Free CFA Level 1 Practice Exam-29 Multiple Choice Questions on Derivatives

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long 5% call and short 5% put

• what is the variation margin?
• how are treasure contracts settled?
• what is the intrinsic value of an option?
• how to synthetically create a long 5% fra?

Treasury contracts are deliverable. Short party has to deliver the treasury bond to the long party

• 1x4 libor contract means what?
• whats a credit derivative
• what is the variation margin?
• how are treasure contracts settled?

margin is really a security deposit parties need to deposit when buy futures

• what is the variation margin?
• 1x4 libor contract means what?
• as it relates to futures what is a margin
• what is the formula for put call parity?

S+P = C + X /(1+rfr)^tprotective put equals fiduciary callprotective put = buy stock and buy put to protect downside (S+P)fiduciary call = buy call and also also discount bond that pays X

• what is the intrinsic value of an option?
• what is the variation margin?
• what is the formula for put call parity?
• what is the settlement price for futures?

its based on a $1m face.based on 90 days billquoted on discount annual basis (so 98 quote means 2% discount)actual discount is 2%*90/360 = 0.5%

• what are main characteristics of treasury bill forward
• what is minimum maturity for treasury bond contracts?
• what is the formula for put call parity?
• whats the difference between futures and forwards

max (0, Strike-Libor) * nominal amount(have to adjust for period if not full year libor)

• what is max payoff on call option on interest rate?
• what is the settlement price for futures?
• what is max payoff on put option on interest rate?
• what is the formula for put call parity?

C. multiplied by the futures price to determine the delivery price.

• A conversion factor in a Treasury bond contract is: A. used to adjust the number of bonds to be delivered. B. multiplied by the face value to determine the delivery price. C. multiplied by the futures price to determine the delivery price.
• how are treasure contracts settled?
• what is minimum maturity for treasury bond contracts?
• treasury bonds are for face value of what amount?

intrinsic value is either 0 or stock - x (which ever is higher). so if out of the money then 0, if in the money then S-x (or x - s for puts). the other part of option value is called time value.

• what is the formula for put call parity?
• what is the intrinsic value of an option?
• what is the variation margin?
• what is the settlement price for futures?

Nothing. no payment is needed. payment/settlement is made at the end of the forward

• how much does one party pay to buy a forward contract?
• what is the formula for put call parity?
• how to synthetically create a long 5% fra?
• what is minimum maturity for treasury bond contracts?

you hope that it appreciates. cause you lock in price, so if it appreciates you buy it below new price

• influence of risk free rate on calls and puts?
• you are long a forward rate agreement (FRA). if rates rise you make or loose money?
• treasury bonds are for face value of what amount?
• if you are long a euro forward you hope that euro appreciates or depreciates?

if rates went up then the is a gain.amount of the gain is new rate minus contract rate time number of days /365, since the gain is not for the whole year. and then need to PV this gain, so divide by 1 +market rate*days/360

• how much does one party pay to buy a forward contract?
• how to synthetically create a long 5% fra?
• describe how to calculate the payment to the long holder of forward rate agreement (FRA)
• what are the examples of contingent claims and examples for forward commitments

they are in different currencies: Libor denominated in USD and Euribor in EUR

• what is the intrinsic value of an option?
• whats the connection between Eurodollar and Libor
• whats the difference between Libor and Euribor?
• whats the difference between futures and forwards