Course Introduction
Investment Banking Practice
Questions
This course provides a comprehensive overview of investment banking, exploring its core functions such as underwriting, mergers and acquisitions, asset management, and securities trading. Students will learn about capital raising processes, financial advisory roles, valuation techniques, regulatory frameworks, and the ethical considerations unique to investment banking. Case studies and real-world examples illustrate the practical application of investment banking services in corporate finance, while the course further emphasizes the importance of risk management and strategic decision-making in global financial markets.
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) Which of the following contracts obligates a buyer to buy or sell something at a later date?
A) call
B) futures
C) cap
D) put
E) swaption
Answer: B
Q2) A market in which the price equals the true economic value
A) is risk-free
B) has high expected returns
C) is organized
D) is efficient
E) all of the above
Answer: D
Q3) Swaps, like options, trade on organized exchanges.
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) A put option increases in value when the stock price decreases.
A)True
B)False
Answer: True
Q2) Options traders who hold their positions for very short periods of time are called position traders.
A)True
B)False Answer: False
Q3) An order placed by an investor for the broker to buy an option at the best available price is called a market order.
A)True
B)False Answer: True
Q4) All of the options on Microsoft comprise an option class.
A)True
B)False
Answer: True
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Page 4
Chapter 3: Principles of Option Pricing
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Sample Questions
Q1) Holding everything else constant, a longer-term European put is always worth more than a shorter-term European put.
A)True
B)False
Answer: False
Q2) Put-call parity is a relationship that can be used to provide the price of both a European put and call simultaneously.
A)True
B)False
Answer: False
Q3) On March 2, a Treasury bill expiring on April 20 had a bid discount of 5.80, and an ask discount of 5.86. What is the best estimate of the risk-free rate as given in the text?
A) 5.86 %
B) 5.83 %
C) 6.11 %
D) 6.14 %
E) none of the above
Answer: C
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5
Chapter 4: Option Pricing Models: The Binomial Model
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Sample Questions
Q1) In a one-period binomial model with S<sub>u</sub> = 49.5, S<sub>d</sub> = 40.5, p = 0.8, r = 0.06, S = 45 and X = 50, what is a European put worth?
A) 2.17
B) 0.50
C) 9.50
D) 5.00
E) none of the above
Q2) The up and down factors in the binomial model are analogous to the volatility. A)True
B)False
Q3) If the number of binomial periods is increased and u, d and r are not adjusted, the value of a European call will increase.
A)True
B)False
Q4) If the binomial model is used with a specific dollar dividend and the stock price follows the up and down parameters, the tree will explode and end up with far more outcomes than time periods.
A)True
B)False
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Chapter 5: Option Pricing Models: The
Black-Scholes-Merton Model
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Sample Questions
Q1) The Black-Scholes-Merton model is the discrete time limit to the binomial model. A)True
B)False
Q2) To construct a riskless hedge, the number of puts per 100 shares purchased is: (Due to differences in rounding your calculations may be slightly different. "none of the above" should be selected only if your answer is different by more than 0.01.)
A) 0.7580
B) 0.2420
C) -0.2480
D) -0.6628
E) none of the above
Q3) Which of the following statements is true about the relationship between the option price and the risk-free rate?
A) a call price is nearly linear with respect to the risk-free rate
B) a call price is highly sensitive to the risk-free rate
C) the risk-free rate affects a call but not a put
D) the risk-free rate does not affect a call price
E) none of the above
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Chapter 6: Basic Option Strategies
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Sample Questions
Q1) The breakeven for a protective put is the same as that for a covered call.
A)True
B)False
Q2) Identify the correct statement related to the choice of exercise price for buying a call.
A) the higher the exercise price the higher the call premium
B) the lower the exercise price the more likely the call option will expire out-of-the-money
C) A higher strike price results in smaller gains on the upside but smaller losses on the downside
D) the higher the exercise price the more dividends contribute to the overall profit
E) none of the above are correct statements related to the choice of exercise price for buying a call
Q3) Covered call writing should be considered a strategy to enhance the return on a stock.
A)True B)False
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Chapter 7: Advanced Option Strategies
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Sample Questions
Q1) An investor who holds a strap (2 calls and 1 put) believes the market is more likely to go up than down.
A)True
B)False
Q2) The payoffs form a straddle are more like the payoffs from a money spread than a calendar spread.
A)True
B)False
Q3) What is the cost of the box spread?
A) $500
B) $2,018
C) $76
D) $484
E) none of the above
Q4) If a straddle is closed prior to expiration, the investor can recover some of the time value of either the call or the put but not both.
A)True
B)False
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Chapter 8: Structure of Forward and Futures Markets
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Sample Questions
Q1) Most forward contracts are closed by
A) delivery
B) offset
C) exercise
D) default
E) none of the above
Q2) When futures accounts are marked-to-market, an account balance below the maintenance margin must be brought up to the initial margin.
A)True
B)False
Q3) Because futures markets do not have designated market makers, there is no such thing as a bid-ask spread.
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
Page 10
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Chapter 9: Principles of Pricing Forwards, Futures and Options on Futures
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Sample Questions
Q1) The Black formula prices an option on an instrument with a positive cost of carry.
A)True
B)False
Q2) What would be the spot price if a stock index futures price were $75, the risk-free rate were 10 percent, the continuously compounded dividend yield is 3 percent, and the futures contract expires in three months?
A) $73.70
B) $77.48
C) $72.60
D) $76.32
E) none of the above
Q3) If the U.S. risk-free rate is 4 percent and the Swiss risk-free rate is 5 percent, a U.S. investor can earn the Swiss rate by buying Swiss francs, selling a forward or futures contract and converting back to dollars at the contract's expiration.
A)True
B)False
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11
Chapter 10: Futures Arbitrage Strategies
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Q1) 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
Q2) Foreign exchange carry arbitrage is based on a trader's expectations regarding purchasing power parity.
A)True
B)False
Q3) It is important to identify the cheapest bond to deliver because it is the one the futures contract is priced off of.
A)True
B)False
Q4) Determine the conversion factor for delivery of the 7 1/4's off May 15, 2026 on the March 2010 T-bond futures contract.
A) 1.225
B) 0.932
C) 1.083
D) 1.127
E) 1.509
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Chapter 11: Forward and Futures Hedging, Spread, and Target Strategies
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Sample Questions
Q1) The implied duration of a futures contract is the duration of the underlying bond measured as if one owned the bond today.
A)True
B)False
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 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) In the real-world, financial decisions are irrelevant, so there is really no reason for firms to hedge.
A)True
B)False
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Page 13
Chapter 12: Swaps
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Sample Questions
Q1) Interest rate swap volume is greater than currency swap volume because virtually ever business is exposed to interest rate risk.
A)True
B)False
Q2) A swap can be terminated by having the party owing the greater amount make a cash payment.
A)True
B)False
Q3) Use the information in problem 16 to find the fixed rate on an equity swap in which the stock index is at 2,000.
A) 5.9 percent
B) 5 percent
C) 6 percent
D) 2.95 percent
E) 3.5 percent
Q4) By adding a hypothetical notional amount to a swap, one can treat the cash flows like those of a bond.
A)True B)False
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Chapter 13: Interest Rate Forwards and Options
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Sample Questions
Q1) Find the premium of a correctly priced interest rate call on 30-day LIBOR if the current forward rate is 7 percent, the strike is 7 percent, the continuously compounded risk-free rate is 6.2 percent, the volatility is 12 percent and the option expires in one year. The notional amount is $30 million.
A) $.0031
B) $93,000
C) $7,817
D) $0.0012
E) $36,000
Q2) If a lender uses a collar, the transactions would be
A) buy a floor at one exercise price, sell a floor at another exercise price
B) buy a floor, sell a cap
C) sell a floor, buy a cap
D) buy a cap at one exercise price, sell a floor at another exercise price
E) buy a cap and sell a floor at the same exercise price
Q3) A short FRA would be appropriate for a party anticipating an increase in interest rates.
A)True
B)False
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Page 15
Chapter 14: Advanced Derivatives and Strategies
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Sample Questions
Q1) One attractive feature of weather as the underlying in a derivative is that it is easily measurable.
A)True
B)False
Q2) Weather derivative payoffs can be based on each of the following variables except
A) temperature above a given level
B) inches of snowfall
C) total value of insurance claims
D) temperature below a given level
E) sunshine
Q3) An equity forward contract is
A) a forward contract on LIBOR secured by a stock as collateral
B) a futures contract on a stock index that is not marked-to-market
C) a call option on a stock with greater downside risk than an ordinary call
D) a forward contract whose payoff is determined by a stock or index
E) none of the above
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) Systemic risk is
A) the risk of a failure of the entire financial system
B) the risk associated with broad market movements
C) the risk of a failure of a firm's financial risk management system
D) the risk of large price movements throughout the financial system
E) none of the above
Q2) The historical method of estimating Value at Risk uses the performance of the portfolio over the last ten years.
A)True
B)False
Q3) 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
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Chapter 16: Managing Risk in an Organization
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Sample Questions
Q1) Derivatives activities in end users are primarily conducted by A) the human resources group
B) the sales staff
C) the chief financial officer
D) the board of directors
E) the treasury group
Q2) Hedge accounting, based on FAS 133, addresses all of the following except
A) fair value hedges
B) unfair value hedges
C) cash flow hedges
D) foreign investment hedges
E) speculation
Q3) Under SEC rules, derivatives activities must be disclosed in one of three ways.
A)True
B)False
Q4) Risk management in which risks such as financial market risk and insurance risk are managed jointly is called enterprise risk management.
A)True
B)False
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