Question 1

Backwardation can be explained by:

Options :

A : expectations of oversupply in the future

B : convenience yields being greater than the total carrying cost

C : short term shortages in the spot markets

D : all of the above

Answer: D

Question 2

Which of the following is not a money market security

Options :

A : Treasury notes

B : Treasury bills

C : Bankers' acceptances

D : Commercial paper

Answer: A

Question 3

Determine the price of a 3 year bond paying a 5% coupon. The 1,2 and 3 year spot rates are 5%, 6% and 7% respectively. Assume a face value of $100.

Options :

A : $ 94.92

B : $ 106.00

C : $ 100.00

D : $93.92

Answer: A

Question 4

A bank sells an interest rate swap to its client, with the client agreeing to pay the bank a fixed 4% and receive 3 month LIBOR + 100 basis points, payments due every quarter. After quarter 1, the 3 month LIBOR is 2% pa. Which of the following payments will happen in respect of this swap, assuming the contract notional is $100m, and the rate convention is 30/360.

Options :

A : Bank pays customer $1,000,000 and customer pays the bank $750,000

B : Bank pays customer $250,000

C : Customer pays bank $250,000

D : Bank pays customer $1,000,000

Answer: C

Question 5

An early exercise of an American call option is advisable whenever the option is deep in the money and delta approaches 1

Options :

A :

An early exercise of an American call option is advisable whenever the option is deep in the money and delta approaches 1

B :

An early exercise of an American call option may be justified if an extraordinarily large dividend payment is imminent

C :

An early exercise of an American call option is never a good idea as an option is always worth more alive than when it is dead

D : An early exercise of an American option, if ever to be done, should be done immediately after an exdividend date

Answer: B