Question 1) Which of the following describes what a company

1) Which of the following describes what a company should do to create a range forward contract in order to hedge foreign currency that will be received?

A) Buy a put and sell a call on the currency with the strike price of the put higher than that of the call

B) Buy a put and sell a call on the currency with the strike price of the put lower than that of the call

C) Buy a call and sell a put on the currency with the strike price of the put higher than that of the call

D) Buy a call and sell a put on the currency with the strike price of the put lower than that of the call

2) Which of the following describes what a company should do to create a range forward contract in order to hedge foreign currency that will be paid?

A) Buy a put and sell a call on the currency with the strike price of the put higher than that of the call

B) Buy a put and sell a call on the currency with the strike price of the put lower than that of the call

C) Buy a call and sell a put on the currency with the strike price of the put higher than that of the call

D) Buy a call and sell a put on the currency with the strike price of the put lower than that of the call

3) What should the continuous dividend yield be replaced by when options on an exchange rate are valued using the formula for an option of a stock paying a continuous dividend yield?

A) The domestic risk-free rate

B) The foreign risk-free rate

C) The foreign risk-free rate minus the domestic risk-free rate

D) None of the above

4) Suppose that the domestic risk free rate is r and dividend yield on an index is q. How should the put-call parity formula for options on a non-dividend-paying stock be changed to provide a put-call parity formula for options on a stock index? Assume the options last T years.

A) The stock price is replaced by the value of the index multiplied by exp(qT)

B) The stock price is replaced by the value of the index multiplied by exp(rT)

C) The stock price is replaced by the value of the index multiplied by exp(-qT)

D) The stock price is replaced by the value of the index multiplied by exp(-rT)

5) A portfolio manager in charge of a portfolio worth $10 million is concerned that stock prices might decline rapidly during the next six months and would like to use options on an index to provide protection against the portfolio falling below $9.5 million. The index is currently standing at 500 and each contract is on 100 times the index. What position is required if the portfolio has a beta of 1?

A) Short 200 contracts

B) Long 200 contracts

C) Short 100 contracts

D) Long 100 contracts

6) A portfolio manager in charge of a portfolio worth $10 million is concerned that the market might decline rapidly during the next six months and would like to use options on an index to provide protection against the portfolio falling below $9.5 million. The index is currently standing at 500 and each contract is on 100 times the index. What should the strike price of options on the index be the portfolio has a beta of 1?

A) 425

B) 450

C) 475

D) 500

7) A portfolio manager in charge of a portfolio worth $10 million is concerned that the market might decline rapidly during the next six months and would like to use options on an index to provide protection against the portfolio falling below $9.5 million. The index is currently standing at 500 and each contract is on 100 times the index. What position is required if the portfolio has a beta of 0.5?

A) Short 200 contracts

B) Long 200 contracts

C) Short 100 contracts

D) Long 100 contracts

8) A portfolio manager in charge of a portfolio worth $10 million is concerned that the market might decline rapidly during the next six months and would like to use options on an index to provide protection against the portfolio falling below $9.5 million. The index is currently standing at 500 and each contract is on 100 times the index. What should the strike price of options on the index be the portfolio has a beta of 0.5? Assume that the risk-free rate is 10% per annum and the dividend yield on both the portfolio and the index is 2% per annum.

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