are low.
B. costs of short-selling are high.
C. prices are consistent with the law of one price.
3. An arbitrage transaction generates a net inflow of funds:
A. throughout the holding period.
B. at the end of the holding period.
C. at the start of the holding period.
4. The price of a forward contract:
A. is the amount paid at initiation.
B. is the amount paid at expiration.
C. fluctuates over the term of the contract.
5. Assume an asset pays no dividends or interest, and also assume that the asset does not yield any non-financial benefits or incur any carrying cost. At initiation, the price of a forward contract on that asset is:
A. lower than the value of the contract.
B. equal to the value of the contract.
C. greater than the value of the contract.
6. With respect to a forward contract, as market conditions change:
A. only the price fluctuates.
B. only the value fluctuates.
C. both the price and the value fluctuate.
7. The value of a forward contract at expiration is:
A. positive to the long party if the spot price is higher than the forward price.
B. negative to the short party if the forward price is higher than the spot price.
C. positive to the short party if the spot price is higher than the forward price.
8. At the initiation of a forward contract on an asset that neither receives benefits nor incurs carrying costs during the term of the contract, the forward price is equal to the:
A. spot price.
B. future value of the spot price.
C. present value of the spot price.
9. Stocks BWQ and ZER are each currently priced at $100 per share. Over the next year, stock BWQ is expected to generate significant benefits whereas stock ZER is not expected to generate any benefits. There are no carrying costs associated with holding either stock over the next year. Compared with ZER, the one-year forward price of BWQ is most likely:
A. lower.
B. the same.
C. higher.
10. If the net cost of carry of an asset is positive, then the price of a forward contract on that asset is most likely:
A. lower than if the net cost of carry was zero.
B. the same as if the net cost of carry was zero.
C. higher than if the net cost of carry was zero.
11. If the present value of storage costs exceeds the present value of its convenience yield, then the commodity's forward price is most likely:
A. less than the spot price compounded at the risk-free rate.
B. the same as the spot price compounded at the risk-free rate.
C. higher than the spot price compounded at the risk-free rate.
12. Which of the following factors most likely explains why the spot price of a commodity in short supply can be greater than its forward price?
A. Opportunity cost
B. Lack of dividends
C. Convenience yield
13. When interest rates are constant, futures prices are most likely:
A. less than forward prices.
B. equal to forward prices.
C. greater than forward prices.
14. In contrast to a forward contract, a futures contract:
A. trades over-the-counter.
B. is initiated at a zero value.
C. is marked-to-market daily.
15. To the holder of a long position, it is more desirable to own a forward contract than a futures contract when interest rates and futures prices are:
A. negatively correlated.
B. uncorrelated.
C. positively correlated.
16. The value of a swap typically:
A. is non-zero at initiation.
B. is obtained through replication.
C. does not fluctuate over the life of the contract.
17. The price of a swap typically:
A. is zero at initiation.
B. fluctuates over the life of the contract.
C. is obtained through a process of replication.
18. The value of a swap is equal to the present value of the:
A. fixed payments from the swap.
B. net cash flow payments from the swap.
C. underlying at the end of the contract.
19. A European call option and a European put option are written on the same underlying, and both options have the same expiration date and exercise price. At expiration, it is possible that both options will have:
A. negative values.
B. the same value.
C. positive values.
20. At expiration, a European put option will be valuable if the exercise price is:
A. less than the underlying price.
B. equal to the underlying price.
C. greater than the underlying price.
21. The value of a European call option at expiration is the greater of zero or the:
A. value of the underlying.
B. value of the underlying minus the exercise price.
C. exercise price minus the value of the underlying.
22. For a European call option with two months until expiration, if the spot price is below the exercise price, the call option will most likely have:
A.
