UE 109 Introduction to Derivative Markets Questions & Exercises 2021-2022 PDF

UE 109, 2021-2022 PSL University Paris-Dauphine UE 109 INTRODUCTION TO DERIVATIVE MARKETS QUESTIONS & EXERCISES...

UE 109, 2021-2022 PSL University Paris-Dauphine UE 109 INTRODUCTION TO DERIVATIVE MARKETS QUESTIONS & EXERCISES DELPHINE LAUTIER YEAR 2021-2022 CAVEAT This handout is the support for the UE 109 ONLY. It gives only a sample of the kind of examination subjects you might have. DO NOT rely on this handout only. This is not sufficient for the preparation of the exams. You are also expected to read and to practice on the course’s manuals, where you will find additional questions and exercises. Finally, you must also regularly revise your course and redo the exercises that were made in class. I wish you good luck for this new academic year. Delphine Lautier Bonus: the first student who finds a typo or an error in this handout will be rewarded by the addition of 5/100 points on his or her copy of the final exam. Once a typo or error has been found by a student, there is no more reward for the others, sorry! THIS HANDBOOK IS ORGANIZED AS FOLLOWS: - PART 1. MULTIPLE CHOICE QUESTIONS - PART 2. CORRECTION OF THE MCQ - PART 3. EXERCISES - PART 4. CORRECTION OF THE EXERCISES Delphine Lautier 1 UE 109, 2021-2022 PSL University Paris-Dauphine LIST OF THE EXERCICES FUTURES 1. HEDGING WITH FUTURES, FINANCIAL RESULTS OF THE OPERATION 2. HEDGING WITH FUTURES, FINANCIAL RESULTS OF THE OPERATION, IMPERFECT HEDGING 3. SPREAD TRADING ON PLATINUM AND GOLD 4. INTERTEMPORAL ARBITRAGE 5. DEPOSIT AND MARGIN CALLS 6. MARK TO MARKET VALUE OF A FUTURES 7. HEDGING SHORT TERM INTEREST REST RISK WITH FUTURES. SWAPS 8. HEDGING WITH A SWAP; THE PROTECTION OF THE BANK 9. THE FIXED PRICE OF A SWAP 10. SWAP OR CAP: DETERMINING THE BEST HEDGING STRATEGY 11. AN ARBITRAGE STRATEGY RELYING ON INTEREST RATE SWAPS. OPTIONS 12. HEDGING WITH AN OPTION AND THE COST OF HEDGING 13. HEDGING WITH AN OPTION ON INTEREST RATES 14. VALUING AN OPTION WITH THE CALL-PUT PARITY 15. VALUING AN OPTION WITH AN ARBITRAGE REASONING 16. VALUING AN OPTION WITH THE COX-ROSS-RUBINSTEIN MODEL 17. VALUING AN OPTION WITH THE BLACK AND SCHOLES MODEL 18. VALUING AN OPTION WITH THE COX-ROSS-RUBINSTEIN MODEL CREDIT RISK 19. EXPECTED DISCOUNTED LOSSES AND CUMULATIVE DEFAULT PROBABILITIES 20. CUMULATIVE DEFAULT PROBABILITIES 21. CUMULATIVE DEFAULT PROBABILITIES AND RISK PREMIA 22. VALUATION OF CORPORATE SECURITIES: ACTUARIAL VERSUS RISK NEUTRAL METHODS 23. SECURITIZATION Delphine Lautier 2 UE 109, 2021-2022 PSL University Paris-Dauphine @@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@ MULTIPLE CHOICE QUESTIONS @@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@@ Put a cross in the empty square situated at the beginning of the line of the selected answer. There might be several answers for one question. 1. The deposit on a futures contract: □ is a part of the payment requested on the price of a futures contract □ is a guarantee for the clearing house □ is determined by the clearing house □ is determined by regulatory authorities after they have consulted the operators of the market □ is always higher for the sellers of futures contracts □ is always higher for the buyers of futures contracts □ is the same for the buyer and for the seller of the futures contract □ changes with the volatility of the underlying asset □ can never be modified by the clearing house □ can be modified by the clearing house □ ranges generally from 1% to 10% of the contract’s value □ can not be lower than 30% of the contract’s value, in order to limit the leverage effect and the speculation □ is required for speculators only □ is eliminated during the last transaction month □ is different from the propositions above 2. Backwardation (discount, inverse carrying charges) is a situation where: □ the temporal basis is negative □ the temporal basis is positive □ the futures price is higher than the spot price □ the futures price is lower than the spot price □ the difference between the futures and the spot prices is equal to storage costs □ the storage cost of the commodity is zero □ the speculator is systematically rewarded □ the convenience yield is high □ the convenience yield is low □ none of the proposed items is true 3. The open interest on a futures markets represents: □ the number of transactions realized during the last trading day a futures contract □ the number of operators holding a position that is not closed □ the number of speculators actively trading on this market □ the number of contracts that are not closed □ the number of contracts held by the speculators □ something different from the propositions above. Delphine Lautier 3 UE 109, 2021-2022 PSL University Paris-Dauphine 4. On the organized markets for derivative products, the most important underlying assets (in terms of the volume of traded contracts, with no consideration for the nominal amount per contract) are: ¨ individual equities and equity indexes ¨ climatic indexes ¨ foreign exchange ¨ credit risk ¨ commodities ¨ interest rates 5. Cash and carry is an operation that: □ consists in selling a futures contract, buying the underlying asset, funding the holding of the underlying asset and delivering this asset at the expiration of the futures contract □ consists in buying a futures contract, selling the underlying asset, investing the result of the sale on the monetary market, and taking delivery of the underlying asset at the expiration of the futures contract □ is very risky, since it constraints the speculator to hold the underlying asset of the futures contract □ is forbidden to professional operators of the futures market □ brings the arbitragist a profitability rate that is roughly equal to the interest rate on the monetary market, if the price of the futures contract is equal to its theoretical level. □ reserved to professional speculators □ is different from the propositions above 6. On the organized markets for derivative products, the two most important regions in the world, as far as the transaction volumes are considered: o are Europe and Asia Pacific o are Europe and Latin America o are Europe and North America o are North America and Asia Pacific o are North America and Latin America o are Latin America and Asia Pacific o gather roughly 10% of the total volume traded on organized markets o gather roughly 30% of the total volume traded on organized markets o gather roughly 50% of the total volume traded on organized markets o gather roughly 70% of the total volume traded on organized markets o gather roughly 90% of the total volume traded on organized markets 7. When an operator holds a short position in the copper futures market of the London Metal Exchange (LME) for the month of July, in order to liquidate the position in this market he must: □ sell contracts for July expiry on the copper futures market of LME □ sell contracts for June expiry on the copper futures market of LME □ sell contracts for July expiry on the copper futures market of New York □ sell contracts for September expiry on the copper futures market of New York □ buy contracts for July expiry on the copper futures market of LME □ buy contracts for August expiry on the copper futures market of LME □ buy contracts for July expiry on the copper futures market of New York □ buy contracts for August expiry on the copper futures market of New York Delphine Lautier 4 UE 109, 2021-2022 PSL University Paris-Dauphine 8. On the over the counter markets (OTC) for derivative products, the two most important underlying assets (in terms of nominal amounts outstanding) are: ¨ individual equities and equity indexes ¨ climatic indexes ¨ foreign exchange ¨ credit risk ¨ commodities ¨ interest rates 9. An operator buys on the Chicago Mercantile Exchange 10 futures contracts on crude oil, at USD 111.20 per barrel. One futures contract represents 1,000 barrels of crude. At the end of the day, the settlement price is USD 109.90 per barrel. Assume there is not maintenance margin. The margin call is: □ 0 because there is no margin call □ 0 because the operator is credited □ 1.3 dollar □ 1,300 dollars □ 13,000 dollars □ 130,000 dollars □ 1,099,000 dollars □ 1,112,000 dollars □ different from the propositions above 10. What would have been your answer if, in the previous question, the settlement price would have been USD 112.40 per barrel? □ 0 because there is no margin call □ 0 because the operator is credited □ 1.2 dollar □ 1,200 dollars □ 12,000 dollars □ 120,000 dollar □ 1,112,000 dollars □ 1,124,000 dollars □ different from the propositions above 11. The duration: □ is an indicator of the price sensitivity of a fixed income security □ is equal to the volatility of a fixed income security □ measures the stability of the volatility when interest rates change □ is the sum of the present value of the cash flows of a fixed income security, weighted by their year of collection □ increases with the maturity of the bond □ can be applied only to bonds with a residual maturity lower than 12 months. □ Increases when the coupon decreases □ Is different from the propositions above Delphine Lautier 5 UE 109, 2021-2022 PSL University Paris-Dauphine 12. Aluminium is priced at USD 1,200 on the spot market. The 3-month interest rate is 6%. The pure storage cost of aluminium during 3 months is equal to USD 8 per ton. The theoretical futures price of aluminium for a 3-month maturity is (do not take into account the decimal points): □ USD 1,280 □ USD 1,272 □ USD 1,264 □ USD 1,226 □ USD 1,218 □ USD 1,210 □ a number different from the propositions above. 13. If the price of the underlying asset is lower than the strike, □ the call is in the money □ the call is out of the money □ the put is in the money □ the put is out of the money 14. A company wants to invest EUR 15,000,000 in 3 months, for 3 months. It asks to its bank a hedge against the risk of a decrease in the interest rates. The 3-month interest rate on the spot market of the euro is: 6% The 6-month interest rate on the spot market of the euro is 61/8% The bank offers its client an interest rate such that: ⎛ 180 ⎞ ⎛ 90 ⎞ ⎛ 90 ⎞ □ ⎜1 + × 6% ⎟ = ⎜ 1 + × 61/8 % ⎟ × ⎜ 1 + ×t ⎝ 360 ⎠ ⎝ 360 ⎠ ⎝ 360 ⎟⎠ æ 180 1 / 8 ö æ 90 ö æ 90 ö □ ç1 + ´ 6 % ÷ = ç1 + ´ 6% ÷ ´ ç1 + ´t÷ è 360 ø è 360 ø è 360 ø ⎛ 90 ⎞ ⎛ 90 ⎞ ⎛ 180 ⎞ □ ⎜1 + × t = 1+ × 6% ⎟ × ⎜ 1 + × 61/8 % ⎟ ⎝ 360 ⎟⎠ ⎜⎝ 360 ⎠ ⎝ 360 ⎠ ⎛ 270 ⎞ ⎛ 90 ⎞ ⎛ 180 ⎞ □ ⎜1 + × t = 1+ × 6% ⎟ × ⎜ 1 + × 61/8 % ⎟ ⎝ 360 ⎟⎠ ⎜⎝ 360 ⎠ ⎝ 360 ⎠ □ none of the propositions above can be accepted 15. In order to belong to the category investment grade, according to the criteria of Standard and Poor’s, a bond must have a rating higher or equal to: □ AAA □ AA □ A □ BBB □ BB □ B □ CCC Delphine Lautier 6 UE 109, 2021-2022 PSL University Paris-Dauphine 16. The premium of a cap on interest rates is 0.35%. The strike of this cap is 8.5%. The premium of a floor is 0.50%. The strike of this floor is 7.0%. The interest rate taken as a reference on the spot market is the 3-month Libor. A company decides to sell a collar. The minimum actual interest rate at which the company will invest its money is: □ 6.45% □ 6.65% □ 6.80% □ 6.85% □ 7.0% □ 7.15% □ 7.20% □ 7.35% □ 7.45% □ none of the propositions above At the exercise date, the 3-month Libor is equal to: 8.40 - 8.45 % The actual interest rate at which the company invests is: □ 7.80% □ 7.85% □ 8.05% □ 8.10% □ 8.20% □ 8.25% □ 8.30% □ 8.55% □ 8.60% □ 8.65% □ 8.75% □ 8.80% □ 8.95% □ 9.0% □ different from the propositions above 17. A trader has to keep a stock of 500,000 barrels of crude oil during a few days. He fears a very important decrease in the prices of crude. In order to hedge this position on the physical market, the trader must: □ buy futures contracts □ buy call options on futures contracts □ buy put options on futures contracts □ sell call options on futures contracts □ sell futures contracts □ sell put options on futures contracts □ do something different from the propositions above Delphine Lautier 7 UE 109, 2021-2022 PSL University Paris-Dauphine 18. The payoff of the buyer of a put option at expiration is: □ + Max (0, S-K) □ + Max (0, K-S) □ – Max (0 ,S-K) □ – Max (0, K-S) □ + Min (0, K-S) □ + Min (0, S-K) □ different from the propositions above 19. Forward transactions appeared initially in the markets for: □ stocks □ corporate bonds □ government bonds □ agricultural and other commodities □ a market different from the propositions above. Delphine Lautier 8