11/17/2020 Midterm Exam: Attempt review

Home My courses FINANCIAL DERIVATIVES General Midterm Exam

Started on Tuesday, 17 November 2020, 9:30 PM

Question 1
Complete

Marked out of 1.00

Two stocks, A and B, have expected returns for one year of -10% and +10% respectively. The stocks have identical
prices of $100 each, and do not pay dividends, and the one-year risk-free rate of return is 2% in simple terms. The
one-year forward prices of the two stocks are:

a. A: 92; B: 112

b. A: 102; B: 102

c. A: 112; B: 112

d. A: 90; B: 110

Question 2
Complete

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A commodity has a spot price of $25 and a one-month forward price of $25.02. The one-month risk-free rate is 2%
in continuously compounded and annualized terms. Assuming no other costs or benefits of carry on the
commodity, what must be the lower bound on the convenience yield that prevents arbitrage?

Answer: 25.02

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Question 3
Complete

Marked out of 3.00

You enter into an FRA of notional 6 million to borrow on the three-month underlying Libor rate six months from
now and lock in the rate of 6%. At the end of six months, if the underlying three-month rate is 6.6% over an actual
period of 91 days, what is your payoff given that the payment is made right away? Recall that the ACT/360
convention applies. 

Answer: 0.053704038

Question 4
Complete

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The spot price of an asset is $50. The expected return on the asset is 10% a year (in simple terms) and the
standard deviation of these returns is 20%. The risk-free rate of interest is 5% a year in simple terms. Assuming no
costs or benefits of carry, what is the one-year forward price of the asset?

Answer: 52.56355482

Question 5
Complete

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In Japan, if the three-month (91 days) interbank rate is 1% and the six-month (183 days) interbank rate is 0.25%,
what is the 3 × 6 FRA rate? 

Answer: -0.00495999

Question 6
Complete

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The US dollar-euro spot exchange rate is $1.50/e. If the one-year simple interest rate on dollars is 1% and on euro is
2%, what is the one-year forward rate of dollars per euro?

Answer: 1.485074751

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Question 7
Complete

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An investor enters into a forward contract to purchase 100,000 shares of IBM stock in 2 months at prices of $105 per
share. After one month, the investor notes that the forward price for the same contract (which now has a one-
month maturity) is $103 per share. She also notes that the one-month discount factor is 0.993. The value of the
forward contract held by the investor is: 

a. -$198; 600.00

b. +$201; 409.90

c. +$198; 600.00

d. +$200; 000.00

Question 8
Complete

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Suppose that the active lease market for gold in which arbitrageurs can short or lend out gold at lease rate of α=
4%, assume gold has no other costs/benefits of carry. Consider a 5 month forward contract on gold with spot price
of $460/oz. and the 5 month rate is 7%, suppose that the actual forward price is given to be $465/oz., what is the
net value of the position?

Answer: 2.730911978

Question 9
Complete

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The price of oil is $100 per barrel. Oil prices are expected to grow at 4% a year. The one-year risk-free rate of
interest is 2% in simple terms. It costs $1 to store a barrel of oil for one year. If oil has no costs or benefits of carry,
what is the theoretical one-year forward price of oil?

Answer: 103.020134

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Question 10
Complete

Marked out of 2.00

The replication method identifies the price of a USD/GBP forward rate as a function of: 

a. The spot USD/GBP exchange rate, the GBP interest rates, and the USD interest rates

b. The expected future USD/GBP exchange rate, the GBP interest rates, and the USD interest rates

c. Only the spot USD/GBP exchange rate

d. The spot USD/GBP exchange rate and the volatility of the spot USD/GBP exchange rate

Question 11
Complete

Marked out of 2.00

How many years does it take to double your money if the continuously- compounded interest rate is 6%?

Answer: 11.55245301

Question 12
Complete

Marked out of 3.00

An Investor enters into a forward contract to sell a bond on 3 months' time at $120 after 1 month, the bond price is
$121.50 suppose that the term structure of I.R is flat at 5% for all maturities. If the bond is paying a coupon of $6 in
one month time, after calculating the arbitrage free price, what is the net value of the investors' short position
assuming that the coupons are due on the bond over the next 2 months? 

Answer: 3.508321663

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Question 13
Complete

Marked out of 2.00

Stock B is trading at $1100. The risk-free rate is 1% for all maturities and the average dividend on the stock is $10
each quarter-end. What is the six-month forward price of the stock, assuming interest calculations are on a
continuously-compounded basis?

Answer: 1085.488742

Question 14
Complete

Marked out of 2.00

An investor enters into a forward contract to buy 5,000 barrels of oil at $80 a barrel in three months. Two months
later, suppose that the one-month forward price of oil is $83 a barrel, and the one-month interest rate is 0%. The
value of the contract the investor holds after two months is? 

Answer: 3

Question 15
Complete

Marked out of 2.00

A stock has a current price of $20. The risk-free interest rate for a half- year maturity is 6% and the dividend rate is
3%. Assume continuous compounding. What is the six-month forward price of the stock?

Answer: 20.30226129

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