Podcast
Questions and Answers
What does the duration of a fixed income security indicate?
What does the duration of a fixed income security indicate?
If the price of the underlying asset is lower than the strike price, what is the status of the call option?
If the price of the underlying asset is lower than the strike price, what is the status of the call option?
What is the primary cost considered in the theoretical futures price calculation for aluminium?
What is the primary cost considered in the theoretical futures price calculation for aluminium?
What does a company seeking to hedge against a decrease in interest rates typically do?
What does a company seeking to hedge against a decrease in interest rates typically do?
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Assuming aluminium is priced at USD 1,200 and the pure storage cost for 3 months is USD 8, what is the theoretical futures price if the 3-month interest rate is 6%?
Assuming aluminium is priced at USD 1,200 and the pure storage cost for 3 months is USD 8, what is the theoretical futures price if the 3-month interest rate is 6%?
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What happens to the duration of a fixed income security as the maturity of the bond increases?
What happens to the duration of a fixed income security as the maturity of the bond increases?
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Which statement is TRUE regarding a bond's duration?
Which statement is TRUE regarding a bond's duration?
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Which of the following is NOT a recognized implication of a margin call?
Which of the following is NOT a recognized implication of a margin call?
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What is the primary purpose of the deposit on a futures contract?
What is the primary purpose of the deposit on a futures contract?
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Which statement about the futures contract deposit is incorrect?
Which statement about the futures contract deposit is incorrect?
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How does the volatility of the underlying asset affect the futures contract deposit?
How does the volatility of the underlying asset affect the futures contract deposit?
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What is the typical range for deposits in futures contracts?
What is the typical range for deposits in futures contracts?
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Which of the following is true regarding regulatory authorities and futures contract deposits?
Which of the following is true regarding regulatory authorities and futures contract deposits?
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What happens to the deposit on a futures contract during the last transaction month?
What happens to the deposit on a futures contract during the last transaction month?
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Which statement accurately reflects the nature of the deposit required for speculators in futures contracts?
Which statement accurately reflects the nature of the deposit required for speculators in futures contracts?
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Which of the following is NOT typically true about futures contract deposits?
Which of the following is NOT typically true about futures contract deposits?
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What is the investment grade rating that a bond must meet according to Standard and Poor’s criteria?
What is the investment grade rating that a bond must meet according to Standard and Poor’s criteria?
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What is the minimum actual interest rate at which a company investing money will secure when using a collar with a premium of 0.50% and a floor strike of 7.0%?
What is the minimum actual interest rate at which a company investing money will secure when using a collar with a premium of 0.50% and a floor strike of 7.0%?
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If the 3-month Libor is expected to be between 8.40% and 8.45%, what is the actual interest rate at which the company invests if the cap has a strike of 8.5%?
If the 3-month Libor is expected to be between 8.40% and 8.45%, what is the actual interest rate at which the company invests if the cap has a strike of 8.5%?
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In the context of options, which of the following represents a strike price for a floor?
In the context of options, which of the following represents a strike price for a floor?
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What type of financial instrument could a trader use to hedge against a decrease in crude oil prices?
What type of financial instrument could a trader use to hedge against a decrease in crude oil prices?
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Which proposition cannot be accepted as a correct interpretation of the given interest rate situation?
Which proposition cannot be accepted as a correct interpretation of the given interest rate situation?
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What is the implied rate derived from a bank's offer that allows for comparison with existing market rates?
What is the implied rate derived from a bank's offer that allows for comparison with existing market rates?
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If a company decides to sell a collar, which of the following terms is most likely to describe its risk exposure?
If a company decides to sell a collar, which of the following terms is most likely to describe its risk exposure?
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Study Notes
Interest Rate Calculation
- The question asks for the interest rate that satisfies a given equation.
- The equation relates the 3-month interest rate, the 6-month interest rate, and an unknown interest rate "t" over a 90-day period.
- The equation is used to determine the interest rate that would be equivalent to investing in a 3-month deposit and then reinvesting the proceeds in another 3-month deposit at the 6-month rate.
Investment Grade Bonds
- According to Standard & Poor's, a bond must have a rating of BBB or higher to be considered investment grade.
Interest Rate Cap and Floor
- A company is selling a collar, which involves selling a cap and buying a floor.
- The cap limits the maximum interest rate the company will receive, and the floor guarantees a minimum interest rate.
- The strike price of the cap is 8.5% and the premium is 0.35%.
- The strike price of the floor is 7.0% and the premium is 0.50%.
- The minimum actual interest rate at which the company will invest its money is the strike price of the floor minus the premium, which is 7.0% - 0.50% = 6.50%.
Margin Call
- A trader has a stock of 500,000 barrels of crude oil and fears a price decrease.
- A margin call is a demand for additional funds to cover potential losses in the account.
- The margin call is determined based on the change in the settlement price and the size of the position.
Duration of a Bond
- The duration of a bond measures its price sensitivity to interest rate changes.
- It is not equal to the volatility of a fixed-income security.
- Duration increases with the maturity of the bond but can be applied to bonds with maturities longer than 12 months.
- Duration also increases when the coupon rate decreases.
Aluminium Futures Price
- The spot price of aluminium is USD 1,200, the 3-month interest rate is 6%, and the storage cost is USD 8 per ton.
- The theoretical futures price for a 3-month maturity can be calculated using the cost of carry model, which incorporates the spot price, interest rate, and storage cost.
Option Pricing
- The text mentions several methods for valuing options, including the Cox-Ross-Rubinstein model and the Black and Scholes model.
Credit Risk
- The text briefly mentions credit risk and discusses concepts such as expected discounted losses, cumulative default probabilities, and risk premia.
- It also touches on the valuation of corporate securities and securitization.
Futures Deposit
- The deposit on a futures contract is a guarantee for the clearing house, ensuring the performance of the contract.
- It is determined by the clearing house and may vary based on the volatility of the underlying asset.
- The deposit can be modified by the clearing house, and it typically ranges from 1% to 10% of the contract value.
- It is required for both speculators and hedgers and is not eliminated during the last transaction month.
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Description
This quiz covers essential concepts in finance including interest rate calculations for various investment scenarios, the definition of investment grade bonds, and the mechanics of interest rate caps and floors. Test your understanding of how these financial instruments work and their implications for investment strategies.
