Investment Analysis
Test Bank
Course Introduction
Investment Analysis explores the principles, methods, and tools essential for evaluating potential investment opportunities and managing investment portfolios. The course covers topics such as risk and return, asset valuation, portfolio theory, securities markets, and the analysis of stocks, bonds, and alternative investments. Through theoretical frameworks and real-world applications, students learn how to assess financial markets, interpret financial statements, use quantitative techniques for informed decision-making, and develop strategies for optimizing investment performance in a dynamic economic environment.
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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Sample Questions
Q1) A call option on a futures contract gives the buyer the right to buy a futures contract.
A)True
B)False
Answer: True
Q2) When the law of one price is violated in that the same good is selling for two different prices, an opportunity for what type of transaction is created?
A) return-to-equilibrium transaction
B) risk-assuming transaction
C) speculative transaction
D) arbitrage transaction
E) none of the above
Answer: D
Q3) Swaps, like options, trade on organized exchanges.
A)True
B)False
Answer: False
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Chapter 2: Structure of Options Markets
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Sample Questions
Q1) Which one of the following is not a type of transaction cost in options trading?
A) the bid-ask spread
B) the commission
C) clearing fees
D) the cost of obtaining a quote
E) all of the above
Answer: D
Q2) The options market is regulated by the Securities Investor Protection Corporation.
A)True
B)False Answer: False
Q3) Exercise prices are set in $5 increments for options on exchanges.
A)True
B)False
Answer: False
Q4) A put option increases in value when the stock price decreases.
A)True
B)False Answer: True
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Chapter 3: Principles of Option Pricing
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Sample Questions
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) Suppose the stock is about to go ex-dividend in one day. The dividend will be $4.00.
Which of the following calls will you consider for exercise?
A) November 115
B) November 110
C) December 115
D) all of the above
E) none of the above
Answer: B
Q3) A stock is equivalent to a long call, short put and long risk-free bond.
A)True
B)False
Answer: True
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Page 5
Chapter 4: Option Pricing Models: The Binomial Model
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Q1) Which of the following statements about the binomial option pricing model is not always true?
A) it can capture the effect of early exercise
B) it can accommodate a large number of possible stock prices at expiration
C) it reflects the effects of the stock price, exercise price, risk-free rate, volatility and time to expiration
D) it gives the price at which the option will trade in the market.
E) none of the above
Q2) When pricing a put with the binomial model, the up and down probabilities are reversed.
A)True
B)False
Q3) In a two-period binomial world, a mispriced call will lead to an arbitrage profit if
A) the proper hedge ratio is maintained over the two periods
B) the hedge portfolio is terminated after one period
C) the option goes from over- to underpriced or vice versa
D) the option remains mispriced over both periods
E) none of the above
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Chapter 5: Option Pricing Models: The
Black-Scholes-Merton Model
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Sample Questions
Q1) A riskless hedge requires more shares of stock than call options.
A)True
B)False
Q2) One of the inputs to the Black-Scholes-Merton model is the volatility over a recent time period.
A)True
B)False
Q3) The option's sensitivity to an interest rate change is called rho.
A)True
B)False
Q4) The time to expiration of an option is based on a 360-day year.
A)True
B)False
Q5) The binomial price will theoretically equal the Black-Scholes-Merton price under which of the following conditions?
A) when the number of time periods is large
B) when the option is at-the-money
C) when the option is in-the-money
D) when the option is out-of-the-money
E) none of the above
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Chapter 6: Basic Option Strategies
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Sample Questions
Q1) If the transaction described in problem 6 is closed out when the option has three months to go and the stock price is at $36, what is the investor's profit?
A) $600
B) $311
C) $889
D) $229
E) none of the above
Q2) Which of the following is equivalent to a synthetic call?
A) a long stock and a short put position
B) a long put and a long stock position
C) a long put and a short risk-free bond position
D) a long stock and a short risk-free bond position
E) none of the above
Q3) In the context of insurance, protective put buyers who choose lower exercise prices are essentially using higher deductibles.
A)True
B)False
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Chapter 7: Advanced Option Strategies
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Sample Questions
Q1) 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
Q2) Which of the following have similar profit graphs?
A) call bull spread and long box spread
B) put bear spread and short box spread
C) butterfly spread and ratio spread
D) calendar spread and call bear spread
E) none of the above
Q3) What will be the profit if the stock price at expiration is $52.50?
A) $171
B) $1,421
C) $1.037
D) $421
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) Futures contracts are similar to forward contracts because they both represent a commitment to buy something at a future time at a fixed price.
A)True
B)False
Q2) Options on futures contracts expire after the underlying futures contract expires.
A)True
B)False
Q3) Futures trades are executed in the pit.
A)True
B)False
Q4) Which of the following is not a method of terminating a futures contract?
A) offset
B) delivery
C) exchange for physicals
D) scalping
E) none of the above
Q5) There are no futures contracts on the Dow Jones Industrial Average.
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) What is the lower bound of a European foreign currency call if the spot rate is $2.25, the domestic interest rate is 5.5 percent, the foreign interest rate is 6.2 percent, the option expires in three months, and the exercise price is $2.20? (The interest rates are continuously compounded.)
A) $0.0457
B) $0.05
C) $0.0793
D) $0.0529
E) none of the above
Q2) A market in which the futures price is said to be unbiased is also a market in which there is a risk premium.
A)True
B)False
Q3) The Black-Scholes-Merton formula can be used in place of the Black formula if you use the futures price for the stock price and a risk-free rate of zero.
A)True
B)False
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Chapter 10: Futures Arbitrage Strategies
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Sample Questions
Q1) If you buy both a 30-day Eurodollar CD paying 6.7 percent and a 90-day futures on a 90-day Eurodollar CD with a price implying a yield of 7.2 percent, what is your total annualized return? (Both yields are based on 360-day years.)
A) 7.25 percent
B) 7.07 percent
C) 10.15 percent
D) 7.75 percent
E) 6.95 percent
Q2) The quality option is sometimes referred to as the switching option.
A)True
B)False
Q3) The invoice price of a Treasury bond futures contract is based on the settlement price on position day and the conversion factor.
A)True
B)False
Q4) The most common means of financing a cash-and-carry arbitrage is a repurchase agreement.
A)True
B)False
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Chapter 11: Forward and Futures Hedging, Spread, and Target Strategies
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Sample Questions
Q1) Though a cross hedge has somewhat higher risk than an ordinary hedge, it will reduce risk if which of the following occurs?
A) futures prices are more volatile than spot prices
B) the spot and futures contracts are correctly priced at the onset
C) spot and futures prices are positively correlated
D) futures prices are less volatile than spot prices
E) none of the above
Q2) An optimal hedge ratio is one in which the change in the futures price equals the change in the spot price.
A)True
B)False
Q3) When the futures expires before the hedge is terminated and the hedger moves into the next futures expiration, it is called
A) spreading the hedge
B) rolling the hedge forward
C) optimally weighting the hedge
D) all of the above
E) none of the above
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Chapter 12: Swaps
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Sample Questions
Q1) If a swap is effectively terminated by entering into the opposite swap with another counterparty, the credit risk will be eliminated.
A)True B)False
Q2) The value of a pay-fixed, receive-floating interest rate swap is found as the value of a
A) floating-rate bond minus the value of a fixed-rate bond.
B) fixed-rate bond minus the value of a floating-rate bond.
C) floating-rate bond minus the value of another floating-rate bond.
D) fixed-rate bond minus the value of another fixed-rate bond.
E) none of the above correctly identify how this value is found.
Q3) The market value of a swap is zero between settlement dates. A)True B)False
Q4) The notional amount is never exchanged in an interest rate swap. A)True B)False
Q5) A swap involving two floating rates is called a basis swap. A)True B)False
Page 14
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Chapter 13: Interest Rate Forwards and Options
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Q1) An FRA is similar to any type of forward contract, but the payoff is based on an interest rate, rather than the price of an asset.
A)True
B)False
Q2) The pricing of a forward swap is done in the same manner as pricing a spot started today, except that forward rates are used instead of spot rates.
A)True
B)False
Q3) The advantage of a collar over a cap is
A) it lowers the out-of-pocket cost
B) it offers the possibility of greater returns
C) it eliminates the risk
D) it has lower transaction costs
E) none of the above
Q4) Payer swaptions can be used to convert callable to non-callable debt. A)True B)False
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Chapter 14: Advanced Derivatives and Strategies
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Sample Questions
Q1) The cost of a break forward contract is a result of the possibility of having a negative value at expiration.
A)True
B)False
Q2) A PO is a security promising a stream of common stock dividend payments.
A)True
B)False
Q3) Which of the following statements about mortgage-backed security strips is true?
A) both interest-only and principal-only strips are subject to pre-payment risk
B) only principal-only strips are subject to prepayment risk
C) only interest-only strips are subject to prepayment risk
D) the prepayment risk of interest-only and principal-only strips is precisely offsetting E) none of the above
Q4) If the S&P 500 ends up at 401, determine the upside capture.
A) 96.7 percent
B) 96 percent
C) 99.3 percent
D) 94 percent
E) 100 percent
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Chapter 15: Financial Risk Management Techniques and Appplications
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Sample Questions
Q1) Which of the following are types of risks faced by a derivatives dealer?
A) tax risk
B) operational risk
C) accounting risk
D) legal risk
E) none of the above
Q2) Earnings at Risk is a better risk measure for a derivatives dealer than is Value at Risk.
A)True
B)False
Q3) Netting allows a significant reduction in credit risk but increases market risk
A)True
B)False
Q4) A delta and gamma hedge is
A) one in which the combined spot and derivatives positions have a delta of zero and a gamma of zero.
B) one that is not guaranteed to be free of all risks
C) effective only for small changes in the underlying instrument.
D) all of the above statements are true
E) none of the above statements are true
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Chapter 16: Managing Risk in an Organization
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Sample Questions
Q1) Barings Bank failed due to excessive government regulation of their derivatives activities.
A)True
B)False
Q2) Dealers typically have more sophisticated risk management operations than end users.
A)True
B)False
Q3) Hedge accounting is a method of accounting for which the
A) gains and losses from a hedge are deferred until the hedge is completed.
B) debits and credits are managed to keep the cash account stable
C) derivatives revenues and expenses are recorded so as to exactly balance
D) gains and losses on derivatives are shown before the hedge is terminated
E) none of the above
Q4) Under SEC rules, derivatives activities must be disclosed in one of three ways. A)True
B)False
Q5) Senior management should evaluate trading performance on a risk-adjusted basis. A)True
B)False
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