Derivatives Study Guide
1. Both forward and futures contracts are traded on exchanges. : False
2. Futures contracts are standardized; forward contracts are not. : True
3. The S&P500 index futures contract is a physical delivery contract. The pork bellies futures contract is a cash-settled contract. : False
4. An American option can be exercised at any time during its life. : True
5. A put option will always be exercised at maturity if the strike price is greater than the underlying asset price. : True
6. The fact that the exchange is the counter-party to every futures contract issued is important because it eliminates interest rate risk. : False
7. Index arbitrage is a strategy which exploits differences between actual index futures prices and their no-arbitrage values.: True
8. Who from the following list would be considered a speculator by entering into a futures or options contract on commodities?(b) Corn delivery truck driver
9. All of the positions listed will benefit from a price decline, except: (a) Short
10. A strategy consists of buying a market index product at $830 and longing a put on the index with a strike of $830. If the put premium is $18.00 and interest rates are 0.5% per month (monthly compounding), what is the profit or loss at expiration (in 6 months) if the market index is $810? (d) $43.76 loss
11. A strategy consists of longing a put on the market index with a strike of 830 and shorting a call option on the market index with a strike price of 830. The put premium is
$18.00 and the call premium is $44.00. Interest rates are 0.5% per month (monthly compounding). Determine the net profit or loss if the index price at expiration is $830 (in 6 months). (c) $26.79 gain
12. Which of the following statements does NOT accurately reflect the relationship between securities and synthetic forward contracts? (c) Prepaid forward forward – zero coupon bond
13. (3points) If you expect a market downturn, one potential defensive
2. Futures contracts are standardized; forward contracts are not. : True
3. The S&P500 index futures contract is a physical delivery contract. The pork bellies futures contract is a cash-settled contract. : False
4. An American option can be exercised at any time during its life. : True
5. A put option will always be exercised at maturity if the strike price is greater than the underlying asset price. : True
6. The fact that the exchange is the counter-party to every futures contract issued is important because it eliminates interest rate risk. : False
7. Index arbitrage is a strategy which exploits differences between actual index futures prices and their no-arbitrage values.: True
8. Who from the following list would be considered a speculator by entering into a futures or options contract on commodities?(b) Corn delivery truck driver
9. All of the positions listed will benefit from a price decline, except: (a) Short
10. A strategy consists of buying a market index product at $830 and longing a put on the index with a strike of $830. If the put premium is $18.00 and interest rates are 0.5% per month (monthly compounding), what is the profit or loss at expiration (in 6 months) if the market index is $810? (d) $43.76 loss
11. A strategy consists of longing a put on the market index with a strike of 830 and shorting a call option on the market index with a strike price of 830. The put premium is
$18.00 and the call premium is $44.00. Interest rates are 0.5% per month (monthly compounding). Determine the net profit or loss if the index price at expiration is $830 (in 6 months). (c) $26.79 gain
12. Which of the following statements does NOT accurately reflect the relationship between securities and synthetic forward contracts? (c) Prepaid forward forward – zero coupon bond
13. (3points) If you expect a market downturn, one potential defensive