1) Suppose that a trader on March 5, 2010, bought a three-year floor on the six-month LIBOR...

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Question:

1) Suppose that a trader on March 5, 2010, bought a three-year floor on the six-month LIBOR with a floor rate of 5.7% and a principal of $200 million.

Swap Date Six-Month LIBOR Rate

5 Mar 2010 4.70%

5 Sep 2010 5.30%

5 Mar 2011 5.80%

5 Sep 2011 6.00%

5 Mar 2012 6.10%

5 Sep 2012 6.40%

5 Mar 2013 6.90%

What would be his payoff on March 5, 2011?

Question options:

a) He would have a payoff of zero.

b) He would have a payoff of $0.1 million.

c) He would have a payoff of $0.2 million.

d) He would have a payoff of $0.4 million.

2) What is one of the advantages of OTC markets?

Question options:

a) They involve low credit risk.

b)They are highly regulated.

c) The terms of the traded contracts are not bound to those specified by the markets.

d) All of the above

3) What is the maintenance margin for writing five call option contracts (that is, on 500 shares) on a given stock with an exercise price of $100? (The current stock price is $102, and the value of the option $3.)

Question options:

a) $0

b) $9,700

c) $10,700

d) $11,700

4) Suppose that a trader on March 5, 2010, bought a three-year cap on the six-month LIBOR with a cap rate of 5.7% and a principal of $200 million.

Swap Date Six-Month LIBOR Rate

5 Mar 2010 4.70%

5 Sep 2010 5.30%

5 Mar 2011 5.80%

5 Sep 2011 6.00%

5 Mar 2012 6.10%

5 Sep 2012 6.40%

5 Mar 2013 6.90%

What would be his payoff on September 5, 2011?

Question options:

a) He would have a payoff of zero.

b) He would have a payoff of $0.1 million.

c) He would have a payoff of $0.2 million.

d) He would have a payoff of $0.4 million

5) Suppose that you work as treasurer at a US corporation and you know that in 3 months your company will be paying SAR (Saudi Reals) 2,000,000for the purchase of lubricant oils. The spot and forward rates of USD-SAR are given below (assume that there is no bid-ask spread for simplification).

USD-SAR spot and forward rates.

Spot 0.272

0.273 1-month forward

0.271 3-month forward

0.270 6-month forward

Suppose that after 3 months (i.e. on the day your corporation buys the lubricants) the spot rate of the USD-SAR was 0.272, what is the net cost (or net saving) resulting from the hedging transaction?

a) A net saving USD 2,000

b) A net saving of SAR 2,000

c) A net cost of USD $2,000

d) A net cost of SAR 2,000