Carleton University BUSI 3512 F14 Midterm verified Answers,100% score

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Do ALL 20 multiple choice problems: 2.5 marks per question for a total of 50 marks. 1. A one-year forward contract is an agreement where A. One side has the right to buy an asset for a certain price... in one year’s time. B. One side has the obligation to buy an asset for a certain price in one year’s time. C. One side has the obligation to buy an asset for a certain price at some time during the next year. D. One side has the obligation to buy an asset for the market price in one year’s time. 2. Which of the following is NOT true A. When a Chicago Board of Options Exchange call option on IBM is exercised, IBM issues more stock B. An American option can be exercised at any time during its life C. An call option will always be exercised at maturity if the underlying asset price is greater than the strike price D. A put option will always be exercised at maturity if the strike price is greater than the underlying asset price. 3. A one-year call option on a stock with a strike price of $30 costs $3; a one-year put option on the stock with a strike price of $30 costs $4. Suppose that a trader buys two call options and one put option. The breakeven stock price above which the trader makes a profit is A. $35 B. $40 C. $30 D. $36 4. 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 5. The price of a stock on February 1 is $124. A trader sells 200 put options on the stock with a strike price of $120 when the option price is $5. The options are exercised when the stock price is $110. The trader’s net profit or loss is A. Gain of $1,000 B. Loss of $2,000 C. Loss of $2,800 D. Loss of $1,0003 6. A speculator can choose between buying 100 shares of a stock for $40 per share and buying 1000 European call options on the stock with a strike price of $45 for $4 per option. For second alternative to give a better outcome at the option maturity, the stock price must be above A. $45 B. $46 C. $55 D. $50 7. A trader has a portfolio worth $5 million that mirrors the performance of a stock index. The stock index is currently 1,250. Futures contracts trade on the index with one contract being on 250 times the index. To remove market risk from the portfolio the trader should A. Buy 16 contracts B. Sell 16 contracts C. Buy 20 contracts D. Sell 20 contracts 8. A company enters into a long futures contract to buy 1,000 units of a commodity for $60 per unit. The initial margin is $6,000 and the maintenance margin is $4,000. What futures price will allow $2,000 to be withdrawn from the margin account? A. $58 B. $62 C. $64 D. $66 9. You sell one December futures contracts when the futures price is $1,010 per unit. Each contract is on 100 units and the initial margin per contract that you provide is $2,000. The maintenance margin per contract is $1,500. During the next day the futures price rises to $1,012 per unit. What is the balance of your margin account at the end of the day? A. $1,800 B. $3,300 C. $2,200 D. $3,700 10. A company has a $36 million portfolio with a beta of 1.2. The futures price for a contract on an index is 900. Futures contracts on $250 times the index can be traded. What trade is necessary to increase beta to 1.8? A. Long 192 contracts B. Short 192 contracts C. Long 96 contracts D. Short 96 contracts 11. The spot price of an investment asset that provides no income is $30 and the risk-free rate for all maturities (with continuous compounding) is 10%. What is the three-year forward price? A. $40.50 B. $22.224 C. $33.00 D. $33.16 12. What should a trader do when the one-year forward price of an asset is too low? Assume that the asset provides no income. A. The trader should borrow the price of the asset, buy one unit of the asset and enter into a short forward contract to sell the asset in one year. B. The trader should borrow the price of the asset, buy one unit of the asset and enter into a long forward contract to buy the asset in one year. C. The trader should short the asset, invest the proceeds of the short sale at the riskfree rate, enter into a short forward contract to sell the asset in one year D. The trader should short the asset, invest the proceeds of the short sale at the risk-free rate, enter into a long forward contract to buy the asset in one year 13. 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 14. An investor has exchange-traded put options to sell 100 shares for $20. There is 25% stock dividend. Which of the following is the position of the investor after the stock dividend? A. Put options to sell 100 shares for $20 B. Put options to sell 75 shares for $25 C. Put options to sell 125 shares for $15 D. Put options to sell 125 shares for $16 15. 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 month [Show More]

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