Question

1. A zero-coupon bond with 4 years to maturity and the yield to maturity of 8%. When the yield increases, the duration of this bond decreases.

a. True b. False

2) A bond issuer often repurchases Callable bonds for a discount bond.

a. True b. False

3. Credit Default Swap (CDS) is an insurance policy on default risk of corporate bond or loan.

a. True b. False

4) The delivery of the underlying asset is seldom made in forward contracts while the delivery is usually made in futures contracts.

   a. True b. False

5) A U.S. firm has a £100,000 receivable with a 3-month maturity. To hedge the receivable, it will take a short position in a £ futures contract.

a. True b. False

6) A put option on Dr. Pepper Snapple Group, Inc., has an exercise price of $40. The current stock price is $41. The put option is in the money.

   a. True b. False

7) A Japanese importer has a €1,000,000 payable due in one year. To hedge the position, it will buy put options on euro.

a. True b. False

8) A protective put is an insurance for an investment in a portfolio of stocks.

a. True b. False

Answer 1

1) True

Reason:

Duration is the time taken in years for the investor to be repaid the bond's price through its cashflows. So, when yield of the bond increases, its duration decreases

2) True

Reason

When the bond issuer purchases the callable bonds, it is usually done when the overall market interest rates have fallen. He can latter reissue at a lower coupon rate. Hence, the issuer is benefitted.

3)True

Reason: In a Credit Default Swap(CDS), the buyer of CDS is insured by the seller against the defaulting bond or loan

4) False

Reason:

Forward Contract can be delivered or settled in cash. It cannot be said that delivery is seldom made in a forward contract

5)True

Reason: Since the US firm has receivables in pounds, to hedge the receiveable, it has to take a short position in pounds

6) False

Reason:

Since the current stock price is higher than the exercise price of the put option, it is out of money and not in the money

7) False

Reason:

Since the Japanese importer has payable in Euro, in order to hedge his position, he has to buy Call option on Euro and not Put Option

8) True

Reason

Protective Put is insurance in a portfolio of stocks by providing downside protection when the price of the stocks declines.