SAMPLE EXAMINATION PAPER
Solutions Guide
SECTION A
15 Multiple Choice Questions [30 marks] – 2 marks each
1. C
2. C
3. C
4. A
5. C
6. D
7. E
8. D
9. A
10. A
11. B
12. B
13. E
14. E
15. B
SECTION B
4 Long-Answer questions [35 marks]
Question 1 [7 marks]
(a) Construct transactions that will increase the beta of the portfolio to 1.3
using one or more of these December futures contracts:
S&P 500 futures, which are cu
ently trading at 151.
SPI 200 futures, which are cu
ently trading at 373.
Goodday Inc. futures, which are cu
ently trading a 394.
All prices are in Australian dollars and assume all futures contracts have a
contract multiplier of $250 per index point.
[4 marks]
Calculate portfolio beta, appropriate hedge ratio etc – see Topic 3 slides for
examples on index futures hedging and market timing. Be mindful of relevant
market instrument to use. No room for e
or in long/short hedge, if in doubt
ecap “rules of thumb” I offered in lecture.
(b) Identify two alternative methods (other than selling securities from the
portfolio or using futures) that replicates the feature strategy in Part a.
Contrast each of these methods with the futures strategy.
[3 marks]
Think options, think synthetics. Be mindful of characteristics of intended
instruments.
Question 2 [7 marks]
The cu
ent December SPI 200 futures contract is at XXXXXXXXXXThe ASX 200 is at
XXXXXXXXXXThe cu
ent 30-day bank bill is at 4.492%.
a) If there are 45 days remaining until December 2001 futures contracts
expire, determine whether put-call parity is maintained for the December
call & put options on SPI 200 futures with the exercise price closest to the
cu
ent SPI 200 price.
[4 marks]
Use put-call parity, see examples in Topic 9 on proof.
) If put-call parity is not maintained, explain the possible reasons why it
might not be.
[3 marks]
As discussed in Tutorial 9.
Question 3 [12 marks]
a) Detail 3 possible solutions available to the client to achieve her aims,
along with the advantages/disadvantages associated with each
method. One of these solutions should be a swap contract.
[4.5 marks]
Solutions can involve transactions in:
1. spot market
2. futures market
3. options market
4. swap
Remember to discuss features and pros/cons of each.
) Fill in the missing values from the cash flow schedule below:
[4 marks]
c) What is the total incremental return for the above swap?
[1.5 mark]
Incremental Return = 3.47%
d) Swaps can be viewed as an amalgamation of a number of alternate
financial instruments. What type of portfolio of financial instruments is
the above swap replicating? What benefits are there from using the
swap over the alternative?
[2 marks]
Long S&P 500 at Libor. Explain benefits in light of concepts discussed at
eginning of Topic 10.
Time Notional Libor Index Dividend Net
# XXXXXXXXXX XXXXXXXXXX
# XXXXXXXXXX XXXXXXXXXX
# XXXXXXXXXX XXXXXXXXXX
Maturity XXXXXXXXXX XXXXXXXXXX
Total
34670
Question 4. [9 marks]
a) The cu
ent price of gold is $300 per ounce. Ca
ying costs in total are
0.5 % (not including interest) of the gold value payable in 6 months
time. If the interest rate is 8%, is there an a
itrage opportunity if the
gold futures price for delivery in six months is $310 per ounce?
[3 marks]
Compare futures price and theoretical price.
) If an a
itrage opportunity exists, explain how you would conduct it and
calculate the a
itrage profit.
[2 marks]
Illustrate a
itrage transaction and compute profit therefrom.
c) Why is it not possible in reality to perfectly hedge a portfolio using
options and/or futures Instruments?
[2 marks]
Review hedging concepts in Topic 3 for answers.
d) Explain the shortcomings of LTCM’s financial strategy that led to its
eventual downfall.
[2 marks]
Read LTCM article in Tutorial 8 for answers.
END OF EXAMINATION
Notes on the Sample Final Examination Script
The final exam for the course will take the form illustrated in the sample exam
following this page.
Examinable material includes everything that has been covered in either the lectures or
tutorials during the whole semester.
Many of the questions are discussed and included in the class activities and so you
should have access to most of the answers.
Sample Examination Paper
OPTIONS FUTURES AND RISK MANAGEMENT
Official Reading Time: 10 mins
Writing Time: 180 mins
Total Duration 190 mins
Instructions to Candidate:
1. Answer ALL questions.
2. You should answer all questions in the answer book(s). No attachments will be
considered. If you used an additional book, please incorporate it within the first
ook.
3. Please allocate your time according to the percentage contribution of the
questions.
4. You should answer Section A questions (multiple-choice) on the first writing page
of the answer book and start each Section B question on a new page in the
answer book. Please label your answers appropriately and show sufficient
workings for all Section B questions.
5. Please submit this examination question paper with your answer book at the end
of the examination. Examination materials must NOT be removed from the
examination room.
Materials:
This is a Closed Book examination. No textbook is allowed.
A calculator incapable of storing text is permitted.
Special Instructions:
1. Unless otherwise instructed, assume continuous compounding/discounting for all
calculations
2. Unless otherwise stated, contract multipliers for options and futures are assumed
to be on a 1:1 ratio.
PLEASE DO NOT COMMENCE WRITING UNTIL INSTRUCTED TO DO SO
PLEASE SEE NEXT PAGE
SECTION A
Answer all questions. Where appropriate, be sure to show your solutions in the answer
ooklet.
15 Multiple Choice Questions [30 Marks] – 2 Marks Each
1. The following diagram shows the value of a put option at expiration:
Ignoring transaction costs, which of the following statements about the value of the put
option at expiration is TRUE?
A. The value of the short position in the put is $4 if the stock price is $76.
B. The value of the long position in the put is –$4 if the stock price is $76.
C. The long put has value when the stock price is below the $80 exercise price.
D. The value of the short position in the put is zero for stock prices equalling or
exceeding $76.
2. Which of the following statements about the value of a call option at expiration is FALSE?
A. The short position in the same call option can result in a loss if the stock price
exceeds the exercise price.
B. The value of the long position equals zero or the stock price minus the exercise price,
whichever is higher.
C. The value of the long position equals zero or the exercise price minus the stock price,
whichever is higher.
D. The short position in the same call option has a zero value for all stock prices equal to
or less than the exercise price.
76 80
Stock Price ($)
-4
0
4
Option
Value
Short Put
Long Put
Exercise price of both Options
3. Which of the following statements about “short selling” is TRUE?
A. A short position may be hedged by writing call options.
B. A short position may be hedged by purchasing call options.
C. Short sellers may be subject to margin calls if the stock price increases.
D. Stocks that pay large dividends should be sold short before the ex-dividend date and
ought afterward to take advantage of the large price decline in a short time period.
4. The cu
ent price of an asset is 75. A three-month, at-the-money American call option on
the asset has a cu
ent value of 5. At what value of the asset will a covered call writer
eak even at expiration?
A. 70.
B. 75.
C. 80.
D. 85.
5. A silver futures contract requires the seller to deliver 5,000 Troy ounces of silver. An
investor sells one July silver futures contract at a price of $8 per ounce, posting a $2,025
initial margin. If the required maintenance margin is $1,500, the price per ounce at which
the investor would first receive a maintenance margin call is closest to:
A. $5.92.
B. $7.89.
C. $8.11.
D. $10.80.
6. Which of the following statements about an American call is not true?
A. Its time value decreases as expiration approaches
B. Its maximum value is the stock price
C. It can be exercised prior to expiration
D. It pays dividends
E. none of the above
7. When puts are priced with the binomial model, which of the following is true?
A. the puts