Question

1. How can a bank create a synthetic 30-day forward rate agreement on a 90-day interest rate?

A. Borrow for 90-days and lend the proceeds for 30 days.

B. Borrow for 90 days and lend the proceeds for 60 days.

C. Borrow for 120 days and lend the proceeds for 30 days.

2. A put option is in-the-money when:

A. The stock price is equal to the exercise price of the option.

B. The stock price is lower than the exercise price of the option.

C. The stock price is higher than the exercise price of the option.

3. At expiration, the exercise value of a call option:

A. Is positive if the underlying asset price is greater than the exercise price.

B. Is zero only if the underlying asset price is equal to the exercise price.

C. Is negative if the underlying asset price is less than the exercise price.

4. For stock options, which of the following will decrease put option value and increase call option values?

A. An increase in the exercise price.

B. An increase in the riskless rate of interest.

C. An unexpected dividend payment on the stock.

Answer 1

1.

c. borrowing at 120 day and selling at 30 day forward will create the 90 day interest rate.

2. B. when the stock price is lower than the exercise price, it happens because the put holder has the right to sell the security at price(at exercise) that is above the current market price and is in profit

3. b. zero . if the difference is o.

And it will be positive when the exercise price is greater than the market price

And negative if the exercise price is less than the market price’

4.

a- The value of put increases and value of call option decreases with increase in exercise price

b. increase in interest rates leads to increase in call value and decrease in put value

c. payment of dividend leads to increase in put value and value of call decreases

so ans. Is B