year interest rate cap has quarterly resets.How many caplets does the cap consist of?
A)38
B)39
C)40
D)41
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Chapter 22: Exotic Options and Other Nonstandard Products
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Q1) In a shout call option the strike price is $30.The holder shouts when the asset price is $40.What is the payoff from the option if the final asset price is $35?
A)$0
B)$5
C)$10
D)$15
Q2) An employer has promised that it will grant employees three year options in one year's time and that the options will be at the money at the time they are granted.What describes these options?
A)Chooser options
B)Forward start options
C)Compound options
D)Shout options
Q3) An Asian option is a term used to describe which of the following?
A)An option where the payoff depends on whether a barrier is hit
B)An option where the payoff depends on the average value of a variable over a period of time
C)An option that trades on an exchange in the Far East
D)Any option with a nonstandard payoff
Page 24
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Chapter 23: Credit Derivatives
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Q1) A hazard rate is 1% per annum.What is the probability of a default during the first two years?
A)2.00%
B)2.02%
C)1.98%
D)1.96%
Q2) Which of the following is the most popular life for a credit default swap?
A)1 year
B)3 years
C)5 years
D)10 years
Q3) What is the number of companies underlying the CDX NA IG index?
A)50
B)75
C)100
D)125
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Chapter 24: Weather, Energy, and Insurance Derivatives
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Q1) What is the day's HDD?
A)5
B)12
C)4
D)0
Q2) Which of the following might we expect to be the result of global warming?
A)An decrease in observed CDDs
B)An increase in observed CDDs
C)An increase in observed HDDs
D)None of the above
Q3) How can an energy producer hedge its risks?
A)Use weather derivatives for price risk and energy derivatives for volume risk
B)Use energy derivatives for price and volume risk
C)Use energy derivatives for price risk and weather derivatives for volume risk
D)Use weather derivatives for price and volume risk
Q4) Which of the following describes a CAT bond?
A)Has a great deal of systematic risk
B)Has very little systematic risk
C)Has a moderate amount of systematic risk
D)Has negative systematic risk
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