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1. Shares of Lakewood, Inc. are currently selling for $52.63. You believe the stock will decline in price ranging from $30 to $32 in the next few months. Which of the following strategies will allow you to profit if your prediction is correct?

I. short the stock

II. buy a call at 50

III. write a call at 55

IV. buy a put at 45

1. II and IV only
2. I and III only
3. III and IV only
4. I, III and IV only
5. I and IV only

1. a Allison bought 100 shares of MIKO, Inc. stock at a price of $35 a share. In addition, she bought a 35 put on MIKO at a cost of $125. Which of the following are true about Allison's position from now until the option expiration date?

I. Her maximum loss is $3,625.

II. Her maximum loss is $125.

III. Her minimum gain is $125.

IV. Her maximum profit is unlimited.

1. I and IV only
2. II and III only
3. II and IV only
4. II, III and IV only

1. The purchase of a June 25 call on XXO stock and the sale of a June 30 call on XXO stock is known as a
   1. Butterfly spread
   2. Long straddle
   3. Bullish spread
   4. Vertical spread
   5. Horizontal spread

1. Mary wrote a 40 naked call on ABC stock at a price of $275. She does not own any shares of ABC. Mary has

I. limited her losses to $275.

II. unlimited loss potential.

III. limited her gains to $275.

IV. unlimited profit potential.

1. I and IV only
2. II and III only
3. I and III only
4. II and IV only

1. Assume the initial margin on a Swiss franc futures contract is $2,000. If an individual purchases a contract at $0.78 per franc and the contract involves 125,000 Swiss francs, what return on invested capital will the investor receive if the price per franc moves to $0.80?
   1. 3%
   2. 50%
   3. 100%
   4. 125%
2. A Options on an exchange rate can be valued using the formula for an option of a stock paying a continuous dividend yield where the dividend yield is replaced by
   1. the domestic risk-free rate
   2. the foreign risk-free rate
   3. the foreign risk-free rate minus the domestic risk-free rate
   4. none of the above

1. Suppose you enter into an interest rate swap where you are receiving floating and paying fixed. Which the following is true about your credit risk?
2. Your credit risk is greater when the term structure is upward sloping than when it is downward sloping.
3. Your credit risk is greater when the term structure is downward sloping than when it is upward sloping.

III Your credit risk exposure increases when interest rates decline unexpectedly.

IV Your credit risk exposure increases when interest rates increase unexpectedly.

1. I and III
2. II and III
3. I and IV
4. II and IV

1. Normal Backwardation
   1. Maintains that for most commodities there are natural hedgers who wish to lay off risk
   2. Maintains that speculators will enter the long side only if the futures price is below the spot price
   3. Assumes that risk premiums in the futures market are based on systematic risk
   4. Both A & B above
   5. Both B & C above
2. The process of marking-to-market
   1. Post gains and losses to account daily
   2. May result in margin calls
   3. Impacts only long positions
   4. All of the above (A, B & C)
   5. A&B Only
3. If the put option premium quoted appears to be less that what would be suggested by the put-call parity equation, an astute arbitrageur could profit by ______ the put option, ______ the call option and _______ the underlying.
   1. Selling; buying; buying
   2. Buying; selling; buying
   3. Selling; buying; selling
   4. Buying; buying; buying

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