Blog

Challenge You’re a derivatives trader, and your college friend Jordan tells you about a hedge fund they’re starting. Jordan promises a “[R0] percent per year return.” The fund has a [T]-year “lock-up,” meaning you must invest immediately and will receive your return in one lump sum at the end of [T] years. You invest $[PV], but then begin second-guessing yourself. As a derivatives trader, you assumed your friend meant continuous compounding, but they may have meant annual discrete compounding instead. How much less will you receive at the end of the lock-up if Jordan’s promised return was actually discrete rather than continuous? (Hint: your answer should be a positive number.) Enter your answer as a number of dollars, rounded to the nearest whole dollar. For $12,345.67, enter 12346.

A one-year Treasury bond pays a $2 coupon in six months and $102 in one year (including the $100 face value and final coupon). The bond’s current market price is $100.25. A six-month T-strip with a $2 face value has a 4.00% annual yield, continuously compounded. A one-year T-strip with a $102 face value has a 4.50% annual yield, also continuously compounded. Using a T-strip replication portfolio strategy, what arbitrage profits can a trader earn?

OptionSellers.com used derivatives to speculate on natural gas prices.Based on our definition, what is a derivative? 

A U.S. Treasury strip has a face value of $100,000 and 1.5 years of remaining maturity.If the yield to maturity is 6.0% per year, continuously compounded, what is the market price of the strip?

Challenge You’re a derivatives trader, and your college friend Taylor tells you about a hedge fund they’re starting. Taylor promises a “[R0] percent per year return.” The fund has a [T]-year “lock-up,” meaning you must invest immediately and will receive your return in one lump sum at the end of [T] years. You invest $[PV], but then begin second-guessing yourself. As a derivatives trader, you assumed your friend meant continuous compounding, but they may have meant annual discrete compounding instead. How much less will you receive at the end of the lock-up if Taylor’s promised return was actually discrete rather than continuous? (Hint: your answer should be a positive number.) Enter your answer as a number of dollars, rounded to the nearest whole dollar. For $12,345.67, enter 12346.

A trader buys 100 shares of a stock at $50 per share, expecting the price to rise. One week later, the stock is trading at $45. What is the trader’s profit or loss from this long position?

Why is the exponential function involving e especially useful in financial mathematics?

Which of the following is true of the net payoffs from purchasing an asset (i.e., going long)? Ignore margin.

Convergence trades and naïve arbitrage trades both involve buying the cheaper of two economically equivalent assets and selling the more expensive one. However, they differ in a crucial way. Which of the following best describes how convergence trades differ from naïve arbitrage trades?

Let’s start the test off right! Select below for 7 points!