1 to 4 not typed.

5 A derivative can best be described as a financial instrument that:
A duplicate the underlying asset’s performance
B transforms the underlying asset’s performance
C passes through the underlying asset’s returns

6 In contrast to over-the-counter options, futures contracts most likely:
A are not exposed to default risk
B represent a right rather than a commitment.
C are private, customized transactions.

7 Biomian Limited is a Mumbai-based biotech company with common stock and listed futures and options on the National Stock Exchange (NSE). The Viswan Family Office (VFO) currently owns 10,000 Biomian common shares. VFO would like to reduce its long Biomian position and diversify its equity market exposure but will delay a cash sale of shares for tax reasons for six months.
Which of the following derivative contracts available to VFO’s chief investment officer is best suited to reduce exposure to a decline in Biomian’s stock price in the next six months?
A A short put position on Biomian stock tha expires in six months.
B A long call position on Biomian stock that expires in six months.
C A short futures position in Biomian stock that settles in six months.

8 Biomian Limited is a Mumbai-based biotech company with common stock and listed futures
and options on the National Stock Exchange (NSE). The Viswan Family Office (VFO) currently
owns 10,000 Biomian common shares. VFO would like to reduce its long Biomian position and
diversify its equity market exposure but will delay a cash sale of shares for tax reasons for six
months.
VFO’s market strategist believes that Biomian’s share price will rise over the next six months
but would like to protect against a decline in Biomian’s share price over the period. Which of
the following positions is best suited for VFO to manage its existing Biomian exposure based on
this views?
A Along put position on Biomian stock that expires in six months.
B A short call position on Biomian stock that expires in six months
C A long futures position in Biomian stock that settles in six months.

9 Biomian Limited is a Mumbai-based biotech company with common stock and listed futures and options on the National Stock Exchange (NSE). The Viswan Family Office (VFO) currently owns 10,000 Biomian common shares. VFO would like to reduce its long Biomian position and diversify its equity market exposure but will delay a cash sale of shares for tax reasons for six months. Assume that Biomian shares rise over the next six months. Which of the following statements about VFO’s derivative strategies under this scenario is most accurate?
A A forward sale of Biomian shares in six months would be more profitable than purchasing the
right to sell Biomian shares in six months.
B Purchasing the right to sell Biomian shares in six months would be more profitable than a
forward sale of Biomian shares in six months.
C We do not have enough information to determine whether a forward sale or the right to sell
Biomian shares will be more profitable in six months.

10 Biomian Limited is a Mumbai-based biotech company with common stock and listed futures and options on the National Stock Exchange (NSE). The Viswan Family Office (VFO) currently owns 10,000 Biomian common shares. VFO would like to reduce its long Biomian position and diversify its equity market exposure but will delay a cash sale of shares for tax reasons for six months.
VFO’s market strategist is considering a six-month call option strategy on the NIFTY 50
benchmark Indian stock market index to increase brad market equity exposure. The NIFTY 50
price today is INR 15,200, and the strategist observes that a call option with a INR 16,000
exercise price (X) is trading at a premium of INR 1500. Which of the following represents the
payoff and profit of this strategy just prior to maturity if the NIFTY 50 is trading at INR 16,500?
A Payoff is INR 500; profit is -INR 1000
B Payoff is INR 1300; profit is INR 800
C Payoff is INR 1300; profit is INR 500

11 Which of the following derivatives is least likely to be classified as a contingent claim?
A a futures contract
B A call option contract
C A credit default swap

12 Which of these is best classified as a forward commitment?
A A convertible bond
B A call option
C A swap agreement

13 Which of the following statements best describes a feature of an option contract?
In an option contract:
A both the long and short can default
B only the short can default
C only the long can default

14 to 17 not typed.

18 If the implied volatility for options on a broad-based equity market index goes up; then it is most likely that:
A the broad-based equity market index has gone up in value
B the general level of market uncertainty has gone up
C market interest rates have gone up

19 For a forward contract with a value of zero, a situation where the spot price is above the forward price is best explained by high:
A interest rates
B storage costs
C convenience yield

20 A perfectly hedged position consisting of a derivative and its underlying asset will most likely
yield a return that is:
A equal to the risk-free rate
B smaller than the risk-free rate
C greater than the risk-free rate

21 not typed.

22 Baywhite Financial is a broker-dealer and wealth management firm that helps its clients
manage their portfolio using stand-along derivative strategies. A new Baywhite analyst is asked
to evaluate the following client situations.
A Baywhite client currently owns 5000 common non-dividend-paying shares of Vivivyu Inc
(VIVU), a digital media company, at a spot price of USD 173 per share. The client enters into a
forward commitment to sell half of its VIVU position in six months at a price of of USD 175.58.
Which of the following market events is most likely to result in the greater gain in the VIVU
forward contract MTM value from the client’s perspective?
A An increase in the risk-free rate
B An immediate decline in the VIVU spot price following contract inception
C A steady rise in the spot price of VIVU stock over time.

23 Baywhite Financial is a broker-dealer and wealth management firm that helps its clients
manage their portfolio using stand-along derivative strategies. A new Baywhite analyst is asked
to evaluate the following client situations.
A Baywhite client has entered into a long six-month MXN/USD FX forward contract—that is, an
agreement to sell MXN and buy USD. The MXN/USD spot exchange rate at inception is 19.8248
= USD 1), the six-month MXN risk-free rate is 4.25%, and the six-month USD risk-free rate is
0.5%. Baywhite’s market strategist predicts that the Mexican central bank (Banco de Mexico)
will surprise the market with a 50 bp short-term rate cut at its upcoming meeting. Which of the
following statements best describes how the client’s existing FX forward contract will be
impacted if this prediction is realized and other parameters remain unchanged?
A The lower interest rate differential between MXN and USD will cause the MXN/USD contract
forward rate to be adjusted downward.
B The client will realize an MTM gain on the FX forward contract due to the decline in the MXN
versus USD interest rate differential.
C The lower interest rate differential between MXN and USD will cause the client to realize an
MTM loss on the MXN/USD forward contract.

24 A client seeking advice on her fixed-income portfolio observes the price and yield-to-
maturity of one-year (r1) and two-year (r2) annual coupon government benchmark bonds
currently available in the market. Which of the following statements best describes how the
analyst can determine a breakeven reinvestment rate in one year’s time to help decide whether
to invest now for one or two years?
A As the two-year rate involves intermediate cash flows, divide the square root of (1+r2) by
(1+r1) and subtract 1 to arrive at a breakeven reinvestment rate for one year in one year’s time.
B Since the first year’s returns are compounded in the second year, set (1+r1) multiplied by 1
plus the breakeven reinvestment rate equal to (1+r2)^2 and solve for the breakeven
reinvestment rate.
C Since the breakeven reinvestment involves a zero-coupon cash flow, first substitute the one-
year rate(r1) into the two-year bond price equation to solve for the two-year spot or zero rate
(Z2), then set (1+r1)*(1+breakeven reinvestment rate)=(1+Z2)^2 and solve for the breakeven
reinvestment rate.

25 Baywhite Financial seeks to gain a competition advantage by making margin loans at fixed
rates for up to 60 days to its investor clients. Since Baywhite borrows at a variable one-month
market reference rate to finance these client loans, the firm enters into one-month FRA
contracts on one-month MRR to hedge the interest rate exposure of its margin loan book.
Which of the following statements best describes Baywhite’s interest rate exposure and the
FRA positive it should take to hedge that exposure?
A Baywhite faces exposure to a rise in one-month MRR over the next 30 days, so it should enter
into the FRA as a fixed-rate payer in order to benefit from a rise in one-month MRR above the
FRA rate and offset its higher borrowing cost.
B Baywhite faces exposure to a rise in one-month MRR over the next 30 days, so it should enter
the FRA as a fixed-rate receiver in order to benefit from a rise in one-month MRR abnove the
FRA rate and offset its higher borrowing cost.
C Baywhite faces exposure to a decline in one-month MRR over the next 30 days, so it should
enter into the FRA as a fixed-rate receiver in order to benefit from a rise in one-month MRR
above the FRA rate and offset its higher borrowing cost.

26 There are two forward contracts, contract 1 and contract 2, on the same underlying. The
underlying makes no cash payments, does not yield any non-financial benefits, and does not
incur any storage costs. Contract 1 expires in one year, and contract 2 expires in two years. It is
most likely that the price of contract1:
A is equal to the price of contract 2.
B is less than the price of contract 2.
C exceeds the price of contract 2.

27 Conceptually, a forward rate agreement most likely allows a company that wants to invest
money in the future to lock in rate by making a:
A variable payment and receiving a fixed payment.
B fixed payment and receiving a different fixed payment.
C fixed payment and receiving a variable payment

28 to 30 not typed.

31 Ace Limited is a financial intermediary active in both futures and forward markets. You have
been hired as an investment consultant and asked to review Ace’s activities and answer the
following questions:

Ace’s investor clients usually use OTC forward transactions that Ace must clear with a central
counterparty. Which of the following statements related to the impacted on Ace from clearing
these positions is most accurate?
A Ace’s counterparties enter long forward contracts whose prices are positively correlated with
interest rates, Ace will have to post more collateral to central counterparties then for otherwise
similar futures contracts, since rising prices will lead to the counterparty MTM gains reinvested
at higher rates.
B If Ace’s counterparties enter short forward contracts whose prices are negatively correlated
with interest rates, Ace will have to post less collateral to central counterparties than for
otherwise similar futures contracts, since failing prices will lead to counterparty MTM gains
reinvested at higher rates.
C Since Ace is required to post collateral (cash or highly liquid securities) to the central
counterparty to clear its client forward transactions. Ace will face similar margining
requirements to those of standardized exchange-traded future markets.

32 The pricing of forwards and futures will most likely differ if:
A interest rates exhibit zero volatility.
B futures prices and interest rates are negatively correlated.
C future prices and interest rates are uncorrelated.

33 not typed.

34 Ace Limited is a financial intermediary that is active in forward and swap markets with its
issuer and investor clients. You have been asked to consult on a number of client situations to
determine the best course of action.
Ace’s client should consider receiving fixed on a cash-settled five-year forward-starting swap
that starts and settles in three months in order to best address its bond reinvestment risk.
B Ace’s client should consider paying fixed on a cash-settled five-year forward-starting swap
starting in three months in order to best address its bond reinvestment risk.
C Ace’s client should consider entering a series of forward rate agreements (FRAs) from today
until five years form now under which it pays a fixed rate and receives a floating rate each
period in five years to address its bond reinvestment risk.

35 Ace Limited is a financial intermediary that is active in forward and swap markets with its
issuer and investor clients. You have been asked to consult on a number of client situations to
determine the best course of action.
Ace enters a 10-year GBP interest rate swap with a client in which Ace receives an initial six-
month GBP MRR of 1.75% and pays fixed GBP swap rate of 3.10% for the first semiannual
period. Which of the following statements best describes the value of the swap from Ace’s
perspective three months after the inception of the trade?
A Ace has an MTM loss on the swap, because it owes a net settlement payment to its
counterparty equal to 1.35% multiplied by the notional and period.
B Ace has an MTM gain on the swap, because once it makes the first know net payment to its
counterparty, the remainder of the future net fixed versus floating cash flows must have a
positive present value from Ace’s perspective.
C While the present value of fixed and future cash flows was set to zero by solving for the swap
rate at inception, we do not have enough information to determine whether the swap currently
has a positive or negative value from Ace’s perspective following inception.

36 Ace Limited is a financial intermediary that is active in forward and swap markets with its
issuer and investor clients. You have been asked to consult on a number of client situations to
determine the best course of action.
At time t=0, Ace observes the following zero rates over three periods:
Periods Zero rates
1 2.2727%
2 3.0323%
3 3.6355%
Which of the following best describes how Ace arrives at a three-period par swap rate (S3)?
A Since the par swap rate represents the fixed rate at which the present value of fixed and
future cash flow equal one another, we discount each zero rate back to the present using zero
rates and solve for S3 to get 2.961%
B Since the par swap rate represents the fixed rate at which the present value of fixed and
future cash flows equal one another, we first solve for the implied forward rate per period
using zero rates, then discount each implied forward rate back to the present using zero rates,
and solve for S3 to get 3.605%.

C Since the par swap rate represents the fixed rate at which the present value of fixed and
future cash flows equal one another, we first solve for the implied forward rate per period
using zero rates, then discount each zero rate back to the present using implied forward rates,
and solve for S3 to get 3.009%

37 Ace Limited is a financial intermediary that is active in forward and swap markets with its
issuer and investor clients. You have been asked to consult on a number of client situations to
determine the best course of action.
A Since the client receives fixed and pays floating swap, it faces an MTM loss on the transaction
as rates rise, increasing Ace’s MTM exposure to the client.
B Since the client receives fixed and pays floating swap, it faces an MTM gain on the transaction
as rates rise, decreasing Ace’s MTM exposure to the client.
C Since the swap’s value is equal to the current settlement plus future expected settlement
amounts, we do not have enough information to determine whether Ace’s MTM exposure to
the client increases or decreases.

38 The price of an interest rate swap that involves the exchange of a fixed payment for a
floating payment is most likely:
A equal to its value at expiration.
B set at initiation and constant over time.
C affected by changes in the floating payment

39 It is least likely true that a swap may be viewed as a series of forward contracts where the
prices of the implicit forward contracts embedded in the swap:
A are equal.
B sum to zero.
C are not equal.

40 The Viswan Family Office (VFO) owns non-dividend-paying shares of Biomian Limited that
are currently prices(S0) at INE 295 per share. VFO’s CIO is considering an offer to sell shares at a
forward price (F0(T)) of INR 300.84 per share in six months based on a risk-free rate of 4%. You
have been asked to advise on the purchase of a put option or the sale of a call option with an
exercise price (X) equal to the forward price (F0(T)) as alternatives to a forward share sale.

VFO is considering the purchase of the put option to hedge against a decline in Biomian’s share
price. Which of the following statements best characterizes the trade-off between the put and
the forward based on no-arbitrage pricing?
VFO is considering the purchase of the put options to hedge against a decline in Biomian’s share
price. Which of the following statements best characterizes the trade-off between the put and
the forward based on no-arbitrage pricing?
A The gain on the forward sale will equal the purchased put option’s profit at maturity provided
the put option ends up in the money at maturity.
B The loss on the forward sale will exceed the loss on the purchased put at maturity if Biomian’s
share price exceeds the forward price by more than the initial put premium paid.
C We do not have enough information to answer this question, since we do not know the time
value of the option at maturity.

41 The Viswan Family Office (VFO) owns non-dividend-paying shares of Biomian Limited that
are currently prices(S0) at INE 295 per share. VFO’s CIO is considering an offer to sell shares at a
forward price (F0(T)) of INR 300.84 per share in six months based on a risk-free rate of 4%. You
have been asked to advise on the purchase of a put option or the sale of a call option with an
exercise price (X) equal to the forward price (F0(T)) as alternatives to a forward share sale.
In evaluating the purchased put strategy (with X = F0(T), the CIO has asked you to consider
selling the put in three month’s time if its price appreciates over that period. Which of the
following best characterizes the no-arbitrage put price at that time?
A As VFO will exercise only if the spot price is below the exercise price, the lower bound of the
put price is the greater of zero and the present value of the spot price minus the exercise price.
B As VFO will exercise only if the spot price is below the exercise price, the upper bound of the
put price equals the present value of the exercise price minus the spot price.
C The put price can be no greater than the forward price and no less than the greater of zro and
the present value of the exercise price minus the spot price.

42 The Viswan Family Office (VFO) owns non-dividend-paying shares of Biomian Limited that
are currently prices(S0) at INE 295 per share. VFO’s CIO is considering an offer to sell shares at a
forward price (F0(T)) of INR 300.84 per share in six months based on a risk-free rate of 4%. You
have been asked to advise on the purchase of a put option or the sale of a call option with an
exercise price (X) equal to the forward price (F0(T)) as alternatives to a forward share sale.

VFO is considering a solid call strategy to generate income from the sale of a call. In your
scenario analysis of the sold call option alternative, VFO has asked you to value the call option
in three months’ time if Biomian’s spot price is INR 325 per share. Given an estimated call price
of INR 46.41 at that time, which of the following correctly reflects the relationship between the
call’s exercise value and its time value?
A The call’s exercise value is INR 24.16, and its time value is INR 22.25
B The call’s exercise value is INR 27.10, and its time value is INR 19.31
C The call’s exercise value is INR 20.99, and it time value is INR 25.42

43 The Viswan Family Office (VFO) owns non-dividend-paying shares of Biomian Limited that
are currently prices(S0) at INE 295 per share. VFO’s CIO is considering an offer to sell shares at a
forward price (F0(T)) of INR 300.84 per share in six months based on a risk-free rate of 4%. You
have been asked to advise on the purchase of a put option or the sale of a call option with an
exercise price (X) equal to the forward price (F0(T)) as alternatives to a forward share sale.
In comparing the sold call and purchased put strategies at the forward price, VFO’s CIO is
concerned about how an immediate increase in the volatility of the underlying Biomian Shares
might affect option value. Which of the following statements about this volatility changes and
its effect on strategy is most accurate?
A An increase in the volatility of the underlying shares has the same effect on call and put
option values, so this change should not affect VFO’s strategy decision.
B Since changes in the volatility of the underlying shares have the opposite effect on put versus
call options, this change will increase the attractiveness of the put strategy versus the call
strategy.
C An increase in the volatility of the underlying shares will increase both the cost of the
purchased put strategy and the premium received on the sold call strategy, so this change will
increase the attractiveness of the call strategy versus the put strategy.

44 The Viswan Family Office (VFO) owns non-dividend-paying shares of Biomian Limited that
are currently prices(S0) at INE 295 per share. VFO’s CIO is considering an offer to sell shares at a
forward price (F0(T)) of INR 300.84 per share in six months based on a risk-free rate of 4%. You
have been asked to advise on the purchase of a put option or the sale of a call option with an
exercise price (X) equal to the forward price (F0(T)) as alternatives to a forward share sale.

Q. In computing the Biomian purchase put and call strategies, which of the following
statements is most correct about how the call and put value are affected by changes in factors
other than volatility?
A Changes in the time to expiration and the risk-free rate have a similar directional effect on the
put and call strategies, while changes in the exercise price lend to have the opposite effect.
B Changes in the time to expiration tend to have a similar directional effect on the put and call
strategies, while changes in the exercise price and the risk-free rate tend to have the opposite
effect.
C Changes in the risk-free rate have a similar directional effect on the put and call strategies,
while changes in the exercise price and the time to expiration tend to have the opposite effect.

45 If the exercise price of a European put option at expiration is below the price of the
underlying, the value of the option is most likely:
A equal to zero.
B less than zero.
C greater than zero.

46 Holding other factors constant, the value of a European put option will most likely decrease
as the:
A risk-free interest rate increases.
B volatility of the underlying increases.
C value of the underlying decreases.

47 If dividends paid by the underlying increase, the value of a European call option will most
likely:
A not change.
B increase.
C decrease.

48 According to put-call parity, if a fiduciary call expires in the money, the payoff is most likely
equal to the:
A difference between the market value of the asset and the face value of the risk-free bond.
B market value of the asset.
C face value of the risk-free bond.

49 According to the put-call-forward parity, if the put in a protective put with forward contract
expires out of the money, the payoff is most likely equal to:
A the market value of the underlying asset.
B zero.
C the face value of a risk-free bond.

50 Privatbank Kleinert KGaA, private wealth manager in Munich, has a number of clients with
large holding in the German fintech firm SparCoin AG. Kleinert’s analyst is concerned about a
drop in SparCoin’s share price in the next year and is recommending to clients that they
consider purchasing a one-year put with an exercise price of $100. SparCoin’s spot price (So) is
$105.25, and it pays no dividends. The risk-free rate is 0.37%.
Kleinert’s analyst estimates a 50-50 chance that the price of SparCoin will either increase by
12% or decline by 10% at the put option’s expiration date. Which of the following statements
best describes the no-arbitrage option price implied by this assumption?
A Since there is a 50% chance that the stock will fail to 94.73, there is a 50-50 chance of a 5.27
payout upon exercise and the no-arbitrage put is therefore worth 2.64 (=5.27/2).
B Since there is a 50% chance that the stock will fall to 94.73, there is a 50-50 chance of a 5.27
payout upon exercise and given the risk-neutral probability of 0.47, the no-arbitrage put price is
2.48 (=5.27*0.47).
C Since there is as 50% change that the stock will fall to 94.73 and the risk-neutral probability is
0.47, the no-arbitrage put price is 2.78 (=5.27*(1-0.47) / 1.0037)

51 Privatbank Kleinert KGaA, private wealth manager in Munich, has a number of clients with
large holding in the German fintech firm SparCoin AG. Kleinert’s analyst is concerned about a
drop in SparCoin’s share price in the next year and is recommending to clients that they
consider purchasing a one-year put with an exercise price of $100. SparCoin’s spot price (So) is
$105.25, and it pays no dividends. The risk-free rate is 0.37%.
If Kleinert’s clients observe that the one-year put option with $100 exercise price is trading at
$2.50, which of the following statements best describes how Kleinert’s clients could take
advantage of this to earn a risk-free return greater than 0.37% over the year.
A Kleinert should purchase the put option and also purchase approximately 0.23 shares per
option to match the hedge ratio.
B Kleinert should purchase the put option and purchase 50% of the underlying shares given the
50-50 chance the stock will fall and the put option exercised.
C Kleinert should purchase the put option and purchase 47% of the underlying shares to match
the risk-neutral probability of put exercise.

52 Privatbank Kleinert KGaA, private wealth manager in Munich, has a number of clients with
large holding in the German fintech firm SparCoin AG. Kleinert’s analyst is concerned about a
drop in SparCoin’s share price in the next year and is recommending to clients that they
consider purchasing a one-year put with an exercise price of $100. SparCoin’s spot price (So) is
$105.25, and it pays no dividends. The risk-free rate is 0.37%.
If risk-free investments yielded a higher return over the next year, which of the following
statements best describes how this would effect the no-arbitrage value of the put option on
SparCoin shares?
A An increase in the risk-free rate will have no effect on SparCoin’s put option price, as it is
solely a function of the probability and degree of share price increase or decrease upon option
expiration.
B An increase in the risk-free rate will increase the value of the put option, as it will increase the
risk-neutral probability of a price decline.
C An increase in the risk-free rate will decrease the value of the put option, as it will both
increase the risk-neutral probability of a price increase and decrease the present value of the
expected option payoff.

53 Privatbank Kleinert KGaA, private wealth manager in Munich, has a number of clients with
large holding in the German fintech firm SparCoin AG. Kleinert’s analyst is concerned about a
drop in SparCoin’s share price in the next year and is recommending to clients that they
consider purchasing a one-year put with an exercise price of $100. SparCoin’s spot price (So) is
$105.25, and it pays no dividends. The risk-free rate is 0.37%.
If the expected percentage increase and decrease in SparCoin’s share price were to double,
which of the following is the closest estimate of the one-year put option price with an exercise
price of 100?
A The one-year put option price will rise to 7.90
B The one-year put option price will rise to 8.50
C The one-year put option price will rise to 7.40.

54 When valuing a call option using the binomial model, an increase in the probability that the
underlying will go up most likely implies that the current price of the call option:
A increases
B remains unchanged.
C decreases.