# QUIZ AND CPE SLIP

Let's discover how much you have learned in the preceding pages. You do this by answering the ten (10) questions in the following section. After you answer these questions, you can click below and I'll tell you how many you got right. If you got seven or better of the ten questions correct, you qualify for four hours CPEs and can obtain a CPE slip by following the procedures given here.

Select one answer for each of the following ten questions. If you later go back over the questions and decide you don't like your original answer, just click what you consider the best answer and your previous answer will be deleted.

1. Using derivatives for speculation can be very risky:
True False

2. Derivatives may be used in conjunction with the related "cash position" to reduce, control, or otherwise manage risk:
True False

This information applies to questions 3 through 7. The strike price of a call option on K Electronics' stock is \$100 and the option is selling for \$15. The underlying stock is selling at \$105.

3. The "premium" on the option is:
\$15 \$10 \$5 \$100

4. The "intrinsic value" of the option is:
\$15 \$10 \$5 \$100

5. The "time value" of the option is:
\$15 \$10 \$5 \$100

Questions 6 and 7 are a continuation of 3 through 5. Assume the option has not been exercised before maturity and that the holder ("buyer") of the option takes appropriate (i.e. wealth-maximizing) action at maturity. Ignore transaction costs such as brokers' commissions but include the premium on the option in your calculations.

6. If the market value of the underlying stock at maturity is \$140 per share, what is the gain or loss per share?
\$0 \$25 \$35 \$40

7. Same as question 6 but assume the market value of the underlying at maturity is \$90 per share.
\$0 \$25 \$10 \$15

Questions 8 and 9 pertain to an airline that will buy a considerable amount of fuel oil next Summer and is concerned about the possible price of oil at that time. Changes in the price of fuel oil closely parallel those of changes in the price of crude oil. The company will suffer - its profits and the price of its stock will plummet - if the price of oil rises and the company will benefit if the price of oil falls. It would like to get rid of some of the uncertainty. It can enter into a forward contract to buy 20 million barrels of a certain grade of oil next Summer at \$125 per barrel, a price it considers acceptable and which it believes is likely - but not certain - to prevail next Summer. It enters into the forward contract. Assume transaction costs are minimal and can be ignored and that there is no risk that the counterparty will not live up to its obligation under the forward contract.

8. Suppose the forward contract is still in force next Summer at which time the "spot" price of oil is \$130 per barrel. The airline:
has a gain on the contract of \$500,000,000;
has a loss on the contract of \$500,000,000;
has a gain on the contract of \$100,000,000;
has a loss on the contract of \$100,000,000.

9. Suppose instead the "spot" price next Summer is \$120 per barrel. The airline:
has a gain on the contract of \$500,000,000;
has a loss on the contract of \$500,000,000;
has a gain on the contract of \$100,000,000;
has a loss on the contract of \$100,000,000.

10. Interest rate swaps:
can only relate to bonds payable and cannot relate to bonds receivable;
always involve fixed rate obligations on both sides;
always involve variable rate obligations on both sides;
may involve a fixed rate obligation and a variable rate obligation.