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SECTION A
Answer ALL questions in this section

  1. 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 below which the trader
    makes a profit is
    a) $25
    b) $28
    c) $26
    d) $20 [3 marks]
  2. 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 $1,000 [3 marks]
  3. Which of the following is NOT true
    a) Futures contracts nearly always last longer than forward contracts
    b) Futures contracts are standardized; forward contracts are not.
    c) Delivery or final cash settlement usually takes place with forward contracts;
    the same is not true of futures contracts.
    d) Forward contracts usually have one specified delivery date; futures contract
    often have a range of delivery dates. [3 marks]
  4. Margin accounts have the effect of
    a) Reducing the risk of one party regretting the deal and backing out
    b) Ensuring funds are available to pay traders when they make a profit
    c) Reducing systemic risk due to collapse of futures markets
    d) All of the above [3 marks]
  5. An interest rate is 5% per annum with continuous compounding. What is the
    equivalent rate with semiannual compounding?
    a) 5.06%
    b) 5.03%
    c) 4.97%
    d) 4.94% [3 marks]
    Page 3
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  6. Which of the following is true of LIBOR
    a) The LIBOR rate is free of credit risk
    b) A LIBOR rate is lower than the Treasury rate when the two have the same
    maturity
    c) It is a rate used when borrowing and lending takes place between banks
    d) It is subject to favorable tax treatment in the U.S. [3 marks]
  7. The spot price of an investment asset that provides no income is $30 and the riskfree rate for all maturities (with continuous compounding) is 10%. What is the threeyear forward price?
    a) $40.50
    b) $22.22
    c) $33.00
    d) $33.16 [3 marks]
  8. 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 months
    c) A position in an option lasting less than six months
    d) A position where an option has been sold [3 marks]
  9. Which of the following creates a bull spread?
    a) Buy a low strike price put and sell a high strike price put
    b) Buy a high strike price put and sell a low strike price put
    c) Buy a high strike price call and sell a low strike price put
    d) Buy a high strike price put and sell a low strike price call [3 marks]
  10. How can a strip trading strategy be created?
    a) Buy one call and one put with the same strike price and same expiration date
    b) Buy one call and one put with different strike prices and same expiration date
    c) Buy one call and two puts with the same strike price and expiration date
    d) Buy two calls and one put with the same strike price and expiration date
    [3 marks]
    Page 4
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    Section B
    Answer TWO questions in this section
    Question 1
    Part a
    BFly plc is a manufacturer of specialist goods which have oil as an integral part of the
    product. Thus the price of oil has an important effect on the overall cost of production for
    BFly plc. The directors of BFly plc have decided that they must fix their cost of oil over the
    next few months.
    BFly plc request a swap dealer to enter into a swap whereby the BFly plc will pay a fixed
    amount to a swap dealer on the settlement dates, and the swap dealer will pay Bfly plc the
    spot price of oil per unit on each settlement date. The following apply;
     settlement will be every three months, beginning one month from today.
     the swap’s term will be 10 months
     settlement dates are 1, 4, 7, and 10 months hence.
     today, Crude Oil Brent Oil futures prices and spot interest rates are:
    Months to Next Delivery Date Oil Futures Price Interest rates
    1 52.46 2.0%
    4 52.65 2.2%
    7 52.14 2.5%
    10 52.75 2.7%
    Required
    i. What is the value of the swap contract when it was first signed? [5 marks]
    ii. Calculate the possible fixed amount the swap dealer might offer.(assume every month
    is 1
    /12th of a year for the purposes of any calculations). [10 marks]

Type Of Service: Academic paper writing
Type Of assignment: Term paper
Subject: Finance
Pages/words: 7/1925
Number of sources: N/A
Academic Level: Undergraduate
Paper Format: APA
Line Spacing: Double
Language style: UK English