Question 1You are looking at the forward price for a non-dividend paying asset and you see that the price of a sixth-month forward contract for the asset is quoted at $53. The current spot price is $50 and the risk-free rate of return for a sixth-month investment is 10%. What actions should you do today to take advantage of this situation?Short the forward, buy the asset, borrow to buy the asset, and repay the loan in six months.Long the forward, short the asset, invest the short-asset proceeds, and harvest the investment proceeds in six months.Long the forward, buy the asset, invest the asset proceeds, and harvest the investment proceeds in six months.Short the forward, short the asset, borrow to short the asset, and repay the loan in six months.Do nothing, the quoted forward price is correct.Question 2A wheat producer and a bread maker could enter the derivatives markets to hedge their positions. What would be the likely position for each of them to take in the derivatives market?Farmer – Long forwardBread maker – Short forwardFarmer – Short forwardBread maker – Long forwardFarmer – Buy a callBread maker – Buy a putFarmer – Buy a callBread maker – Buy a callFarmer – Buy a putBread maker – Buy a putQuestion 3You are modeling a multi-step binomial option problem and the time between each step is 0.125 of a year. The risk-free rate of return (annual) is 8% and the standard deviation of the return on this asset is 0.63. What is the risk-neutral probability of the asset moving from one node upward to another node.0.9900.8000.4670.533Question 4If you are naturally short the position on an asset and you enter into a long forward position for that asset (same dollar amounts), then the payoff diagram for the combined postions would look like __________________.a option payoff.a put option payoff.a call option payoff.a flat line since the losses in the natural postion and the forward would offset making the payoff the same in all possible prices.a line with a 45 degree slope since the losses in the natural postion and the forward would offset .Question 5Your firm produces film and as part of that production process, you require 10 tons of silver next month. At this point, you have contracts to purchase 5 tons of silver. How would you describe your position with respect to silver?neutrallongshortprofitablea delta positionQuestion 6If interest rates are always positive, is it possible for the forward price on a non-dividend paying asset (ignore storage costs and convenience yields) to be lower than that of the spot price?Yes, if interest rates are low enough.No, positive interest rates will always generate a forward price greater than the spot price (ignoring storage costs and convenience yields).Yes, the demand for spot assets is always greater than the demand for future-date assets.No, demand for spot assets is always greater than the demand for future-date assets.Yes, the forward price for an asset is always independent of the spot price for that asset.Question 7 The relationship between the spot price and the forward price for an asset (non-dividend paying asset) is through an interest rate. What is essentially the reason for this?There is no explanation for this.A forward contract is really a risk-free security.A forward contract is in substance, really a loan from the personal selling the asset forward to the person buying the asset forward.A forward contract is in substance, really a loan from the personal buying the asset forward to the person selling the asset forward.Question 8Assume that the delta of a call option on a firm’s assets is .792. This means that a $50,000 project will increase the value of equity by:$27,902.$39,600.$43,820.$63,131.$89,600.Question 9 The delta of a call measures:the change in the ending stock value.the change in the ending option value.the swing in the price of the call relative to the swing in stock price.the ratio of the change in the exercise price to the change in the stock price.None of the above.Question 10 You own both a May 20 call and a May 20 put. If the call finishes in the money, then the put will:also finish in the money.finish at the money.finish out of the money.either finish at the money or in the money.either finish at the money or out of the money.Question 11 The fixed price in an option contract at which the owner can buy or sell the underlying asset is called the option’s:opening price.intrinsic value.strike price.market price.time value.Question 12 A financial contract that gives its owner the right, but not the obligation, to buy or sell a specified asset at an agreed-upon price on or before a given future date is called a(n) _____ contract.optionfuturesforwardswapstraddleQuestion 13 You are considering selling a call option on a non-dividend stock that has a current price of $100 per share. The option will have an expiration date of 1 year and a strike price of $110. You have determined that the stock will either be worth $125 or $80 one-year from today and the risk-free rate is 10%. Using a 1-step binomial option pricing model, determine the price for the call option.$6.67$9.20$15.00$26.67Question 14 The value of an option if it were to immediately expire, that is, its lower pricing bound, is called an option’s _____ value.strikemarketvolatilitytimeintrinsicQuestion 15The last day on which an owner of an option can elect to exercise is the _____ date.ex-paymentex-optionopeningexpirationintrinsicQuestion 16 Jeff opted to exercise his August option on August 10 (before expiration) and received $2,500 in exchange for his shares. Jeff must have owned a (an):warrant.American call.American put.European call.European put.Question 17 The current price for XYZ’s, non-dividend paying stock is $20. What is the fair forward price for its stock 6-months from today if the risk-free rate is 8%?$20$20.40$20.67$20.82Question 18You have a position with respect to an asset that will lose money as the price of that asset increases. You have a __________ position.shortlongin-the-moneyout-of-the-moneyat-the-moneyQuestion 19 You are looking to hedge a position for a call option that you just wrote (sold). The current price of the underlying assets is $100 and the strike price on the option is $105. You have determined that the shares will either be worth $120 or $110 tomorrow. How many shares should you purchase (assuming the option is written on 100 shares) in order to hedge your position until tomorrow?1007550250Question 20 You are looking to hedge a position for a call option that you just wrote (sold). The current price of the underlying assets is $120 and the strike price on the option is $150. You have determined that the shares will either be worth $140 or $130 tomorrow. How many shares should you purchase (assuming the option is written on 100 shares) in order to hedge your position until tomorrow?1007550250You are looking at the forward price for a non-dividend paying asset and you see that the price of a sixth-month forward contract for the asset is quoted at $53. The current spot price is $50 and the risk-free rate of return for a sixth-month investment is 10%. What actions should you do today to take advantage of this situation?Short the forward, buy the asset, borrow to buy the asset, and repay the loan in six months.Long the forward, short the asset, invest the short-asset proceeds, and harvest the investment proceeds in six months.Long the forward, buy the asset, invest the asset proceeds, and harvest the investment proceeds in six months.Short the forward, short the asset, borrow to short the asset, and repay the loan in six months.Do nothing, the quoted forward price is correct.Question 2A wheat producer and a bread maker could enter the derivatives markets to hedge their positions. What would be the likely position for each of them to take in the derivatives market?Farmer – Long forwardBread maker – Short forwardFarmer – Short forwardBread maker – Long forwardFarmer – Buy a callBread maker – Buy a putFarmer – Buy a callBread maker – Buy a callFarmer – Buy a putBread maker – Buy a putYou are modeling a multi-step binomial option problem and the time between each step is 0.125 of a year. The risk-free rate of return (annual) is 8% and the standard deviation of the return on this asset is 0.63. What is the risk-neutral probability of the asset moving from one node upward to another node.If you are naturally short the position on an asset and you enter into a long forward position for that asset (same dollar amounts), then the payoff diagram for the combined postions would look like __________________.a option payoff.a put option payoff.a call option payoff.a flat line since the losses in the natural postion and the forward would offset making the payoff the same in all possible prices.a line with a 45 degree slope since the losses in the natural postion and the forward would offset .Your firm produces film and as part of that production process, you require 10 tons of silver next month. At this point, you have contracts to purchase 5 tons of silver. How would you describe your position with respect to silver?neutrallongshortprofitablea delta positionIf interest rates are always positive, is it possible for the forward price on a non-dividend paying asset (ignore storage costs and convenience yields) to be lower than that of the spot price?Yes, if interest rates are low enough.No, positive interest rates will always generate a forward price greater than the spot price (ignoring storage costs and convenience yields).Yes, the demand for spot assets is always greater than the demand for future-date assets.No, demand for spot assets is always greater than the demand for future-date assets.Yes, the forward price for an asset is always independent of the spot price for that asset.Question 15You have a position with respect to an asset that will lose money as the price of that asset increases. You have a __________ position.shortlongin-the-moneyout-of-the-moneyat-the-money