1. The price of a credit default swap (CDS) on a AAA-rated bond would be higher
ID: 2795414 • Letter: 1
Question
1. The price of a credit default swap (CDS) on a AAA-rated bond would be higher than the price of an otherwise identical BB-rated bond.
True
False
2. Suppose you hold a share of stock and a put option on that share. If the stock price is below the exercise price when the option expires the value of your position is the value of the stock.
True
False
3. You can sell a call on a stock that you do not own.
True
False
4. If the 3-month SPX futures is below the spot value, we can infer that markets expect the SPX to decline over the next 3 months.
True
False
5. If the current stock price is $50, the intrinsic value of a call option with an exercise price of 30 is
-20
0
20
50
none of the above
-20
0
20
50
none of the above
Explanation / Answer
1) False. AAA-bond is less risky than BB-rate bond. Hence, the price of CDS on AAA bond will be lower.
2) False. The put option will make a payoff when the stock price goes below the exercise price. Hence, the value of the position is the value of stock plus payoff from put option.
3) True. You do not need to own the stock in order to sell a call.
4) True. Based on the futures price, we can infer the markets are likely to decline in the next 3 months.
5) 20. Intrinsic Value = 50 - 30 = 20
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