Speculative Markets
Mock Exam
Course Introduction
Speculative Markets explores the mechanisms, dynamics, and implications of markets that are primarily driven by speculation rather than underlying fundamental values. The course examines financial instruments such as derivatives, futures, and options, as well as asset bubbles and the role of investor psychology in driving price volatility. Students will analyze historical and contemporary case studies to understand how speculative behavior can impact market efficiency, risk, and systemic stability. Ethical considerations, regulatory responses, and the broader economic effects of speculation are also discussed, equipping students with critical insight into the complex interplay between speculation and financial market development.
Recommended Textbook
Introduction to Derivatives and Risk Management 9th Edition by Don M. Chance
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16 Chapters
945 Verified Questions
945 Flashcards
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Chapter 1: Introduction
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Sample Questions
Q1) A market in which the price equals the true economic value
A) is risk-free
B) has high expected returns
C) is organized
D) is efficient
E) all of the above
Answer: D
Q2) The expected return minus the risk-free rate is called
A) the risk premium
B) the percentage return
C) the asset's beta
D) the return premium
E) none of the above
Answer: A
Q3) A seller of a put option on a futures contract obligates them to buy a futures contract should the put buyer exercise the option.
A)True
B)False
Answer: True
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Page 3
Chapter 2: Structure of Options Markets
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Sample Questions
Q1) Organized options markets are different from over-the-counter options markets for all of the following reasons except
A) exercise terms
B) physical trading floor
C) regulation
D) standardized contracts
E) credit risk
Answer: A
Q2) Which of the following are long-term options?
A) Bond options
B) LEAPS
C) currency options
D) Nikkei put warrants
E) none of the above
Answer: B
Q3) CBOE option market makers are also called liquidity providers.
A)True
B)False
Answer: True
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Page 4
Chapter 3: Principles of Option Pricing
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Sample Questions
Q1) The lower bound of a European put on a non-dividend paying stock is lower than the intrinsic value of an American put.
A)True
B)False
Answer: True
Q2) The difference between a Treasury bill's face value and its price is called the
A) time value
B) discount
C) coupon rate
D) bid
E) none of the above
Answer: B
Q3) 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
Answer: D
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Page 5
Chapter 4: Option Pricing Models: The Binomial Model
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Sample Questions
Q1) A portfolio that combines the underlying stock and a short position in an option is called
A) a risk arbitrage portfolio
B) a hedge portfolio
C) a ratio portfolio
D) a two-state portfolio
E) none of the above
Q2) When pricing an American put with the binomial model, you must check for early exercise at each time point and stock price except the current one.
A)True
B)False
Q3) Options that can be priced by considering only the payoffs at expiration are called path-independent.
A)True
B)False
Q4) Put-call parity holds within a two period binomial model.
A)True
B)False
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Chapter 5: Option Pricing Models: The
Black-Scholes-Merton Model
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Sample Questions
Q1) The Black-Scholes-Merton model combined with put-call parity give the theoretical price of an American put option.
A)True
B)False
Q2) The relationship between the volatility and the time to expiration is called the A) volatility smile
B) volatility skew
C) term structure of volatility
D) theta
E) none of the above
Q3) The call's vega is: (Due to differences in rounding your calculations may be slightly different. "none of the above" should be selected only if your answer is different by more than 0.05.)
A) -3.02
B) 0.046
C) -0.792
D) 4.67
E) none of the above
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Chapter 6: Basic Option Strategies
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Sample Questions
Q1) The holder of a protective put has the equivalent of an insurance policy on the stock.
A)True
B)False
Q2) Which of the following investors may be obligated to buy stock?
A) covered call writer
B) call buyer
C) put writer
D) protective put buyer
E) none of the above
Q3) Which of the following is the breakeven for a protective put?
A) X + S<sub>0</sub> - P
B) P + S<sub>0</sub>
C) X - S<sub>T</sub>
D) X - S<sub>0</sub> - P
E) none of the above
Q4) Both call and put writers have the potential for unlimited losses.
A)True
B)False
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Chapter 7: Advanced Option Strategies
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Sample Questions
Q1) To truly gain from a straddle, an investor must have a better estimate of volatility than everyone else.
A)True
B)False
Q2) The holder of a straddle does not care which way the market moves as long as it makes a significant move.
A)True
B)False
Q3) A spread that is profitable if the options are in-the-money is called a money spread.
A)True
B)False
Q4) A spread option strategy is a transaction in one option and an opposite transaction in the underlying instrument.
A)True
B)False
Q5) A call butterfly spread combines a call bull spread with a call bear spread.
A)True B)False
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Chapter 8: Structure of Forward and Futures Markets
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Sample Questions
Q1) Which of the following is the most actively traded U.S. futures contract?
A) S&P 500 Index
B) crude oil
C) Treasury bonds
D) Wheat
E) none of the above
Q2) Scalping is a colorful term used to describe a futures trading style that involves aggressive, emotional trading.
A)True
B)False
Q3) Forward contracts are regulated by the Commodity Forward Trading Commission.
A)True
B)False
Q4) The following process is the only type of permissible futures transaction that occurs off the floor of the exchange
A) determination of the position day
B) determination of the delivery day
C) determination of a daily settlement price
D) offsetting
E) exchange for physicals
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Chapter 9: Principles of Pricing Forwards, Futures and Options on Futures
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Sample Questions
Q1) Value is created in a futures contract with the passage of time.
A)True
B)False
Q2) The cost of carry includes the interest lost on the funds tied up in the asset stored.
A)True
B)False
Q3) Futures prices differ from spot prices by which one of the following factors?
A) the systematic risk
B) the cost of carry
C) the spread
D) the risk premium
E) none of the above
Q4) A contango market is consistent with
A) a negative basis
B) futures prices exceeding spot prices
C) a positive cost of carry
D) all of the above
E) none of the above
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Chapter 10: Futures Arbitrage Strategies
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Sample Questions
Q1) The timing option results from the difference in closing times of the spot and futures market.
A)True B)False
Q2) Selling an index futures and holding an undiversified portfolio would eliminate unsystematic risk.
A)True B)False
Q3) Transaction costs in program trading are so small that they are not much of a factor.
A)True
B)False
Q4) Suppose the number of days between two coupon payment dates is 181, the number of days since the last coupon payment is 100, the annual coupon rate is 8 percent and the par value is $100,000, then the accrued interest is $2,210.
A)True B)False
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Chapter 11: Forward and Futures Hedging, Spread, and Target Strategies
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Sample Questions
Q1) A firm that expects to borrow in the future would use a short hedge to protect against interest rate changes.
A)True
B)False
Q2) A hedger should select a contract that expires the same month as the date on which the hedge is terminated.
A)True
B)False
Q3) When the futures expires before the hedge is terminated and the hedger moves into the next futures expiration, it is called
A) spreading the hedge
B) rolling the hedge forward
C) optimally weighting the hedge
D) all of the above
E) none of the above
Q4) If the target beta exceeds the underlying's beta, then the manager will go long the futures contract.
A)True
B)False
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Chapter 12: Swaps
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Sample Questions
Q1) The underlying amount of money on which the swap payments are made is called
A) settlement value
B) market value
C) notional amount
D) base value
E) equity value
Q2) If a swap is effectively terminated by entering into the opposite swap with another counterparty, the credit risk will be eliminated.
A)True
B)False
Q3) A swap involving two floating rates is called a basis swap.
A)True
B)False
Q4) Currency swap volume is greater than equity swap volume.
A)True
B)False
Q5) The level of the stock is irrelevant to the pricing of equity swaps.
A)True
B)False
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Chapter 13: Interest Rate Forwards and Options
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Sample Questions
Q1) Interest rate caps are equivalent to a series of interest rate call options.
A)True
B)False
Q2) Swaptions are like forward swaps in which of the following ways
A) Both are free of credit risk
B) Both require the execution of a swap at expiration
C) They have the same price
D) Both are traded on swaption exchanges
E) none of the above
Q3) The value of an FRA is obtained by determining the value of a strategy of long a long-term underlying time deposit and short a short-term underlying time deposit.
A)True
B)False
Q4) The pricing of a forward swap is done in the same manner as pricing a spot started today, except that forward rates are used instead of spot rates.
A)True
B)False
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15
Chapter 14: Advanced Derivatives and Strategies
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Sample Questions
Q1) A contingent-pay option is replicated by which of the following combinations?
A) long an ordinary call and long an ordinary put
B) long an ordinary call and short a cash-or-nothing call
C) long an ordinary call and short an asset-or-nothing call
D) long an ordinary call and long an equity forward
E) long an ordinary call and long a risk-free bond
Q2) An option to buy an option is called a compound option.
A)True
B)False
Q3) The Black-Scholes model is not appropriate for pricing electricity derivatives. A)True
B)False
Q4) Interest-only strips lose the some or all of the end of their stream of cash flows if prepayment occurs.
A)True B)False
Q5) The cost of portfolio insurance is the return foregone if the market moves up. A)True B)False
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Chapter 15: Financial Risk Management Techniques and Appplications
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Sample Questions
Q1) Market risk is which of the following
A) the risk associated with failing to properly record market transactions
B) the risk that a dealer will lose market share to a competing dealer
C) the risk associated with movements in such factors as interest rates and exchange rates
D) the risk of the government declaring a transaction illegal
E) none of the above
Q2) Netting allows a significant reduction in credit risk but increases market risk
A)True
B)False
Q3) The Monte Carlo simulation method of estimating Value at Risk is one of the most flexible methods because it permits the user to assume any probability distribution.
A)True
B)False
Q4) The historical method of estimating Value at Risk uses the performance of the portfolio over the last ten years.
A)True
B)False
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Chapter 16: Managing Risk in an Organization
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Sample Questions
Q1) Which of the following organizations recommends best practices for the investment management industry?
A) PRMIA
B) Risk Standards Working Group
C) GARP
D) G-30
E) Financial Accounting Standards Board
Q2) Cash flow accounting must be used for all hedges involving cash outlays.
A)True
B)False
Q3) FAS 133 defines effective hedging as
A) a hedge with no basis risk
B) a correctly priced hedge
C) a perfect hedge
D) a hedge that reduces 80 to 125 percent of the risk
E) none of the above
Q4) An effective risk management system requires that the risk manager be independent of the derivatives traders.
A)True
B)False
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