An analyst is evaluating a European call option with a strike price of 25 and 219 days to expiration. The underlying stock is currently trading for $29, and the analyst thinks that by the option expiration date the stock will be valued at $35. If the risk-free rate is 4.0%, what is the lower bound on the value of this option?
A. $0
B. $4.00
C. $4.58.
Party A enters into a plain vanilla 1-year interest rate swap agreement with Bank B in which he will make fixed-rate payments in exchange for receiving floating-rate payments based on LIBOR plus 100 basis points. Assume that payments are made quarterly in arrears based on a 360-day year. The fixed rate on the swap is 6.5%. The current interest rates on 90, 180, 270, and 360-day LIBOR are 5.2%, 5.5%, 5.8%, and 6.0%, respectively. If the notional principal is SI00 million, what will Party A's net cash flow at the end of the first quarter equal?
A. -$675,000
B. -$75,000
C. +$75,000
Krissy Steele, CFA, manages money for high net worth individuals. Steele develops unique investment policies for all of her clients and uses various investment funds to construct portfolios. However, Steelehas been reluctant to use hedge funds. Which of the following statements made by Steele is least likely to be correct?
A. The volatility of historical returns associated with hedge fund indexes understates their true risk level.
B. Hedge fund returns are normally distributed.
C. Published information on hedge fund returns is based on incomplete historical data.
When compared to a traditional mutual fund, an ETF will most likely offer:
A. better risk management
B. less portfolio transparency
C. higher exposure to capital gains distribution taxes.
An investor purchases oil commodity futures contracts worth $25 million and an equal amount of 10-year Treasury notes with an interest rate of 3.5%. Assuming that oi! prices rise by 10% and the price of the notes remains unchanged, the total return of the position after three months is closest to:
A. $2,500,000
B. $2,600,000
C. $2,700,000
Archie Boone, CFA, is the managing director at Hoffman Advisors, an alternative investment management company. Boone is reviewing the work of a real estate analyst and finds that in calculating net operating income (NOI) for a property, the analyst has understated vacancy by $3,000, overstated depreciation expense by $4,000, overstated insurance expense by $4,000, and understated interest expense by $2,000. If Boone corrects the analyst's estimates of NOI for all these items, the updated estimate will:
A. increase by $1,000 as the restatement of vacancy will be partially offset by the restatement of insurance expense.
B. increase by $1,000 as the restatement of depreciation expense will be partially offset by the restatement of vacancy.
C. decrease by $1,000 as the restatement of insurance expense will be more than offset by the restatement of vacancy and interest expense.
An investor purchased a stock for $60 a share using margin from his broken If the initial margin requirement is 40%, and the maintenance margin requirement is 20%, which of the following best describes the price at which a margin call will initially be triggered?
A. Below $30.
B. Below $45.
C. Below $48.
Steve Brown is questioned by his superior about the commonly cited criticisms and benefits of the derivatives market. Which of Brown's statements regarding the criticisms and benefits of derivative markets is most likely correct?
A. Derivatives markets are often criticized for being too risky and illiquid for all but the most knowledgeable investors.
B. Derivatives benefit financial markets due to the price discovery and risk management functions they provide.
C. Derivatives benefit financial markets by generating high fees for dealers wilting to make a market in these securities.
Two portfolio managers at an investment management firm are discussing option strategies for their clients' portfolios. The first manager is considering a covered call strategy on Consolidated Steel Inc. (CSI). The manager states that the strategy is attractive since it will increase the expected returns from the anticipated appreciation in CSI, while reducing the downside risk. The second manager is considering a protective put strategy on Millwood Lumber Company (MLC). The manager states that the protective put strategy will allow his investors to retain an infinite profit potential while limiting potential losses to an amount equal to the initial stock price minus the put premium. Determine whether the comments made by the first and second manager are correct.
A. Only the first manager is incorrect.
B. Only the second manager is incorrect.
C. Both the first manager and the second manager are incorrect.
Bond X carries a rating of BBB-/Baa3. Bond Y has a rating of B/B2. Both bonds are callable after five years, and both bonds mature in ten years. Identify the most accurate statement regarding the credit risk of these bonds. Which bond's value would be most affected by a ratings downgrade, and which bond has the higher default risk?
A. Bond X would be more affected by a ratings downgrade, but Bond Y has higher default risk.
B. Bond Y would be more affected by a ratings downgrade, but Bond X has higher default risk.
C. Bond X has higher default risk, but both bonds would feel equivalent effects of a ratings downgrade.
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