Top 84 CFA Level 2 Practice Questions Free on Derivatives with Instant Answers

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Consider arbitrage only: S(0) - XHOwever, since American calls can't be worth less than European calls -> same minimum as European calls: S(0) - X/(1+r)^T

• Lower bound of option price
• Minimum value of American calls
• Forward price of contract
• time value/speculative value

Any future contracts can be offset by another future contract with another counter party

• Gamma
• Fungible
• Eurodollar
• F(0,h,m)

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• Calculate the price of n-day T-bill based on discount rate
• To exploit arbitrage: sell the relatively overvalued and buy the relatively undervalued
• continuous interest rate (from discrete rate)
• Arbitrage free equation (with interest rate) for S and F exchange rate

If interest rate positively correlates with future prices -> investors will prefer futures since they generate gaines when interest rate goes up and can reinvest at higher interest rate -> future price is higher than forwardIf r negatively correlates with future prices -> futures pricie is lower and forward prices

• Relationship between interest rate and price comparison between future and forward rate
• continuous interest rate (from discrete rate)
• Arbitrage free equation (with interest rate) for S and F exchange rate
• Relationship between put option price vs.1. price of underlying stocks2. RFR3.

Current credit risk is the risk of not receiving a payment currently due, since there is none at the inception of the swap, current credit risk is zero. Potential credit risk is the risk that payments possibly due in the future will not be made.

• number of options needed to delta hedge
• Normal contango vs. contango
• floating side of a swap
• current vs. potential credit risk (context of swap)

1. Call delta: N(d1)2. Put delta: N(d1) - 1

• Call vs. put option delta from BSM model
• seller of a flooer
• 5 inputs to BSM model
• Black-Scholes-Merton model vs. Black model

buy a cap (benefit if rates go up too high-> liability increases) and sell a floorasset: sell a cap, and buy a floor

• interest rate collar for:LIBOR based liabilityLIBOR based asset
• Call vs. put option delta as stock prices increases
• In the money, out of the money, at the money
• Long a floorLong a cap

agree to pay the buyer at the end of any period over a certain period if LIBOR is less than the floor rate.

• Multiplier
• payer swaption
• seller of a flooer
• Eurodollar

1. Buy forward contract at x dollar2. Sell yen for dollar. Earn the interest on dollar. 3. At the future, buy yen through the forward contract. Will earn more yen then sold orginally

• Arbitrage: forward price is too low
• Off-market forward contract
• Interest rate call vs. put
• Cost of carry model

there are futures contracts on assets that have nonmonetary benefits. Assets that are often in short supply, particularly those with seasonal and highly risky production processes, are commonly viewed as hav- ing such benefits. The nonmonetary benefits of these assets are referred to as the convenience yield". Formally, a convenience yield is the nonmonetary return offered by an asset when in short supply. "hen an asset is in short supply, its price tends to be high. Holders of the asset earn an implicit in

• Convenience yield
• Funds of funds
• Fungible
• payer swaption

The call option delta is: 0.25The put option delta is 0.25 - 1 = -0.75

• Arbitrage free equation (with interest rate) for S and F exchange rate
• value of fixed/floating is different from market value of the swap
• The price of a June call option with an exercise price of $50 falls by $0.50 when the underlying stock price falls by $2.00. The delta of a June put option with an exercise price of $50 is closest to?
• Receiver swaption on bonds with an exercise rate of x% -> equivalent to a call/put option on bonds?

(1) hedge fund managers are not earning a positive alpha, (2) investors feel that the fees paid to hedge fund managers are not justified, and (3) investors have objections to hedge funds' lack of transparency or liquidity.

• Forward price for dividends as a fixed percentage of stock price
• differentiate: option on rates vs. option on prices
• Investors may be motivated to choose hedge fund replication strategies over actual investments in hedge funds when:
• Why the value of Euro puts does not necessarily increase with time?

Ask Bret

• Expiration rate vs. termination date
• why: eurodollar futures are better hedge for bank loan than t-bill
• " In addition, in interest rate swaps, the next payment that each party makes is known. That would obviously not be the case for a single forward contract."
• continuous interest rate (from discrete rate)

T-bond futures prices must be adjusted to conform to the price for the bond that is cheapest to deliver, using its conversion factor (CF):x (1/CF)

• seller of a flooer
• Funds of funds
• conversion factor
• Convenience yield

1. increases: call option delta is positive (in-the-money call option -> higher stock prices increase option price2. increases (postiive rho)3. lower: consider call option: delayed purchase. If call later -> reduced by the amount of dividends not received

• Relationship between interest rate and price comparison between future and forward rate
• Calculate the price of n-day T-bill based on discount rate
• Relationship between call price if the factor increases1. price of underlying stocks2. RFR3. CF
• Relationship between put option price vs.1. price of underlying stocks2. RFR3.