Question 1. The current stock price of firm Y is $300.

Firm Y does not pay any dividends

over the next 12 months. The expected return is 15%. The 12-month spot rate is 5%. What
is the 12-month forward price written on the stock of firm Y?

• A. $315.
• B. $315.38.
• C. $345.
• D. $348.55.

Question 2. Which of the following examples requires a long position in a futures contract
written on oil to hedge risks?

• A. Firm A owns an oil rig and produces three million barrels of oil this month and
intends to sell the produced oil in one month.
• B. Investor B expects that oil prices will increases because of political tensions in the
Middle East, which she expects to cause a decrease in aggregate oil supply. She wants to
take advantage of this situation and trade in financial markets to make a profit from
increasing oil prices.
• C. Firm C is in the transport industry and needs to buy jet fuel to operate its airplanes
next month.
• D. Firm D does not store or produce oil. However, it has a contractual obligation to
deliver 10,000 barrels of oil to a client in 2 months. Firm D will receive a fixed price on
delivery.

Question 3. Which statements about the fundamental theorem of asset pricing (FTAP) are
correct?

• A. We assume that investors are risk neutral.

• B. We assume that there is no arbitrage.
• C. We assume that the capital asset pricing model holds.
• D. We assume that there exists a probability measure such that the expected returns of
all assets are identical.

Question 4. In the following we consider 6-month European options written on a risky

investment asset. The asset does not pay dividends within the next year. There are no
storage costs to hold the asset. The 6-month spot rate is 10% continuously compounded.
Which statements are correct?

• A. The time value of an in-the-money call option is positive.

• B. The time value of an out-the-money call option is positive.
• C. The time value of an at-the-money put option is positive.
• D. The price of an at-the money call option is higher than the price of an at-the money
put option.

Question 5. Suppose the 1-year spot rate is r = 5%, asset A does not pay dividends (within
the next year) and has an annual volatility σ = 60%. What is the price of a 1-year at-the-
money European call option, as a fraction of the current stock price? Round threshold
values d1 and d2 to a precision of 2 decimal points. Make use of the following table.

• A. 8.9%
• B. 9.0%
• C. 25.5%
• D. 26.0%

Question 6. Suppose you have a 5-year zero coupon bond with a current value of
$100,000,000? You are concerned about small parallel shifts in the yield curve. Which of the
following positions provides the best hedge?

• A. 100 long positions in Eurodollar futures.

• B. 2000 long positions in Eurodollar futures.
• C. 100 short positions in Eurodollar futures.
• D. 2000 short positions in Eurodollar futures.

Question 7. Which of the following examples requires a short position in cobalt metal
futures to hedge risks?

• A. Firm A produces batteries and needs to buy cobalt in the next 3 months for its
operations.
• B. Mining corporation B expects to mine 10,000 metric tonnes of cobalt in the next 4
months, which it then intends to sells in the spot market.
• C. Investor C invests in several car companies that produce and sell electric cars. She
worries that increasing cobalt prices lead to an increase in battery prices, and therefore,
a drop in profits of the electric car firms.
• D. Firm D does not store or produce cobalt. However, it has a contractual obligation to
deliver 5,000 metric tonnes of cobalt to a client in 2 months. Firm D will receive a fixed
price on delivery.

Question 8. Which statements about duration based hedging are wrong?

• A. We assume that changes in interest rates are small.
• B. We assume that forward rates are a good predictor of future changes in interest rates.
• C. We assume that all bonds have the same yield to maturity.
• D. We assume that the yield curve is flat.

Question 9. Which of the following assumptions does the Black-Scholes model make?

• A. We know the possible realizations of the underlying asset’s price at the maturity date.
• B. Investors are risk neutral.
• C. The risk-free interest rate is constant over time.
• D. The volatility of the underlying asset is constant through time.

Question 10. Which statements are true about limits-to-arbitrage?

• A. Only large institutions can earn arbitrage profits.

• B. You need a seat at the exchange to trade without a time-delay to earn arbitrage
profits.
• C. The use insider information is prohibited by the law, and therefore, it is not possible
to earn arbitrage profits.
• D. Collateral requirements and borrowing constraints may lead to deviations from
theoretical no-arbitrage prices.

Question 11. Suppose the risk free rate is 5%. We consider European options with 3 months
to maturity. The underlying asset does not pay dividends within the next 3 months. There
are no storage costs to hold the asset. Which statements are correct?

• A. The time value of a call option is always positive.

• B. The time value of a put option is always positive.
• C. The risk neutral probability to be in the money at maturity is higher for the at-the-
money call than the put option.
• D. The price of an at-the money call option is higher than the price of an at-the money
put option.

Question 12. Assets A and B have the same spot price of $100 today. Over the next year,
asset A either increases to $120 with a probability of 99% or increase to $101 with a
probability of 1%. Over the same time period, asset B either increases to $121 with a
probability of 1% or decreases to $0 with a probability of 99%. The 1-year spot rate is 10%
continuously compounded. Which of the following is true if neither asset is paying
dividends within the next year?

• A. There is an arbitrage.
• B. Asset A’s one-year forward price is equal to that of asset B.
• C. Asset A’s one-year forward price is greater than that of asset B.
• D. Asset A’s one-year forward price is less than that of asset B.

Question 13. Given annual volatility σ = 40%, risk-free interest rate r = 5%, and dividend
yield q = 0, what is the price of a 6-month at-the-money European call option, as a fraction
of the stock price? Make use of the following table if necessary.

• A. 7.2%
• B. 12.4%
• C. 13.6%
• D. 14.1%

Question 14. You have entered a long position in a forward contract to buy £1’000’000 in
one year for 1.5 $ per £. What is your payoff in one year if the £ appreciates to 1.6 $ per £?

• A. + $100’000.
• B. - $100’000.
• C. + £160’000.
• D. - £160’000.

Question 15. The S&P500 SPDR ETF is currently traded at $200. The forward price with 1
month to maturity is also $200 per share and 1 forward contract is written on 100 shares.
You take 5 short positions in the forward. What is your payoff if the S&P500 SPDR ETF
decreases to $195 after 1 month?

• A. - $500.
• B. - $2’500.
• C. + $500.
• D. + $2’500.

Question 16. The price of Apple is $125 today. Apple does not pay any dividends over the
next 3 months. There is a forward contract with 3 months to maturity and a forward price
of $130. You can borrow and lend money for 3 months at an effective interest rate of 1%.
Which of the following is true?
• A. There is an arbitrage and an arbitrage strategy involves taking a long position in the
forward contract.
• B. There is an arbitrage and an arbitrage strategy involves buying the underlying.
• C. There is an arbitrage and an arbitrage strategy involves lending money at the risk-
free rate.
• D. There is no arbitrage.

Question 17. Which of the following scenarios has an arbitrage opportunity?

• A. The exchange rate between the Japanese Yen (JPY) and the US dollar (USD) is 0.01
USD/JPY, the exchange rate between Swiss franc (CHF) and USD is 0.95 CHF/USD, the
exchange rate between CHF and JPY is 0.0095 CHF/JPY.
• B. Google stock is $500 today. It is expected to increase to $530 in one year. The risk
free interest rate to borrow or lend money for 1 year is 10%.
• C. Currently, the risk free interest rate for a 1-year investment 10%, and the risk free
interest rate for a 2-year investment is 12% per year.
• D. Facebook stock is $100 today. The risk free interest rate for a 1-year investment is
10%. The forward price to trade one Facebook stock in 1 year is $105.

Question 18. The 1-year spot rate is 5% and the 3-year spot rate is 7%. What is the forward
rate to lend or borrow money in 1 year for another 2 years?

• A. 5%.
• B. 6%.
• C. 7%.
• D. 8%.

Question 19. What is the duration of a 15-year zero coupon bond with face value $1000?

• A. 10 years.
• B. 15 years.
• C. 20 years.
• D. It is not possible to tell without knowing the bond yield or the 15-year spot rate.

Question 20. Stocks of firm A and B trade at the same price today. Stock A has an expected
return of 10% and B an expected return of 12% over the next year. Which of the following is
true if neither stock pays dividends over the next year?

• A. Stock A’s 1-year forward price is less than that of stock B.

• B. Stock A’s 1-year forward price is greater than that of stock B.
• C. Both stocks have the same forward price.
• D. We do not have enough information to make a definitive statement.

Question 21. Suppose the 1.5-year spot rates in the USA (lend/borrow $) and in the UK
(lend/borrow £) are both 5%. The current exchange rate between $ and £ is 1.55$/£. What
is the (no arbitrage) forward exchange rate with maturity in 1.5 years?

• A. 1.5$/£.
• B. 1.55$/£.
• C. 1.6$/£.
• D. There is not enough information to tell. It depends on the central bank policy in the
US and UK.

Question 22. The price of a bushel of corn is $5. Suppose there are no storage costs to keep
corn. There is a forward contract with 6 months to maturity and a forward price of $5 per
bushel (suppose the price is fair). The 6-month spot rate is 2%. What is the convenience
yield?

• A. - 2%.
• B. 0.
• C. 2%.
• D. 4%.

Question 23. The dividend yield of the S&P 500 is 3% per year. The 1-year spot rate is 2%
and the expected return on the S&P 500 is 7% per year. Which statements are correct?

• A. The expected price of the S&P 500 in 1 year is larger than the forward price of a
forward contract written on the S&P 500 with 1 year to maturity.
• B. The expected price of the S&P 500 in 1 year is lower than the forward price of a
forward contract written on the S&P 500 with 1 year to maturity.
• C. There is no way to tell whether the expected price of the S&P 500 in 1 year is lower or
higher than the forward price of a forward contract written on the S&P 500 with 1 year
to maturity.
• D. Borrowing money at 2% for 1 year to buy e^(-0.03) units of the S&P 500 and hold it
(while reinvesting dividends) for 1 year yields exactly the same payoff as taking a long
position in a forward contract written on 1 unit of the S&P 500 with 1 year to maturity.
Question 24. 6 months ago (time t=0), you have entered a long position in a forward
contract written on one Apple stock with forward price $100 and 9 months to maturity
(time T=0.75). Today (time s=0.5), the price of one Apple stock is $120, the 3-month spot
rate is 10% and Apple does not pay any dividends within the next 3 months. What is the
current value of your long position (at time s=0.5)?

• A. 20.
• B. 22.47.
• C. 23.04.
• D. 29.52.

Question 25. Which of the following is an arbitrage?

• A. An investment strategy pays a higher expected return than the risk free asset.
• B. An investment strategy pays a very risky return (big standard deviation) but with a
probability of 1 it pays a higher return than the risk free asset.
• C. A gamble that costs nothing and pays with only 1% probability $1 and with 99%
probability nothing.
• D. A gamble that costs $0.01 and pays with 99% probability $1 and with 1% probability
nothing.

Question 26. In which of the following situations does a hedger want to take a long hedge?

• A. A firm expects to produce and sell 100’000 lbs of copper in 6 months. It plans to use
copper futures to hedge its exposure to copper price fluctuations.
• B. A firm expects to receive £100’000 in 3 months and then plans to exchange it to $. It
plans to use $ per £ exchange rate futures to hedge its exposure to exchange rate
fluctuations (foreign currency is typically the underlying).
• C. A firm has to buy 100 bushels of corn in 3 months to produce corn bread for an
outstanding order. It plans to use corn futures to hedge its exposure to corn price
fluctuations.
• D. An airline has sold tickets for a flight in 2 months to fly from Chicago to Hong Kong. It
plans to use crude oil futures to hedge its exposure to jet- fuel price fluctuations.

Question 27. The volatility of monthly price changes in jet-fuel is 4%, and the volatility of
price changes in heating oil futures is 5%. The correlation between jet-fuel price changes
and heating oil futures price changes is 90%. What is the optimal hedge ratio if we use
heating oil futures to hedge jet-fuel price fluctuations?

• A. 0.65.
• B. 0.72.
• C. 0.80.
• D. 0.89.

Question 28. Which of the following situations does NOT describe someone who should
implement a hedging strategy?

• A. Mary is very nervous about losing profits if selling prices drop.

• B. Melanie's creditors will not lend her money if her crops might lose money.
• C. Katherine's board of directors will not tolerate losses, even if it means profits are
smaller.
• D. Dawn wants to reduce price fluctuations, but will need to conduct many transactions
to achieve her goals.

Question 29. Which of the following are valid reasons against the use of futures to hedge
risks?

• A. Firm should focus on key competences and not trade in financial markets.
• B. Losses from the hedging position may realize immediately while offsetting gains from
the underlying may not realize for some time.
• C. Hedging can be costly and tax and accounting implications can be unfavourable.
• D. Hedging risks may increase bankruptcy and distress costs.

Question 30. 3 months ago you have entered a fixed for floating interest rate swap with
annual exchanges of payments and a maturity of 10 years (now there are 9 years and 9
months left to maturity). The notional principal is USD 10 million. The fixed rate of 4%
(annual compounding) is exchanged for the 12-month libor (annual compounding). 3
months ago the 12-month libor was 4% (annual compounding) and the current yield curve
is flat and equal to 4% (annual compounding). You are the floating rate payer and fixed rate
receiver. Check all true statements.

• A. The swap currently has a positive value for you.

• B. If today the yield curve suddenly shifts parallel upwards by 0.01% (from 4% to
4.01%), then the swap becomes more valuable for you.
• C. If today the yield curve suddenly becomes downward sloping and the short rate and
the 9-month spot rate stay at 4% (all X-month spot rates with X>9 are less then 4%),
then the swap becomes more valuable.
• D. Suppose 3 months ago you have borrowed USD 10 million from a bank at a fixed
interest rate of 4.4% (annual compounding), interest payments are due at the end of
every year and you are expected to pay back the loan after 10 years. Your position in the
 swap (floating rate payer) transforms your liability in a new liability of borrowing USD
10 million at a floating rate of libor+0.4% (annual compounding).

Question 31. Suppose you own a European put option written on Apple with a strike price
of $100, which expires today. Suppose the stock price of Apple is $110 today. What is your
payoff from the put option?

• A. -$10.
• B. $0.
• C. $10.
• D. It is impossible to tell, given the provided information.

Question 32. What is the intrinsic value of an at-the-money put option with a current price
of $2?

• A. less than $2.

• B. $2.
• C. $0.
• D. It is impossible to tell, given the provided information.

Question 33. Consider options with the same underlying asset and same time to expiration.
Which of the following statements is always correct?

• A. In-the-money call has strike price lower than in-the-money put.

• B. In-the-money call has strike price lower than out-of-the money put.
• C. Out-of-the-money call has strike price lower than out-of-the-money put.
• D. Out-of-the-money call has strike price lower than in-the-money put.

Question 34. Which of the following option strategies speculates on an increase in the
volatility of the underlying?

• A. Bull spread.
• B. Box spread.
• C. Straddle.
• D. Strangle.

Question 35. The early exercise feature of American style options refers to
• A. The right of the option holder to exercise the option at any time before it expires.
• B. The right of the option writer to cancel the option.
• C. The right of the option holder to sell the option at any time before it expires.
• D. The fact that American traders go the gym before markets open.

Question 36. Which of the following options will NOT be exercised early?

• A. Put on a dividend paying stock.

• B. Call on a dividend paying stock.
• C. Put on a non-dividend paying stock.
• D. Call on a non-dividend paying stock.

Question 37. A stock is currently selling for $22.00 per share. What is the intrinsic value of a
call option with the strike price of $20.00 per share?

• A. $0.00.
• B. $1.00.
• C. $2.00.
• D. $3.00.

Question 38. On which of the following factors does the option price NOT depend?

• A. strike price.
• B. risk free rate.
• C. expected return of the underlying asset.
• D. dividend payment.

Question 39. Suppose you would like to estimate the value of a call option with a strike price
of 50 and a time to maturity of 3 months. Which of the followings are the appropriate inputs
to the option pricing model?

• A. The annualized 3-month risk-free interest rate, continuously compounded.

• B. The annualized 6-month risk-free interest rate, continuously compounded.
• C. The most updated dividend yield.
• D. The forward-looking dividend yield you believe is accurate for the next 3 months.
Question 40. You would like to estimate the option value by the Black-Scholes option pricing
formula. You believe the past volatility is a good proxy of the future volatility, what should
you do?

• A. Collect daily returns and compute the standard deviation of the returns.
• B. Collect daily returns and compute the standard deviation of the returns. Multiply the
standard deviation by square-root of 250 (number of trading days per year).
• C. Collect daily stock prices and compute the standard deviation of the prices.
• D. Collect daily stock prices and compute the standard deviation of the prices. Multiply
the standard deviation by square-root of 250 (number of trading days per year).

Question 41. Which of the following options cannot be valued by the Black-Scholes Option
Pricing Model?

• A. An American call option where the underlying stock does not pay dividends.
• B. A European call option where the underlying stock pays dividends.
• C. An American put option where the underlying stock pays dividends.
• D. A European put option where the underlying stock does not pay dividends.

Question 42. If the volatility of the underlying stock return is zero, which of the following is
true?

• A. The call option price will be zero.

• B. The put option price will be zero.
• C. The call option price is the maximum between the difference of the current stock
price and the strike price and zero.
• D. The put option price is the present value of the maximum between the difference of
the strike price and current stock price and zero.

Question 43. Which of the following about the Black-Scholes Option Pricing Model is false?

• A. The value of Φ(d1) is always the same as the call option delta.
• B. The value of Φ(d2) is the risk-neutral probability that the stock price at maturity is
greater than the strike price.
• C. The formula assumes the continuously compounded returns on the stock are
normally distributed.
• D. Black-Scholes formula might not hold when there are transaction costs or taxes.