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##### finance mcq with solution

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Question;QUESTION 11. A trader creates a long butterfly spread from options with strike prices $60, $65, and $70 by trading a total of 400 options. The options are worth $11, $14, and $18. What is the maximum net loss (after the cost of the options is taken into account)?a. $100b. $200c. $300d. $4001 pointsQUESTION 21. Which of the following is true of a box spread?a. It is a package consisting of a bull spread and a bear spreadb. It involves two call options and two put optionsc. It has a known value at maturityd. All of the above1 pointsQUESTION 31. What is the number of different option series used in creating a butterfly spread?a. 1b. 2c. 3d. 41 pointsQUESTION 41. Six-month call options with strike prices of $35 and $40 cost $6 and $4, respectively. What is the maximum gain when a bull spread is created by trading a total of 200 options?a. $100b. $200c. $300d. $4001 pointsQUESTION 51. Which of the following creates a bear spread?a. Buy a low strike price call and sell a high strike price callb. Buy a high strike price call and sell a low strike price callc. Buy a low strike price call and sell a high strike price putd. Buy a low strike price put and sell a high strike price call1 pointsQUESTION 61. How can a straddle be created?a. Buy one call and one put with the same strike price and same expiration dateb. Buy one call and one put with different strike prices and same expiration datec. Buy one call and two puts with the same strike price and expiration dated. Buy two calls and one put with the same strike price and expiration date1 pointsQUESTION 71. How can a strip trading strategy be created?a. Buy one call and one put with the same strike price and same expiration dateb. Buy one call and one put with different strike prices and same expiration datec. Buy one call and two puts with the same strike price and expiration dated. Buy two calls and one put with the same strike price and expiration date1 pointsQUESTION 81. A trader creates a long butterfly spread from options with strike prices $60, $65, and $70 by trading a total of 400 options. The options are worth $11, $14, and $18. What is the maximum net gain (after the cost of the options is taken into account)?a. $100b. $200c. $300d. $400QUESTION 91. Which of the following describes a protective put?a. A long put option on a stock plus a long position in the stockb. A long put option on a stock plus a short position in the stockc. A short put option on a stock plus a short call option on the stockd. A short put option on a stock plus a long position in the stock1 pointsQUESTION 101. When the interest rate is 5% per annum with continuous compounding, which of the following creates a principal protected note worth $1000?a. A one-year zero-coupon bond plus a one-year call option worth about $59b. A one-year zero-coupon bond plus a one-year call option worth about $49c. A one-year zero-coupon bond plus a one-year call option worth about $39d. A one-year zero-coupon bond plus a one-year call option worth about $291 pointsQUESTION 111. Which of the following creates a bear spread?a. Buy a low strike price put and sell a high strike price putb. Buy a high strike price put and sell a low strike price putc. Buy a high strike price call and sell a low strike price putd. Buy a high strike price put and sell a low strike price call1 pointsQUESTION 121. Six-month call options with strike prices of $35 and $40 cost $6 and $4, respectively. What is the maximum gain when a bull spread is created by trading a total of 200 options?a. $100b. $200c. $300d. $4001 pointsQUESTION 131. What is a description of the trading strategy where an investor sells a 3-month call option and buys a one-year call option, where both options have a strike price of $100 and the underlying stock price is $75?a. Neutral Calendar Spreadb. Bullish Calendar Spreadc. Bearish Calendar Spreadd. None of the above1 pointsQUESTION 141. How can a strangle trading strategy be created?a. Buy one call and one put with the same strike price and same expiration dateb. Buy one call and one put with different strike prices and same expiration datec. Buy one call and two puts with the same strike price and expiration dated. Buy two calls and one put with the same strike price and expiration date1 pointsQUESTION 151. A trader creates a long butterfly spread from options with strike prices $60, $65, and $70 by trading a total of 400 options. The options are worth $11, $14, and $18. What is the maximum net gain (after the cost of the options is taken into account)?a. $100b. $200c. $300d. $4001 pointsQUESTION 161. How can a strap trading strategy be created?a. Buy one call and one put with the same strike price and same expiration dateb. Buy one call and one put with different strike prices and same expiration datec. Buy one call and two puts with the same strike price and expiration dated. Buy two calls and one put with the same strike price and expiration dateQUESTION 171. A tree is constructed to value an option on an index which is currently worth 100 and has a volatility of 25%. The index provides a dividend yield of 2%. Another tree is constructed to value an option on a non-dividend-paying stock which is currently worth 100 and has a volatility of 25%. Which of the following are true?a. The parameters p and u are the same for both treesb. The parameter p is the same for both trees but u is notc. The parameter u is the same for both trees but p is notd. None of the above1 pointsQUESTION 181. In a binomial tree created to value an option on a stock, what is the expected return on the option?a. Zerob. The return required by the marketc. The risk-free rated. It is impossible to know without more information1 pointsQUESTION 191. In a binomial tree created to value an option on a stock, the expected return on stock isa. Zerob. The return required by the marketc. The risk-free rated. It is impossible to know without more information1 pointsQUESTION 201. Which of the following is NOT true in a risk-neutral world?a. The expected return on a call option is independent of its strike priceb. Investors expect higher returns to compensate for higher riskc. The expected return on a stock is the risk-free rated. The discount rate used for the expected payoff on an option is the risk-free rate1 pointsQUESTION 211. The current price of a non-dividend-paying stock is $40. Over the next year it is expected to rise to $42 or fall to $37. An investor buys put options with a strike price of $41. What is the value of each option? The risk-free interest rate is 2% per annum with continuous compounding.a. $3.93b. $2.93c. $1.93d. $0.931 pointsQUESTION 221. Which of the following describes how American options can be valued using a binomial tree?a. Check whether early exercise is optimal at all nodes where the option is in-the-moneyb. Check whether early exercise is optimal at the final nodesc. Check whether early exercise is optimal at the penultimate nodes and the final nodesd. None of the above1 pointsQUESTION 231. The current price of a non-dividend-paying stock is $30. Over the next six months it is expected to rise to $36 or fall to $26. Assume the risk-free rate is zero. What is the risk-neutral probability of that the stock price will be $36?a. 0.6b. 0.5c. 0.4d. 0.31 pointsQUESTION 241. The current price of a non-dividend-paying stock is $30. Over the next six months it is expected to rise to $36 or fall to $26. Assume the risk-free rate is zero. An investor sells call options with a strike price of $32. What is the value of each call option?a. $1.6b. $2.0c. $2.4d. $3.01 pointsQUESTION 251. The current price of a non-dividend paying stock is $50. Use a two-step tree to value an American put option on the stock with a strike price of $48 that expires in 12 months. Each step is 6 months, the risk free rate is 5% per annum, and the volatility is 20%. Which of the following is the option price?a. $1.95b. $2.00c. $2.05d. $2.101 pointsQUESTION 261. Which of the following is NOT true in a risk-neutral world?a. The expected return on a call option is independent of its strike priceb. Investors expect higher returns to compensate for higher riskc. The expected return on a stock is the risk-free rated. The discount rate used for the expected payoff on an option is the risk-free rate1 pointsQUESTION 271. The current price of a non-dividend-paying stock is $30. Over the next six months it is expected to rise to $36 or fall to $26. Assume the risk-free rate is zero. An investor sells call options with a strike price of $32. Which of the following hedges the position?a. Buy 0.6 shares for each call option soldb. Buy 0.4 shares for each call option soldc. Short 0.6 shares for each call option soldd. Short 0.6 shares for each call option sold1 pointsQUESTION 281. A tree is constructed to value an option on an index which is currently worth 100 and has a volatility of 25%. The index provides a dividend yield of 2%. Another tree is constructed to value an option on a non-dividend-paying stock which is currently worth 100 and has a volatility of 25%. Which of the following are true?a. The parameters p and u are the same for both treesb. The parameter p is the same for both trees but u is notc. The parameter u is the same for both trees but p is notd. None of the above1 pointsQUESTION 291. The current price of a non-dividend paying stock is $30. Use a two-step tree to value a European call option on the stock with a strike price of $32 that expires in 6 months. Each step is 3 months, the risk free rate is 8% per annum with continuous compounding. What is the option price when u = 1.1 and d = 0.9.a. $1.29b. $1.49c. $1.69d. $1.891 pointsQUESTION 301. In a binomial tree created to value an option on a stock, the expected return on stock isa. Zerob. The return required by the marketc. The risk-free rated. It is impossible to know without more information1 pointsQUESTION 311. If the volatility of a non-dividend-paying stock is 20% per annum and a risk-free rate is 5% per annum, which of the following is closest to the Cox, Ross, Rubinstein parameter p for a tree with a three-month time step?a. 0.50b. 0.54c. 0.58d. 0.621 pointsQUESTION 321. Which of the following describes how American options can be valued using a binomial tree?a. Check whether early exercise is optimal at all nodes where the option is in-the-moneyb. Check whether early exercise is optimal at the final nodesc. Check whether early exercise is optimal at the penultimate nodes and the final nodesd. None of the aboveQUESTION 331. When the non-dividend paying stock price is $20, the strike price is $20, the risk-free rate is 5%, the volatility is 20% and the time to maturity is 3 months which of the following is the price of a European put option on the stocka. 19.7N(-0.1)-20N(-0.2)b. 20N(-0.1)-20N(-0.2)c. 19.7N(-0.2)-20N(-0.1)d. 20N(-0.2)-20N(-0.1)1 pointsQUESTION 341. A stock provides an expected return of 10% per year and has a volatility of 20% per year. What is the expected value of the continuously compounded return in one year?a. 6%b. 8%c. 10%d. 12%1 pointsQUESTION 351. A stock price is $100. Volatility is estimated to be 20% per year. What is an estimate of the standard deviation of the change in the stock price in one week?a. $0.38b. $2.77c. $3.02d. $0.761 pointsQUESTION 361. A stock price is 20, 22, 19, 21, 24, and 24 on six successive Fridays. Which of the following is closest to the volatility per annum estimated from this data?a. 50%b. 60%c. 70%d. 80%1 pointsQUESTION 371. Which of the following is true for a one-year call option on a stock that pays dividends every three months?a. It is never optimal to exercise the option earlyb. It can be optimal to exercise the option at any timec. It is only ever optimal to exercise the option immediately after an ex-dividend dated. None of the above1 pointsQUESTION 381. An investor has earned 2%, 12% and -10% on equity investments in successive years (annually compounded). This is equivalent to earning which of the following annually compounded rates for the three year period.a. 1.33%b. 1.23%c. 1.13%d. 0.93%1 pointsQUESTION 391. The volatility of a stock is 18% per year. Which of the following is closest to the volatility per month?a. 1.5%b. 3.0%c. 5.2%d. 6.3%1 pointsQUESTION 401. What was the original Black-Scholes-Merton model designed to value?a. A European option on a stock providing no dividendsb. A European or American option on a stock providing no dividendsc. A European option on any stockd. A European or American option on any stock1. 41-Which of the following is NOT true?a. Risk-neutral valuation provides prices that are only correct in a world where investors are risk-neutralb. Options can be valued based on the assumption that investors are risk neutralc. In risk-neutral valuation the expected return on all investment assets is set equal to the risk-free rated. In risk-neutral valuation the risk-free rate is used to discount expected cash flows1 pointsQUESTION 421. What is the number of trading days in a year usually assumed for equities?a. 365b. 252c. 262d. 2721 pointsQUESTION 431. What does N(x) denote?a. The area under a normal distribution from zero to xb. The area under a normal distribution up to xc. The area under a normal distribution beyond xd. The area under the normal distribution between -x and x1 pointsQUESTION 441. Which of the following is true for a one-year call option on a stock that pays dividends every three months?a. It is never optimal to exercise the option earlyb. It can be optimal to exercise the option at any timec. It is only ever optimal to exercise the option immediately after an ex-dividend dated. None of the above1 pointsQUESTION 451. When there are two dividends on a stock, Black's approximation sets the value of an American call option equal to which of the followinga. The value of a European option maturing just before the first dividendb. The value of a European option maturing just before the second (final) dividendc. The greater of the values in A and Bd. The greater of the value in B and the value assuming no early exercise1 pointsQUESTION 461. The original Black-Scholes and Merton papers on stock option pricing were published in which year?a. 1983b. 1984c. 1974d. 19731 pointsQUESTION 471. The risk-free rate is 5% and the expected return on a non-dividend-paying stock is 12%. Which of the following is a way of valuing a derivative?a. Assume that the expected growth rate for the stock price is 17% and discount the expected payoff at 12%b. Assuming that the expected growth rate for the stock price is 5% and discounting the expected payoff at 12%c. Assuming that the expected growth rate for the stock price is 5% and discounting the expected payoff at 5%d. Assuming that the expected growth rate for the stock price is 12% and discounting the expected payoff at 5%1 pointsQUESTION 481. An investor has earned 2%, 12% and -10% on equity investments in successive years (annually compounded). This is equivalent to earning which of the following annually compounded rates for the three year period.a. 1.33%b. 1.23%c. 1.13%d. 0.93%1 points

Paper#47656 | Written in 18-Jul-2015

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